A Comparison of Procurement Models for B2B Electronic Commerce

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1 A Comparison of Procurement Models for B2B Electronic Commerce 1 A Comparison of Procurement Models for B2B Electronic Commerce Avijeet Chauhan School of Computer Science and Engineering University of New South Wales and Narciso Cerpa Department of Systems Engineering University of Talca Abstract Procurement models for business-to-business e-commerce are currently quite common due to the advent of e-commerce. These models allow organizations to integrate their processes with procurement companies to automate and facilitate the purchase of indirect goods. There are currently a variety of procurement models for e-commerce that have been proposed by researches and practitioners. In this paper we develop a comparison framework based on characteristics and aspects that may represent advantages and/or disadvantages for those organizations implementing these models. We compare four of these models based on our comparison framework, and provide an analysis of the pros and cons of each procurement model compared. Keywords: Procurement, Models, Business-to-Business, MarketPlaces, Hubs, Yield-Manager, Comparison. 1. Introduction Business-to-Business commerce can be defined as exchange of information to support transactions and relationships between two or more businesses. It includes a range of business transactions including wholesale trade, company purchases of services, resources, technology, manufactured parts, capital equipment and office supplies/equipment (Lucking-Reiley and Spulber, 2000).

2 A Comparison of Procurement Models for B2B Electronic Commerce 2 The purpose of this report is to establish a framework for comparing B2B models, which serve a similar purpose. For this purpose the report has been limited to B2B systems supporting online procurement. Procurement refers to routine purchases of indirect goods - items required to run a business but not central to the business s output. Such items include office supplies, computers, and stationary. Procurement plays a crucial role in process and product development, and has evolved from reactionary and operational function to a more strategic and proactive one (Lefebvre et al., 2001). Businesses often require integration of processes with procurement companies to streamline their core activities. Electronic commerce procurement solutions can reduce the overall procurement costs, by reducing transaction costs (Lucking-Reiley and Spulber, 2000), reallocating resources required for manual procurement, and reducing inventory. The next section of the report introduces the models that will be used for comparison. The models are defined in detail and their characteristics are also listed. Models that are compared include: Buy side marketplace model, sell side marketplace, MRO (Maintenance, Repair, and Operations) hub and yield manager. All of the mentioned models facilitate online procurement but have different characteristics, which will be used for the comparison. A framework will then be established for comparing B2B models for online procurement of goods and services. The framework will identify and detail a number of comparison factors, which will be used as the basis for comparing the various models. Following that various models for online procurement will be compared, and details of the comparison will be listed. The comparison will be beneficial in evaluating the models, identifying their characteristics, advantages and disadvantages. Finally conclusions from the comparison will be derived, and a final analysis will be given. 2. Procurement Models This section describes the models that will be compared using the comparison framework. All the models provide a common purpose to enable online procurement. However the models differ and have unique characteristics that set them apart, and enable them to be more useful for particular scenarios. The models for comparison include: - Buy Side Marketplace - Sell Side Marketplace - Yield Manager - MRO Hub The main commonality between these models is that they enable online procurement. Procurement of indirect goods and services is horizontal, and is non-industry specific. Since the purpose of this report is to explore and compare solutions to support procurement, the models have been limited to horizontal

3 A Comparison of Procurement Models for B2B Electronic Commerce 3 orientation. Each of the above models is explored in detail to provide a greater understanding of the model and also its characteristics. 2.1 Buy Side Marketplace Buy side markets are initiated by a single or small number of large buyers with many smaller fragmented sellers. This model supports procurement, fulfillment and purchasing initiated by the buyer. Buy side models facilitate reverse auction dynamic, pricing mechanism. Examples of buy side solutions include Freemarkets.com and Covisint. Benefits of this model include streamlined purchasing operations and time and cost savings (Archer and Gebauer, 1999). Most of the advantages are for the buyer organization that owns the system. In terms of online procurement the buyer drives the demand and price. The selling organizations benefit from low or nil maintenance costs. The disadvantage of this model is that supplier interacting with multiple buyers will have to deliver data in various formats. The suppliers must also adhere to the standards and protocols adopted by the buying organization. Another disadvantage is that the buying organization is responsible for investment, maintenance and establishing various standards and protocols. Its characteristics include: - 1-many interaction pattern - Supports reverse auctions and online catalogs - Private or public accessibility - Buyer side bias - Buyer ownership 2.2 Sell Side Marketplace Sell side marketplace model has a one-to-many interaction pattern and is initiated by a single supplier supporting many buyers. The model is also known as supply side or sell-centric model. In this model there is a single supplier, who initiates the market, and multiple buyers. The model can facilitate online procurement by allowing procuring organizations to take part in the market as a buyer. Examples of sell side solutions include computer manufacturer Dell ( and wholesale distributor W.W.Grainger ( (Archer and Gebauer, 1999). Most of the advantages are for the selling organization that owns the sell side solution. The seller drives the prices of goods based on level of supply. The solution is seller biased, and the seller has the most control over the marketplace. Buyers can benefit from low maintenance costs and through smaller investment costs compared to the seller. For online procurement, the procuring or buying organization faces substantial disadvantages. A drawback of sell side model is that buying organizations may have to integrate their systems with various solutions if they interact with

