Sizing Up Private Trading Networks

June 15, 2001

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A one-size fits all approach to private supply chain connectivity may not be the answer. Tiered solutions based on company size seem the right way to go.

Seeking to leverage the most from electronic business-to-business, many companies are attempting to establish links with their suppliers by implementing private trading networks. While it may not be as daunting a task for large suppliers who often have sufficient resources allocated to e-business initiatives, it's more of a challenge for small and medium enterprises (SMEs). Although a large supplier's transactions with SMEs may be on a much smaller dollar scale, the sheer frequency with which they do business can account for about 80% of the total transactions. Therefore electronically linking these smaller suppliers is essential if the hub company is serious about cutting down the costs associated with manual processing.

When it comes to implementing e-biz initiatives, suppliers should be slotted into three separate tiers. The first tier is made up of high-volume transaction suppliers. These companies are likely to have some sort of e-commerce initiative already in place, usually in the form of a value added network (VAN). VAN fees can be exorbitant, usually costing the company a ballpark figure of $100,000 a month. By convincing first tier suppliers to make the move to a private network, hub companies can reduce this fee or even wipe it out completely. The resulting savings can justify their investment in private network software within a few months. The second tier of suppliers are companies that may also rely on VANs or electronic data interchange (EDI), but usually do so with a limited number of their supply partners. These companies can typically justify the cost of their private network connection within a year of implementation.

The third tier is made up of those suppliers who have little or no electronic connectivity. Although these partners may each supply only one component of relatively low cost, they often make up the lion's share of total transactions, and therefore a greater share of manual transaction processing fees. Their inclusion in the private network is crucial if hub companies want to reap the full benefits of b2b e-commerce.

In order to convince these second- and third-tier SMEs to link up with a private network, hub companies need to provide convincing evidence of future gains and ease worries of present costs. So far, the number of vendors has made connectivity to a private network cost prohibitive for SMEs. In response, software solutions providers are now tailoring their products to smaller operations and smaller budgets. These tiered solutions allow smaller companies to utilize their server, PC, java client or browser to connect directly to the private network and participate in varying degrees of business automation.

Companies seeking full connectivity across the supply chain should understand that this move requires a shift on behalf of their partners. Hub companies should therefore provide ample time for their suppliers to connect to the private network. Realistically, this process should be calculated in months, not days. The company should allow an initial period of 30 days to contact their suppliers and explain the benefits of private network connectivity. Once contacted, suppliers may take up to another 30 days to research and evaluate their options regarding connectivity. While hesitant suppliers are understandably taking their time weighing the options, hub companies can work on connecting early adopters. During the third month of roll out, hub companies can start expecting suppliers, both large and small, to declare themselves ready for connectivity. Typically, 10% of a company's partners will elect to join the private network each following month, with 70% to 90% coming on board within the first year. Of course, there are a number of factors that affect the rate of adoption and these estimates vary from industry to industry. The underlying wisdom is that in order to reap the benefits of full transaction automation across the supply chain, companies must select solutions that both benefit their partners in the long run and are economically feasible in the short run.

Source: Size Shouldn't Matter
Don Willis
Line 56, June 6, 2001
http://www.line56.com/articles/default.asp?NewsID=2579

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