Trying times as trading exchanges trace a path to their transformation
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.
Keeping pace with this market potential, the exchanges have been promoting both data synchronization and collaboration services. WWRE and Transora each offers a data synchronizing or data cleansing service that makes sure product descriptions meet industry standards, and each offers connections to industry data pools, such as the Germany-based SINFOS, which stores product information from about 1,000 European companies. The WWRE said last month that it was planning to build 12 or 13 connections to industry data pools throughout the world by year-end. Meantime, Transora has built several connections. It’s also working on a project to let GNX’s retailers make worldwide data connections through Transora’s own data pool of mostly CPG manufacturers. GNX will also be able to offer Transora’s data synchronization service.
Few takers
GNX, WWRE and Transora are also touting their respective offerings in supply chain collaboration services, which are available to any retailers and their suppliers. GNX offers a range of services including CPFR, a Supply Link tool for sharing basic document with trading partners, sourcing and negotiation tools, an exchange for managing the replenishment of perishable products, a collaborative product development service for private label food and non-food grocery products, and the GNX Catalogue, which is being developed with Transora and will collect supplier data that could be integrated into retailers’ back-end systems to support collaboration services.
The same types of collaboration services are also available through the 62-member WWRE, though with some notable differences. Last fall, for instance, it introduced a hosted digital asset management application that supports retailer-supplier collaboration in working on new product designs. The application, developed with Artesia Technologies, enables designers in remote locations to simultaneously work on audio, video, photographic as well as text images of a product in development. WWRE also offers its own data catalog and synchronization service, WorldWide Item Management, for providing integration with data pools as well as retailers’ own systems. Transora, which offers CPFR as well as procurement services, focuses mostly on data synch services and its own industry data pool.
But drumming up business beyond basic auction and procurement has so far produced modest numbers. Transora, with more than 50 members, notes that it had 25 customers for its data synch services by the end of April. WWRE says its data synch business has been picking up following Wal-Mart’s directive to its partners.
GNX, which serves more than 30 retailers, says only seven are now involved in some form of collaboration with their suppliers, including Sears and Germany-based Metro AG, which has begun sharing forecasting data with Procter & Gamble and other suppliers. And U.K.-based food retailer J. Sainsbury plc is using GNX to collaborate with suppliers in developing private-label products. GNX says its other collaboration customers have yet to publicly announce their projects.
A mixed approach
Like GNX, WWRE so far can point to only isolated use of its collaboration services. Parnaby says the most interest expressed so far by WWRE’s retailers is in its Collaborative Planner CPFR service, a hosted web application that lets retailers and manufacturers share supply and demand data to support replenishment of products. The first users are Walgreen Co. and health care products supplier Wyeth Consumer Healthcare in a pilot project that has resulted in improved communication between the two companies in sharing supply and demand forecasts, WWRE says. No other performance results were released. “We’re hopeful of seeing nine or 10 similar projects in the works within a year,” Parnaby says.
GNX and WWRE each charges $200,000 or more per year to subscribe to supply chain collaboration and data synchronization services, depending on number of products and type of collaboration. Data synchronization services can cost less if used separately from collaboration services.
Analysts contend that to get many more retailers to adopt collaboration services, the exchanges will have to go back to making good on one of their original promises: enabling retailers and manufacturers to collaborate between their back-end software applications, a higher value proposition that can produce better results in reduced inventory costs and merchandising that produces more sales.
The exchanges, however, are taking a mixed approach toward their new opportunities in data synchronization and supply chain collaboration services. On the one hand, they downplay the need for retailers and manufacturers to first synchronize all data before beginning to collaborate. They point out that GNX member Sears and WWRE member Walgreen started their collaboration projects without first completing synchronization projects, offering them as showcases for supply chain services. “We don’t follow the view that you need to synchronize data before doing supply chain collaboration,” Laughlin says.
A range of services
On the other hand, GNX and WWRE as well as Transora are preparing for a range of services through which companies will have multiple options to integrate their data and collaborate: retailers and manufacturers will be able to take the Sears or Walgreen route of collaborating through an exchange-hosted application, or using the exchanges as conduits to conduct back-end-to-back-end collaboration. But it will take some time to get this into widescale use, says WWRE’s Parnaby. “Some members really see the opportunity for data integration behind the firewall, but it will be a few years before we see this as the next EDI for back-end-to-back-end integration,” he says.
The long-term benefits of such integration still have to be proven, but they’re not hard to imagine, says AMR’s Romanow. For instance, she says, a retailer’s back-end merchandising system could get automated updates from a supplier’s production and logistics systems detailing the particular style, color, fabric treatments and assorted sizes of an incoming container of blue jeans, as well as the expected time of store delivery. “Once a retailer has that information in a merchandising system, think about what a merchandise planogram would look like,” she says. “They could actually plan it. Now they just guess based on what merchandise they think will arrive.”
Now it’s up the exchanges to convince retailers and their suppliers, she adds, that such collaboration is more than an empty promise.
Auction boom at GNX
(Value in millions of auctions conducted by retailers and manufacturers)
Q1 2002 $700
Q1 2003 $1,400
Source: GlobalNetXchange
paul@verticalwebmedia.com
