B2B exchanges

The expansion of trade brought about by the railway revolution of the 19th century is mirrored today internationally with the emergence of online business-to-business (B2B) exchanges. The Internet has enabled a new method of product procurement, creating opportunities for all those involved in the procurement of materials.

This is particularly true in the process industries, which are very asset-intensive with material purchases representing 40 per cent of the capital cost of a new plant.

The development of these exchanges has occurred at a time when a number of challenges face the process engineering sector. The industry is under intense pressure to cut costs and bring new plants on stream ever earlier. Globalisation is requiring sourcing of materials local to the plant often in emerging markets. These challenges, combined with the fact that B2B links need to be able to support the complete lifecycle of a plant (which could run into several decades), demand that any B2B solution needs to be long-term, flexible and globally accessible to both buyer and seller.

The key challenge for the industry lies in finding a way to link the process of engineering design and requisitioning with the actual buying of goods and materials, through the use of e-collaboration. At present it can be considered that there are two separate approaches for the procurement of different types of materials required by the process industries - strategic buying and transaction-based buying. A comprehensive e-procurement system needs to support both.

Strategic buying is deployed to procure the more specialist engineered equipment items required in the construction of a plant - pressure vessels, for example. It requires niche buying skills, supplier analysis and selection, and long-term collaboration between partners. Strategic buying allows the buyer to build up trust in their supplier and allows the supplier to respond more easily to a buyer's changing needs. Up to two thirds of a new plant fall in this category.

Transaction-based buying, on the other hand, is used for the procurement of low cost catalogue-based commodity items, such as pipes, valves and fittings. This form of procurement was the original target of online B2B exchanges, which are particularly suited to credit card type purchases. However, there is a considerable technical challenge to scale up such exchanges to accommodate engineering commodities that are more complex products, need to be 'bulked' and are subject to continuous engineering change.

To give an indication of the magnitude of goods and materials involved, consider an onshore gasoline plant with a capital cost of $250 million. From a requisition point of view, this might consist of 500 major specialist engineered equipment items, together with 'bulk' engineering commodities comprising 4000 tonnes of structural steel, 90000 metres of piping and 60000 pipe fittings.

Chain reactions

Technology to support these buying practices has traditionally concentrated on streamlining the supply chain through dedicated supply chain management (SCM) systems. However, over the last five years SCM potential has been improved by the development of e-procurement, particularly in the form of electronic exchanges.

These exchanges take the form of publicly accessible electronic marketplaces, set up for buyers and sellers, effectively allowing instantaneous global automation of the buying process - exchanges such as Industria, ProcureZone and PrimeContract.

But how should an organisation go about setting up an exchange?

The basic steps are: establish the resources needed to make the exchange viable; secure the customer base; and secure the organisational structure of the exchange itself.

A key resource is possessing sufficient capital to create an effective exchange. To spread the risk a number of joint venture partners need to be found to inject capital into the venture. A critical mass of suppliers must be brought in to make components available online. Also technology partnerships need to be forged to provide the necessary infrastructure, including a secure web-enabled desktop and software such as purchasing/RFQ applications.

Signing up major customers to guarantee procurement throughput is essential. As with all new small business ventures likelihood of success is increased by a rigorous business plan implemented by an entrepreneurial ceo who not only understands the business but has also had experience of running a small, agile company.

However, establishing an electronic exchange does not automatically guarantee that organisations will profit from using it. A number of technical and cultural issues need to be addressed to make organisations adapt to this new method of procurement to support the complete lifecycle of the plant. These include the creation of links between the various 'islands of computerisation' involved, such as those between engineering activities and business activities, between engineering and generic business processes and engineering activities during project execution (for example, between buying the materials and those directly involving the construction site).

Electronic delivery can be the driver and the technology needed to link these various islands of information. But it is essential that those involved in creating these links fully understand the business, as the nature and value of the data involved differs from industry to industry.

Once the exchange is installed it is also essential that the requisite educational steps be taken so that the organisation fully adapts to using it. If a company does commit to total buy-in throughout the organisation, there are a number of cost-based benefits that can be realised from the use of an electronic exchange. These relate in the first instance, for example, to the automation of existing paper-based processes and transactions.

Win-win situation

In terms of trading in 'bulk' items, all parties involved are able to achieve increased productivity, through automated sales and procurement processes. Manufacturers also have the ability to improve their capacity utilisation and forward planning. The customer gains from a reduced on-site inventory. Benefits could also be seen in trading of engineered equipment items from the use of an electronic exchange, in that it can provide better quality of data, for example up-to-date engineering drawings accessible on-line, and it ensures there are less expensive mistakes on site to correct.

These very tangible bottom-line and quality benefits paint a rosy picture of the future for exchanges. However, the dot.com downfall is still at the forefront of people's minds, and many boards are now reluctant to invest yet more money on new technology.

Exchanges are only as good as the sum of their parts; they need to achieve critical mass and achieve sufficient liquidity. Unless enough companies commit to setting up exchange access, they simply won't work. Many process engineering business managers are therefore asking the question 'Is the role of B2B exchanges sustainable, and should we commit?'

The answer is that as with any technology investment there is a risk. However, as with all other e-business practices, electronic exchanges are proliferating globally, giving real cost savings for many businesses now. Any process engineering companies not taking stock need to recognise this today if they are to survive and ensure continued profitability in a market of shrinking margins.

Neil McPhater is business integration manager with Aveva Consulting, a wholly owned subsidiary of the Cadcentre Group.