FTC leaves questions unanswered

16 November 2000
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16 November 2000

In the wake of a US report into online marketplaces, many purchasers remain sceptical about the likely benefits of such ventures. David Arminas gauges the mood

For all the complexity of last month's US Federal Trade Commission (FTC) report, a startlingly simple conclusion was reached about Covisint, the giant auto exchange. Proof of any anti-competitive behaviour will be in the pudding, as Covisint is yet to be up and running anywhere near as fully as the hype might suggest.

The commission's report concluded that there was no evidence so far to suggest that marketplaces were contravening competition laws. In any case, it added, adequate legislation was in place in the US to deal with any breaches that arose.

"The FTC report was a fudge," according to business author and consultant Paul Strassmann. "But what else could they do?"

Nonetheless, marketplaces and trading exchanges are the future, Strassmann, told SM at the f@stEC e-procurement conference on board the Marco Polo last week. Firms should get used to them, although most of the present exchanges will wither through lack of profitability, he added.

But there remains a dilemma for many procurement professionals. What tactics should they employ when approaching marketplaces? If a company has a successful electronic data interchange (EDI) system and good relationships with major suppliers, does it want to upset the applecart by moving towards a more marketplace-orientated buying system?

Probably not, said Bob Easterling, director of strategic planning at engine maker Cummins in the US. "One hundred per cent of our suppliers are on EDI, so we have to make sure there is going to be a real return in making that step [to a marketplace]. EDI is working very well for us. Sometimes we will work with a supplier for two years before allowing them to make a component for us. That is something you are not going to get in an Internet bidding process."

By putting a percentage of product spend through a marketplace, companies run the risk of reducing the profitability of suppliers that previously had 100 per cent of those orders. That can destroy relationships built up over many years and leave the company holding the bag, cautioned Easterling.

Mark Ralf, group e-commerce director at healthcare company Bupa and a keynote speaker at the conference, admitted he was "not too keen on marketplaces".

There was just too much choice out there, he said. "All the suppliers are not going to sign up to all those marketplaces, as the cost of doing so is too high for them. So at some point the marketplaces are going to converge, merge and buy one another out. You can see now the strategy is to create a marketplace accompanied with a lot of noise and the hope of being bought up."

If procurement professionals believe they need wait only six months or a year to see how marketplaces pan out for others, they may be sorely mistaken, Strassmann said. It could take around five years to develop a site where sufficient volumes are generated to ensure sustainable profitability for the owners and measurable efficiency gains for the main sponsors. Many sites will fail.

Marketplace developers will certainly be watching Covisint in order to apply lessons to other manufacturing ventures.

Paul Kelly, commodity manager with UK-based Collins & Aikman, a first and second-tier plastics interior trim supplier to major automakers, believes it will take more than simple persuasion for second-tier suppliers to join marketplaces.

Kelly, who oversees around 800 suppliers across Europe, reckons first-tier suppliers will have to "hand-hold" second-tier companies, showing them the benefits of marketplaces and making sure they use them.

For those doing the hand-holding, it could pay dividends, noted Andre Versteeg, executive director, supply management and logistics, at engineering firm Babcock Borsig in Germany. The firm started online auctions in March and is pleased with the results.

"Of course [our suppliers] were confused, but that is why we invited them to workshops, told them how it works, what they had to do, and did a demo with them," said Versteeg, who added that Babcock had not lost any suppliers in the process.

But whatever the FTC says about Covisint, many European purchasing directors will be more interested in the European Commission's verdict. That may come about if and when a supplier group challenges a marketplace, according to Roberto Miscioscia, director of procurement operations at 3M Europe. The company had decided not to join with another large firm to buy indirect materials after its lawyers warned about a concentration of buying power attracting unwanted EC attention.

Given that so many questions about marketplaces remain unanswered, the time may not be right to jump on board.

SMnov2000

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