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The role of e-marketplaces in relationship-based supply chains: a survey

IBM Systems Journal, March, 2005 by W. Grey, T. Olavson, D. Shi

Along with the Internet boom came high expectations for the role of e-marketplaces and their potential to enhance supply chain efficiency. (1) From 1998 to 2000, business-to-business (B2B) e-commerce was heralded as the next major innovation in business, and analysts projected that trillions of dollars would flow through B2B exchanges by 2004. Legions of exchanges sprang up virtually overnight, supported by a new industry of e-business software vendors providing tools for everything from dynamic pricing to collaborative commerce. This brief but meteoric rise came to a sudden halt by the end of 2000. In the two-month period following the peak, many e-marketplaces failed or merged. Firms reevaluated their e-business strategies and reduced their investments in B2B activities. Investors lost confidence in B2B-related stocks. Within a year, Ariba and Commerce One, two key B2B e-commerce solution providers, lost over 95 percent of their market value. Their stock prices never recovered. (2)

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Early attention to e-marketplaces focused on their potential to lower the costs of doing business. An interesting study of transaction costs by Garciano and Kaplan (3) suggested that the transaction cost savings alone from B2B exchanges could be a substantial portion of the total cost of production and order fulfillment. By lowering search costs and making it easier to match buyers and sellers, e-marketplaces raised the possibility that firms could conduct large volumes of their B2B transactions using dynamic channels such as auctions and exchanges. Later, e-marketplaces sought to provide value by offering services to facilitate collaboration and information-sharing, rather than just online commerce. Proposed services included collaborative design and systems to facilitate the sharing of supply chain information such as forecasts and inventory levels. The e-marketplaces also sought to improve supply chain efficiency by automating business processes such as procurement, order management, and fulfillment. Beall et. al (4) provided evidence for the success of electronic reverse auctions along those dimensions.

In this paper, we analyze potential sources of value provided by e-marketplaces in relationship-based supply chains. We focus on dynamically priced B2B transactions in which long-term relationships between buyers and sellers are important, as is the case for strategic sourcing of most direct materials. We use the term dynamic pricing broadly to refer to short-term flexibility of prices to respond to changing supply and demand conditions. Prices may be market-based, as in exchanges, auctions, and reverse auctions. Dynamic prices may also be posted by sellers in response to real-time information about demand, required lead time, or remaining capacity or inventory levels. (5)

This paper builds on the following existing work on e-business. Kleindorfer and Wu (6) explore the interconnection between contracting and market structures. Wu and Kleindorfer (7) explore applications of options in electronic markets. Swaminathan and Tayur (8) discuss supply chain integration and optimization in a B2B context; whereas Peleg, Lee, and Hausman (9) study price discovery and price structure in electronic exchanges, including the design of auctions. Zhu (10) studies information issues associated with e-marketplaces. Our survey also builds on the work of Geoffrion and Krishnan (11) in analyzing management science (MS) opportunities enabled by the Internet. Additional relevant literature can be found in Dai and Kauffman, (12) and in three special issues of Management Science on e-business and e-marketplaces. (13,14)

We have two primary objectives. For industry professionals, we seek to demonstrate the potential of e-marketplaces to improve the performance of relationship-based supply chains. For academic readers, we seek to provide context and motivation for future work in this area by highlighting real-world problems that could be the focus of future research.

The structure of the paper is as follows. The next three sections are the main sections of the paper. They describe, respectively, background material on the role of e-marketplaces in relationship-based supply chains, potential sources of value for e-marketplaces, and the challenges facing e-marketplaces. The concluding section contains suggestions for future MS research.

BACKGROUND

In a modern multi-echelon supply chain, business transactions can be extraordinarily complex. Multiple firms, each with unique and competing objectives, must coordinate production processes to respond to rapidly shifting patterns in customer demand. Decisions must be made quickly, with imperfect knowledge about future supply and demand. Although information sharing benefits overall supply chain performance, in many cases the misaligned interests and incentives of supply chain partners prevent the unfettered flow of information. Firms can use a variety of mechanisms, widely discussed in the supply chain literature, to align incentives, balance demand and supply, and facilitate information flows with their trading partners. (15,16)

Technology Industry

The role of e-marketplaces in relationship-based supply chains: a survey

IBM Systems Journal, March, 2005 by W. Grey, T. Olavson, D. Shi

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