Business & Technology Nexus

Dave Stephens on technology and business trends

My Favorite B2B Exchange

with 2 comments

Back in the day, my team was responsible for building Oracle Exchange. And in 2000, that was really saying something. But now it all seems so silly. Customers weren't that interested in what the software did – instead it was a big "land grab" along industry and geographic lines. CommerceOne was selling off equity in exchange for big deals, and their were takers everywhere.

[What is a B2B Exchange you ask? Its a hosted multi-tenant service where buyers and sellers meet to conduct business. You can use it to run forward auctions, reverse auctions, host catalogs, buy and sell, exchange messages like a VAN, and generally tie into ERP and CRM systems.]

At the height of craziness, one company I'll keep close to vest for now demanded 10% ownership in Oracle (can you believe it?) for the right to be a B2B Exchange customer (just in case you were wondering, Larry said no). My boss at the time, Kevin Miller, was flying on one of Oracle's corporate jets with Ray Lane to help close deals!

There were Catering exchanges, there were Contact Lens exchanges, there were Lumber exchanges. Perhaps the worst business plan I ever saw was the Retail Exchange (Sears and Carrefour were 2 of the principles at the time). They called themselves GNX & eventually they merged with WWRE and (wouldn't ya know it) they are still alive and kicking. So they get the last laugh. Goes to show you what I know!

My favorite idea and business plan for an Exchange was in the airline industry, and it was called Aeroxchange. It's still around, and the idea makes as much sense today as it did back then.

Airline maintenance is complicated. And airlines can't afford to have huge inventories of spare parts in all airports. So they have a few places (hubs), where they keep their stuff. And boy do they keep a lot of it. The estimates of excess inventory are astounding: billions and billions and billions. But better to have the spare part yourself than to rely on a competing airline. You see, airlines catch each other in "AOG" status (aircraft-on-the-ground). AOG means you've got a plane unexpectedly in need of service with passengers waiting. You can't take off without a part & a repair. Competing airlines come up with astronomical mark-ups for the part required for lift-off. And the cycle of revenge takes over from there.

Enter Aeroxchange, a modern day version of the old inventory listing services like ILS. Aeroxchange strives to become the trusted agent for airlines and parts dealers & manufacturers, a "neutral party between buyer and seller."

Of course, Aeroxchange turned to reverse auctions to maintain cash flow early on as they were building out their supply chain offering.

The best example I recall was sourcing all the lightbulbs in the cockpit of a particular aircraft, let's say a 737. What? You're not fascinated? The first scary piece of information was that there were over 400 different light bulbs in there. The second piece is that the airlines who participated had all been buying from the same guy. He'd take them golfing and wine and dine them. You know, a real pro on the relationship selling front. Of course, he refused to participate in the event. New suppliers were found, and at a average savings of over 50% (my memory is 73% but it's been 5 or 6 years so don't quote me). I remember feeling pretty badly about the guy who lost the business, until I realized that these more efficient suppliers had been artificially blocked from winning for so long. I believe he may have even sued AeroXchange. Sour grapes.

But with good software, Aeroxchange has an opportunity to build a much more important business than reverse auctions. By maintaining a part history that includes all regulatory requirements – for rotables and non-rotables, including scanned images of certifications, etc, it can be a brave new world. A virtual inventory of all available parts from manufacturers, brokers, and other airlines, with all the information needed to generate a "fair and reasonable" price.

It's idealistic, but that's a good thing, right? Airlines sharing inventory and parts information to make us safer in the air. Airlines benefit by more efficiently maintaining their fleet. With that & their reverse auction savings perhaps they can absorb some of the jet fuel price increases and continue to offer great fares! :)

p.s. As a total aside, here's yet more proof I'm obsessed with commodity prices. Take a look at the jet fuel chart I threw together from here. Can you imagine an airline trying to absorb this cost increase without increasing fares? That's why I was so impressed with Qantas' huge bet & long-term contract on jet fuel before prices really spiked.

 

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Written by Dave Stephens

03/27/06 9:23 PM at 9:23 pm

Posted in Historical, Opinion

2 Responses

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  1. my good friend Noah Eisner called me on my skewering of GNX. And he should know, he was @ Oracle in exchange business development at the time! Here’s his view:

    i totally disagree with your post about GNX…they were essentially a bunch of retailers who wanted to defray the costs of running a Sourcing SaaS with catalog buying/transaction delivery by splitting the costs over its membership. and theoretically, GNX would add all the retail knowledge to the generic platform. while many of the original concepts in the plan (e.g., how they charge, who gets admitted) may have been off-base, so was everyone at the time. the silliest ideas that i saw for an exchange was a juice exchange (proposed by the juice guys from nantucket netcktars) and some diamond exchange…although maybe this idea had some true value in the wholesale market.

    Dave Stephens

    03/28/06 8:45 AM at 8:45 am

  2. i always thought that b2b exchanges would be a great tools for public organizations like govenments since transparency and demand aggregation were the rules of that business (at least i thought). the problem was really long deal cycles and very public sector specific requirements. oh, a good robust gov’t specific contract system helps.

    York

    03/30/06 5:26 PM at 5:26 pm


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