Literature Review

Taxonomy

Kaplan and Sawhney (1999) have classified B2B Hubs based on Purchase Situations:

They have proposed a simple two-way classification - manufacturing inputs versus operating inputs (the “what”); and systematic sourcing versus spot sourcing (the “how”)

This allows us to classify B2B hubs into four categories:

●      MRO hubs (operating supplies, systematic sourcing, horizontal focus)

●      Yield managers (operating supplies, spot sourcing, horizontal focus)

●      Catalog hubs (manufacturing inputs, systematic sourcing, vertical focus)

●      Exchanges (manufacturing inputs, spot sourcing, vertical focus)

How do E Hubs create value?

According to Kaplan and Sawhney (1999), the two fundamental ways in which an E Hub creates value are:

1. Aggregation - The aggregation mechanism relies on bringing a large number of buyers and sellers under one roof, and reducing transaction costs by “one-stop shopping”. An important characteristic of the aggregation mechanism is that adding another buyer to the hub only benefits sellers, and does not benefit other buyers. This happens for a simple reason – buyers can never be sellers in a catalog aggregation model. So adding a buyer to the system only benefits sellers, and adding a seller to the system only benefits buyers. The aggregation mechanism is static in nature, because prices are pre-negotiated. The aggregation mechanism (also called the “catalog mechanism”) works best in the following settings:

●        The cost of processing a purchase order is high relative to the cost of items procured.

●        Products are specialized and not commodity-like.

●        The number of SKUs (Stock Keeping Units) is extremely large.

●        The supplier universe is highly fragmented.

●        Buyers are not sophisticated enough to understand dynamic pricing mechanisms.

●        Most purchasing is done on the basis of pre-negotiated contracts.

●        A meta-catalog of products carried by a large number of suppliers can be created.

2. Matching - The matching mechanism is a trade mechanism that creates value by bringing buyers and sellers together to negotiate prices on a dynamic and real-time basis. In contrast with the aggregation mechanism, buyers can be sellers in the matching mechanism. So adding a buyer to the hub benefits buyers as well as sellers. The source of value creation in the matching mechanism is improved matching due to improved marketplace liquidity. While catalogs benefit only from the aggregation mechanism, exchanges benefit from both aggregation and matching. Because they benefit from both mechanisms, Kaplan and Sawhney think that successful exchanges will reap greater benefits from being successful first-movers. The matching mechanism tends to work best in the following settings:

●        Products are commodities or near-commodities.

●        Trading volumes are massive, relative to transaction costs.

●        Products are relatively standardized and can be traded sight-unseen.

●        Buyers and sellers are sophisticated enough to deal with dynamic pricing.

●        Purchasing is often done on a spot/transactional basis.

●        Logistics and fulfillment can be conducted by third-parties, often without revealing the identity of the seller or buyer.

●        Demand and prices are volatile.

The Concept of Bias

E Hubs can be biased towards the suppliers or the buyers or they can be neutral as well. When an E Hub is biased towards the suppliers and aggregate a lot of buyers to negotiate in favour of the suppliers, it is called a Forward Aggregator. On the other hand, if an E Hub is biased towards the buyers and aggregate a lot of suppliers to negotiate in favour of the buyers,  it is called a Reverse Aggregator.

Similar concepts can be applied for Matching business models as well and the bias can be either Forward Auction or Reverse Auction.