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

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

• E-mail
• Print
• Link

In some industries, e-marketplaces can address these difficulties by providing a cost-effective means for creating spot markets that operate in parallel with existing supply chain relationships. This allows supply chain participants to simultaneously realize the benefits of both relationship-based and market-based coordination. By conducting the majority of their transactions through contracts with existing trading partners, participants can continue to reap the benefits of collaboration and long-term relationships. At the same time, spot markets serve as a channel for suppliers to offload excess inventory or capacity and for buyers to address periodic shortages.

In the semiconductor industry, for example, e-marketplaces like Converge support an active spot market for dynamic random-access computer memory devices (called DRAMs). Major buyers and suppliers conduct the majority of their transactions through negotiated contracts, using spot markets primarily to buffer supply and demand shocks. In addition, spot markets enable contract prices to adjust more rapidly to shifts in supply and demand because they serve as a benchmark during contract negotiations. They also improve resource allocation by serving as an important input for suppliers evaluating potential investments in new production capacity.

The allocation of highly differentiated goods and services can also benefit from dynamic pricing mechanisms. In a B2B environment, transactions can be quite complex and often require evaluation and negotiation along multiple dimensions. Differentiated offerings may have a broad array of potential attributes, and a number of different factors can affect the purchasing volumes between a given set of supply chain partners. Transactions may also involve bundles or combinations of possibly complementary goods and services. By using sophisticated decision support tools, supply chain participants can use auctions and exchanges to more efficiently consummate these complex, multidimensional transactions. (See, for example, Reference 29, which describes a number of ways that both buyers and sellers can use optimization techniques in conjunction with dynamic pricing to better manage B2B transactions.)

Information aggregation and dissemination

The ability of markets to collect, aggregate, and broadcast information has been widely reported in the literature of economics and finance. (30) Market information offers a number of potential benefits in relationship-based supply chains. Spot markets and auctions can serve as a vehicle for price discovery, making it easier to negotiate long-term contracts and to obtain real-time information about market demand. In markets with volatile prices, long-term supply contracts can be pegged to spot market prices, with contract prices reset periodically based on a reference price index. This enables suppliers to offer strategic customers volume discounts with respect to spot market prices, as well as preferred credit terms and higher service levels. At the same time, all parties benefit from contract prices that adjust more rapidly to changing market conditions. For example, computer manufacturers like IBM and Hewlett-Packard use reported DRAM spot market prices as a benchmarking tool during their negotiations with DRAM suppliers. This reduces the need for extensive negotiations to arrive at a market price, thus letting negotiations focus more on determining an equitable price based on the incremental value of the relationship, across dimensions such as purchasing volumes, quality, and service levels.