Recently, electronic exchanges have captured considerable interest among smaller manufacturers. Also called electronic marketplaces, they are a relatively new way for businesses to begin doing electronic commerce. They are sites on the Internet that allow businesses to buy and sell products and services to other businesses.

Because they are accessed with a normal web browser, rather than expensive, proprietary software, electronic exchanges offer smaller companies the chance to take advantage of the reach and efficiency of electronic commerce technology—but without the major investment in internal web site development and management. They could be a great initial venture into e-commerce for many small manufacturers.

Electronic exchanges come in many forms including:

• Vertical. These carry a range of products and services of interest to a single industry.
  
  
• Horizontal. These carry a single or closely related product or service needed by many industries.
  
  
• Closed. These generally are run by, and for, the benefit of a single large company. They provide a way to streamline supply chains already in existence. An example is Wal-Mart's Retail Link.
  
  
• Private. These are for companies with multiple divisions that operate autonomously. Benefits accrue to the holding company by promoting standardization and optimization.
  
  
• Micro. A niche part of an industry determines if it can create advantages by linking its members and trading partners, and then these members collaborate to implement either a public or a private exchange.

Another system classifies electronic exchanges by ownership:

• Proprietary—like RetailLink, for example.



• Consortium-operated—owned jointly by a cluster of traditionally competing companies with shared procurement interests. (Covisint was developed to serve the needs of the Big Three auto makers.)
  
  
• Independent—generally open to buyers and sellers within a market without bias toward membership. These are usually supported by transaction fees.

As with most elements of e-commerce, up-to-date numbers are hard to come by, but it was estimated that roughly 1200 electronic exchanges would be in operation by the end of 2000, and 5000 by the end of 2002. The rapid growth is partly attributable to investor willingness to fund innovative business models involving electronic commerce. Although much of that interest has cooled over the last several months, it is still anticipated that they will continue to multiply for a while.

Small manufacturers are increasingly looking to these exchanges as a relatively easy way to transition into the world of electronic commerce. There is reason for caution, however, since it is widely felt that their rapidly growing numbers are not ultimately sustainable. Eventually, and some say soon, there is likely to be a significant shakeout.

Some markets, like the funeral and security services industries, are served by single exchanges. These are likely to remain. In others, such as chemicals and financial services, there are as many as 30. For companies in such saturated markets, joining an exchange means betting on that exchange's long-term ability to become, and remain, important to the suppliers and purchasers it represents. Companies wanting to evaluate exchanges should consider the following factors:

1. Ownership. Consortium-driven exchanges may not resolve internal disagreements among natural competitors in time to attain critical mass. Independent ones do not have this problem.
   
   
2. Industry expertise. Look for exchanges whose operators understand the needs and wants of the purchasers and sellers they serve and the industry they represent. Although technical capability is needed, it alone will not ensure longevity.
   
   
3. Funding. Exchanges starting from scratch as a novel business idea may not have enough resources to eventually become profitable. Exchanges that are built on a preexisting bricks-and-mortar presence are more likely to survive.
   
   
4. Liquidity. This is the number of buyers and sellers actually enrolled as members. To survive and prevail, exchanges need a critical mass of both and a good balance between them.
   
   
5. Functionality. Many exchanges simply match buyers and sellers. Others provide numerous other services (handle transactions, perform translation to EDI code, etc.). Exchanges that offer such value-added services will probably outlast those that don't.
   
   
6. Integration. Some exchanges offer full integration of catalog and sales data with supplier and buyer applications. Others are just collections of independent services. Whether you need it or not at this point, such integration appears to be where e-commerce is heading. To survive, an exchange will need to offer it.
   
   
7. Reach. E-commerce potentially puts all business into a global market. Some exchanges will survive by serving specialized, local niches; most will need a world-wide focus and may even offer enabling, value-added services such as translation and currency exchange.
   
   
8. Market position. In industries with multiple exchanges, the survivors will be those who can clearly differentiate themselves and their value to their members.

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Authored by: Fred Goss, Interim Director, Small Business Research & Information Center, University of Missouri-Rolla.
Source: Creating Quality Newsletter, Volume 10, Number 4, April 2001

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