B2B EXCHANGES: Principles and promise
by NAMNEWS

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Exchanges have a diverse range of functions and services, some of which have had a significant impact on global sourcing.

·  Online Marketplaces: exchanges can act as online marketplaces, enhancing competitiveness by efficiently linking buyers and sellers.  They can find new suppliers or customers and can use online auctions, tenders or catalogues to deliver the best offer in terms of price, quality and service.

·  Peer Group Alliance: Exchanges can connect companies for mutual benefit, notably by enabling them to combine purchasing power.

·  Transactional Data: Exchanges can reduce the cost of data flow between trading partners.  Online data catalogues enable purchasers to make quick and informed decisions, while EDI can develop a cheaper method of exchanging transactional information.

B2B exchanges have created a new and dynamic purchasing process that can deliver cost benefits to retailers, while opening up new sales channels for suppliers from around the world.  Tesco was the first retailer to hold an auction on WorldWide Retail Echange (WWRE) for corned beef.  It attracted 7 potential suppliers and the procurement time was reduced from 3 days to 3 hours.  When the leading online retail marketplaces were established, most observers focused on a single feature: reverse auctions.  This process enables retailers to solicit bids from multiple suppliers in order to strike the best possible deal.  Sainsbury’s was the first UK food retailer to hold a global reverse auction on GlobalNetXchange and has since put its entire economy private-label range through the exchange.

Owners of buyer-sites like GlobalNetXchange and seller-sites like CPGmarket.com will use their combined market share to force trading partners to use the eMarketplace.  Next to increasing power, a partnership between peers neutralises potential competing ventures.  This strategy for market control will only succeed if partners get a fair share of control – Ahold and Tesco balked at GlobalNetXchange’s offer of equity stakes far below that of founders Sears and Carrefour and formed a competing partnership with 9 other retailers.  WWRE and GNX are both retailer driven industry exchanges.  Their equals from the suppliers’ side are Transora.com and CPGMarket.com.  All exchanges are designed to facilitate transactions in the food industry over the Internet.  GNX and Transora were established in February 2000 and April 2000 respectively.  Both e-marketplaces have announced the joint formation of a ‘megahub’ (January 2001).  And they have even moved beyond the boundaries of the food industry by inviting similar exchanges with other industries.  In addition, 2 suppliers joined the retail exchange GNX as members last March, following GNX’s commitment to establishing itself as a neutral exchange that offers value to a membership base consisting of both retailers and suppliers.

Hubs

GlobalNetXchange launched a ‘megahub’ that makes it possible for members of both exchanges to communicate with each other through a single connection point.  Transora and GlobalNetXchange, which all continue to operate as separate entities, have since invited other exchanges to join the hub.  CPGmarket.com, a marketplace formed by Danone and Nestlé last year, recently decided to become the hub’s third member exchange.

Joe Laughlin, Chief Executive of GlobalNetXchange, says that the 2 marketplaces recognised early on the need for a universal solution to help companies of all sizes deal with multiple exchanges and to make inter-exchange communication easy and inexpensive.  The megahub allows members of one exchange to avail themselves of the services of another without the expense of building a connection between exchanges.  This facilitates cross-value chain applications such as joint promotions management and Collaborative Planning, Forecasting and Replenishment (CPFR).  

However, Global Internet Exchanges do not simply connect industry participants so that they can strike better deals with their suppliers.  They enable them to coordinate their processes throughout the supply chain.  Thanks to increased supply-chain transparency, participants in online marketplaces should be able to reap a number of efficiency benefits, such as more accurate demand forecasting that allows them to reduce both inventory levels and cycle times.

Practical Applications

To turn this vision into reality, Transora and GlobalNetXchange have launched a Collaborative Planning, Forecasting and Replenishment (CPFR) initiative for their members.  CPFR allows purchasers and vendors to share information in order to improve their sales forecasting.  Retailers and manufacturers enter their forecasts for sales of a particular system onto a CPFR system.  This then uses software to identify anomalies in forecasting figures and forces communication between the 2 parties in order to agree the forecast figures.  As the sales are taking place across the globe and are subject to promotions at different intervals and at different locations, the data is valuable in allowing manufacturers to increase or reduce production levels, and the retailer to determine stock orders. 

Until now, only a handful of retailers and suppliers have effectively implemented CPFR, which allows users to have complete visibility of information from raw material supplier production to retailer point-of-sale data.  But Transora and GNX argue that their global hub removes many of the hurdles that have previously faced companies seeking to maximise the benefits of CPFR.  While traditional EDI links between companies allow for more efficient transaction processing, they have limited the scale and scope of CPFR implementation because of the one-to-one nature of such links. 

UK Supermarket chain Sainsbury’s, a member of GNX, in February 2001 became the first company to implement CPFR through a B2B exchange with its trading partners Unilever UK and Kimberly Clark Europe.  The trial collaboration involved products in the health & beauty baby care and household categories.  Sainsbury’s, which recently outsourced its entire IT operations to Accenture, says that the GNX application enables it to expand the collaborative work that has already begun to develop with its suppliers using EDI.  Not to be outdone, WWRE launched 2 retail pilots in February 2001, one in Belgium involving the Delhaize Group and Vandemoortele, and the other in the US with Target and Kimberly Clark.  WWRE says that the pilots will result in a product that dramatically improves the interaction and flow of information between all its member retailers and suppliers.

The Road Ahead

Besides CPFR, the leading exchanges plan to extend their offering to include a range of related services such as e-procurement, order management, trade promotion planning and execution, category management and transportation management.  Together, these services should help participants to fulfil one of the goals of ECR: to create fully automated and transparent supply chains.

But some issues remain: What functionality will be made available and when?  What data and business processes are necessary?  Who will participate in these exchanges, and how will competitive issues be handled?  How does public exchange participation fit into a company’s overall e-business strategy? 

