May 28, 2003, 12:00 AM

Trying times as trading exchanges trace a path to their transformation

Retail-oriented trading exchanges are still trying to live up to their promise.

By Paul Demery

Among the bright stars of the Internet boom a few years ago, retail industry trading exchanges shined for a while as harbingers of what was to come. Their growth formula hinged on their promise to bring large numbers of trading partners together through a central electronic marketplace. The exchanges would flourish with online auctions and e-procurement services, then progress to more sophisticated offerings in supply chain collaboration, their founders said.

The plan hasn’t quite worked out that way. Instead of moving broadly into supply chain collaboration services that, for instance, would automatically update a retailer’s merchandising system with details on the size and color of an inbound shipment of shirts, the three major exchanges-the retail-focused GlobalNetXchange and WorldWide Retail Exchange and the manufacturer-centric Transora-have spent three years becoming established centers of web-based procurement services and two-GNX and WWRE-are popular for online auctions.

Most companies that use the exchanges rely on them for online reverse auctions and liquidation strategies as well e-procurement of indirect goods like office supplies, says Renee Speicher, senior manager at consultants BearingPoint Inc. Companies also use the exchanges to view industry price trends and to test market value of products by putting some out to bid, she adds. “I’m not suggesting that’s not good use of exchanges,” Speicher says, “but at this point we thought we’d be further along with what you could do on Transora and the other exchanges. They had publicized that by now we’d have full-scale collaborative planning, forecasting and replenishment, but now we have to ask: Will this ever come to fruition?”

Moving beyond

Exchange executives say they’re determined to move beyond online auctions and procurement, which have become commodities, toward more widespread use of collaborative planning, forecasting and replenishment and other forms of supply chain collaboration services. They note that some retailers and manufacturers, most notably GNX member Sears, Roebuck and Co. and tire manufacturer Michelin, have begun using exchange-hosted collaboration services to improve trading operations, even if in a more limited fashion than the initially promised level of collaboration (see related story on page 6). “We expect our business to grow in collaboration services,” asserts GNX CEO Joseph Laughlin.

Still, the road ahead won’t be easy for the exchanges to build a stronger base in the collaboration services market. Retailers and manufacturers have plenty of options to seek out online procurement, auctions and supply chain services. They can install systems on their own servers or subscribe to hosted applications other than the ones offered at GNX, WWRE and Transora. There are several software providers, for example, that offer licensed or hosted collaboration software, including Manugistics Group Inc. and Syncra Systems Inc., the two providers of the supply chain collaboration applications hosted by the retail industry exchanges.

The exchanges need to sell retailers and manufacturers on the added value they can offer, but they must also convince companies that may be little inclined to follow their lead after having heard the missed promises of the recent past, observers say. Laughlin and his counterparts at WWRE and Transora, however, say they’ve learned how to better focus their services. “We have more entry-level services that can lead to collaboration in supply chains,” such as a new digital asset management tool, says Nick Parnaby, global director of member services at WWRE.

A good deal of the missed promises stemmed from the hype of the early Internet era, when many business leaders and analysts expected that web technology would cause a fast migration into machine-to-machine data integration, enabling retailers, for example, to automatically send data on expected product demand directly into a supplier’s back-end production software applications. But that migration proved harder than most had expected, and many retailers and manufacturers balked at the idea of paying for unproven new-age data integration platforms. “The difficulty in building a pipe for back-end data integration is what’s holding up adoption of collaboration in retail,” says Kara Romanow, senior analyst for CPG industry at AMR Research Inc.

Emerging value

But recent developments offer new opportunities for the exchanges to finally push ahead with collaboration services. Evolution of XML data integration standards, for instance, is making it easier for companies to share electronic information through Internet exchanges. And industry leaders Wal-Mart Stores Inc. and Procter & Gamble Co. are requiring trading partners to send purchase orders, invoices and other data through the Internet, forcing them into data synchronization. Because data synchronization supports the ability of companies to conduct supply chain collaboration, this presents the retail exchanges with an opportunity to offer synchronization services as a first step toward collaboration. “The thing that has emerged as the primary value proposition for exchanges is not e-commerce, as everyone thought it would be, it’s data synchronization-because that’s the prerequisite of any real e-commerce and valuable collaboration,” Romanow says.

That can only help the exchanges as they try to find a role that their members will value. “If companies moving toward data synchronization get help from the exchanges, that will position the exchanges to offer more value,” Speicher says. “If the exchanges become key players in data synchronization plans, they’ll see an uptick in CPFR.”

By helping retailers and manufacturers synchronize their product data, the exchanges can assure that trading partners are all using the same product descriptions to conduct smoother, more accurate commerce transactions. The immediate benefit of data synchronization is more accurate business documents, such as invoices and purchase orders, which can help assure proper deliveries while avoiding costly billing errors. In turn, this will bring more companies into global trade, industry experts say, particularly as a growing global network of Internet-based data pools of company product information becomes interoperable over the next year or two. And that would support the potential for a surge in demand for supply chain collaboration services.

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