Special Report: E-Commerce

Almost Sold

Many suppliers have avoided online marketplaces, fearing it's a buyer's world. New technology is changing that

By ROB EURE

Ray Huber thinks he may finally be able to take advantage of online marketplaces.

Like many suppliers, Mr. Huber, director of e-business for Cutler-Hammer Inc., says the Pittsburgh electrical-parts company has been pressured by some of its big customers in the past year to jump into the marketplaces where companies bid on buyers' online requests for goods and services.

And like many other suppliers facing similar calls from their customers, Cutler-Hammer, one of the four largest makers of electrical components in the U.S., has been hesitant, largely avoiding these e-markets. The subsidiary of Cleveland-based Eaton Corp. isn't quite convinced online marketplaces are the best place for selling.

Among its fears: that companies without the technological wherewithal to quickly sort through the numerous buyers' requests will miss out. And the ones that do win an online bidding war may find themselves losing money because they don't have time to crunch the numbers. Old-fashioned salesmanship will go by the wayside.

"We've been kind of strong-armed by our customers to look at [online markets] closely," says Mr. Huber. "We looked, but so far we've been reluctant to participate because I can't see the advantages. These online marketplaces reduce the product to price and availability and, frankly, don't show much promise for bringing new customers. They don't make a lot of sense to us."

But new technology could give Cutler-Hammer an edge in the online marketplace. Mr. Huber expects to have software installed by this summer that will give Cutler-Hammer's sales staff an almost instant analysis of customer requests. With the software, managers who have to make sales decisions on the fly will be able to quickly categorize the requests according to price, size and even the value of the customer's business to Cutler-Hammer. The managers can then focus their efforts on the requests they know will make the company money.

Cutler-Hammer may still be at the mercy of buyers trying to drive down prices, Mr. Huber says, but at least the software will give the company a chance to critique every bid to avoid losing money on Web sales. The software, he says, should enable the company, which has annual sales of $2 billion, to finally start selling products over the Web.

"We hope this will give us a way to weigh requests faster so we know which ones we ought to bid on, and which ones we might want to pass up," says Mr. Huber. "In the long run, if these e-markets are going to work, they have to make sense for everybody, and so far, they've just made sense for the buyers, not the suppliers."

The Price of Efficiency

Web-based markets have been hailed by some as one of technology's most promising efficiencies. Early leaders in these markets have been large industries -- in particular the automotive and aerospace sectors -- that sought a way for businesses to buy and sell to one another without the need of lengthy sales pitches and phone calls. In developing e-markets, the buyers focused on cutting time and getting the lowest price possible.

For the suppliers doing the bidding, however, the markets remove their opportunity to differentiate themselves with such intangibles as service and quality. The markets, suppliers complain, eliminate developing long-term relationships with customers as a sales tactic in favor of the mere ability to match a price, which usually cuts into profits.

"It's 'Caveat Vendor,'" says Wilson Rothschild, senior analyst with Metagroup Inc., a Boston-based technology consulting firm. "Let the seller beware."

Mr. Rothschild adds: "Sellers have just been bullied. They get customers announcing that they need to cut costs by 15% or else. Some companies that have jumped in find they are bidding on contracts by the seat of their pants and losing money. So a lot of them have just walked away" from e-markets.

But that doesn't mean Mr. Rothschild expects online markets to fail altogether. "There's huge potential, once we reach a point where everybody has something to gain from using them," he says. "Smart suppliers are going to be investing this year and next in technology that will help them make good decisions. It's going to be a matter of survival."

John Maholtz, director of market-making and supplier services at FreeMarkets Inc., a Pittsburgh company that runs e-markets for buyers, says Web-based markets are based on more than price and availability.

Price is the driving force, Mr. Maholtz says, but he says sellers get some advantages with online markets. With the marketplaces, buyers are able to find sellers who make exactly the parts they need and have the capacity to fill the order. That means sellers get requests for bids that match their product lines, and don't waste their time on bids for products they can't make, he says. "In the supply business, sometimes 60% of the requests you get don't really match" the products you sell, he says. Customers "tend to blanket manufacturing looking for someone who might offer to make a part."

