B2B still providing returns: even a dramatic shakeout has not faltered food industry trading exchanges. B2B's expanded services and linkage to back office systems are luring retailers to log on.

The "dot-bomb" phenomenon of 2001 changed the robust landscape of Internet marketplaces, yet a slow, but steady growth still exists in their membership within the grocery industry. While some competing business-to-business (B2B) exchanges continue to come under scrutiny for wasting investment dollars, many industry experts still regard the marketplaces as a way to streamline costs. By linking marketplaces to retailers' back-end systems, exchanges are providing a valuable asset to the grocery industry, they say.

The emergence of the Internet and the accessibility of real-time information initially spurred the development of electronic commerce. Seeking ways to streamline day-to-day tasks, businesses participated in e-commerce to gain direct connectivity with their suppliers.

The inception of B2B exchanges dates back to the debut of the Efficient Consumer Response (ECR) movement in 1992, an initiative focused on slashing billions of dollars from the supply chain. ECR was further pushed along by the promise of Electronic Data Interchange (EDI), the standards-based computer-to-computer communication between trading partners. By the late 1990s, the Internet was widespread and could be used as a tool to further EDI communications. Not to mention, other retail verticals were already giving the supermarket industry a run for its money in B2B commerce.

"Wal-Mart was hot and heavy into its private RetaiLink network, which it uses to conduct e-commerce with its suppliers. Furthermore, grocers were falling behind in technology usage compared to retailers in the general merchandise arena," says Tom Murphy, president of Colorado Springs, Colo.-based Peak Tech Consulting.

By 2000, the grocery industry fully felt the boom of Web-based retail B2B exchanges. These sites enabled companies to perform efficient transactions via a network of businesses worldwide. The growth of these online B2B trading exchanges was truly astonishing. E-marketplaces popped up across every conceivable industry, all touting that they could cut operational costs by automating paper-based, labor-intensive processes, while helping retail and manufacturer members streamline various buying and selling processes. The benefits of B2B exchanges included reduced transaction costs and inventory, access to more information about product flow within the supply chain and easier access to a wider range of suppliers, according to the Food Marketing Institute's (FMI) annual technology survey.

For example, the GlobalNetXchange (GNX), at gnx.com, was formed by a partnership between Sears, Carrefour and Kroger. While all retailers and suppliers were invited to join, competing grocers still see a conflict of interest. Worldwide Retail Exchange (wwre.org or worldwideretailexchange.org) was also designed to facilitate and simplify trading between manufacturers, retailers and suppliers. The WWRE currently consists of 64 members from Asia, Europe, North America and South America, and has combined annual sales of approximately $900 billion.

Grocery Manufacturers of America's (GMA) Transora is dubbed the consumer packaged goods (GPO) industry's business-to-business exchange. Investors include more than 50 of the world's largest GPO manufacturers, representing more than $650 billion in annual revenues, according to its website, Transora.com The exchange offers solutions for manufacturers, suppliers and retailers that increase the visibility of demand information, consolidate and control spending, synchronize item information, improve service levels and cut cycle times. From raw material to store shelf, Transora's aim is to free companies from reactive inventory practices and allow them to focus on strategic activities that drive market performance.

Simultaneously, vertical trading exchanges began saturating the market in the 1990s. These exchanges, which are often run by food brokers, are dedicated to a specific commodity food item or group, such as perishables. And of course, following Wal-Mart's lead, some grocers, typically wholesalers, began establishing their own extranets for secure trading with suppliers.

By 2000, oversaturation and less available venture capitalist funding caused a shakeout amongst the dead weight in all genres of B2B exchanges. This movement was further pushed along when the dot-coin bubble popped in 2001.

Only those sites with the proper business model survived. Among the hardest hit were verticals that featured top-notch technology, but didn't have the business savvy to sustain a client base. "B2B still has a long way to go," says Russ Ross, Giant Eagle's senior vice president of strategic planning. "This was proven by the shakeout in 2001. Industry-specific exchanges struggled the most because they simply provided technology. The winners were the marketplaces that featured value-added business models."

GNX, Transora and WWRE are some of the companies that made it through the fire. WWRE officials credit its core business plan for much of its survival. "We understand you need to be industry neutral and open to all, regardless of size. This is what drives critical mass," says Nick Parnaby, WWRE's global director of member development and marketing. "In March 2000, we were retail specific; by June 2001, we opened our doors to manufacturers, which is helping us to achieve critical mass.

Among WWRE's top services are supporting sourcing, procurement and electronic auctions. To date, 90% of WWRE's membership uses the site's nine styles of auctions. The most popular feature on the site is the reverse electronic auctions device, which typically is used to procure private label products or services sold at store level.

Another option available to retailers is forward auctions, which are used to liquidate supply. "However, this is only the low-hanging fruit," says Parnaby. "Trends this year will be more collaborative services, including connecting retailers and suppliers to proactively negotiate, forecast and replenish product. We have several forums for the advancement and sharing of best practices around these processes, including guidelines on how to take advantage of CPFR [collaborative planning, forecasting and replenishment]."

WWRE expects 27 members to begin data synchronization this year. Thirty trading partners have already implemented CPFR processes using WWRE implementation support and the exchange's hosted CPFR and promotions management tools, says Parnaby.

