The Electronic Marketplace

• Trade through e-marketplaces is expected to grow from 7.8% of e-commerce activity in 2002 to 48% of online trade by 2006.
• So far, 15 percent of all Fortune 2000 companies have set up private exchanges, and an additional 28% plan to have one by the end of 2003.

• Researchers predict that private exchanges will garner up to 90% of the investment in new e-marketplace infrastructure over the next three years.

With this kind of seemingly contradictory research, how does one determine an electronic marketplace strategy?

Electronic Data Interchange (EDI) networks have grown to be key players in business to business communication by introducing the transfer of data electronically between companies using networks, instead of using the old paper pushing method. Early computers assisted businesses in storing and computing data, but communicating the data to other companies was challenging. In the 1960’s, telecommunications technology allowed companies to transmit their data over regular telephone lines. This was helpful in decreasing transmission times and reducing paperwork, but each communication was created for a specific purpose or company – so no standard existed to disseminate the valuable information to many customers or partners.

Finally in the 1980’s, standards were introduced which allowed the ubiquitous use of EDI. The Accredited Standards Committee (ASC) developed ANSI X12 as a national standard used by over 300,000 companies. The only worldwide standard is known as UN/EDIFACT, and there are also standards adopted by companies in specific countries like the UK.

Value-Added Networks (VANs) and Electronic Trading Networks (ETNs) are two types of EDI which allow companies to communicate over private or semi-private networks. EDI is now accessible to even the smallest of companies due to lower fees and increased efficiency. Many vendors are willing to customize a trading network to their customer using capabilities of EDI, XML, and the internet.

Public Business to Business (B2B) exchanges resemble EDI but use different technology. Web-based public trading networks allow users to send and receive larger files, graphics, and databases using XML (Extensible Markup Language). These exchanges assist in increasing operational efficiencies, expanding the customer base, exposure to new market segments, and increased customer satisfaction. However, common standards do not yet exist for XML causing some confusion among users. Currently there are far fewer public trading exchanges than private. This translates to fewer potential customers. Security is an acknowledged challenge… public networks do not have the controls in place that more established private vendors do. Finally, public trading places are just that – public. They do not offer the privacy and confidentiality of private e-markets.

Newer invitation-only private networks combine functionality of EDI and XML to introduce closed trading networks for multiple buyers and sellers. These marketplaces have the benefits of online trading with the security of closed networks.

Extracting cost from supply chains is a goal of many SC managers. EDI is still the giant standard in certain industries like retail, manufacturing, and energy, and most companies plan to continue their use of the mature technology. “We have a full XML capability, and of all our clients, there’s been only one that’s asked for XML,” says Steve Rabin, chief technology officer at transaction management services provider eB2B Commerce. “Of 750,000 transactions per quarter we process, less than 1 percent is something other than EDI.”

Forrester Research estimates that private exchanges will continue to carry most business transactions through 2003. But public e-networks are predicted to grow quickly to conduct almost half of all transactions by 2006. Hybrid systems which use both the EDI standard as well as XML capabilities are also gaining popularity.

Customers and suppliers should carefully consider their competencies before committing to a long term electronic marketplace strategy. Influence in the supply chain as well as capabilities for online interaction should be considered. Careful analysis will help to identify whether it makes more sense to build or join an exchange, launch a portal, or simply use an intermediary.