Business to Business Exchanges Niti Chopra Nikki Douglas

Business to Business Exchanges Niti Chopra Nikki Douglas Mike Engdale Daniel Platschek April 10, 2003 1

What are Business to Business Exchanges? n B 2 B Exchanges are online marketplaces for businesses to buy and sell goods and services to and from other businesses. n n Petro. Cosm was an online marketplace where oil and gas companies could buy and sell products. Covisint, an exchange in the automotive industry, aims to reduce parts procurement costs by purchasing from manufacturers online. http: //b 2 b. ebizq. net/exchanges/kenjale_1. html, viewed February 24, 2003. Anonymous, “Covisint Moves Ahead” Manufacturing Engineering, March 2001, Vol. 126, 3, page 34. http: //www. chevrontexaco. com/news/archive/texaco_press/2000/pr 7_18 b. asp, viewed April 4, 2003. 2

Types of Exchanges n Horizontal exchanges n n n Service a broad range of industries. For items that are of generic use. Must have large number of suppliers to be effective. n Vertical exchanges n n Specialize in serving one industry. Provide better collaboration of resources, standardizations, procurement process efficiencies. http: //www. workz. com/cgi-bin/gt/tpl_page. html, template=1&content=1408&nav 1=1&, viewed March 10, 2003. 3

How are products presented on an Exchange? n Auctions n n n Sellers offer goods and buyers bid to buy. Sellers get highest price. Reverse Auctions n n n Buyers post an order for what they want to buy, sellers bid. Buyer pays lowest price. Electronic Catalogs n n Sellers determine the content of catalog and prices. Online Distribution n Established buyers can buy online from their supplier. Domaracki, Gregory S. , Millot, Francois, “The Dynamics of B 2 B E-Commerce” AFP Exchange, Jul/Aug 2001, Vol. 21 4, pp. 50 -57. 4

Exchange Statistics n Covisint – formed by GM, Daimler. Chrysler, and Ford n n n “Big 3” invested a total of $200 million to start Covisint. Approximately 11, 000 suppliers have used Covisint. Petro. Cosm – formed by Chevron n Ended up almost $90 million in debt. Koch, Christopher, “Covisint’s Last Chance; Can an old guy come out of retirement and save one of the icons of the new economy? ”, CIO, December 1, 2002, Vol. 16 Issue 5, pages 62 -69. Bransten, Lisa and Herrick, Thaddeus, “E-Business: Starting Gate”, The Wall Street Journal, October 15, 2001. 5

B 2 B E-Commerce Growth E-Marketer estimates that the US share will account for one half of the total. They estimate US share to be $721 billion in 2003 and $1. 01 trillion in 2004. http: //www. crmassist. com/news/dispnews. asp? I=90400&t=99, viewed March 23, 2003. 6

As Managers… n n n Exchanges could introduce you to new customers (supplier) or help reduce costs (buyer). Introduce your company to e-commerce by purchasing “non-essential” supplies online using an exchange. Company may be forced to engage in online business by a customer. 7

What Was Petro. Cosm? n n Global internet B 2 B marketplace for companies to buy and sell oil and gas products and services. Browser-based access to products and services including drilling, electrical, pipes, valves, and fittings; and professional, engineering, and construction services. http: //www. chevrontexaco. com “Petrocosm announcement”, March 23, 2000. 8

Founding Members n n Chevron Corp. and electronic-commercesoftware developer Ariba Inc. along with Crosspoint Venture Partners and Requisite Technology Inc. Texaco Inc. joined the partnership 2 months later. http: //www. chevrontexaco. com “Petrocosm announcement”, March 23, 2000. 9

Goals n n To create the first B 2 B marketplace owned by buyers and suppliers across the energy industry. Benefits such as aggregated purchasing, lower transaction costs and seamless access to global markets could drive $11 billion in oil and gas industry savings and efficiencies. http: //www. chevrontexaco. com “Petrocosm announcement”, March 23, 2000. 10

Goals n n Buyers were projected to save between 5% and 30% by reducing paper forms and other transaction costs. Sellers were promised the opportunity to expand their customer base, develop new markets and reduce costs and paper work. “Chevron and Ariba To Form Web Market For Energy Industry”, The Wall Street Journal, January 20, 2000. http: //www. chevrontexaco. com “Petro. Cosm Launches Online Marketplace for Oil and Gas Industry”, July 18, 2000. 11

