Understanding online marketplaces

By William C. Copacino -- Logistics Management, 7/1/2000

In my last column, I provided a framework for assessing how traditional purchasing models would evolve to buyer-centric (one buyer to many sellers), seller-centric (one seller to many buyers), or true marketplaces (many buyers to many sellers). In this and subsequent columns, I will provide insights on how true marketplaces will evolve and operate.

It is important to understand that "marketplace" is a generic term that covers a broad range of operating models. A useful basis for classifying marketplaces can include what and how businesses buy, and what functionality marketplaces offer. Here is an overview of each area.

What businesses buy

Indirect or MRO (Maintenance, Repair, and Operations) supplies. These include everything from office supplies and computers to cleaning supplies and repair parts. Buyer-centric "e-procurement" initiatives provide an efficient ordering system and companywide visibility of purchases, so volume contracts can be negotiated. "Horizontal exchanges" allow companies from different industries to aggregate these purchases into even larger volumes and gain additional savings.

Direct material. This includes items from the bill of materials that go into a product. Vertical exchanges provide an opportunity for players in the same industry to aggregate demand, gain volume economies and transaction efficiencies, and collaborate with channel partners to manage the extended supply chain.

How businesses buy

Systematic sourcing. The term "systematic sourcing" implies that prices are not dynamic but are established for a set period of time. Pricing may be set either by suppliers through their catalogs or through negotiated contracts.

Dynamic pricing. This type of pricing can involve mechanisms such as the online ask-bid process, auctions, or other bidding processes (requests for proposal). Pricing is "event driven;" that is, it is established on a one-time basis by one of these mechanisms.

What marketplaces offer

Marketplaces. A marketplace allows buyers and sellers to conduct a trade or purchasing transaction. The real power of marketplaces is that they allow companies in a supply chain to collaborate in such areas as product design, forecasting and demand planning, capacity planning, and other supply chain activities. Some marketplaces are limited to trading functionality, while others plan to offer supply chain collaborative capabilities.

These parameters help us categorize exchanges. Some examples from each category are shown in the accompanying figure.

The first generation of marketplaces was limited to trading functionality. The next generation of marketplaces will be the vertical industry consortia, like the automotive exchanges, which will provide a fuller collaborative capability. Subsequently, we envision that a linked network of industry vertical and horizontal marketplaces will evolve. I will discuss this evolution and its implications in my next column.

William C. Copacino is managing partner of Andersen Consulting's Strategic Services Practice for the Americas. A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Andersen Consulting's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.