Providers expand services as technology evolves

By Christopher Reilly -- Purchasing, 11/2/2000

The face of electronic commerce is changing at a rapid pace.

Frenzied demand for e-commerce in the chemical industry has led to many new corporate initiatives, which have permeated the industry's top players. Demand for e-commerce is so great, in fact, that many customers today insist that their existing (and potential) suppliers develop electronic commerce capabilities and put them into practice.

Few dispute the cost benefits e-commerce can provide through improved workflow processes, more strategic sourcing, better quality assurance through supplier performance monitoring, and lower transaction costs.

As more buyers realize these benefits, online suppliers and vertical marketplaces alike are refining their services and business models, and are partnering with other online entities to bring more value to the mix for customers.

"The chemical industry, like some other forms of heavy industry, is seeing an evolution of technological offerings with regard to electronic commerce," says John Mulholland, vice president of strategy at e-Chemicals, based in Ann Arbor, Mich., one of the first third-party online e-commerce providers. "Look back 18 months and we have seen a progression from companies developing Web sites to showcase their products and services, toward actually carrying out online transactions," he says. Here, Mulholland explains, is where online auctions, whether conducted by suppliers, consortia of buyers, or third-party organizations have come into play. According to Mulholland, these online auctions focused on bringing buyers and suppliers together in a new medium for doing business.

"The next step," he says, " Which we are now seeing more clearly defined, is an evolution toward providing supply-chain integration through the use of electronic means."

Customer focus

Online supplier marketplaces and third-party e-commerce solutions catering to the CPI have at least one fundamental similarity. They are all designing their business models with a focus on the customer. With competition for buyers' business heating up, these on-line marketplaces continue to refine their service offering to make doing business easier. This is good news for buyers, because in some cases, it means that they can satisfy materials procurement requirements, save some money, and extract added value from the third-party providers.

To better determine customers' online e-business needs, many companies are gathering information from customers to apply to the development of their online e-business capabilities.

According to Regg Bonnevie, director, global programs, e-business at Eastman Chemical Co., based in Kingsport, Tenn., his company has conducted several quality assessments with customers to identify areas where service could be improved. "We're trying to build a portfolio of options through the use of information technology to deliver solutions to efficiency problems," he says. "We're also building our commercial platform so that customers can place orders online, track the status of those orders, and download summary reports of historical purchases," he says. "Essentially, we're letting our customers choose how they want to do business with us in the future," he says.

Nick Stojka, executive vice president of Commerx Inc., the Chicago, Ill.-based parent company of PlasticsNet.com, an online marketplace serving the plastics resins markets, agrees, adding that companies like his are beginning to diversify their service offering to apply to a range of customers.

"We're mainly seeing the larger chemical players getting fully involved in e-commerce right now," says Stojka. "The companies with multiple plants, using multiple technologies, and who typically have large supplier bases are primarily the companies that are buying these services. Our customer base mainly comprises companies with annual sales in the "$500 million to $5 billion range," Stojka says.

However, some online e-commerce providers, such as PlasticsNet, are also stripping down the functionality of their service offerings to apply to smaller customers, Stojka explains. "For instance, those companies with only one plant probably wouldn't need all the routing tools and services that a larger company would require," he says.

As for the smaller companies, Stojka says that many appear to be waiting. Stojka believes that the cost and implementation of information systems infrastructure, (which is generally quite expensive) appears to be behind smaller companies' unwillingness to jump into business-to-business e-commerce with both feet.

Some other third-party marketplaces are building a smaller-customer approach into their business model. For instance, Fobchemicals.com, based in Chicago, Ill., a buyer-focused online vertical hub, which specializes within vertical markets, touts its Centralized Aggregate Purchasing System (capsE), technology to coordinate purchasing efforts of many smaller buyers.

"Unlike online catalogue sites, fobchemicals.com acts as a co-op for buyers, aggregating their purchasing to provide more competitive pricing to customers," according to a company spokesperson.

"Increasingly, we're called upon to lend our expertise (in the chemicals and e-business markets) to buyers who come to our site," says Linda Stegeman, marketing manager at ChemConnect, based in San Francisco, Calif. "In addition to saving time and money by using our service, buyers are finding out that they can also get expert technical advice."

Partnering for expanded services

Business-to-business transactions for many products and services, such as maintenance repair and operating expenses (MRO), appear tailor-made for online e-commerce. However, direct material transactions in the CPI can be complex. Many chemicals require intricate handling and delivery procedures and, in some cases, approvals and certifications from regulatory bodies. Transportation, logistics and storage are important concerns for buyers and suppliers, and have been topics for debate among many buyers and third-party marketplaces.

"Horizontal services such as logistics and credit are critical to our industry, but are highly fragmented and inefficient," says Regg Bonnevie at Eastman Chemical. As an example, Bonnevie says that logistics for online purchases in the near future will probably constitute about 10% of the total revenue spend, which he estimates at about $170 billion. To better serve buyers needs in this market segment, Bonnevie says that Eastman has partnered with Global Logistics Technology Inc., a logistics software company based in Shelton, Conn., and formed a new company-ShipChem.com.