Implementation n Exchange went live in July of 2000. Chevron planned to target a “substantial portion” of its annual $10 billion in spending through Petro. Cosm. Former Halliburton VP, Norman C. Chambers, selected as Chief Executive Officer. http: //www. chevrontexaco. com “Petro. Cosm Launches Online Marketplace for Oil and Gas Industry”, July 18, 2000. 12

Petro. Cosm’s Downfall n n n November 2000 merger of Chevron and Texaco left only one major buyer in the exchange. Competitors were reluctant to do business on what was seen as Chevron. Texaco’s internal supplier network. Competing exchange, Trade-Ranger, offered a much broader range of buyers including 14 major oil refining companies. Darbonne, Nissa & Haines, Leslie, “Chevron, Texaco to form worlds’ fourth-largest oil” Oil & Gas Investor, November 2000. Sliwa, Carol, “Oil firms rush to set up supply nets” Computerworld, January 24, 2000. Messmer, Ellen, “Regulators OK petrochemical B 2 B exchange”, Network World, August 14, 2000. 13

Petro. Cosm’s Downfall n n n After only 1300 transactions in its first year, Petro. Cosm was $84 million in debt. Chevron. Texaco refused to pump money into the exchange and even tried to buy back the company for pennies on the dollar. Petro. Cosm shareholders refused the offer and filed for Chapter 11 bankruptcy protection in June of 2001. Bransten, Lisa and Herrick, Thaddeus, “E-Business: Starting Gate”, The Wall Street Journal, October 15, 2001. 14

Petro. Cosm Conclusion n Exchange was focused on only a few major buyers. The e-commerce collapse dried up Petro. Cosm’s venture capital. Chevron. Texaco refused continued support of a solution they believed they could develop in-house. Bransten, Lisa and Herrick, Thaddeus, “E-Business: Starting Gate”, The Wall Street Journal, October 15, 2001. 15

Covisint Case Study n n n Background Services Case Study Conclusion 16

What is Covisint n Web Based Global Business – to – Business Exchange For The Automotive Industry n n n “Co” represents Connectivity, Cooperation & Collaboration. “Vis” sites Visibility on the Web. “Int” Integrity to conduct Business. proquest. umi. com/auto’s new driving range 17

Covisint’s Background n n GM & Ford launched their own exchange Trade. Xchange by GM & Auto. Xchange by Ford Thrilled both GM & Ford but suppliers were thrown into a panic So came the idea to build a common exchange www. metalcenternews. com/ big three go b 2 b 18

Covisint’s Background n n n Lauched Feb 2000, Live Oct 2000 Public Exchange Founding Members www. covisint. com 19

Covisint’s Background n Industry Participants (Suppliers) n Technology Partners www. covisint. com 20

Covisint’s Background n n Technology Providers VW, BMW did not join Currently has 11, 000 suppliers Based at Southfield, Michigan Covisint Find Its Way? -- Low adoption rates force auto exchange to radically alter mission; [1]; David Joachim and Chuck Moozakis; Internet. Week, Manhasset; Sep 17, 2001, Iss. 878; pg. PG. 1 www. covisint. com Automotive network shifts into gear; Patrick Waurzyniak; Manufacturing Engineering, Dearborn; Jan 2001; Vol. 126, Iss. 1; pg. 62 21

Covisint’s Mission n n Stream line the heavily fragmented supply chain network. Bring down the procurement cost & speed up the process. Eliminate unnecessary paperwork & administrative bottlenecks. Allow faster communicaton within & outside the organization. www. marketvoices. com 22

Covisint’s Mission 23

Covisint’s Services n n Collaboration Procurement Solutions Supply Chain Management Quality Assurance 24

Collaboration n Collaboration- Virtual Project Workspace n n It lets manufacturers & suppliers use the web to design & review how parts are manufactured. Benefits n n Decreases product development time Decreases Cost www. covisint. com Can Covisint Find Its Way? -- Low adoption rates force auto exchange to radically alter mission; [1]; David Joachim and Chuck Moozakis, sep 17, 2001 25

