Public exchanges haven't become a primary procurement venue because they're not as reliable as contracts with preferred suppliers, says Whitmore. However, HP's Billington believes there's untapped value in public exchange auctions. He says using those hubs can change how companies manage supplies by helping buyers account for the risk of surplus and shortage.
Billington imagines public exchanges that let buyers and suppliers trade not physical goods but positions on future supplies, such as safety stock inventory kept on hand in case supplies run short. "You don't use safety stock all the time, but you pay for it all the time," says Billington. Buyers could use exchanges to build portfolios of options on supplies or even time on manufacturing equipment, then take delivery or trade as their needs dictate. A similar concept is already in play on exchanges that trade bandwidth, Billington says. Telecommunications companies such as Arbinet-thexchange Inc. use exchanges to sell minutes of capacity. "Once we get the right unit we transact in, that we can hedge in. We're creating markets that are transparent or nearly transparent," he says. "The efficiency gains are huge."
Bud Mathaisel, CIO of Solectron Corp. -- a competitor of Celestica -- thinks public ex-changes can help him save money by connecting to each of his company's 8,000 suppliers and 300 customers, as it costs between $10,000 and $500,000 to enable each private connection. This expense includes mapping each transaction and the supporting data on both his and his partners' systems. Add to that the cost of keeping those interfaces up to date and soon it could cost Solectron more than $80 million to build and support a completely integrated, private, Web-based trading network.
Public exchanges provide standards for describing data and business processes, making the job easier and less expensive. "The idea would be for Solectron to build one bridge between us and the public exchange and for all our trading partners to do the same, and then its done," says Mathaisel. More than 200 of Solectron's suppliers transact business with the company electronically. "That's an expense we'd like to take out of the system, and one way is to have public exchanges reduce individual connection costs." Companies could use that infrastructure for private business as routinely as they discuss confidential matters on the phone. (Solectron is a founder of both the Converge and E2Open exchanges.) Mathaisel thinks the current enthusiasm for private exchanges stems from the immature capabilities of public trading hubs and questions about their ability to stay afloat. Public exchanges, whether they're owned by a consortium of industry members or independent investors, depend on fees collected from users to finance operations. Almost none of them are making money, and most are still building the systems that are supposed to deliver the greatest value to members.
Solectron has been using public exchanges the same way as HP and Celestica. "We're doing basic trading," Mathaisel says. "It requires nothing special, other than standard Web connectivity." Buying components from a public exchange isn't new. Solectron has long been a customer of the New England Components Exchange, a parts exchange that existed before the Web, and was recently purchased by Converge.
Mark Jenkins, Solectron's director of e-business, says the company has been working with one customer to conduct its order management through one of the exchanges, collecting information about changes in demand for products and providing the customer with data on Solectron's inventory (he wouldn't name the customer or the exchange). It's a small step, but a definite improvement over the previous process, which involved faxing and e-mailing data, says Jenkins. Now there's a single online record of order quantities and related data accessible to both companies.
Mathaisel acknowledges that some key customers show no sign yet of wanting to use public exchanges. So Solectron, like Celestica, is working with six large customers on private exchanges and has set up a website for suppliers to share planning and inventory information with Solectron's systems. "The major multinationals have invested millions of dollars in developing proprietary supply chain processes," observes James Hatcher, director of e-business and supply chain Asia Pacific for global manufacturer QAD Inc. "That's part of their competitive advantage."
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