Saturday, April 26, 2008 Update: Internet exchange offers hope, challenge for OEMs By Jennifer Baljko Shah and Mark Hachman EBN (05/05/2000 4:57 PM EST) The High-Tech Exchange, an e-commerce initiative launched earlier this week by a dozen industry players, is likely to be one of many online trading hubs that connect component suppliers, distributors, and OEMs, supply-chain management experts said. But just how these exchanges will work, and which will create enough buzz and substance to be the dominant site, remains to be seen, they added. "These are brand-new business models," said Jim Forquer, a director at the consulting firm Pittiglio Rabin Todd and McGrath. While there have been many announcements about these marketplaces in all industries, "the number of transactions per press release is pretty low," he said. "We have to take note that this is something very new and still being developed." Despite the potential for infighting within the e-commerce space, PC makers and OEMs in other industry segments share the same goal: to implement common Web-based supply-chain management practices across different companies, and to increase supply and demand visibility. At the same time, supply-chain managers and purchasers will face the unenviable task of figuring how the dynamics of this emerging model will affect their existing practices. They will also have to determine how these exchanges will affect component pricing strategies, information-sharing processes, and strategic relationships with preferred suppliers. "There are lots of questions," said Mike Doyle, chairman and chief executive of the National Initiative for Supply Chain Integration. "One of the serious problems in any exchange is that there needs to be a clarification of what types of items are running through the exchange. Another major issue is if a few companies own the highway and are charging a toll to use it, how can they ensure competitors that they can't see sensitive and important information such as pricing." The e-marketplace phenomenon that is sweeping through various industries has even piqued the curiosity of the Federal Trade Commission. In an effort to understand how e-marketplaces and online exchanges work and affect competition, the government agency will hold a public workshop on June 29. Taking the first stab at a multiparty open exchange in the PC sector, AMD, Compaq, Gateway, Hitachi, HP, Infineon, NEC, Quantum, Samsung, SCI Systems, Solectron, and Western Digital said they will be the 12 initial founding members of an independent company that will operate High-Tech Exchange (www.ehitex.com). Eight additional founding members are expected to be added to the roster. "Suppliers, customers, and competitors, in many cases, were able to come together at lightning speed to put together a very exciting opportunity and probably one of the most meaningful events in the industry in many years," said Matt Massengill, president and chief executive of Western Digital Corp., during a news conference. "This is a great opportunity for us to truly get the kinds of efficiencies out of the supply chain that we need to have." Initially, the High-Tech Exchange, slated to be up and running within 90 days, will offer auctions, catalog management, and value-added services such as a news ticker. Down the road, demand forecasting, inventory visibility, capacity utilization, online supply commits, reverse logistics, trading agents, and collaborative product-design- service capabilities are likely to be added. Reducing redundancies and getting partners to speak a common language are other areas the exchange hopes to tackle. "It helps everyone in the supply chain do things more efficiently," said Phil Fok, director of corporate operations at Solectron Corp., Milpitas, Calif. "For example, orders are usually e-mailed or faxed, and someone has to receive and review them, then fax or e-mail them back. E-commerce done correctly can eliminate redundant entry stuff. You get improved performance." Leveraging existing technology is one way to achieve that, according to Curt Francis, vice president of corporate development at Quantum Corp. in San Jose. "Internet-based commerce has been a substantial force in a number of areas, in autos and steel. Why would it not happen here?" he said. One of the most challenging hurdles the new group faces is getting everyone to speak the same language. Though many companies have joined standards boards like RosettaNet -- a consortium developing e-business process standards that will allow supply-chain partners to more effectively interact via the Internet -- putting the right technology in place could be a bear of a job, according to Fadi Chehade, chief executive of ViaCore Inc. and former head of RosettaNet. "Building RosettaNet-ready PIPs isn't simple," he said. "If you thought EDI was hard, this is harder. "What concerns me is that you can't announce something that is meaningful that will