Covisint Procurement Quote Manager - Get RFQ electronically. n Benefits - Save costs, delays & time. n Catalogs - An electronic purchasing environment for indirect material. n Benefits n n Average reduction of 73% in transaction costs. Paperless and automated service. Average saving of 74% in process time. www. covisint. com 26

Procurement Solutions n Asset Management - n Benefits - n n It lets carmakers liquidate excess shop floor equipment & other assets. Help users to identify, appraise, categorize, track & sell assets. Auctions Benefits n n n Rapid, real time, web based negotiation Process reduction of 72% Users reported savings of 5 -30% Both buyer & seller save time Can Covisint Find Its Way? -- Low adoption rates force auto exchange to radically alter mission; [1]; David Joachim and Chuck Moozakis, sep 17, 2001 www. covisint. com 27

Buyer Auction 28

Quality Assurance It offers advanced quality planner & problem solver. n Advanced Quality Planner - It is used by n automakers to make sure that parts meet necessary specifications before they go into production. n Goals- The process helps create more robust, problem-free designs and minimizes quality defects from reaching the customer. www. covisint. com 29

Quality Assurance n Problem Solver- It allows OEM’s & suppliers to solve the problem together. n Goal- The goal of Problem Solver is to help permanently correct problems not eliminated by the AQP Process. www. covisint. com 30

Supply Chain Management n Fulfillment Service - n Benefits It gives members real time information about parts, inventory, and anticipated demand pulled directly from supplier’s legacy systems. n n n Reduction in inventory of 30 -70% Reduction in premium freight costs of 50 -90% Reductions in admin costs of 40 -80% Can Covisint Find Its Way? -- Low adoption rates force auto exchange to radically alter mission; [1]; David Joachim and Chuck Moozakis www. covisint. com 31

Business Model n n n Standard pricing for all services. Collaboration - monthly subscription fee. Procurement - per event fee. Quality Assurance - monthly subscription fee. Supply Chain - a combination of transaction & monthly subscription fees. Can Covisint Find Its Way? -- Low adoption rates force auto exchange to radically alter mission; [1]; David Joachim and Chuck Moozakis sep 27, 2001 32

Is it a Success? n n The founders account for 80 to 90 percent of revenue. It laid off one-third of its staff of 300. Revenue $60 million, well short of the projected $100 million. Covisint will broker the sales of $50 billion but it’s a far cry from the estimated $240 billion. www. detnews. com/ covisint struggles to survive in emarketplace by doron levin, bloomberg news, august 23, 2002 proquest. umi. com/ Covisint’s last chance, christopher koch, dec 1 2002 www. auto. com archives/ covisint hits rough patch as business falling, jamie butters, december 9, 2002 33

Case Study Conclusion “Covisint is continuing to fall short of it’s lofty intentions, we think it’s going to disintegrate within the next 18 months. ” Scott Upham, Senior Director J D Power & Associates (December 9, 2002) Industry experts say the only way to save Covisint is to find a new way to make money – and fast. www. auto. com/archives/ covisint hits rough patch as business falling, by jamie butters& jeff bennett, dec 9, 2002 34

Covisint’s Strengths n The three founding members n New CEO Harold Kutner n Provides a single platform for suppliers Online buy gains speed; David Hannon; Purchasing, Boston; Feb 7, 2002; Vol. 131, Iss. 2; pg. 22, 3 pgs 35

Covisint’s Weaknesses n n Suppliers have resisted using Covisint Relied on tier one suppliers to bring in lower tiers. Competition. Anti-trust investigation. Online buy gains speed; David Hannon; Purchasing, Boston; Feb 7, 2002; Vol. 131, Iss. 2; pg. 22, 3 pgs Motorcity shakeup; Christopher Koch; Darwin, Framington; Jan 2002; Vol. 2, Iss. 1; pg. 46, 6 pgs VW Widens Private Exchange; Chuck Moozakis; Internet. Week, Manhasset; Dec 10, 2001, Iss. 888; pg. PG. 1 36

B 2 B Best Practices n n n What have we learned? Review lessons from Covisint, Petrocosm, and other B 2 Bs. Conclusion. 37

B 2 B Best Practices n B 2 B initiative must have full support from top management. “Because implementing e-business requires radical changes in business activities, it is critical for development teams to receive support from upper management. ” Phan, Dien D. Information Systems Management 38

