B2B Exchanges

If you've ever bought anything from Hewlett-Packard Co., you probably haven't given the company's logo much thought. But making sure that thin plastic strip gets stamped on every product is always on Corey Billington's mind.

Last November, the company started buying its logos through a private marketplace that Billington, HP's vice president of supply chain services, helped establish between four plastics manufacturers and the 49 contractors that make HP's products. While the logo is hardly the most critical component, if that supply chain were to break down, Billington figures Chairman and CEO Carly Fiorina would be calling. "It would be an unpleasant conversation," he says. "[She'd say], 'You know, we don't ship products without our logos on them.'" Billington and his staff spent more than two years building the private network called GetSupply and training its manufacturing partners and internal procurement professionals to use it. He estimates the network has trimmed 30 percent from the cost of the logos a US$7.5 million savings off an annual $25 million expense. Now HP is adding its memory suppliers to the exchange. Sharing demand and production data with a finite set of suppliers makes economic sense, says Billington. The private exchange lets HP referee the marketplace, ensuring a steady supply of parts and more efficiently distributing the workload among its suppliers.

Executives in other industries are now deciding whether they should build their own B2B marketplaces or participate in public trading hubs as investors or simply users. As dozens of public exchanges fold and dozens more struggle with profitability, conventional wisdom says smart companies should cement connections with current suppliers and customers, but that wisdom is only partly true. The solution should depend on your business needs.

Looking at a few companies in a single industry such as electronics manufacturing shows CIOs taking diverse approaches to exchanges. When trading proprietary information such as product design or forecasting data with established customers and suppliers, those companies opt for private marketplaces. When buying and selling commodities or finding new trading partners, they turn to a public exchange. And many companies also do business in both environments.

Public exchanges, including established ones like the steel industry's e-Steel, hope to boost revenues by hosting private supply networks for their members. At a recent conference, Mohan Sawhney, McCormick Tribune professor of e-commerce and technology at Northwestern University's Kellogg Graduate School of Management in Evanston, Ill., predicted such hybrid exchanges would become the "markets of the future."

Whether or not to take advantage of those emerging services is "one of the strategic decisions a CIO needs to make," says HP's Billington. "Let's think about the most private of private exchanges, a one-on-one. When I talk to the Converge people, they say, whatever we pay [for that capability], they'll do it for 20 percent less. We'll have to think carefully about that." HP was one of 15 companies that helped found Converge Inc., a public exchange for technology and electronics manufacturers. As HP was building its private GetSupply exchange, the company divested itself of another trading network it had built to buy and sell parts at auction. The network, called Trading Hubs, became the online auction system used by Converge. HP now pays Converge to procure scarce parts and liquidate excess inventory.

The interlocking decisions of buyers and suppliers will determine which trading environments take hold during the next few years. "The conditions are not unlike what they've always been for a company to [decide] whether it's to their advantage to deploy a technology," says Joan Harbin, research director of AMR Research Inc.'s B2B marketplaces practice in Boston. "One consideration is what are your competitors doing? Another is what does it cost?"

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