What is E-marketplace?
An E-marketplace refers to an electronic platform where buyers and sellers can meet to make business transactions online. It can be classified into public and private E-marketplaces.
A public E-marketplace is run by an electronic intermediary company, which is neither a buyer nor a seller, for conducting electronic buying and selling between members of the exchange. On the other hand, a private E-marketplace is designed and run by private investors and it invites buyers and sellers to do online business on its platform.
Table of Content
- 1 What is E-marketplace?
- 2 What is Online Catalogues?
- 3 What is Online Auctions?
The company running the private exchange could be a buyer or a seller. For example, Celestica Inc., an electronics manufacturer, established a private E-marketplace for its 10,000 suppliers in 1999.
In contrast, Solectron, another electronics manufacturer, decided to use a public E-marketplace for connecting with its 8,000 suppliers, which it found to be more cost-effective than launching its own private E-marketplace.
An important difference between an E-marketplace and other models of E-procurement is that it allows one-to-many and many-to-many transactions between buyers and sellers. A private E-marketplace allows one-to-many (one buyer, many sellers – a buy-side system) or many-to-one (many buyers, one seller – a sell-side system).
In contrast, a public E-marketplace allows many-to-many transactions, where all buyers and sellers are allowed to transact, and the system is not a company-centric one.
Functions of E-marketplace
The main functions of an E-marketplace are to:
- provide a virtual marketplace for buyers and sellers.
- facilitate interaction between potential buyers (who have procurement needs) with potential suppliers who can provide the required goods.
- facilitate online procurement transactions.
- provide E-procurement tools that can be used by buyers, such as online catalogs, supplier collaboration tools, electronic online auction tools, tools for issuing electronic RFQs, online negotiation tools, supplier performance analysis tools, etc.
Buyers can also use E-marketplaces for e-sourcing. They can locate prospective suppliers, send RFPs, and may even decide to conduct online auctions. They can also use these exchanges for evaluating, negotiating, and selecting suppliers for their procurement needs.
Advantages of E-marketplace for Buyers
The advantages of an E-marketplace for buyers are as follows:
- Allowing procurement at low transaction costs.
- Facilitating price discovery and offering better prices.
- Providing multiple and better supply sources.
- Offering quantity discounts due to consolidation of online purchases.
- Providing 24×7 service.
- Expediting the delivery process and reducing the P2P cycle time.
Disadvantages of E-marketplace for Buyers
The disadvantages an E-marketplace for buyers are:
- Suppliers in an E-marketplace are mostly new and unknown.
- Price is the primary criterion of sourcing in an E-marketplace. Therefore, other aspects of sourcing, such as long-term supplier partnerships are neglected.
- Too much emphasis on price can potentially lower the quality level.
- An E-marketplace is not suitable for the procurement of critical materials and components.
What is Online Catalogues?
Online catalogues allow the online purchase of materials and other resources. These catalogues contain products for online purchasing from predetermined suppliers. Online catalogues also provide pricing details and applicable discounts for volume buying.
These catalogs may be available for purchasing goods within the procurement intranet of the buying organization provided by approved suppliers. These catalogues may be developed, maintained, and updated for E-procurement processing by the buying organization based on supplier catalogues and an internal inventory system.
Alternatively, the E-procurement platform can point to an external link to the supplier-maintained catalogues.
Types of Catalogues
There can be three types of catalogues as listed below:
- Simple catalogues: These catalogues provide a list of basic items, such as stationeries with individual descriptions and prices. These catalogues involve 60% of all E-marketplace transactions.
- Goods and services catalogues: These catalogues include items like desktop computers requiring detailed and complex descriptions. These catalogues involve 30% of all E-marketplace transactions.
- Contract-driven catalogues: These catalogues include items that are based on supplier contracts already established through sourcing processes. These catalogues involve 10% of all E-marketplace transactions
Online catalogues can also be classified based on the entity which manages the content, viz. supplier-managed catalogues, buyer-managed catalogues, and third-party managed catalogues.
In the case of supplier-managed catalogues, the supplier hosts the content over the Internet along with the selection and configuration application. In the case of buyer-managed catalogues, the content is developed and approved by the buying organization for use by internal employees.
Many E-procurement system vendors like Ariba, Commerce One, etc. provide software applications, which can help companies aggregate catalogues from their suppliers and add proprietary content. Third-party catalogues are developed by a separate company that manages catalogues for the benefit of buyers and suppliers. They may contain data from many suppliers who are willing to use the portal.
An online catalogue will typically contain the name of products, the product hierarchy, the product description, the product price, and the relevant supplier and internal item codes. Such catalogues may contain several hundred items per supplier and have to be created, approved, and updated so that the end-users can have access to the goods and services they require. This update is called catalogue content management.
A buyer can initiate the creation of purchase requisitions and search for or select items from the approved supplier catalogues available in the E-procurement portal. The buyer views and responds to notifications and the requisition status. Some examples of purchases through supplier catalogues are the purchase of desktop computers, office stationery, etc.
Advantages of Online Catalogues
The advantages of online catalogues are:
- E-procurement through online catalogs allows for bringing greater amounts of total spending under management. Most indirect spend that happens in a decentralized way across the organization can be brought under the E-procurement process.