B 2 B Best Practices n B 2 B strategy (vision) must be fully integrated into the company’s overall strategy. Exchanges are a new channel meant to enhance, not replace, existing ways of doing business. In their role of bringing customers and suppliers together, exchanges must not forget that this is just another way to bring customers and suppliers together. 39

B 2 B Best Practices “e-business should complement rather than cannibalize traditional ways of competing. Companies that use e-business to make traditional business process better will do better that those that invent and implement new combinations of virtual and physical activities. ” Phan, Dien D. Information Systems Management 40

B 2 B Best Practices n The technology factor n n In the 90 s, the major barrier for companies to engage in B 2 B was the ease and speed (connectivity) at which companies could exchange information. Today, security and the exchange of confidential information (privacy) is considered B 2 B’s enemy number one. 41

B 2 B Best Practices n The security issue - Covisint “The majority of our parts are specialized. We would go online with parts that tell our competition what we will be doing 2 -3 years from now. ” Hubert Bergmann, VW’s Management Board 42

B 2 B Best Practices n The security issue - Petro. Cosm Petrocosm, started by Chevron, also had its share of difficulty convincing other companies in the oil industry to join. Only Texaco, which later merged with Chevron, was willing to join the exchange. 43

B 2 B Best Practices n Use the technology wisely. “Some companies have used internet technology to shift the basis of competition away from quality, features, and service and toward price, making it harder for anyone in the industry to turn a profit. ” Phan, Dien D. Information Systems Management 44

B 2 B Best Practices n Keep the technology current while keeping good cost control. “To succeed companies will need to constantly search and implement innovative strategies that capitalize on both the power of the internet and the changes in both traditional and electronic markets. ” (Scarborough and Spatarella, 1998) 45

B 2 B Best Practices n Keep the technology current while keeping good cost control. n GM Dealer Advantage: Using the flexibility of the technology to their advantage, Covisint is branching out into new directions. Through Covisint, GM will link dealers to online catalogs and order forms. “That’s a new space for us, and it expands what we already provide online to manufacturers. ” Wes Arrington, VP Global Accounts for Covisint 46

B 2 B Best Practices n Listen to the users (Buyers and Suppliers). n n Know what users want and what the market needs and values and what users will let you do for them. The tools and/or applications that Covisint offers today are a direct result of mainly the buyer’s input. Covisint’s new CEO promises to listen more to suppliers. Koch, Christopher, “Covisint’s Last Chance; Can an old guy come out of retirement and save one of the icons of the new economy? ”, CIO, December 1, 2002, Vol. 16 Issue 5, pages 62 -69. 47

B 2 B Best Practices n Listen to the users. “Delivering personalized web content. Web content must be accurate, current, and appropriate for each individual customer. Intel works closely with sales forces to ensure that customers are getting what they need and are coming back to the site. ” Phan, Dien D. Information Systems Management 48

B 2 B Best Practices n B 2 B is not for everyone. The case of Agri. Place. com: An exchange that tried to put the buyers and the farmers together leaving the grain brokers out. 49

B 2 B Best Practices n Implement good e-business education and training. n Covisint provides online training to reduce the number of support calls. Some customers require basic training on how to use the Web. 50

B 2 B Best Practices 51

B 2 B Best Practices The Matrix – Covisint’s Differentiators 52

B 2 B Best Practices The Matrix – Covisint’s Differentiators n Created a single technical platform (standardized) so suppliers could easily and cost effectively join the exchange. Keep in mind some of these suppliers are resourceconstrained as the profit margins are continually squeezed by the Buyers. 53

B 2 B Best Practices The Matrix – Covisint’s Differentiators n First to introduce Collaborative Product Development: Design sharing between OEMs and suppliers on the web. Involves the supplier in the design phase of product development. 54

Conclusion Where do we go from here? n The statistics paint a grim picture: 1, 500 Exchanges in July 2001 Only 700 Exchanges in July 2002. Jorgensen, Barbara “The Shakeout in B 2 B Exchanges” Electronic Business, 2003. n n B 2 B is here to stay, however, it is still in its infancy stages and we have seen its growing pains. Are B 2 Bs ready to take the place of the purchasing department? 55

Any Questions? 56