E-marketplaces — A Positive Case For Suppliers

by Gerry Blackwell

As B2B e-marketplaces become more pervasive, what changes will small business suppliers have to make, and what benefits can they expect?

By now it's an old story. Big buyer puts pressure on small seller to engage in electronic commerce, either directly or through an intermediary. Result: small seller loses - or so it often seems to the small seller.

Auto makers were the first to insist that parts suppliers implement electronic data interchange (EDI) technology over 20 years ago. It frequently entailed significant expense and upheaval for small businesses — with little tangible benefit. Some SMBs simply couldn't afford to participate.

More recent experience with Internet-based business-to-business e-marketplaces has been little better. Big companies forced suppliers into online blind reverse auctions — where they had to bid down prices to win business. E-marketplaces often just had the effect of eroding suppliers' margins.

Many small businesses still see EDI and e-marketplaces as an imposition, something to be resisted, or at least resented. Given past history, distrust is perhaps justified. But small businesses in at least some industries are discovering that e-marketplace survivors that learned from early mistakes — many failed — can deliver real benefits to sellers as well as buyers.

E-marketplace in Action
A.J. Levin Company is a good example. The Burbank CA aircraft spare parts supplier has 10 employees and annual revenues of about $10 million. It counts major airlines such as United and Lufthansa and many aircraft Maintenance and Repair Organizations (MROs) as customers.

Eighteen months ago, FedEx, a long-time A.J. Levin customer, told the parts supplier that if it wanted to continue doing business it would have to join Aeroxchange, an airline industry e-marketplace launched in 2000. That's how FedEx was going to do business henceforth.

"We really had no option," says company vice president Richard Levin. "FedEx has 100 airplanes — that's a lot. Plus we knew other customers were looking at joining Aeroxchange too."

Levin says the company is still not 100-percent comfortable with its involvement in Aeroxchange. But he admits it has won one important new customer through Aeroxchange, and he expects to reap significant productivity benefits down the road.

His company, like many others, had previously invested in an earlier generation of EDI technology based on the Spec 2000 standard developed for the airline industry and promoted by the Air Transport Association (ATA). It used Spec 2000 to communicate with some customers over a dedicated commercial network operated by SITA."Aeroxchange is basically a reinventing of the system that we already had with the ATA's Spec 2000 and SITA," Levin says.

It meant another round of technology change for A.J. Levin and other suppliers in the same position — still ongoing at many, including at A.J. Levin.

Because Aeroxchange is based on the Internet and open systems standards, though, costs for change are much lower. And while the impetus for change came from the airlines, supplier participants enjoy significant benefits as well, Levin admits. For example, Aeroxchange's use of the Internet for communications eliminates SITA charges for both sides.

Aeroxchange itself is anxious to reassure small suppliers that the benefits cut both ways. "We're trading-partner neutral," is how Aeroxchange president and CEO Al Koszarek puts it. Suppliers can be forgiven for being a little skeptical about this statement given that Aeroxchange was formed by — and is still owned by — a consortium of big airlines.

Continued on Page 2: The Cost of Doing Business

Continued From Page 1

The Cost of Doing Business
Nor is participation in Aeroxchange cost free for suppliers. Companies like A.J. Levin pay fees as high as $9,000 a year to make their electronic catalogs available to Aeroxchange's AeroBuy subscribers.

Suppliers that already have a PC and an Internet connection don't have to incur any additional expenses to participate, however. They can view and respond to requests for proposals from AeroBuy subscribers and view Aeroxchange reports using a Web browser by surfing to the Aeroxchange portal site.

A.J. Levin has already received some value for its fees — besides hanging on to FedEx as a customer.

Aeroxchange gives suppliers instant visibility with potential customers all over the world via the Internet. When a buyer does a search for a particular part, it sees all the supplier subscribers offering that part, whether they're firms they normally deal with or not. Aeroxchange then sends suppliers regular reports showing which buyers have "hit" their catalogs.

After reports showed Northwest Airlines, which was not then a customer, had viewed the company's catalog 400 times in one month, A.J. Levin made a sales call and suggested the two companies should be doing business. "They agreed, and now they've become an important customer for us," Levin says. "That was a benefit we wouldn't get any other way than by participating in Aeroxchange."