While this development is certainly an indicator of exchanges' strong penetration in grocery, industry marketplaces are learning how partnerships with UCCnet further strengthen and expand their services,

UCCnet, which is the foundation of global industry standards for electronic commerce, synchronizes product information between business-to-business partners within the industries served by Princeton, N.J-based Uniform Code Council (UCC). UCCnet provides a global platform that ensures efficient Internet trade. Although only 3% of companies that responded to the FMI study have used UCCnet for data synchronization, 42% were planning on using the service.

By aligning with B2B exchanges, "we are working with the industry to get global standards within the global marketplace," says Fred Geiger, senior vice president of UCCnet. "This allows data synchronization to occur between trading partners so data stays accurate."

Historically, trading partners were not required to be a member of UCCnet prior to joining an industry exchange. However, WWRE recently joined forces with UCCuet to build standards-based connections worldwide with local catalog providers. Using UCCnet as the global registry, WWRE will expand its global data synchronization network. By featuring a single standardized (EAN.UCC) XML format, including core data, country-specific data and relationship-dependent data based on EAN and UCC requirements, the exchange will progress toward complete WWRE-UCCnet interoperability by early 2004, says Parnaby.

In May, 10 manufacturer and retailer members launched a project outlining this process. The first two members to join UCCnet's registry as part of this project were drugstore chains CVS and Schering-Plough. The project also includes participation by Albertsons, Safeway and other grocery members of the WWRE, adds Parnaby.

GNX and Transora have made similar announcements and plan to start adding UCCnet by the end of the year. Retailers that may not have the financial or information technology (IT) resources to participate directly with industry exchanges can still conduct e-commerce. The key is trading partners must connect with companies that integrate with established exchanges. One example is ViaLink. Acting as a "go between" for the retailer and the exchange, ViaLink integrates data and applications to synchronize with UCCnet, and connects retailers and suppliers to conduct e-commerce processes.

"Many companies do not have the resources for data synchronization, so they come to us to help them achieve this," says Bob Noe, CEO for the company. "Once companies become a ViaLink member, trading partners can conduct price and promotion collaboration, and advanced services like SBT [scan-based trading], which is the fastest growing portion of our business."

Scan-based trading enables grocers to synchronize supply and demand at the point-of-sale to reduce inefficiencies that increase costs within the direct-store-delivery (DSD) supply chain. According to FMI's survey, 23% of respondents were using scan-based trading with their suppliers at store level, and 28% planned to do so in the future.

Currently, ViaLink has 1,000 customers, including Target, Winco, Harris Teeter, Winn-Dixie and Farm Fresh; 750,000 registered items in its catalog; and a database composed of 5 million prices related to its registered items. Retailers and suppliers are also tapping third-party global supply chain management companies like FreeMarkets to conduct B2B processes. The software vendor provides services to manage the global supply chain "to reduce costs and supply risks that cause over and out-of-stock situations," says Matthew Nikhil, FreeMarkets' global supply management solutions manager.

FreeMarkets' strong suit is managing reverse auctions. Giant Eagle, which has been a charter member of WWRE since 2001, is also a FreeMarkets member. The 213-store supermarket chain is also successfully participating in FreeMarkets' reverse auctions. "The advantage to being a member is your company does not have to develop its own infrastructure. Instead, FreeMarkets has established, industry-specific resources," says Ross. "By participating in auctions as a group, retailers can procure commodities like batteries, forklifts, even cleaning services, at better prices than independent retailers procuring services alone."

As FreeMarkets conducts an auction online, all bids and auction progress are e-mailed to participants. If a member needs to take action, a workflow application alerts the member to the next step.

Regardless of the type of exchange or third-party partner being used, supermarket chains and suppliers continue to participate in B2B in hopes of gaining the most efficient supply chain. The FMI technology survey reported that 29% of companies participated in a B2B exchange in 2002, and exchange usage was 50% higher than levels in 2000. Moreover, the study reported that 26% of respondents said they were planning to participate in an exchange in the future.

Before jumping on the B2B bandwagon, food retailers should know how many of their suppliers are participating. For example, the FMI study revealed that the majority of respondents involved in B2B transactions say that fewer than 5% of their suppliers are using B2B exchanges. By evaluating participation levels, trading partners can expand on existing relationships and create supply chain efficiencies.

For example, WWRE officials say the exchange has saved members more than $800 million through the use of online negotiations, its first product offering. WWRE's Parnaby reports that grocers using the exchange's procurement services have seen up to 700% returns on investment within one year.

However, those conducting CPFR through exchanges will see tangible returns closer to an 18-month timeframe as the number of trading partner relationships scales out. "Others have even seen hundreds of thousands of dollars in savings in a single afternoon by participating in high-volume collaborative or individual auctions," says Parnaby. Giant Eagle's Ross confirms these returns, reporting that various auctions have helped the grocer achieve savings from 5% to 35%. "One auction helped us accrue a 48% savings," he notes. "That is all put toward the bottom line."

While early returns are impressive, the true benefits and possible efficiencies of B2B marketplaces will be gained as they are integrated with participants' back office systems. "That is the last mile and the hardest part," says ViaLink's Noe. "Currently, exchanges and trading partners connect firewall to firewall, but that does not penetrate the buying or legacy system. There needs to be a machine-to-machine tie-in among the systems that really drive the business. Without this connection, trading partners are not gaining the true value that is possible."

While this promise has existed since the turn of the new millennium, very little progress has yet occurred. One reason is that connecting systems is an arduous task for all involved. "The best place to start may be a distributed share data model from the trading partner's legacy system, past the firewall outward, rather than take it in," adds Noe. "Then we can transparently process and protect the data in the middle."