- Online catalogs allow the centralization of procurement items in terms of visibility and control. All such purchases are handled through a single platform and this provides a greater visibility and control to senior management thereby creating cost-reduction opportunities.
- These catalogs greatly reduce maverick spending. Any purchase that deviates from the stated purchasing procedures and policies can be prevented or reported immediately.
- These catalogs create a paperless purchasing environment.
- These catalogs allow quick identification and selection of required materials and services at the user level.
- Purchasing through the approved supplier-based catalogs makes direct purchases easy for end-users without resorting to elaborate requisition and approval-related processes, thereby reducing the P2P cycle for indirect spending.
- Greater empowerment of end-users along with faster turnaround time is achieved.
- Supplier performance and price analysis is facilitated.
- Catalog-based online purchasing can allow better management of spending through tracking all purchases across the organization, performing analysis of spending patterns, and control of the spending.
Disadvantages of Online Catalogues
Disadvantages related to online catalogs are:
- It requires the implementation of E-procurement software and associated re-engineering of business processes that cover the scope of purchase.
The cost of E-procurement software could be significant for small and medium buyers. E-procurement software also requires significant implementation time.
- Established suppliers may be reluctant to adapt to catalog-based online purchasing.
What is Online Auctions?
Online auctions are a type of electronic commerce where goods or services are sold to the highest bidder through an internet-based platform. Unlike traditional auctions that require physical attendance, online auctions can be accessed from anywhere with an internet connection.
Online auctions are an important component of the E-procurement ecosystem. In online auctions, the buying organization creates a Request For Quote (RFQ) and invites potential suppliers to submit bids. Next, the auction is conducted to select the lowest-price bidder. The auction continues till a pre-established bidding period ends or until no seller is willing to bid any lower. The price during the auction dynamically changes in a descending (online) order until the lowest supplier price wins the auction.
Owing to the number of sellers participating in the auction process, the price is expected to be driven down. In a regular online auction, prices are revealed to all sellers but the identity of competitors remains anonymous. In another type of online auction, termed a ‘rank online auction’, sellers are only told their relative rank and will be unaware of their competitor’s prices.
Several organizations have achieved significant cost savings by doing procurement using online auctions. There are instances of online auctions which saw participation by sellers from all over the world.
Steps in Online Auction
The steps involved in the online auction are given below:
- The buying organization decides the procurement of items through an online auction.
- Suppliers are evaluated and approved for participation in the auction process. Only the technically approved vendors should be made a part of online auctions. Market research may be conducted by website hosting for identifying potential sellers.
- Suppliers are invited to participate in the bidding process.
- The buying organization prepares an e-RFX, i.e. an Electronic Request for Quotation, and sends it to all the qualified suppliers.
- The suppliers are informed about the details regarding the bidding place and date and the rules of the auction.
- The bidding process begins at the appointed time and usually lasts for about 30 minutes to an hour. Competitors may be allowed to see other bids or it may be a closed auction. However, suppliers’ identities remain confidential during the bidding.
- The company analyses auction bids and awards the business to the chosen supplier (preferably) who need not necessarily be the lowest bidder. The choice of supplier depends on technical ranking and some other terms and conditions also.
When E-procurement models started gaining ground, many organizations were attracted by their high savings potential. Some organizations tried to auction every type of spend without taking into consideration category-specific strategies.
Auction formats also did not sufficiently take into consideration some important supplier evaluation parameters like the total cost of ownership. This led to several failures which created a negative perception of the utility of online auctions.
This also led to the realization that a certain amount of expertise and professionalism is required for the successful usage of online auctions. However, E-auctions have proved their value in many specific procurement situations; for example, in commodity buying, for which online auctions are quite suitable.
Commodity purchases, unlike indirect spending (like desktops, stationeries, and consumables) are critical sourcing items that have a great potential for cost savings. They are also not constrained by the need for sustained long-term supplier relationships.
Advantages of E-auctions
E-auctions provide the following advantages:
- Offer significant purchase price savings due to the competitive bidding process.
- Reduction in time and resources needed for conducting the sourcing process.
- Allow efficient purchase of services such as security, consulting, and housekeeping.
- Improve the overall procurement efficiency.
- Improve transparency within the organization.
- Allow many suppliers to participate in the procurement process, thereby increasing the supplier base.
- Better audit trail and faster retrieval of documents.
- Mapped approval flow which leads to less paperwork.
Disadvantages of E-auctions
E-auctions also have the following disadvantages:
- They ignore the total cost of ownership and consider only the purchase price.
- They ignore long-time supplier partnerships due to focus on the purchase price.
- All expenditure categories are not suitable for online auction-based sourcing. Only a small percentage of the total procurement spend is sourced through E-auctions.
- The benefits of online auctions depend on bidding conditions. A product that has limited supplier competition cannot yield many benefits.
- E-auctions can lead to a zero-sum game, which is detrimental from the long-term sourcing perspective.
- Not all solutions strategy works on all categories of items.
- India SME suppliers are still not comfortable with online procurement because it is still in the evolving stage.
- Online auctions are prone to the practice of dummy bidding which is an unethical practice.