Levin doesn't expect wins like that every month. For one thing, there are only a dozen or so airlines using the service on a regular basis, and some, like Lufthansa, were already customers. But winning additional new customers via Aeroxchange is at least a possibility. SAS, the Scandinavian airline, not a customer now, is one potential target.

"It partly depends on how Aeroxchange expands," Levin says of his prospects of winning new business. Koszarek says his company is constantly marketing the service to airlines big and small. American Airlines joined earlier this year.

Resistance is Futile
While very small companies with little technology expertise can participate with nothing more than a PC, Internet link and browser, A.J. Levin is going much further, integrating its systems with Aeroxchange's.

Instead of surfing to the portal site to collect RFPs and communicate with customers and potential buyers, Aeroxchange sends data directly to the company's computers over the Internet in XML (eXtensible Markup Language), an open standard for complex Internet-based communications.

Aeroxchange's role is to take data from its subscribers' different computer and communications systems — both buyers' and sellers' systems — and make it intelligible to trading partners on the other side.

"They're basically the translator," Levin explains. "Say Air Canada deals with X12 [another EDI standard] and this other company uses a system from SAP (an ERP software vendor), Aeroxchange translates from both (to XML in the case of A.J. Levin)."

For now, the company has to watch for messages containing RFPs and manually respond to them via e-mail. But before the end of the year, Levin expects to have software in place on his back-end systems that will automatically respond to RFP messages from Aeroxchange, pull prices from its catalog, apply appropriate volume discounts and send back a response — all with no human intervention.

Not every small business could achieve this without investing in outside programming and systems integration services. "We're a little smarter than the average bear when it comes to technology," Levin says. He will install and configure add-on software himself for the Microsoft Business Network technology the company uses, he says.

It's not just automated responses to RFPs. When a buyer issues R.J. Levin a purchase order — again, in XML format — the new software Levin is installing will automatically generate all the paper work, update the company's accounting system — and even send the customer a shipping notification when the order goes out the door.

Aeroxchange.com is one of many business-to-business e-marketplaces.

"Doing all of this automatically will allow me to increase throughput without having to add people, and that means I'm ahead of the game," Levin says. He figures the new systems could allow A.J. Levin to increase orders from 20 to 50 a day.

So what's not to like about Aeroxchange?
Levin complains that some of the other activities at the exchange are less beneficial. In some cases, for example, A.J. Levin has responded to joint RFPs from a number of buyers. It's hard to know what price to quote because there is no guarantee all buyers will actually place orders with the winning bidder in the end, he says.

If he quotes a price based on an aggregate volume of 1,000, and then only two of three buyers place orders for only 400 units, is he committed to the price per unit he quoted for 1,000?

Koszarek says this problem shouldn't arise. In Aeroxchange "cooperative purchasing" events, if one buyer pulls out, suppliers are supposed to be notified and asked to re-bid, he explains.

Levin also has concerns about security. While Aeroxchange is doing everything it should be at the data level, he claims he has seen instances of customers posting their Aeroxchange passwords on bulletin boards in their offices. He worries that if an unscrupulous competitor saw and copied down a password, they could log in to the Aeroxchange system as that buyer and see A.J. Levin's catalog prices and RFP bids.

Koszarek notes that Aeroxchange subscribers, unlike subscribers to some other e-commerce services, can have as many user accounts and passwords as they want, at no additional charge. So there should be no need for employees to share user IDs and passwords — and therefore less likelihood they would need to post passwords. Aeroxchange also makes clear in its policies that subscribers must not share passwords.

"Under the circumstances, it's hard to think airline buyers would create security infractions by posting passwords," Koszarek says. "We certainly haven't seen that kind of behavior."

Despite the cavils, it's clear that, overall, Levin sees a bigger upside than downside to participation in Aeroxchange. While there is no guarantee that small businesses in other industries would have similar experience with industry e-marketplaces — if any exist — the lesson appears to be that e-marketplaces and EDI can be beneficial for small suppliers.

According to some estimates, there are over 1,000 e-marketplaces operating on and off the Internet. For names of major global e-marketplaces by industry, check out this emarketservices.com article.

Based in London, Canada, Gerry Blackwell has been writing about information technology and telecommunications for a variety of print and online publications since the 1980s. Just for fun, he also authors features and columns on digital photography for Here's How, a spiffy new Canadian consumer technology magazine.

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This article was originally published on Thursday Aug 19th 2004
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