Buying in the chemicals and plastics industry is not like buying in a lot of other industries. According to some estimates, anywhere from 33-50% of chemicals are bought and sold within the chemicals industry—that is, one chemical company buying from another, often a competitor, but also a well-known business partner.

This unique environment lends itself to more streamlined and deeper transactions. This market certainly received its share of online models offering such efficiency in the dot.com rush. But the past two years have seen a significant shakeout in the B2B online chemical and plastics exchange market. Some may consider that an understatement, but the choices out there now for buying online are much more focused than in the past, making it an opportune time to review the models and start figuring how they can benefit your organization.

With that in mind, here is a brief review of four major tools for sourcing and buying.

Most in the industry consider this the grandaddy of the chemicals and plastics exchanges—the healthiest survivor of the B2B dot.com shakeout that claimed a host of victims in this market. And its secret may not be so much its functionality or its model as its speed to market. John F. Beasley and Jay Hall founded ChemConnect in 1995 as a bulletin board site, long before anyone had heard of an online marketplace for anything.

"The founders of ChemConnect believed that the chemicals and plastics industries were ready to take advantage of the efficiencies of e-commerce," says Michele Hincks, vice president of marketing at ChemConnect. "The trade of chemicals/plastics is a huge global and fragmented market of approximately $1.7 trillion, and the industry needed a better way to conduct business worldwide. Clearly, the founders viewed it as a major business opportunity, but more than that, the founders believed that ChemConnect could be a model for the adoption of B2B e-commerce practices within other industries."

ChemConnect today offers a commodities exchange for online real-time trading, a trading center for e-RFQs and online reverse auction capabilities. In addition, ChemConnect is blazing a new trail by offering risk management options through an agreement with the Chicago Mercantile Exchange and provides fulfillment services as well. Last year more than $4 billion worth of goods were purchased on ChemConnect including those on CheMatch, which ChemConnect acquired in early 2002.

If you want to talk traction, ChemConnect boasts 8,000 member companies and has a database of more than 60,000 products available today. ChemConnect's broad offerings means it competes with all of the other niche players in the industry like FreeMarkets for auctions and Elemica for connectivity.

In the shadow of ChemConnect is Omnexus, a private plastics-only industry marketplace that is working hard to differentiate itself from other models. Omnexus offers a more private network model, focusing on negotiating with existing suppliers in a closely connected network. They are not focused on discovery of new suppliers.

"If you're looking to do spot buys, be it in a private or public auction, then Omnexus is not the right place for you," says Michael Thaler, vice president of strategy at Omnexus. "Omnexus is not concerned with finding new suppliers. We're focused on existing relationships with suppliers, either under contract or not under contract. It's as though you establish a private marketplace with each supplier and then all of those marketplaces are put into one location to access online."

Omnexus features an automated ordering process with price and availability information and order placement and confirmation capabilities. After the transaction, it offers order tracking, electronic billing and payment, online and traditional customer support, online document access and comment screens. New tools include the Sur PLUS Center, a searchable catalog containing excess inventory listings from resin producers, and a Tech Center that puts plastics processors in direct contact with technical experts from multiple suppliers.

With a plastics-only focus, Omnexus may compete more directly with sites like GE Polymerland than it does with ChemConnect or FreeMarkets.

When is a marketplace not a marketplace? When it's Elemica.

Twenty-two major players in the chemicals industry, including many of the same names behind Omnexus, founded Elemica in mid-2000. Elemica is less of a procurement marketplace because it is a transaction tool for chemicals buyers who have already sourced suppliers. View this as a connectivity hub that translates the information that is being sent between its members' ERP systems for repeat orders.

"We built a hub to provide interoperability so each individual trading partner only has to talk to us, instead of to all of the other members in the network," says Kent Dolby, CEO of Elemica. Dolby says the 22 founding members of Elemica wanted to gain efficiencies in transaction processing for contract repeat order business, reduce supply chain costs and inventory investments and lastly eliminate duplicate technology spend.

Elemica has a close relationship with Omnexus and there are many overlap users of both depending on the mix of spend and suppliers involved. Elemica does not charge buyers, but charges sellers based on number of transactions.

Down the road, Elemica's business model could easily be applied to other industries and Dolby has not ruled that out but does not see it as a priority in the short-term. "We believe in focus," Dolby says. "We have work to do in the chemicals industry and want to provide other leveraged services to the industry." Some market watchers expect to see some value-added services in supply chain and logistics from Elemica down the road.

FreeMarkets is representative of a host of non-industry-specific e-sourcing providers available to chemicals buyers today. FreeMarkets offers a full-serve product, which includes auctioning tools and in-depth consulting services, as well as a self-serve tool with less consulting help. The chemicals and plastics market is a focus area for FreeMarkets, according to Keith Guilbault, director of energy and process industries, who says the company has roughly 20 chemicals industry experts on board today for consulting and outsourcing help.

"In general, the exchanges and marketplaces are mostly software solutions only," says Guilbault. "We've found the most successful [solutions] are a combination of software and services. We have a number of customers that were involved in the development of those exchanges and we're seeing more of the volume coming from exchanges to FreeMarkets."

Most of these tools are based on companies using an ERP system, but what if a user does not use an ERP? Is it possible to gain advantages from these tools without an ERP? In short, the answer is yes in theory, but, it is not usually recommended.

Elemica's main benefit is ERP-to-ERP connectivity, but it offers a Web-based solution and Transaction Enabling Engine, which enables a seller without ERP connectivity to receive and process orders from buyers who use Elemica. It's still an online connection better than faxing and e-mailing, but certainly does not provide the level of connectivity gained through ERP to ERP connections.