4 A Comparison of Procurement Models for B2B Electronic Commerce 4 multiple suppliers (Archer and Gebauer, 1999). Buying organizations must also adhere to the standards and protocols adopted by the buying organization. Buyers also face competition from other buying organizations, especially in situations when there is low supply and high demand. A disadvantage to the selling organization is that it is responsible for investment, maintenance of the system and establishing various standards and protocols. Its characteristics include: - 1-many interaction pattern - Supports forward auctions and online catalogs - Private or public accessibility - Seller side bias - Seller ownership 2.3 Yield Manager Yield managers are procurement specific solutions and focus on spot procurement of indirect goods. Yield managers add value when there is high degree of price and demand volatility or when huge fixed-cost assets cannot be liquidated or acquired at short notice. Although these hubs are horizontally focused they tend to be more vertically oriented than MRO hubs (Kaplan and Sawhney 1999). Examples of yield managers include Youtilities.com and CapacityWeb.com (Kaplan and Sawhney, 1999). Characteristics of Yield managers include: - Many-many interaction pattern - Supports spot pricing - Public accessibility - Neutral, no bias - Owned by neutral intermediary 2.4 MRO Hub MRO Hubs also procurement specific solutions and are focused on improving efficiencies in the procurement process for operating supplies for a diverse set of industries. The model has moved from a traditional enterprise centric model to a network centric model, where all catalogs are hosted on a common hub that businesses connect to (Kaplan and Sawhney, 1999). Examples of MRO hubs include Bizbuyer.com, MRO.com and ProcureNet.com. Characteristics of MRO hubs include: - Many-many interaction pattern - Support systematic purchasing - Public accessibility - Neutral, no bias - Owned by neutral intermediary

5 A Comparison of Procurement Models for B2B Electronic Commerce 5 3. Comparison Framework This section describes the framework that will be used to compare the models mentioned in the preceding section. The framework consists of a number of factors that can be used to assess the models. The following is a list of factors that will be used in the comparison: - Advantages to Buying organization - Disadvantages to buying organization - Advantages to selling organization - Disadvantages to selling organization - Pricing mechanisms supported - Bias: neutral versus one sided - Interaction patterns - Ownership 3.1 Advantages to buying organization This factor is used to identify the advantages of the particular model to the buying or procuring organization. Different models provide different benefits to the buyer, and the benefits can be assessed according to level of control, price of goods (lower) and cost of adopting the solution. 3.2 Disadvantages to buying organization This factor is used to identify the disadvantages of the particular model to the buying or procuring organization. The models have different disadvantages to the buyer, and the benefits can be assessed according to level of integration with internal systems, complying with different standards, and maintenance costs. 3.3 Advantages to selling organization This factor is used to identify the advantages of the particular model to the selling organization. Different models provide different benefits to the seller, and the benefits can be assessed according to level of control, price of goods (higher) and cost of adopting the solution. 3.4 Disdvantages to selling organization The selling organization may be disadvantaged by the solution. Different models have different disadvantages, and can be assessed according to level of integration with internal systems, complying with different standards, and maintenance costs.