Manufacturing and retailing executives across the consumer products industry are wrestling with these issues – even those who are among the founding members of the consortia.

THE RETAILER-SUPPLIER INTERFACE

There are three key imperatives for exchanges to succeed:

• Information and communication and communications technology must provide the capability to share information at high speed and low cost
• There must be agreement on basic standards and how information should be exchanged
• There must be a collaboration of trust between trading partners creating a demand to share information

The state of trade relations between CPG manufacturers and retailers today is marked by insufficient communication, collaboration and trust.  CPGs and retailers openly admit that relationships with their key trade partners are less than optimal.  In a battle over the consumer, there is far too little sharing of information as partners keep their data secret.  Retailers believe that manufacturers are too product-focused and lack the necessary information systems to manage and analyse data.  Increasingly retailers are making more demands of their CPG partners for closer collaboration and increased information sharing.  In particular, they are looking to their suppliers for help with consumer marketing activities, developing insights into consumer needs, and optimising category performance.  Furthermore, retailers appear willing and able to develop internal capabilities that help them move forward unilaterally in some of these areas, rather than waiting for their partners.

Manufacturers, on the other hand, believe that retailers are too focused on price and have traditionally been unwilling to collaborate.  CPGs continue to look to their retail partners for greater, more real-time information on consumer needs and behaviours.  However, to accelerate their own information gathering efforts, CPGs are capturing consumer information directly from consumers through direct mail, phone surveys, and the Internet, as well as from third-party sources.  Both CPGs and retailers believe that investments in new systems and resources are required.

There are four value chain segments where CPGs and retailers can collaborate more closely with one another to generate revenue growth (as opposed to areas which are primarily about cost cutting).

• ·     New Product Development: There is currently little cooperation and collaboration between CPGs and retailers regarding consumer needs.  In general, there is little interaction between retailers and CPGs in new product development activities.  CPGs share few insights with retailers from the extensive consumer market research they typically conduct in the early phases of a product development cycle.  Similarly, following a new product launch, little or no PoS data flows from retailers to CPGs that would shed light on consumer response and product preferences.  This lack of interaction helps contribute to high product development costs and failure rates for CPGs.  In addition, retailers are sometimes ill-prepared for new product launches and struggle to schedule the stocking of products as promised.

• ·     Trade Promotions: High cost of promotional spending without real returns has led to antagonistic relations between CPGs and retailers.  Traditionally, trade promotion interactions have been complex, expensive, and antagonistic.  According to a report by Mainspring, the Truth about CPG/Retail Public Exchanges, published in 2001, in the US CPGs spend approximately US$25bn a year in promotions, representing nearly 11 – 13 per cent of gross sales and 50 per cent of a typical firm’s marketing budget.  In addition, CPGs and retailers incur US$5 to US$8bn in additional hidden costs related to store operations, carrying inventory, warehousing, sales and diverting costs.  Lack of effective methods of tracking and monitoring promotions removes accountability and builds distrust.  Errors in processing lead to high deductions/discrepancies and slow financial settlement.  Information about the promotion program itself and funds allocation is often based in historical, rather than real-time data, which is often unreliable.  Finally, paper-based systems lead to high costs and administrative errors.

• ·     Category Management: Paper-based strategies and legacy data prevents CPGs from meeting retailers’ increasing data analysis demands.  CPGs’ category management programs are largely paper-based, which leads to significant processing errors.  In addition, these systems rely on historical data and are unable to integrate information from multiple sources.  As a result, the information provided to retailers does not meet their needs for consumer-based market research on a local level.  Lack of collaboration, analysis and research leads to missed opportunities to meet consumer demand with the right product mix.  In addition, lack of space planning monitoring tools leads to poor relations as retailers often fail to comply with agreed upon plans.

• ·     Account Management: CPGs’ account managers lack the necessary tools and training to effectively respond to retail customer needs and enhance overall profitability.  Currently there is insufficient collaboration between the CPG sales force and retailers, often resulting from the lack of or ineffective use of information provided for retailers.  Without access for real-time information the CPG sales force is unable to respond to the retailer’s needs is a timely fashion.  A CPG account manager should be armed with intelligence on competitor deals, distributor deals, best and worst performance of key categories, and details of promotion programs when calling on a retail account.  However, if even armed with this information, lack of training on how to analyse and properly use the data will prevent the sales force from being effective.

CHALLENGES

Public exchanges face five key challenges that limit their ability to alleviate the problems experienced by trading partners in the CPG industry.

• It will take public exchanges much longer than initially promised to develop a comprehensive set of B2B functionality.
• Many important value chain processes cannot and should not be put on a public exchange.
• Companies will not universally and exclusively participate in public exchanges.
• While XML is a significant improvement over current technologies, it is not a panacea for data exchange and process standardisation.
• Participation in a public exchange is neither simple nor easy, but requires each member to address complex strategic, organizational and technology-related issues
• Despite these challenges, public exchanges in one form or another do have important roles to play.  They are best suited for efforts that leverage scale in non-strategic areas for the benefit of all industry participants.

Ultimately, the greatest opportunity for individual CPGs and retailers lies in building advanced private extranet-based systems that deliver the high value e-enabled services trading partners are demanding today.  If competitors can successfully address the complex issues around technology integration and investment prioritisation, such initiatives will lead to more collaborative trade relationships, lower operating costs, and enhanced revenues and profitability.

For a more detailed analysis of the Retailer-Supplier Interface download the full article from the kamcity library
www.kamcity.com/library

Source: The Truth About CPG/Retail Public Exchanges, Mainspring.  CIES Food Business News, April 2001, Global Retailing 2002, IGD, EMR-NAMNEWS

Date article published: 01/05/2001

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