Unit 2

Text A A B2B Guide

Electronic commerce, or e-commerce, is fast catching the imagination of people and businesses.

In fact, it is changing the very paradigm of the manner in which business is being conducted. While e-commerce is the “front end” for selling products over the Internet, Electronic Business covers the use of technology, processes and management practices that enhances competitiveness.

Though e-commerce is on Business-to-Business (B2B), Business-to-Consumer (B2C) and Consumer-to-Business (C2B), it is being increasingly realized that the B2B holds the most potential. While the global B2C e-commerce grew from $147.1 billion in 2014 to $192.2 billion by 2016, that for B2B from $817.6 billion to $8939.3 billion. Little wonder that the focus world over is now on B2B e-commerce.

1. Differentiating B2B and B2C

Amazon.com, which sells books over the Internet, is an example of a B2C e-commerce initiative where the company gets in touch with its consumers directly. This is equivalent to the direct selling concept popularized by companies such as Amway. The only difference is that the selling is done via the Net. On the other hand, ChemConnect.com and Chemdex.com (which deal with chemicals) are B2B e-commerce initiatives that bring two firms together on the virtual market place.

A B2B initiative needs a large infrastructure and a company would need to restructure its systems and business processes. It involves many participants with complex rules, higher purchasing amounts and complex products. Unlike B2C, greater certainty is required for order fulfillment.

Again, unlike B2C, brand value of a site is not critical. Suppliers and buyers care more for the value-added services. Consequently, B2B e-commerce initiatives are mostly manned by experts in the business. The valuation of a B2C initiative grows as the eyeball count (number of visitors to the site) goes up, though the consumers gain little in the process. On the other hand, in a B2B initiative, the eyeball count benefits both buyers and sellers. Suppliers’ marketing costs go down as they find buyers more easily, even as the buyers spend little in tracking down suppliers.

2. The Evolution

The first stage in the evolution of B2B was the Electronic Data Interchange (EDI) where a buyer maintained separate connections with each supplier. This was both difficult and expensive to maintain. It neither increased the population of buyers and sellers nor was it transparent. The second stage was the basic e-commerce model where companies put their product catalogues on the Internet and conducted one-to-one transactions.

Now, B2B e-commerce is in the third stage of evolution. Unlike the first and the second, now a B2B e-commerce initiative brings together large numbers of buyers and sellers, thereby creating a community of traders. As many buyers and sellers gather at a common place, the information flow increases and hence the transparency. This in turn reduces the overall transactions cost.

3. The Various Types

Three different types of B2B exchanges operate. The first category is buyer-controlled. It is a consortium of buyers who aggregate their purchases. The recently-formed consortium among Daimler Chrysler, Ford and General Motors (to which Toyota recently joined) is an instance. By this process the buyers are looking to manage efficiently the procurement process; lower administration cost, and ensure uniform pricing.

The second category is seller-controlled. Here the sellers who cater to fragmented markets such as chemicals and auto components come together to create a common trading place for the buyers. While the sellers aggregate their market power, it greatly eases the buyers search for alternative sources.

The third category is third-party exchanges that are neither buyers nor sellers. They thrive purely on the fees generated by matching buyers and sellers, for example, ChemConnect.com, Chemdex.com and so on.

4. Benefits of B2B E-commerce

B2B e-commerce helps to remove barriers raised by geographic fragmentation of the market. While buyers get to know about new sellers with better products, suppliers discover new buyers. B2B also helps in eliminating unnecessary inventory build-up for both buyers and sellers. Lack of information about production schedules of the buyers lead to inventory build-up for the sellers. At the same time, the difficulty associated with finding alternative supply sources forces the buyers to build-up inventory. As B2B promotes information flow and enhances transparency, supply-chain management becomes possible. In addition, both the sellers and sellers enjoy reduced order processing costs and lower cost of interacting with each other.

Mere order matching, which earns commission, is just not enough for the third-party exchanges. They will have to strive to retain the buyers and sellers, that is, they have to provide other value-added services (providing specialized information, for instance) that help retain the existing sellers and buyers and attract fresh traders. Buyers and sellers, in turn, benefit through specialized information content. In effect, the market benefits from buyer and seller discovery and price and product transparency.

5. The B2B Process

The B2B process starts with a requisition for an order. Purchasing organizations have internal approval process to prevent unauthorized orders. Though the exchanges do not directly offer these facilities, they do it with the help of software provided by companies such as Ariba and Oracle.

Second, before the orders are processed, the exchanges have to have the set of suppliers for each of the products for the industry which they are catering to. For example, ChemConnect have to compile the list of suppliers for each and every chemical for which they offer the facility of trading.

In the third stage, the exchanges match the orders of the buyers with the suppliers.

The fourth stage is ensuring that the orders are fulfilled. This includes all post-order requirements, including arranging for shipping of the material ordered.

The fifth stage would be to process the payment schedule. Though there are very few exchanges which offer the entire gamut of the above services, there are many which go up to order matching.

6. The Revenue Model

How do the B2B exchanges earn revenue in the process? The B2B initiatives earn primarily through transaction fees which range between 0.50 per cent and 10 per cent of the total value of each transaction based on the complexity. The more the orders matched, the higher the revenue. Others charge an annual subscription fees, irrespective of the number of orders. The exchanges also earn through membership fees, auction fees and license fee for the use of any specialized customized software that is offered.

Revenue is also generated by providing specialized content. This could be in the form of analysis, statistics, price and product data, industry news, forecast reports and other technical services.

7. Indian Situation

Though Indian companies perceive a big potential for e-commerce, only a few have a strategy in place and are willing to commit resources. As of now they appear to be concentrating more on other traditional methods such as cost reduction, offering value-added services, making new product launches, brand building and so on for improving their profitability.

If the importance for B2C e-commerce is of any indication, e-commerce is perceived to be a way toget in touch directly with the consumer. The B2B concept of integrating suppliers and buyers is yet to catch on. Though success stories in the international arena may prompt some to jump into the B2B, companies may want hardcore evidence of savings in the domestic marketplace. Problems associated with infrastructure and cyber security (still in its infancy) could be the key impediments towards a full-fledged implementation of B2B e-commerce. It may take quite some time before the full potential of B2B e-commerce is realized and companies start making big investments.