6 A Comparison of Procurement Models for B2B Electronic Commerce Pricing mechanisms suported The models differ in terms of their support of pricing mechanisms. This factor evaluates the different static and dynamic pricing mechanisms that the models can support. Static pricing consists of electronic catalog based solutions, which are an essential part of electronic procurement solutions (Ginsburg et al., 1999). For the purposes of this paper dynamic pricing mechanisms have been limited to auctions. Auctions are formalized trading procedures in which the trading partners interaction is governed by specific trading rules (Klein 1997). Electronic auctions are a special case of automated negotiations and different auction mechanisms are best suited for different situations. Two main categories of auction are (Bichler et al.): - Forward Auction: an auction, which is based on a sell-centric net market model, with many buyers and one supplier. - Reverse Auction: an auction based on the buy-centric net market model, with many sellers and a single buyer. 3.6 Bias: neutral versus one sided The bias factor evaluates the bias of the model, which is directly related to ownership and one-sided advantages of the solution. - Buy side bias: the buyer receives most of the advantages of the solution, and has more control. The buying organization may also be the owner of the system, and thus may have the most influence. - Sell side bias: this is opposite to the buy side solution. The selling organization receives most of the advantages of the solution, and has more control. The seller may also be the owner of the system, and thus may have the most influence. - Neutral: this refers to unbiased solutions, where both the buying and selling organizations receive similar benefits and advantages. Most often neutral solutions provide benefits by aggregating both buyers and sellers thus creating liquidity for goods and services sold. 3.7 Interaction patterns Interaction pattern factor refers to the relationships with other organizations, specifically the pattern of the relationship. Interaction patterns for models supporting online procurement system, have been limited to the following: - One-to-many: Usually a company interacts with various businesses on another tier. For example a manufacturer purchasing raw materials from various suppliers. - Many-to-many: A many-to-many interaction pattern allows many companies to integrate with many other companies in different tiers. A many-to-many interaction pattern allows dynamic, short-term relationships to be established between companies.

7 A Comparison of Procurement Models for B2B Electronic Commerce Ownership B2B models supporting online procurement may be owned by a particular company, a group of companies, independent intermediary or by the industry. The ownership of the system determines the most influential parties and the controlling parties. The following is the description for the various ownership entities: - Buyer: The buyer may own the B2B market and may be the most influential party. In general the buyer may adopt standards and protocols for integration and communication, which the supplying companies will have to adopt in order to integrate with the buyer. This usually occurs if there is a large influential buyer, and smaller dispersed suppliers. Buyer focused markets usually have private accessibility but some also offer public accessibility to decrease costs of products by increasing supply. - Seller: The seller may own the B2B system or application and involve numerous buyers to participate through electronic transactions. This usually occurs if there is a large supplier, and many smaller fragmented buyers. In this case the supplier is the most influential party and the buyers will have to adhere to the standards, infrastructure and technology adopted by the supplier. Seller focused markets are usually private, although some offer public accessibility to increase buyer demand and increase the product price as a result of increased demand. - Industry: Marketplaces can be organized by industry consortiums to provide mutual benefits to all businesses operating within the particular industries, or participating in similar transactions. Solutions owned by industry consortiums are usually vertically focused because they are industry specific, and therefore are not considered in the comparison of procurement solutions, which are horizontally oriented. - Intermediary: Marketplaces can be owned by Intermediaries that provide mutual benefits to all businesses participating in the solution. 4. Comparison of the Procurement Models This section compares the models identified in section two, according to criteria set in the preceding section. The comparison is vital in understanding the relative strengths and weaknesses of the models and providing a thorough evaluation. 4.1 Advantages to buying organization The following table lists the relative advantages of the models to the buying organization, for online procurement purposes:

8 A Comparison of Procurement Models for B2B Electronic Commerce 8 Advantage Table 1. Advantages to buying organization. Buy Sell Yield MRO Side Side Manager Hub No Maybe Yes Yes Low initial investment costs for buyer Low maintenance costs for buyer No Maybe Yes Yes Buyer control Yes No No No Prices driven by buyer demand Yes No Maybe Maybe Access to large number of Yes No Yes Yes suppliers Buyer side bias Yes No No No Support buyer catalogues Yes Yes Maybe Maybe Support for reverse auction Yes No Yes No Support private accessibility Yes Yes No Yes Support public accessibility Yes Yes Yes No Support long term relations with suppliers Support short term relations with suppliers Buyers don t need to adopt supplier standards Buyers don t need to adopt intermediary standards Yes Maybe Maybe Yes Yes Yes Yes No Yes No Yes Yes Yes Yes No No From the above table it is evident that the buy side solution provides the most benefits to the buyer in terms of control, bias, large supplier base, support for reverse auctions and diminishing the need to support supplier or intermediary based standards and protocols. However, supplier may be reluctant to participate in a solution that provides excessive control to the buyer. Yield managers and MRO hubs offer low cost and maintenance advantages and a large supplier base, although they remove the bias and buyer control that is evident in the buy side solution. A sell side solution has the least advantages for the buying/procuring organization. It may offer low maintenance and investment costs, however the buying organization has to adopt supplier based standards and the supplier base is restricted. 4.2 Disadvantages to buying organization The following table lists the relative disadvantages of the models to the buying organization, for online procurement purposes:

9 A Comparison of Procurement Models for B2B Electronic Commerce 9 Table 2. Disadvantages to buying organization. Disadvantage Buy Side Sell Side Yield Manager MRO Hub Large initial investment costs for Yes Maybe No No buyer Large maintenance costs for Yes Maybe No No buyer Supplier control No Yes No No Prices driven by supply No Yes Maybe Maybe Access to restricted number of No Yes No Maybe suppliers Seller side bias No Yes No No Buyers need to adopt supplier No Yes No No standards Buyers need to adopt intermediary standards No No Yes Yes The above table indicates that a Buy side solution has the least associated disadvantages for the buying organizations. The main disadvantages are high investment and maintenance costs. The sell side solution has many more associated disadvantages including, possibly high investment and maintenance costs due to adoption of supplier standards, supplier bias, and prices driven by supply of goods or services. A yield manager offers access to a larger supplier base than MRO hubs, which only offer private access. 4.3 Advantages to selling organization The following table lists the relative advantages of the models to the selling organization, for online procurement purposes: Table 3. Advantages to selling organization. Advantage Buy Side Sell Side Yield Manager MRO Hub Low initial investment costs for Maybe No Yes Yes supplier Low maintenance costs for Maybe No Yes Yes supplier Supplier control No Yes No No Prices driven by supply No Yes Maybe Maybe Access to large number of buyers No Yes Yes Yes Supplier side bias No Yes No No Support supplier catalogues Yes Yes Maybe Maybe Support of forward auction No Yes Yes No

10 A Comparison of Procurement Models for B2B Electronic Commerce 10 Support private accessibility Yes Yes No Yes Support public accessibility Yes Yes Yes No Support long term relations with Yes Yes Maybe Yes buyers Support short term relations with No Yes Yes No buyers Suppliers don t need to adopt No Yes Yes Yes buyer standards Suppliers don t need to adopt intermediary standards Yes Yes No No The review of the advantages offered by the solutions clearly indicates that a sell side solution offers the most advantages to the supplier. Both MRO hub and Yield manager provide similar benefits, although MRO hub only provides private access, and yield manager provides public access. Another difference is that a yield manager can support both long term and short relationships for a supplier with buyers, whereas an MRO hub only supports long term pre-negotiated contracts. The buy side solution has the least advantages for the supplying organizations, and may only be opted if the buyer has substantial power in the market and will provide extended benefits to suppliers. 4.4 Disadvantages to selling organization The following table lists the disadvantages of the models to the supplying organization, for online procurement purposes: Table 4. Disadvantages to selling organization. Disadvantage Buy Side Sell Side Yield Manager MRO Hub High initial investment costs for Maybe Yes No No supplier High maintenance costs for Maybe Yes No No supplier Buyer control Yes No No No Prices driven by buyer demand Yes No Maybe Maybe Access to limited number of Yes No No Maybe buyers Do not support forward auctions Yes No No Yes Buyer side bias Yes No No No Only support long term relations No No No Yes with buyers Only support short term relations with buyers No No Maybe No

