See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/233754780

A Comparison of Procurement Models for B2B Electronic Commerce

Conference Paper · January 2001

CITATIONS READS

2 482

2 authors, including:

Narciso Cerpa
Universidad de Talca
102 PUBLICATIONS   1,279 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

The Journal of Theoretical and Applied Electronic Commerce Research has been included in SSCI View project

All content following this page was uploaded by Narciso Cerpa on 20 May 2014.

The user has requested enhancement of the downloaded file.

A Comparison of Procurement Models for B2B Electronic Commerce 1

A Comparison of Procurement Models for B2B

Electronic Commerce

Avijeet Chauhan
School of Computer Science and Engineering
University of New South Wales
and
Narciso Cerpa
Department of Systems Engineering
University of Talca

Abstract

Procurement models for business-to-business e-commerce are currently quite

common due to the advent of e-commerce. These models allow organizations
to integrate their processes with procurement companies to automate and
facilitate the purchase of indirect goods. There are currently a variety of
procurement models for e-commerce that have been proposed by researches
and practitioners. In this paper we develop a comparison framework based on
characteristics and aspects that may represent advantages and/or
disadvantages for those organizations implementing these models. We
compare four of these models based on our comparison framework, and
provide an analysis of the pros and cons of each procurement model
compared.

Keywords: Procurement, Models, Business-to-Business, MarketPlaces, Hubs,

Yield-Manager, Comparison.

1. Introduction

Business-to-Business commerce can be defined as “exchange of information to

support transactions and relationships between two or more businesses”. It
includes a range of business transactions including wholesale trade, company
purchases of services, resources, technology, manufactured parts, capital
equipment and office supplies/equipment (Lucking-Reiley and Spulber, 2000).
A Comparison of Procurement Models for B2B Electronic Commerce 2

The purpose of this report is to establish a framework for comparing B2B models,
which serve a similar purpose. For this purpose the report has been limited to
B2B systems supporting “online procurement”. Procurement refers to routine
purchases of indirect goods - items required to run a business but not central to
the business’s output. Such items include office supplies, computers, and
stationary. Procurement plays a crucial role in process and product development,
and has evolved from reactionary and operational function to a more strategic and
proactive one (Lefebvre et al., 2001). Businesses often require integration of
processes with procurement companies to streamline their core activities.
Electronic commerce procurement solutions can reduce the overall procurement
costs, by reducing transaction costs (Lucking-Reiley and Spulber, 2000),
reallocating resources required for manual procurement, and reducing inventory.
The next section of the report introduces the models that will be used for
comparison. The models are defined in detail and their characteristics are also
listed. Models that are compared include: Buy side marketplace model, sell side
marketplace, MRO (Maintenance, Repair, and Operations) hub and yield
manager. All of the mentioned models facilitate online procurement but have
different characteristics, which will be used for the comparison.

A framework will then be established for comparing B2B models for online
procurement of goods and services. The framework will identify and detail a
number of comparison factors, which will be used as the basis for comparing the
various models. Following that various models for online procurement will be
compared, and details of the comparison will be listed. The comparison will be
beneficial in evaluating the models, identifying their characteristics, advantages
and disadvantages. Finally conclusions from the comparison will be derived, and
a final analysis will be given.

2. Procurement Models

This section describes the models that will be compared using the comparison
framework. All the models provide a common purpose – to enable online
procurement. However the models differ and have unique characteristics that set
them apart, and enable them to be more useful for particular scenarios. The
models for comparison include:
- Buy Side Marketplace
- Sell Side Marketplace
- Yield Manager
- MRO Hub

The main commonality between these models is that they enable online
procurement. Procurement of indirect goods and services is horizontal, and is
non-industry specific. Since the purpose of this report is to explore and compare
solutions to support procurement, the models have been limited to horizontal
A Comparison of Procurement Models for B2B Electronic Commerce 3

orientation. Each of the above models is explored in detail to provide a greater

understanding of the model and also its characteristics.

2.1 Buy Side Marketplace

Buy side markets are initiated by a single or small number of large buyers with
many smaller fragmented sellers. This model supports procurement, fulfillment
and purchasing initiated by the buyer. Buy side models facilitate reverse auction
dynamic, pricing mechanism. Examples of buy side solutions include
Freemarkets.com and Covisint.
Benefits of this model include streamlined purchasing operations and time and
cost savings (Archer and Gebauer, 1999). Most of the advantages are for the
buyer organization that owns the system. In terms of online procurement the
buyer drives the demand and price. The selling organizations benefit from low or
nil maintenance costs.
The disadvantage of this model is that supplier interacting with multiple buyers
will have to deliver data in various formats. The suppliers must also adhere to the
standards and protocols adopted by the buying organization. Another
disadvantage is that the buying organization is responsible for investment,
maintenance and establishing various standards and protocols.
Its characteristics include:
- 1-many interaction pattern
- Supports reverse auctions and online catalogs
- Private or public accessibility
- Buyer side bias
- Buyer ownership

