Insider Trading, Part 1

The stock rooms that used to hold boxes of parts no longer exist in Dell Computer Corp.’s six factories. The Austin, Texas, computer maker has such an efficient supply chain that on Feb. 2, at the end of last quarter, it had only five days of inventory on hand, the lowest in its 17-year history.

Dell attributes these efficiencies to the private trading exchange it ramped up last summer to interface with its suppliers. That private trading exchange offers Dell a way to become just as resourceful with suppliers as it is with customers, who know Dell as a leader in the way it deals with real-time customer orders.

“What we’re trying to do is achieve a constant state of balance between supply and demand,” says Dell spokesman Venancio Figueroa. “If we achieve that balance, the suppliers get more timely, accurate information, customers get products and components they want, and Dell doesn’t have to manage excess inventory.”

In 2000, the buzz surrounded independent public trading exchanges, like the food industry’s FoodUSA.com, and consortium trading exchanges, like the auto industry’s Covisint. But those have, at worst, failed, and, at best, failed to live up to their hyped expectations.

This year, Dell isn’t alone. Companies like Cisco Systems, Inc., Maytag Corp., Proctor & Gamble Co., and Charles Schwab & Co., have taken the lead in establishing private trading exchanges to improve their supply chain management. The private trading exchanges these and others companies are building are reaping great rewards: Improved supplier relationships, streamlined order-fulfillment processes, and, most importantly, reduced costs.

AMR Research Inc. predicts that by 2005 one of every three companies with sales of over $1 billion will implement a private trading exchange–which for Fortune 500 companies could cost $50 million to $500 million to build. Meanwhile, the supply chain management (SCM) market is expected to reach $7.8 billion in 2001, with inventory management, order fulfillment, and supply chain planning as the top three applications users will look to implement, the Boston-based research firm predicts.

Market researcher eMarketer predicts that currently at least 90 percent of business-to-business (B2B) e-commerce is transacted through private exchanges.

And AMR breathlessly urges every enterprise with sales exceeding $1 billion to build a private trading exchange. If only one-third of them do, the private trading exchange will create the largest application software market ever, growing to $35 billion by 2005, AMR predicts in a February 2001 report.

Admittedly, the use of private trading exchanges is still in its infancy. Companies, which have seen less than stellar results from public or consortium exchanges, are turning to their corporate extranets to create private trading exchanges.

Unlike public exchanges, where anyone can participate, private exchanges are set up by individual corporations to deal solely with their own suppliers. They are password-protected extranets that extend a single company’s supply chain to its trading partners. They work, says AMR senior analyst Louis Columbus, when they’re driven by a company’s profit motive.

“Private trading exchanges aren’t going to exist because they’re cool and bring together functions, but because people get a sustainable value out of them,” Columbus says.
They also don’t force traditional competitors to suddenly cooperate with each other, as the public and consortium exchanges do. One reason those exchanges haven’t caught on is because participants had no incentive to cooperate with each other in such an unnatural business environment.

Although AMR suggests that all large companies should create a private trading exchange, Columbus says such exchanges will only succeed if they help companies improve customer satisfaction through increased responsiveness.

The advantage of a private exchange is privacy and customization, says Steve Butler, senior business analyst with eMarketer. Companies can build networks to their own needs, customize them to their own suppliers, and protect the close relationships they want to maintain. The exchanges also give companies the ability to act more quickly when market conditions change.

“In the future world, where companies are connected better, they’ll be able to communicate (that) their orders are dropping and inventories are dropping, so people in the supply chain will have a better idea of what’s happening in real time,” Butler says.

Want to know how Dell benefits from its private trading exchange? Tune in tomorrow for Part 2.

(Freelance writer Cynthia Flash covers business and technology from Bellevue, Wash. She can be reached at cynthia@flashmediaservices.com)