A Short Intro to Business-to-Business E-Commerce

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Business-to-business (B2B) online commerce is expected to be embraced by almost all businesses that conduct B2B commerce in the material (as opposed to cyberspace) world. Thus, great sums of gross merchandise will likely trade hands over the Internet. Already, companies such as Cisco Systems , Dell Computer, and Intel conduct a majority of their B2B commerce over the Internet. Less tech-centric companies are following suit, with automakers, wholesalers, and diversified companies like General Electric launching major online business initiatives.

There's no doubt that the raw size of B2B e-commerce is going to be huge. Due to variations in the way things are counted and estimated, it's hard to nail a precise market size figure, but it will certainly be big business. The value of goods and services sold online among businesses could be anywhere from $1 trillion to $2 trillion by 2003, depending on the market research firm you quote. Even if B2B firms only capture a small percentage of this business, the potential is still great. Either way, the size of B2B e-commerce should dwarf the value of the products sold to consumers.

There are basically two different types of B2B companies -- horizontal and vertical. Vertical companies work within an industry (vertical) and typically make their money from advertising on specialized sector-specific sites or from transaction fees from the e-commerce they may host. The two largest vertically oriented B2B companies are Internet Capital Group and VerticalNet, each of which owns numerous subsidiaries operating in hundreds of different verticals. (Coincidentally, Internet Capital Group is also VerticalNet's largest shareholder.)

Horizontal companies are a completely different breed and operate at different levels across numerous different verticals. Whether it's Ariba enabling companies to electronically procure raw goods, i2 helping to make manufacturing processes run more efficiently, or Siebel Systems empowering sales forces with critical information, most horizontal companies make their money by selling software and related services.

What are the main attractions to businesses interested B2B e-commerce?

Reduced purchasing costs
One of the easiest ways that a company can cut costs is by remodeling the way it purchases raw goods. The National Association of Purchasing Managers says that the average manual purchase order costs a company $79. This is because locating goods needed and then filling out the necessary paper work is a labor-intensive process. Searching for products online requires much less time and electronically processing an order streamlines the ordering procedure. Of cause most of B2B websites need to pay for exchange such as Alibaba, but now there are also B2B websites such as Global Trading Web is free of charge.

Increased market efficiency
Using the Internet, companies can quickly and easily get price quotes from numerous suppliers. By increasing the number of sellers, buyers are more likely to get a better price, and vice versa. Just as eBay has created an efficient market for everything from Barbie dolls to old Atari games, B2B hosts make connections between buyers and sellers that may not have otherwise happened.

Greater market intelligence
Related to finding good prices, B2B hosts give producers a better insight into the demand levels in any given market. Spot price levels can quickly be determined in everything from paint pigments to plastic cups. This allows companies to make better decisions regarding what to and what not to produce.

Decreased inventory levels
Using B2B technologies, companies can better utilize their inventory and raw materials. The Internet allows even more time to be shaved off for companies that use "just in time" manufacturing techniques. In essence, it allows firms to use less working capital to do the same amount of work, freeing these funds to be invested elsewhere.

The overriding attraction that runs throughout online B2B is that it can make companies much more efficient. Increased efficiencies means reduced costs, which is a goal that interests every company, thus making the potential B2B e-commerce industry enormous. The Motley Fool's newest Internet Report analyzes the industry and names key players for investment potential. Of course, not every B2B company is going to be a winner, so make sure you do your homework. To discuss this topic further, please visit the boards linked below.