Collaborative Efforts Add Value to Supply Chains

Bob Todd has been a founding investor/director in several start-ups, two of which are now public companies with combined annual sales in excess of $6 billion. His supply chain investments include Digital Market (acquired by Agile) and Supplybase (acquired by i2).

Q:

How will online supply chains impact the marketplace?
A: It will have a large impact in industries that have standard parts with small order sizes and where prices can be driven down by aggregating demand or supply. In other industries where the order sizes are huge, you will not see a lot of change in prices.

Q: How will industries with huge order sizes benefit?
A: They will benefit in terms of collaboration, as opposed to buy/sell savings. The system enables customers to be more efficient, which cuts the cost of commerce as opposed to the cost of the product. In aggregate, the cost of procurement might be $50 million, which you can reduce by $10 million because you are reducing the overhead of the organization, as opposed to the per-unit cost.

Q: How will online procurement make customers more efficient?
A: By increased collaboration, which means visibility into the supply chain and demand chain. They all want a better system for managing e-commerce, so they don't have faxes and e-mails going back and forth. Everyone will gain some efficiency by using the Internet for the processing and physical distribution of paperwork between buyers and sellers.

Q: Will these supply chain networks replace traditional salespeople?
A: Salespeople are very good at describing non-standard products. So if you are talking about a $100 million order, you are probably looking at all sorts of non-standard specifications that an online system will not be able to handle. The standard price for a product ignores all sorts of other things, like add-ons, customization and next year's contract.

Q: When did the concept of the online exchange emerge?
A: The concept of an exchange started two to three years ago. Chemdex was one of the earliest exchanges for the buying and selling of chemicals. Chemdex was a pure way to buy and sell for an array of products that were pretty standard, which means there was not a lot of freedom other than price and quantity. Then they added content, so now you can find out about what you are buying.

Q: How would a participant make use of this content?
A: All of the participants expect to get their industry content off of these exchanges. For example, in the electronics industry, you need component cross-reference and identification so that if one vendor calls a part "AB" and another vendor calls it "BC," you can still compare prices. You would want all that to be available on the industry Web site.

Q: In what other ways have online exchanges evolved?
A: They have added more sophisticated buying engines and auctions, as well as the ability to deal with more sophisticated products and product configurations. They are moving to industry-wide marketplaces that include collaboration and visibility of the supply chain. The automobile industry is one of the first that fits that model.

Q: Do you think that there's room for multiple exchanges in a given industry, or will one dominate?
A: You might argue that one market would be best. But I have already seen some companies that will enable an individual buyer or seller to deal with more than one marketplace with one transaction. So if it develops along those lines, why do I care if I deal with multiple marketplaces as long as I only have to deal with one transaction?

Q: What about antitrust concerns?
A: When you look at the auto industry, the issue is not limited to Ford, GM and Chrysler. All of their suppliers and technology people are involved as well. I think the DOJ is concerned more with the percentage of ownership the three automakers have in the exchange, rather than their market share.