For a Million Gallons of Glue Find a Marketplace on Steroids

  • Written By: D. Geller
  • Published On: May 2 2000



For a Million Gallons of Glue Find a Marketplace on Steroids
D. Geller - May 2nd, 2000

Event Summary

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 labor-intensive services.

When 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.

FreeMarkets 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.

The 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 clients.

Market Impact

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 verticals.

Similarly, 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.

User Recommendations

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.

 
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