be available in a matter of days [as the Internet Exchange will be]. That worries me because it's not simple stuff," Chehade said. "Can you integrate companies' systems simply? The answer is no." E-commerce Competition While the High-Tech Exchange has some heavy-hitters on its roster, other big names, such as IBM Corp., Dell Computer Corp., Intel Corp., and the major distribution players, are not on the list. Though it's still too early to speculate whether some of them will join at a later date, the possibility of having competing exchanges is already emerging. Later this month, Big Blue is expected to announce that it will form a separate exchange with at least nine other companies, said Jerry Latta, IBM's global general manager for aerospace and electronics in Southbury, Conn. "We started down this path several weeks ago," Latta said. "There's room for all kinds of exchanges in the industry. They can take on all different forms, shapes, and characteristics." Latta declined to discuss what companies will be founding members, what technology will be used to connect the players, or other details about how the exchange will operate. A formal announcement outlining their strategy is expected to be released by the end of the month. Dell, which has optimized the PC industry's shift toward a build-to-order sales strategy, has forged its own independent supply-chain model. A spokesman for the Round Rock, Texas, company characterized Dell's supply-chain management model as "quite advanced," but declined to give specifics beyond acknowledging that several of the processes are patented. He stopped short of saying that Dell might risk exposing or sharing these processes should it decide to participate in the exchange. "We're aware of [the exchange], but it's not clear what it is, or what its benefit to Dell would be," the spokesman said. "Dell is generally regarded as a leader in supply-chain management. We have developed our own Internet-based tools for supply-chain management and in the management of finished goods." Intel, the world's leading chip maker and a key enabler of Dell's direct-sales efforts, declined to comment whether it was considering joining the supply-chain program. Internally, Intel has been setting up e-commerce initiatives to manage its customer and supply base. "We have ongoing technical innovations in software and services and continue to be vigilant in regard to these things," a spokesman said. Where Distributors Fit In Top-tier distributors Arrow Electronics Inc. and Avnet Inc., which have been aggressive in pursing e-commerce efforts, could not be reached for comment. Both Arrow and Avnet are investors in eConnections, a Web-based supply-chain management company that may offer some of the services being offered by the High-Tech Exchange. But Rob Rodin, chief executive of eConnections, declined to comment on last week's announcement, saying that there are "unanswered questions" about the group's plans. Others in the channel see the OEM-led exchange as complementary to their models. "Here are the largest computer OEMs telling people that they can't support their supply chains through a direct model," said Ron Pugh, vice president of sales at Wyle Systems, the computer-products unit of VEBA Electronics LLC. "So they're pooling their resources to, effectively, create a distributor." The volume of computer products and components sold through the indirect channel practically assures that Wyle and other distributors will be major suppliers to this and similar exchanges, Pugh said. Another approach is to create a separate exchange that may eventually plug into the broader OEM entity. ProcurePoint.com, Walpole, Mass., is trying to do just that. ProcurePoint, a software company, is creating tools that will enable franchised distributors to connect with small and midsize contract electronics manufacturers, said chairman Timothy X. Cronin. Other companies, particularly dot-coms that have been beating the online procurement drum for the last several months-NECX.com and PartMiner, for example-also said the model lends credibility to their offerings and will help drive the transition to an online procurement environment. "We welcome the validation from big-name buyers like HP and Compaq," said William Barron, chief marketing officer at PartMiner Inc., New York. "We appreciate that they will be a catalyst to bring about change." What's At Stake Despite all the noise about which companies are doing what, those that are successful with the e-marketplace model have much to gain. Nearly $3 trillion in transactions will be conducted electronically by 2004 in the United States, and e-marketplace transactions will represent about $850 billion of that amount, according to The Yankee Group, Boston. And AMR Research Inc., Boston, estimates that the cost reductions generated from Internet commerce on sales, general, and administrative line items could exceed $50 billion by 2004.