Posted at 6:54 p.m. PST Sunday, February 27, 2000
Business-to-business is BIG
business
Online marketplaces dwarf consumer transactions
BY JOELLE TESSLER
Mercury News Staff Writer
E-COMMERCE is changing Steve Paxton's life.
It's not that he's snapping up CDs on Amazon.com or trading Beanie
Babies on eBay. Instead, he's using the Internet to buy buy motor oil,
examine fuel bills and credit card invoices and stock up on toy cars
and cases of Coca-Cola.
The owner of the Blossom Valley Chevron station in South San Jose hasn't figured out exactly how
much his venture online is saving in time or money. But he likens it to the life-changing impact TV
viewers felt when they no longer needed to get up every time they wanted to switch channels.
``It's like a remote control; it just saves you time,' Paxton said of his Web connection. ``We now go
to one source for information that we gathered from three or four different areas before.'
Mention e-commerce and most people think of the Amazon.coms and eBays. But the electronic
revolution's impact is far more staggering in the business world.
The Gartner Group estimates that $145 billion worth of non-financial goods and services were traded
among businesses online in 1999. That compares with $31.2 billion in sales to consumers over the
Net. And that gap is expected to widen sharply. Gartner, one of several analyst firms attempting to
measure e-commerce, predicts business-to-business transactions will total $3.95 trillion in 2003 and
$7.3 trillion in 2004, vs. $380.5 billion in business-to-consumer e-commerce in 2003. (The firm
hasn't estimated consumer e-commerce for 2004.)
Nobody really has a handle on the true impact. Valuing the time people like Paxton save is difficult,
and it seems everyone from software tool makers to companies building new markets on the Web
claims they're participating in the business-to-business e-commerce boom.
``Business-to-business e-commerce is a complex topic to try to communicate . . . but it is startling
how big it is,' said Robin Abrams, chief operating officer of Ventro Corp., a Mountain View
company that operates online marketplaces to match buyers and sellers of chemicals, medical
equipment and other goods.
San Francisco-based Chevron Corp. figures the online network connecting most of its 8,000 stations
saves some operators up to 10 hours a week of back office work. Ordering pre-paid calling cards
from AT&T takes just a few clicks of the mouse; the network's negotiating power cuts the cost of a
case of Coke.
Chevron also hopes to slice $200 million a year in corporate costs with Petrocosm Marketplace, a
new energy industry online market it's creating with e-commerce software giant Ariba. On Friday,
General Motors Corp., Ford Motor Co. and DaimlerChrysler AG said they will create the world's
biggest Internet marketplace to cheaply and efficiently buy $250 billion to $300 billion a year worth
of auto parts from suppliers.
While such online marketbplaces are attracting lots of attention at the moment, business-to-business
e-commerce involves more than just placing orders and accepting payments over the Internet. It also
means establishing online connections up and down the ``supply chain' -- starting with the raw
materials providers and ending with the retailers that sell finished products to the public.
With such connections, companies supplying other firms can let customers tap into their computer
systems to look up the status of an order or the answer to a technical question. And they can track
customers' inventory levels to make sure they aren't running low on critical parts.
San Jose-based networking equipment maker Cisco Systems, for one, has integrated its
manufacturing and distribution networks so that 56 percent of its orders ``never touch Cisco human
hands,' according to Sue Bostrom, vice president of Cisco's Internet business solutions group. Those
orders come in electronically and move electronically to contract manufacturers, which build the
products to order and ship them directly to the buyer or distributors. It's what Bostrom calls a
``virtual supply chain.'
By using computers to automate processes done in the past by people using a phone or fax, and
removing much of the paperwork from routine functions like filling out requisitions, companies are
saving thousands of hours and millions of dollars. They're cutting down on customer support staff,
providing more up-to-date information than paper catalogs could ever offer and filling orders more
quickly.
Cisco savings
Cisco, which takes in more than $1 billion in orders online each month, estimates it saves as much as
$70 million a year by processing orders on the Net. Cisco has been able to reduce staffing in its
order-entry center to about 300 people, from the 1,000 it would need without the Web, Bostrom
said. Cisco has also slashed the amount of time it takes to ship a product from one to three weeks
after an order is placed, down from six to eight.
``If you can bring efficiency to the overall supply chain, you can reduce the cost to produce
products,' said Kirk Cruikshank, executive vice president at Ariba, a Mountain View developer of
electronic commerce software used by companies to do business online.