And even if sellers lose out in a bidding war on e-markets, Mr. Maholtz says, they can at least see the bids of their competitors "so they know if their production costs are in line" with the rest of the industry.

At Cutler-Hammer, Mr. Huber says the software the company is installing will prepare it to compete by evaluating orders faster and better than his sales staff can now.

"If we get a request for a big order, we should be able to weigh various factors: Can we turn it out on time? Is the price worth the effort? Is this a big customer we want to keep happy or is this Joe's Garage making the request?" he says. "In the electronic world, everybody wants things faster. That's probably where the savings are, so we want to be ready to handle it."

The technology Cutler-Hammer purchased came from Metreo Inc., of Palo Alto, Calif., one of a handful of high-tech companies now offering software designed to give sellers an advantage in e-markets.

Metreo President and Chief Executive Officer Daphne Carmeli says that early development of e-markets left sellers out of the equation.

"The whole idea behind e-markets was for buyers to save money on their purchases," she says. "So far, they have just been putting out requests and [telling] sellers what they expect the price to be."

Sellers were at the mercy of such demands "because if they didn't meet the price, somebody else would," Ms. Carmeli says. "Most of these businesses are not equipped to make decisions on bids in Internet time.

"Typically," she adds, "a large business takes 10 to 14 days to examine a bid, price the item and prepare a response. But e-markets demand a decision immediately, and the seller has no way of knowing if they are making a good deal or losing money. There's serious pain out there."

Scan and Match

Metreo's system scans for requests and then either matches them with inventory, costs and availability or suggests alternative products that might fit an order and save money. The $500,000-to-$700,000 system can be individualized to recognize longstanding or potentially lucrative customers, for whom a price break is in order, she says.

Metreo is aiming at selling its system software to companies with sales of $600 million a year and up, Ms. Carmeli says, because analysts expect about a third of companies that size to invest in Web-based sales in the next four years.

Boston-based AMR Research Inc., a technology-consulting firm, estimates that global businesses will invest $35.3 billion in 2005 on technology that enables them to buy and sell goods on the Web, up from $7.3 billion this year. Most of these e-markets will be private exchanges, says Kevin O'Marah, a senior analyst with AMR, but will still demand that sellers be able to respond fast with flexible quotes -- called dynamic pricing -- or lose the business.

As e-markets develop in the next few years, Mr. O'Marah thinks they will move beyond the basics of price and availability and restore some of the quality and service elements that have suppliers bucking the early introduction of markets. Some analysts and companies imagine a bidding system that allows suppliers to collaborate with customers. A supplier could, say, offer improvements to a customer's product by suggesting a better part than what was requested online.

"The real promise of e-markets is not cost savings, though that is part of it," Mr. O'Marah says. "It's in the exchange of information and increasing the value of the product so that both the buyer and seller profit."

He explains it like this: "Say I want to build a bike and contact a wheel maker for the part. But what if the wheel maker can offer me a more-efficient wheel at less cost and faster? That's an increase in value. It's also a key relationship between the buyer and the seller. So far, not many buyers or sellers have started talking about e-markets that way, but I think that's where the potential lies."

Johan DePraeter, president of Coats North America, a thread manufacturer in Charlotte, N.C., hopes that's right. His company, a subsidiary of London's Coats Viyella PLC, learned about a year ago that one of its largest customers, Sun Apparel Inc. of El Paso, Texas, wanted Coats to have an online buying system in place within six weeks.

The problem for Coats wasn't that it didn't want to comply, but that its old computers that stored inventory information predated the Internet and the company couldn't download the information to its Web site.

Coats hired Seattle-based WRQ Inc. to write a program to tie its computers to the Web and met the customer demand. So far, Mr. DePraeter says the company hasn't seen an increase in sales from the effort, but Coats is planning on slowly increasing its ability to sell threads online.

Still, Mr. DePraeter says he isn't concerned with the Web competition. "I think quality will always be important," he says. "You can ruin a $50 pair of jeans for the cost of 37 cents in thread if the colors are wrong."

-- Mr. Eure is a staff reporter in The Wall Street Journal's Portland, Ore.

Write to Rob Eure at rob.eure@wsj.com