For a Million Gallons of Glue Find a Marketplace on Steroids
Geller - May 2nd, 2000
FreeMarkets, Inc. (NASDAQ: FMKT) runs a marketplace that enables large
competitive auctions for the purchase of industrial parts and raw materials.
Unlike most digital market makers whose goal is to create completely digital
marketplaces, FreeMarkets provides value by combining technology with
buying a thousand rolls of standard sized paper towels it is efficient
to look in a catalog and choose vendors based on price, delivery times,
and reputation. When buying millions of cubic feet of natural gas or a
family of PC boards, a different approach is definitely called for.
works with purchasers to help them craft detailed product specifications.
These requests are prepared by specialists in the product, materials,
or service being acquired. Preparation of a specification might take between
four and ten weeks.FreeMarkets
also helps buyers identify potential bidders on the contract. FreeMarkets
then works with the suppliers to train them in the use of the system.
The bidding takes place in an electronic market that shows all suppliers
the current bids in real time. The marketplace supports multiple currencies
and a host of specialized features. Buyers typically save between 2% and
25% on a single acquisition.
Postal Service is the nation's largest civilian employer, largest shipper,
and tenth largest commercial enterprise. Its complex contracts for shipping
services, equipment and repair, and raw materials make it a natural for
the specialized procurement services that FreeMarkets provides. FreeMarkets
recently signed a partnership agreement with American Management Systems,
Inc. (NASDAQ: AMSY), which will bring FreeMarkets other public sector
At present FreeMarkets has little overlap with other marketplaces, such
as those being created by Commerce One or Ariba. As digital marketplaces
become more crucial to the supply chain - as is beginning to happen in
the automotive industry and ether verticals - these marketplaces will
undoubtedly begin to encroach somewhat on the lower end of FreeMarkets'
space. However, it is not efficient for such markets to attempt to develop
the depth of product specific knowledge that FreeMarkets has in 70 different
while FreeMarkets could use its position in these verticals to build digital
exchanges for more routine procurements, there is no compelling reason
for them to do so. In the increasingly competitive world of electronic
purchasing FreeMarkets has the enviable position of being able to make
money while sitting well above the fray.
The lesson in this announcement is that digital exchanges as generally
understood do not fit every company. Organizations with complex buying
needs should not reduce their requirements or standards to achieve their
goals. However, organizations should also avoid assuming that their requirements
are so complex as to require this top-of-the-line solution. They may find
that they do have the option of using a more generic digital marketplace.
If that is the case they should weigh the advantages carefully.