Page 281 - Electronic Commerce

Chapter 5

example, rolled sheets) requires significant time and money to change over to produce
another type of steel (for example, bar steel). To minimize these changeover costs, steel
mills produce steel products in large batches to meet estimated demand rather than
actual orders. Because production quantities are designed to meet estimated demand
instead of actual demand, steel mills often have overproduction of some items.
Companies such as Bethlehem Steel, one of the largest steel mills in the world,
256 solved this problem in the past by sending faxes to potential buyers of their excess pro-
duction. Buyers would respond with a bid on the product in which they were interested,
and Bethlehem would negotiate with them to determine price and delivery terms.
In 1998, MetalSite was one of the first metal trading exchanges to begin doing busi-
ness on the Web. These exchanges offered manufacturers such as Bethlehem an efficient
way to reach a larger market for their excess production. By mid-2000, there were more
than 200 metal exchanges operating on the Web. These exchanges were following a
reintermediation strategy; that is, they were entering the supply chain of the steel
industry to provide some added value that had not existed in the supply chain before.
However, most industry analysts agreed that there was no need for more than one or two
exchanges in the steel industry. In 2001, metal trading exchange sites began to fail.
MetalSite had grown rapidly. With more than $35 million of investors’ money,
MetalSite was able to sign up 24,000 registered users and by mid-2001, was trading
about $30 million worth of steel each month. However, its commissions of between
1 percent and 2 percent on each trade did not yield enough money to cover operating
costs. The steel business was in a downturn along with the rest of the U.S. economy,
and the downward pressure on commissions from competing exchanges was increasing
rapidly. The major steel companies were discussing ways to form alliances to operate
their own exchanges. After three years of operation and a desperate last-minute search
for new investors, MetalSite closed in August 2001.
MetalSite had entered a business that could not support more than a few companies,
and it was unable to become one of the survivors. The lesson from MetalSite’s experi-
ence is that a reintermediation strategy must add significant value to the supply chain,
and the company pursuing that strategy must be able to construct significant barriers
that competitors must overcome to enter the business. MetalSite was unable to do
either and thus failed. Many other B2B exchange sites that found themselves in similar
competitive situations have also failed.

Private Stores and Customer Portals
As established companies in various industries watched new businesses open
marketplaces, they became concerned that these independent operators would take
control of transactions from them in supply chains—control that the established
companies had spent years developing. Large companies that sell to many relatively small
customers can exert great power in negotiating price, quality, and delivery terms with
those customers. These sellers feared that industry marketplaces would dilute that power.
Many of these large sellers had already invested heavily in Web sites that they
believed would meet the needs of their customers better than any industry marketplace.
For example, Cisco and Dell offer private stores for each of their major customers within

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