Online middlemen: Separating the good from the bad

By Shawn P McCarthy -- Logistics Management, 12/1/1998

The pleasure--and the problem--with the evolving Internet economy is that people are figuring out how to insert themselves into the cash-flow portion of the supply chain. This trend can be a pleasure when the usurpers bring a significant added value with them, perhaps by finding new ways to bring together buyers and sellers, handle transactions, or sort and store information.

It can become a problem, though, when entrepreneurs become middlemen who complicate rather than streamline the supply chain process. Such folks provide no real value-added service other than perhaps handing off information from one party to another. If you're a supply chain manager, your job is to separate the good middlemen from the bad.

The hot term in Internet commerce these days is "disintermediation"--removing links from the supply chain. But an even newer term, "reintermediation," describes what's really happening: New and different types of intermediate links are emerging as others disappear.

For example, it's possible for manufacturers to reach consumers directly via the Web. But few manufacturers want to develop in house the technology that's required to sell directly to consumers over the Internet. That has created two types of reintermediation opportunities. The first involves new internal systems that allow wholesalers or retailers to gain access to a manufacturer's inventory system, place orders, predict stocking needs, and so forth. Placing that functionality far up the manufacturing chain may eliminate distributors, but that creates opportunities for other middlemen to emerge elsewhere in the supply chain.

The second includes outsourcing sites that host e-commerce facilities for manufacturers. Similarly, some middlemen have opened online information "exchanges." One that has great potential is the MetalSite, where registered buyers can purchase steel and other metals directly from brokers. (See the Pointers below.) But other exchanges are not nearly as useful. Some are little more than advertising sites that don't really link you with suppliers or service providers.

Worse, some collect information on what you need, then go upstream to sell it to a provider. They've inserted themselves in the money flow and effectively separated you from a partner you want to reach.

To avoid being pulled into the online middleman trap, apply the same supply chain management principles to your information flow that you use for your physical supply chain. Ensure material flow is based on "pull" from customers and develop alliances with key suppliers to get better prices and service. Remove all activities that do not add value, especially data handoffs between organizations and extra layers of personnel or inventory. Verify that any new providers will bring you significant cost savings and not simply enable companies to shift their costs to you.

The trick is to choose the right middleman. The ideal scenario for many companies: Consumers say what they want, the middleman collects and organizes the requests, and sellers decide whether to make a deal.

Tip of the Month

The logistics industry could learn a lot from a site like www.priceline.com. There, users state their needs, cite specifications, and suggest a price they'd be willing to pay for such things as airline tickets or a car. A provider of the desired product or service responds, and if both parties are satisfied, a transaction may ensue, with Priceline facilitating online payment and providing other e-commerce services. It's an efficient system that can be applied to any product--a prime example of moving information instead of inventory.

Pointers

* Visit MetalSite at www.metalsite.com.

* Constellation is a resource center for electronic supply chain management at the University of California at Berkeley. It's maintained by Edward Toung and is reachable at http: queue.ieor.berkeley.edu/~etoung/constellation/.

* For articles on the latest logistics technologies that help shave dollars from the supply chain, visit http:www.manufacturing.net/magazine/logistic/depts/logtech.htm.