11 A Comparison of Procurement Models for B2B Electronic Commerce 11 Suppliers need to adopt buyer standards Suppliers need to adopt intermediary standards Yes No No No No No Yes Yes The review of the disadvantages to the supplying organization indicates that a sell side solution offers the least disadvantages to the supplier, and the buy side solution offers the most disadvantages. An MRO Hub is more restrictive than a Yield Manager and cannot support forward auctions, or short term relationships. However it provides the advantage of lower competition for the suppliers through private access, and pre-negotiated contracts. 4.5 Pricing mechanisms supported The following table is used to identify the pricing mechanisms that can be supported by the identified models. The table will be used to compare the advantages of the solution through provision of multiple pricing mechanisms. Table 5. Pricing mechanisms supported. Pricing Mechanism Buy Side Sell Side Yield Manager MRO Hub Buyer Catalogues Yes Maybe Yes Yes Supplier Catalogues Maybe Yes Yes Yes Forward Auction No Yes Yes Maybe Reverse Auction Yes No Yes Maybe Pre negotiated contracts Yes Yes Maybe Yes A Yield manager solution provides the most flexibility in terms of the various pricing mechanisms that can be supported. It offers both auctions and catalogue based solutions for both buyers and sellers, and may also support pre negotiated contracts for long term relationships between buyers and suppliers. An MRO Hub is also somewhat flexible, and may offer forward and reverse auctions for short term procurement. Buy side solutions do not offer forward auctions and may not support supplier catalogues in order to lower prices. Similarly, Sell side solutions do not offer reverse auctions and may not support buyer catalogues in order to increase prices of goods and services. 4.6 Bias Buy Side Marketplace: A buy side marketplace is biased towards the buying organization/s, and offers substantial advantages to the buyers over the supplying organizations.

12 A Comparison of Procurement Models for B2B Electronic Commerce 12 Sell Side Marketplace: A sell side marketplace is biased towards the supplying organization/s, and offers substantial advantages to the supplying organizations over the buyers. Yield Mangers: Yield managers are neutral electronic hubs that provide similar advantages to both the buying and supplying organizations. MRO Hubs: Like Yield managers, MRO hubs are also neutral electronic hubs that provide similar advantages to both the buying and supplying organizations. 4.7 Interaction patterns The following table compares the Interaction patterns adopted by the models for online procurement. Table 6. Interaction patterns. Procurement Model Interaction Patterns One-to-Many Many-to-Many Buy Side Marketplace Sell Side Marketplace Yes Yes Yield Manager MRO Hub Yes Yes Buy side and Sell side marketplaces are one sided marketplaces that support Oneto-Many relationship pattern between businesses. A buy side solution supports a relationship between a single buying entity and many supplying organizations, and a sell side solution supports a relationship between a single supplier and many buyers. Both Yield managers and MRO Hubs support many-to-many relationships, enabling many suppliers to link to many buyers and vice versa. In this manner these models also create a true marketplace where the price of goods and services reflect the demand and supply. 4.8 Ownership Buy side Marketplace: Usually owned by buying organizations. Sell side Marketplace: Owned by supplying organizations Yield Manger: Owned by an Intermediary. MRO Hubs: Owned by an Intermediary.

13 A Comparison of Procurement Models for B2B Electronic Commerce Conclusions In conclusion, this paper identifies the problem of online procurement and identifies four models to support online procurement: Buy side Marketplace, Sell Side marketplace, Yield Manager and MRO Hub. A framework for comparing these models is developed, and a number of criteria for the comparison are detailed. A comparison is then made between the identified models using the developed framework. Analysis and evaluation of the comparison provides a number of conclusions that can be drawn. Firstly a Buy side marketplace is the most advantageous solution for the buying or procuring organization. It offers many advantages to the buying organization, but offers limited advantages to the selling organizations. The solution is ideal as an online procurement if the buying organization is developing the system, and already has substantial power over its suppliers. A sell side marketplace is the most advantageous solution for the supplying organization. It offers many advantages to the suppliers, but many disadvantages to the buyers. The solution is ideal as an online procurement if the supplying organization is developing the system, buyers are fragmented and the supplier already has substantial power over its buyers. Both Yield Manager and MRO Hub solution provide similar benefits to both buyers and sellers. Although, a Yield manager solution can support short term relationships between buyers and sellers and can offer both forward and reverse auctions. Yield Managers also offer public accessibility and increase the market base for both buyers and sellers, creating competition and a true marketplace. A MRO Hub solution is more beneficial for long term contracts and for developing longer term relationships. It protects the buyers and sellers from fluctuating prices, through pre-negotiated contracts. MRO Hubs only offer private access and insulate both buyers and suppliers form additional competition. The evaluation of the models based on the comparison framework reveals that all models have distinct advantages and disadvantages, and hence may be used in different situation suiting distinct organizational needs. References Archer, N., and Gebauer J.: Managing In the Context of The New Electronic Marketplace. Presented at 1 st World Congress on the Management of Electronic Commerce, Jan, 2000, Canada. Bichler, M., Segev, A., Beam, C.: An electronic broker for business-to-business electronic commerce on the Internet. Working Paper, Fischer Center for management and Information Technology, Haas Scholl of Business, University of California, Berkeley.

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