Bonnevie explains that ShipChem. com offers software that aggregates global logistics information on carriers, rates, asset utilization and scheduling. "There are a lot of containers and trucks that are back-hauled empty, simply because there is no place to get the necessary scheduling information and specifications on deliveries," he says.

In addition, ShipChem.com has announced a strategic alliance with WorldWideTesting.com, Atlanta, Ga., which provides online sample evaluation and quality assurance services. The alliance provides WorldWideTesting's services extension of ShipChem's logistics service offering.

Similarly, ChemConnect.com recently formed partnerships with several companies in order to boost its logistics service offering for customers. These include deals with BDP International, a provider of global transportation and logistics services to the chemical industry; Optimum Logistics, an Internet-based logistics system designed to electronically arrange and track all stages of the bulk material supply chain; CarrierPoint, which offers a real-time platform for shippers and carriers to bid on and assign shipments; and Bulknet.com, an online load management and information exchange, offering shippers and carriers customized proprietary logistic Web sites.

Another example of expanded services through partnerships is Eastman's investment in e-Credit. According to Bonnevie, e-Credit is building a global financial network to enable companies such as Eastman to conduct credit verification for customers, smooth electronic invoicing on online transactions, sell receivables, and offer other financial services.

Other partnerships are designed to penetrate global markets. In mid-August, two online chemical trading exchanges-ChemCross.com, based in Houston, Texas, and Chemease.com, based in China-announced a strategic alliance.

According to company sources, the deal provides many benefits for both chemical exchanges. For example, ChemCross benefits from Chemease's strong presence in China, while Chemease will have access to ChemCross's large, international customer base.

Lessons learned

As online marketplaces and e-commerce providers have evolved over the past year, the industry's movers and shakers have identified several lessons learned.

Primary among the lessons is that e-commerce is a tool. The laws of supply and demand will still rule. Used effectively, e-commerce can provide significant cost savings to buyers, which may be realized throughout the supply chain. However, technological developments cannot replace a well-thought-out business strategy. Failure to recognize this simple truth is a recipe for disaster in the new economy.

Here are some other lessons that buyers, suppliers and third-party marketplaces have learned, compiled from a variety of sources:

1. More price transparency. Auction technology provides real-time information to determine which way the market is headed. Auctions allow buyers and suppliers to test and validate assumptions almost instantaneously, where weeks or even months of market research were required in the past.

2. Speed is primary benefit. Most buyers believe that the number-one value that online procurement provides is the speed at which transactions may be conducted. Buyers can eliminate time spent calling suppliers with their material requirements. In many cases, available material is presented to them electronically. As one marketing manager at an online marketplace puts it, "To survive in this business, we have to be very quick to capitalize on opportunities. The value we bring is the ability to accelerate transactions."

3. The development of strong relationships between buyer and supplier are still paramount. While the information sharing that e-commerce can provide has and will continue to automate some functions of procurement, buyers and suppliers agree that the technology is no substitute for a strong relationship, especially when problems arise.

4. In terms of competition between online marketplaces, the primary factor is the total value they offer to customers and how their delivery mechanism of that value best fits with customers' own e-commerce strategies.

5. Now is the time for experimentation. Currently, many suppliers are experimenting with wide-spec, off-spec inventory and with excess inventory used in online auction formats. As more companies become more familiar with e-commerce transactions, expect to see more prime material trading through online channels.

6. Getting involved. In the face of e-commerce growth, chemical companies are realizing the importance of involvement in e-business and the development of strategies that address the new supply model. Companies that resist the change to information technologies will have to compete in the future with those that have embraced this progression, and they do so at their own risk.

Where are we headed?

Historically, chemical companies have invested in many forms of information technology, but these have been more focused on the enterprise itself, to make their own operations more efficient. But as these technologies have progressed, and through the connectivity the Internet provides, companies are linking their back-office systems with their suppliers.

"We see e-commerce headed toward greater supply chain optimization," says e-Chemical's John Mulholland. "More important than buying materials based on the ease and low transaction costs associated with online procurement, chemical companies are beginning to link their own material requirement information with their suppliers for more strategic sourcing, planning and scheduling throughout the supply chain," he says. "More important than price is the objective to wring cost out of the system through this information sharing between buyer and supplier. Some companies are doing this currently, but we expect to see much more of it in the future," he says.

The reward potential of greater supply chain integration through online information sharing is great. Eastman's Regg Bonnevie comments, "A good estimate of the chemical industry today is that approximately 20% of sales revenue is tied up in working capital. That's probably about $340 billion in working capital in the industry, in the form of finished goods, process raw materials inventories, receivables, etc.," he says. "If companies can do a better job of using technology to make information flow more transparently, there is a tremendous opportunity for cost reduction," he says.

Another trend taking shape is the outsourcing of information based, and electronic commerce functions to third-party providers. Companies will be looking for expertise in handling all aspects of implementation of these systems. Evidence of this is the fact that many providers are marketing themselves as total e-business solution providers.

"As Web-hosted procurement becomes more complex, companies are increasingly turning to third parties to outsource their technology implementation and network management," says PlasticsNet's Nick Stojka. "We'll see more outsourcing because the technology is getting more sophisticated. Capital costs for e-procurement platforms and services are escalating, and more technological expertise is required to maintain the systems," he says.