December 26, 2000, 9:55 AM

Trading Up

When it comes to embracing the Internet as a sales channel, critics have drubbed some of the world’s largest retailers for being either the lost, the last or the least. But in recent months, many venerable members of the brick-and-mortar set have moved with dot-com fleet to put their trading online.

Old Economy names such as Sears Roebuck & Co., Kmart Corp., Target Corp., Safeway Inc. and the Kroger Co. have reached across the Atlantic to France’s Carrefour and Britain’s Marks & Spencer to forge alliances aimed at buying smarter and faster through reverse auctions and other techniques. But the long-term goal is even bigger.

“We started off with auction capabilities because that’s where the technology currently is most robust,” says Joseph Laughlin, senior vice president at Sears and acting CEO of one such trading alliance, the GlobalNetXchange. “But the ultimate mission is to leverage exchange technology to drive inefficiencies out of the entire supply chain.”

Some industry watchers see the exchanges generating another advantage: staving off the loss of market share from e-retailers. “Working through the exchanges certainly will lower the cost of goods for large retailers, an area where they already have an advantage over the pure-play Internet retailers,” says Thomas Panek, e-commerce practice leader with Sedlak Management Consultants, Richfield, Ohio. “When they match that buying volume with the ability to purchase goods through online auctions, their costs should fall even more.”

But Laughlin insists the explosion of e-retailing had no particular influence on the GlobalNetXchange. Its activities “will make it easier to compete-period,” he adds, “whether the competition is other brick-and-mortar retailers or pure Internet retailers.”

Essentially electronic communities in which companies come together to trade goods and services, these virtual marketplaces began popping up several years ago in other industries. But they didn’t command much attention until last November, when General Motors Corp. and Ford Motor Co. unveiled separate plans for Internet networks aimed at automating purchasing from their suppliers around the globe. By February, DaimlerChrysler had latched onto the idea, and the Big Three joined forces on a single exchange. Now, it seems that a new group of trading exchanges is born everyday.

Exchange explosion

Janet Seuleski, an industry analyst with AMR Research, Boston, estimates that at least 600 Internet-based trading exchanges currently are operating within various industries, most of them formed in the past two years. The retail industry spawned three separate exchanges in March alone, with each one listing some of the industry’s biggest names among its members.

The GlobalNetXchange was first out of the gate. Its founding members include Sears of Hoffman Estates, Ill., and Carrefour of Paris. Then came RetailersMarketXchange.com, which is designed to serve convenience store chains and the mom-and-pop retail set. Chevron Corp., San Francisco, joined McLane Co. of Temple, Texas, a logistics and transportation provider-and Wal-Mart subsidiary-in launching this venture.

The Worldwide Retail Exchange has 14 charter members, including Troy, Mich.-based Kmart, Target Corp. of Minneapolis, Safeway, Pleasanton, Calif., and CVS Corp., the drugstore chain headquartered in Woonsocket, R.I. A who’s-who of European retailers also belong to this exchange, including Marks & Spencer and Auchan and Casino from France.

All of these exchanges will be operated by independent corporations that expect to turn a profit by charging fees for services carried out on their networks. Laughlin imagines them functioning much like stock market exchanges, providing a platform for buyers and sellers worldwide to conduct trade without ever having to meet face-to-face.

Trading exchanges are configured in the hub-and-spoke fashion common to electronic data interchange networks. The company running the exchange is the hub, while buyers and suppliers make up the spokes. Member companies connect to an exchange via the Internet, and users access its services through their Web browsers.

Members conduct transactions by sending information to the hub, which routes that information to the appropriate party on the other side. Documents such as purchase orders, invoices and shipping notices typically are sent in XML format, making it easy for companies receiving the documents to download them into their backend business systems.

Trading exchanges typically operate on three levels: content management, commerce services and collaboration. Content management involves making sure buyers can readily tap the information they need to make purchasing decisions. Commerce services are the means of negotiating prices and the terms of delivery. And collaboration includes the techniques for moving documents and information among buyers and suppliers.

Initially, companies that purchase goods on an exchange will reap the greatest benefits because they will be exposed to an array of potential new suppliers that in many instances will have to submit bids to win their business. According to Laughlin, GlobalNetXchange already is helping retailers to lower their procurement costs through reverse auctions, an RFP-style process in which buyers solicit bids for various goods and set a deadline for suppliers to respond.

When the clock runs out, the trading exchange sends all bids to the buyer, who then decides which supplier gets the order. Once the auction ends, the buyer and supplier work through the scheduled delivery of the goods. They also can transfer invoices and payments through the exchange, which takes a cut ranging from 2 to 8% of the value of what’s being sold. The average document transfer fee is $1.

GlobalNetXchange members have conducted roughly a dozen reverse auctions for various items-including jeans, TVs, computers and videotapes-since the exchange went live in March, with the average auction lasting about two hours. “The primary benefit of these auctions is to the retailer,” Laughlin says, “although suppliers do benefit by gaining access to potential new customers.”

Unchained economies

Suppliers also benefit by using the exchange to auction surplus goods. But the biggest payoff for suppliers will occur when the exchanges begin shaking up the supply chain with new economies of scale and service. Laughlin imagines GlobalNetXchange members using the platform to carry out demand forecasting, inventory management, capacity planning and product development. “The key to an exchange’s success,” he says, “will be its ability to provide services that all of its members-both buyers and suppliers-perceive as valuable.”

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