B2B Exchanges Expected to Replace EDI Trading

Because they are faster and easier to use, new business-to-business (B2B) exchanges, which rely on Web-based transactions over the Internet, will ultimately replace all networks that rely on EDI for business-to-business trading.

At least that was the consensus of panelists at a super session held at the recent NRF.com trade show. The super session, "Revolution: How the New Business-to-Business Markets Will Change the Retail Industry Forever," was sponsored by the consulting firm PricewaterhouseCoopers (PWC).

The panelists included: John M. Corrigan, senior vice president and CIO, Estee Lauder Cos.; Jerry Miller, senior vice president and CIO, Sears; Mike Frank, vice president, development, Target; and Herbert Kleinberger, partner and global retail consulting leader for PWC. The session was moderated by Paul W. Farris, professor of business for the Darden Graduate School of Business, University of Virginia.

Miller noted that at Sears, there are only a handful of people who understand EDI (Electronic Data Interchange), "even after all these years." XML (Extensible Markup Language), by contrast, is "understood by hundreds of people. Even kids coming out of high school understand XML," he said, whereas "college graduates with computer science degrees still find EDI difficult to work with. I think that's the reason we'll see the adoption of Web-based business-to-business transactions explode."

XML is a tool that tells a computer how to interpret a text file, in contrast with HTML (hypertext markup language), which tells it how to display data.

Miller said that Sears, with a number of partners around the world, has formed a B2B exchange called Global Net, with the primary goal of reducing supply chain costs. He said Global Net currently focuses on auctions, but will ultimately be responsible for some $20 billion in annual mainstream transactions.

Miller said, "We think the next generation of communications between us and our suppliers will be XML-based, and we want to do anything we can to get there as soon as we can. Global Net is what will help us get there."

Frank of Target said his company is a founding member of another B2B exchange, the World Wide Retail Exchange (WWRE), and that he expects the effort will ultimately enhance Target's relationships with its vendors. Members of the WWRE have combined sales of $596 billion.

According to PWC's Kleinberger, new B2B exchanges represent a major business transformation taking place among all industry sectors, driven by the Internet.

"We believe these exchanges are here to stay," he said. "In the retail industry, the real opportunity they offer is in reducing supply chain costs."

Other opportunities, he said, include improving buying efficiency and streamlining communications between buyers and sellers.

Miller said Sears has "thousands of people who are authorized to buy across the enterprise. We want to consolidate that down to a lower number of people, so we can have a little more control over what we're spending and reduce our expenses so we can negotiate better prices."

In response to a question, Miller said that B2B exchanges would most likely cover their costs in a manner akin to the ASP model, wherein users of the system pay fees depending on their amount of usage.

He said Global Net is based on a for-profit model, and will likely be profitable within one to three years. "That's the only way we can attract the type of talent we need in order to build the type of services we're looking for."

He said that all of Global Net's equity partners have agreed to use the exchange for at least 75% of their total transaction spending. The exchange is open to all other players with no minimum requirements, he added.