Dave Clementz, president of Chevron Information Technology, said the online retailers network will
save the company about $10 million a year by streamlining its field sales operation, which sends
representatives to gas stations around the country.
That's nothing compared with the savings it hopes Petrocosm will produce each year.
Chevron employees will use the Web site to look through supplier catalogs and place purchase
orders, allowing the company to channel its purchasing power and negotiate discounts. So far, fewer
than 100 of Chevron's 35,000 suppliers -- which provide everything from pipes to helicopters to
construction services -- have joined the network. But Chevron hopes to bring that number up to
several thousand eventually.
``We don't control the prices of our products, like gas and jet fuel, or of raw materials like crude oil
and natural gas,' Clementz said. ``So we need to keep our costs as low as possible. The Internet is a
way of cutting costs.'
Chevron hopes other energy companies will also join Petrocosm.
Business-to-business e-commerce is so much bigger than the business-to-consumer variety in large
part because businesses already spend so much more than consumers do in the offline world.
After all, ``every consumer market is really the end result of a lot of business-to-business buying and
selling,' said Steve Harmon, head of e-Harmon.com, a San Francisco-based Internet research and
investment firm.
Sticking with it
What's more, once e-commerce becomes part of a company's way of doing business, that company
will probably stick with it because it has made necessary investments in software, hardware, training
and building its online connections with suppliers and customers. This contrasts with the consumer
e-commerce market, where online retailers struggle to hold on to customers.
``Consumers are a quick sale, but they are very fickle,' said Gartner Group analyst Leah Knight.
``Businesses require a longer sales cycle, but once they make that switch they are fairly loyal.'
Among the hottest players in business-to-business e-commerce right now are the ``online market
makers,' companies using the Web to electronically connect buyers and sellers. Like Chevron's
Petrocosm, these markets are often focused on a particular industry.
And they are proving especially valuable in industries that are fragmented with many buyers, many
sellers or both. The Web turns out to be an extremely efficient way to connect them all. ``The Internet
is helping create one giant meeting place,' said International Data Corp. analyst Anna Giraldo Kerr.
Gartner projects that by 2004, these online market makers will drive nearly 40 percent of
business-to-business e-commerce transactions.
Ventro, a leading Net market maker that started out in the ``life sciences' business, launched a
marketplace for chemicals in late 1998 and quickly expanded into lab supplies. These networks now
make up Ventro's Chemdex business.
By aggregating many suppliers into one electronic catalog, the Chemdex market saves scientists at
pharmaceutical and biotech firms hours of flipping through thick paper catalogs full of complex,
technical details to compare product information.
In addition, Chemdex eliminates much of the paperwork involved in buying supplies. The company
estimates that the average purchase order that goes through Chemdex, worth about $500, carries
$10 to $20 in administrative costs. That's well below the $120 to $140 the company says it would
cost to process that purchase order offline.
Chemdex works with 95 buyers and 2,200 suppliers. And Ventro is expanding into new markets like
medical supplies and fluid processing equipment such as pipes and pumps.
Freemarkets, another Net market maker, operates what it calls ``downward price auctions' -- which
are designed to drive down the price of supplies -- for 34 industrial companies, including Quaker
Oats, Raytheon and Owens Corning.
Simple concept
The concept is simple. Owens Corning submits a request for, say, trucking services to the
Freemarkets network, and identifies which suppliers it would like to bid for the contract. Those
suppliers then put together offers and compete for the business in real-time auctions.
About $2.7 billion in industrial materials went through Freemarkets in 1999, and the average auction
resulted in savings of about 15 percent, said Glen Meakem, Freemarkets chairman and CEO.
As abstract as business-to-business e-commerce may seem to the average person, consumers do
benefit as companies use the Net to cut costs and streamline their operations.
Take online car-buying site Autobytel.com. Chief Operating Officer Ann Delligatta calls Autobytel a
``business-to-business-to-consumer' company since it uses an extranet to communicate with its
3,300 car dealers.
The Autobytel network helps dealers do everything from keep track of conversations with potential
customers to remain in contact with past customers by e-mail. The network even alerts a dealer when
a car has been sitting unsold on a lot for too long and allows the dealer to sell the car to another
dealer through a virtual auction.
The company's ultimate goal is to drive about $1,000 in savings, mostly in marketing and personnel
costs, out of each car purchase for its dealers to pass along to consumers.
``We are trying to drive down the dealer's price, which drives down the price of the automobile for
consumers,' Delligatta said. |
