Philipps: There are a number of benefits for suppliers: Low-cost access to new marketing channels, access to market information and market news, as well as pre-selected logistics partners, foreign exchange services, escrow payments, supplier financing at preferential rates and supplier pre-transaction inspection services designed to assure buyers of the capabilities of suppliers’ production facilities.

If suppliers become fully integrated with the new systems and organise their internal procedures and structures towards the requirements of exchanges, they can also profit from considerably lower transaction and communication costs. Typical overall transaction cost savings even with clients from developing countries amount to at least 15% over other transaction methods.

ITC: How will the emergence of Internet trading exchanges alter buyer/supplier relationships?

Philipps: Until now suppliers have employed a number of different tactics to differentiate their offering from others.  Such tactics have included the use of quantity and quality mix differentiators, differential pricing, add-on services, future support deals and guarantees. In many cultures face-to-face meetings and discussions are traditionally required as a prelude to the exchange of documents and negotiations.

To a certain extent these approaches will have to change in the future. For example, suppliers linked to an exchange will not necessarily have the benefit of meeting potential customers before pre-qualification. Prospective suppliers will need to enter details about their product or service offering into a table that is pre-defined by the buyer according to the buyer’s requirements and most important constraints. Bidding will close at a precise cut-off time and no other channel for receiving offers will be acceptable, or even possible.

It will be important that both buyers and suppliers adapt their internal processes to meet the challenges of the new ways of trading. Buyers will have to consider, in advance of posting their needs, the selection criteria and weighting factors that they will use to choose suppliers.

ITC: On what areas should suppliers be concentrating?

Philipps: In some countries considerable changes may be required to ensure that each company forming a link in the export supply chain can react in time to meet the demands of international buyers. Contingency planning and back-up facilities may be required to ensure that deadlines are met and that infrastructure breakdowns do not result in missed deadlines and lost sales.

At the present time, with technology being so new, most international buyers are prepared to work with their suppliers to obtain the full benefits from the use of an Internet trading exchange. This would appear to be a good opportunity for TSI’s to step in and co-ordinate national coaching or information transfer programmes with major international buyers active in their country’.

We do not expect so much pressure on suppliers to reduce prices as a result of the implementation of the new systems, but we do expect to see a demand for an increase in the velocity of responses and delivery. This means that suppliers’ back-office operations, product and service information and supply-chain dependability will become vital for their success. This is especially the case where suppliers rely on other producers to provide components for their final products.

Training in associated organisational and managerial will be a priority if developing country enterprises are going to make the transition into becoming digitally enabled businesses. Here are two examples of why this is so important:

Suppliers must ensure that they have reliable and accurate data on their production and delivery costs and times. This is because the product mix and delivery schedule demanded by the buyer may be different than the supplier’s regular offering.

When using a trading exchange where an auction process takes place competing bids may be posted very quickly, for example: every 15 minutes. In these cases a supplier must be sure at what point the bid price falls to the point where the deal would be unprofitable. Training in this form of electronic auction procedure will be vital for enterprises in developing countries and transition economies.

ITC: Proponents of Internet trading exchanges claim massive cost savings that have led suppliers to fear a cartel-like operations by big corporate buyers?

Philipps: Firstly, suppliers have nothing to fear in regard to competition between buyers using the same trading exchange and also nothing to fear about segregation of sensitive or confidential data when using any of the leading Internet trading exchanges.

The business model underpinning the operations of each of these sites is that of an independent service entity that should respond to the needs of buyers, suppliers and trade facilitators networked into the site. The main objective of the trading exchange is to increase the velocity of communications related to trading and trade-related data exchanges and decrease the cost of transactions. There is no evidence yet of concerted downward pressure on prices as a particular result of selling using an Internet-based trading exchange. The reduction in costs is largely achieved through use of the latest technology and by the alignment of business processes.

Secondly, each model is developed to serve the needs of an industry sector and the stakeholders who will operate the site. Suppliers and networked trade facilitators (such as logistics, foreign exchange and applications service providers) have to be encouraged to join the venture or it will not succeed or cover its costs of operation. Stakeholders and participants in an exchange are free to go elsewhere to conduct their business, so the onus is on the exchange operator to provide an exemplary and valuable service.

ITC: Many large-scale trading exchange ventures were announced at the beginning of this year but only a few of them have come into operation with pilot programmes. Why is it taking so long for them to become operational?

Philipps: Implementing the technology solution behind a trading exchange accounts for only about 20% of the cost and about 25% of the time and effort of establishing a viable operation. Sometimes the technology implementation can take only a few days. The bulk of the work to be done relates to the alignment of business processes, back office systems integration, establishing bid comparison criteria and training users, both buyers and suppliers. Different sites employ different bidding and bid evaluation criteria. The new processes can take some time for users to master.

In our own experience we find that smaller, open-minded enterprises often master the changes required much more quickly than larger or more rigidly structured organisations. In this respect, developing country enterprises may well have an advantage over large multinational groups.

Many organisations that we talk to fear they are being left behind and make a mad dash towards a technology solution. This is the wrong attitude to take. As with any other investment, there should be good business reasons for embarking on the use or development of an Internet trading exchange. It is by no means too late, and nobody is being left behind – yet. This is a very new industry and there are few clear indications of best practice that have emerged so far. For this reason there can be some merit in delaying large investments until clearer business patterns have emerged, or until competitors force a choice.

Enterprises should ensure that they keep up-to-date with developments in their markets and try out as many different ITE providers as they can to establish which type of operation best serves their needs. For the moment developing countries should ignore the overwhelming publicity generated by the industry and concentrate on the essential requirements of enabling their enterprises to eventually take advantage of the new technologies.