Omnexus is open to non-ERP users as well, offering a Web-based connection to its marketplace. Thaler says the UltraLite integration technology streamlines the connection of Web-based buyers to all Omnexus sellers. Hincks says ChemConnect users can access its negotiation tools and risk management solutions without involving their ERP system, but "true collaborative commerce will occur when trading partners are linked via the hub to each other's ERP systems."

The main difference between the models available today is the public marketplace model of a ChemConnect or FreeMarkets versus a private model of Omnexus and Elemica. So which is most efficient?

Not surprisingly, Thaler comes out in favor of the private model of Omnexus. "What people in the B2B world fail to understand is there is a very close relationship between buyers and suppliers," he says. "And when you get into specialty chemicals or engineered resins or any material that's not pure commodity, that relationship is extremely important. So the whole idea of breaking apart existing supplier relationships and having them form new ones in cyberspace to save a penny here or there does not make sense."

Leif Eriksen, analyst at Boston-based AMR Research, says in the long run, chemicals and plastics buyers will use a combination of public and private tools, depending on the company and what industry they serve.

"There will always be a place for auctions and public marketplaces for more commodity-type items where price is the biggest factor," says Eriksen. "Companies need to pursue a number of strategies depending on the type of products they're buying."

Troy Dahleen, administrative services manager for ITW Deltar Engineered Fasteners in Chippewa Falls, Wis., says his company plans to continue its use of Omnexus as one part of its spending mix, but will not move all of its spending onto Omnexus. ITW Deltar makes plastic fasteners for the automotive industry and has about 25-30% of its plastics spend going through Omnexus today. Dahleen says his firm looked at using private connections with individual chemicals firms, but liked the Omnexus model because it offers one single connection to a host of suppliers' networks.

Another major difference between the surviving models in the chemicals B2B marketplace space is the funding source behind them. Omnexus and Elemica are consortium models funded by a collection of the major players in the chemicals or plastics industry. ChemConnect and FreeMarkets are funded in a more dot.com style. But, as Eriksen is quick to point out, none of these models are financially independent yet.

"These are the shakeout survivors, but none of them are profitable right now," he says. "They all have a reasonable amount of money in the bank. ChemConnect is the closest to being profitable because it is not a consortium. It is relying on outside funding and will probably not see much more. If it can sustain some of its momentum it should be profitable this year or early next year. The consortiums will have to go to investors for more money before reaching profitability."

Perhaps the company best suited to evaluate the four models above is Dow Chemical of Ann Arbor, Mich., which has used and/or invested in each of the four models. According to Andy DuPont, global director, electronic marketing channels for Dow Chemical, Dow started out using FreeMarkets back in 1999 for reverse auction capability but when word of the ChemConnect industry-specific model began spreading, Dow quickly threw its support behind that model instead. Since then, Dow has been a key investor and user in Omnexus and Elemica, as well as ChemConnect.

"Having an industry-focused entity to develop auction capabilities specific to our needs in the chemicals industry was pretty high on our target list," says DuPont. "We've worked with ChemConnect to refine their auction capabilities specific to the chemicals industry and that has paid off."

Jeff Baker, e-business manager at Dow Chemical, says the breadth of offering at ChemConnect led to Dow's support. Currently, Dow is using ChemConnect's reverse auctions, commodity exchange, trading center and is evaluating the risk management tools that ChemConnect gained in the CheMatch acquisition.

Elemica is a big focus of Dow's e-movement and Dow has sent key suppliers letters informing them that Dow wants to use Elemica to integrate ERP-to-ERP with them. Overall, Dow is still in the early stages and has only moved 2-3% of its spend on these new tools, but expects to ramp up more quickly in the next two years. "ERP integration is definitely on the uptake," DuPont says. "I think we do more buying on Elemica than anyone else."

The more skeptical market watchers question Dow's validation of the tools that they have a financial interest in, but DuPont says they just happened to pick the winners of a long race. "Some people see that we've participated in more than one opportunity and feel we were placing bets on several horses," says DuPont. "But that is not the case. Each of the investments we made had a targeted value proposition for us and we put a fair amount of analysis into what functionality was needed and who could best provide that. We are quite happy with the way these investments played out in terms of providing functionality that is complementary to the other."

Most market watchers feel the shakeout in the online chemicals marketplace space is just about over and the surviving models have well-defined niches that differentiate them from each other. Eriksen warns the game of Survivor is not over yet and more consolidation could take place before the end of 2002.

Future entrants to this space will have to present clearly defined, well-outlined models. Earlier this year, Dow Corning unveiled Xiameter, a new online marketplace to buy and sell bulk silicon-based materials online. Xiameter offers real-time pricing for high-volume shipments of more than 300 materials in a no-frills marketplace with no market research, intellectual property services or technical services.

Baker says the breadth of a model like ChemConnect's offers much more appeal than a standalone auction model like FreeMarkets' and feels buyers have to take a "just use it" approach to find the optimal mix of models for a given organization.

"For example, some people rave about auctions and some people don't," he says. "But in truth, each company probably has a certain percent of spend that is a good fit for auctions, but you have to analyze your spend and find that. Not everything at Dow fits in this model, but there are some strong efficiencies and interesting market dynamics we have achieved with these models and we're still evaluating them to see how they fit with our model."

And work on data standards is progressing as well. In June, the Chemical Industry Data Exchange agreed to work with the Petroleum Industry Data Exchange and the Rapid, an agricultural trade group, to collaborate on new data standards for B2B transactions between their respective industries.