2.2 Sell Side Marketplace

Sell side marketplace model has a one-to-many interaction pattern and is initiated
by a single supplier supporting many buyers. The model is also known as supply
side or sell-centric model. In this model there is a single supplier, who initiates
the market, and multiple buyers. The model can facilitate online procurement by
allowing procuring organizations to take part in the market as a buyer. Examples
of sell side solutions include computer manufacturer Dell (www.dell.com/) and
wholesale distributor W.W.Grainger (www.grainger.com/) (Archer and
Gebauer, 1999).
Most of the advantages are for the selling organization that owns the sell side
solution. The seller drives the prices of goods based on level of supply. The
solution is seller biased, and the seller has the most control over the marketplace.
Buyers can benefit from low maintenance costs and through smaller investment
costs compared to the seller.
For online procurement, the procuring or buying organization faces substantial
disadvantages. A drawback of sell side model is that buying organizations may
have to integrate their systems with various solutions if they interact with
A Comparison of Procurement Models for B2B Electronic Commerce 4

multiple suppliers (Archer and Gebauer, 1999). Buying organizations must also
adhere to the standards and protocols adopted by the buying organization. Buyers
also face competition from other buying organizations, especially in situations
when there is low supply and high demand.
A disadvantage to the selling organization is that it is responsible for investment,
maintenance of the system and establishing various standards and protocols.
Its characteristics include:
- 1-many interaction pattern
- Supports forward auctions and online catalogs
- Private or public accessibility
- Seller side bias
- Seller ownership

2.3 Yield Manager

Yield managers are procurement specific solutions and focus on spot

procurement of indirect goods. Yield managers add value when there is high
degree of price and demand volatility or when huge fixed-cost assets cannot be
liquidated or acquired at short notice. Although these hubs are horizontally
focused they tend to be more vertically oriented than MRO hubs (Kaplan and
Sawhney 1999). Examples of yield managers include Youtilities.com and
CapacityWeb.com (Kaplan and Sawhney, 1999).
Characteristics of Yield managers include:
- Many-many interaction pattern
- Supports spot pricing
- Public accessibility
- Neutral, no bias
- Owned by neutral intermediary

2.4 MRO Hub

MRO Hubs also procurement specific solutions and are focused on improving
efficiencies in the procurement process for operating supplies for a diverse set of
industries. The model has moved from a traditional enterprise centric model to a
network centric model, where all catalogs are hosted on a common hub that
businesses connect to (Kaplan and Sawhney, 1999). Examples of MRO hubs
include Bizbuyer.com, MRO.com and ProcureNet.com.
Characteristics of MRO hubs include:
- Many-many interaction pattern
- Support systematic purchasing
- Public accessibility
- Neutral, no bias
- Owned by neutral intermediary
A Comparison of Procurement Models for B2B Electronic Commerce 5

3. Comparison Framework

This section describes the framework that will be used to compare the models
mentioned in the preceding section. The framework consists of a number of
factors that can be used to assess the models. The following is a list of factors that
will be used in the comparison:
- Advantages to Buying organization
- Disadvantages to buying organization
- Advantages to selling organization
- Disadvantages to selling organization
- Pricing mechanisms supported
- Bias: neutral versus one sided
- Interaction patterns
- Ownership

3.1 Advantages to buying organization

This factor is used to identify the advantages of the particular model to the buying
or procuring organization. Different models provide different benefits to the
buyer, and the benefits can be assessed according to level of control, price of
goods (lower) and cost of adopting the solution.

3.2 Disadvantages to buying organization

This factor is used to identify the disadvantages of the particular model to the
buying or procuring organization. The models have different disadvantages to the
buyer, and the benefits can be assessed according to level of integration with
internal systems, complying with different standards, and maintenance costs.

3.3 Advantages to selling organization

This factor is used to identify the advantages of the particular model to the selling
organization. Different models provide different benefits to the seller, and the
benefits can be assessed according to level of control, price of goods (higher) and
cost of adopting the solution.

3.4 Disdvantages to selling organization

The selling organization may be disadvantaged by the solution. Different models

have different disadvantages, and can be assessed according to level of
integration with internal systems, complying with different standards, and
maintenance costs.
A Comparison of Procurement Models for B2B Electronic Commerce 6

3.5 Pricing mechanisms suported

The models differ in terms of their support of pricing mechanisms. This factor
evaluates the different static and dynamic pricing mechanisms that the models
can support. Static pricing consists of electronic catalog based solutions, which
are an essential part of electronic procurement solutions (Ginsburg et al., 1999).
For the purposes of this paper dynamic pricing mechanisms have been limited to
auctions. Auctions are formalized trading procedures in which the trading
partners interaction is governed by specific trading rules (Klein 1997). Electronic
auctions are a special case of automated negotiations and different auction
mechanisms are best suited for different situations. Two main categories of
auction are (Bichler et al.):
- Forward Auction: an auction, which is based on a sell-centric net market
model, with many buyers and one supplier.
- Reverse Auction: an auction based on the buy-centric net market model, with
many sellers and a single buyer.

3.6 Bias: neutral versus one sided

The bias factor evaluates the bias of the model, which is directly related to
ownership and one-sided advantages of the solution.
- Buy side bias: the buyer receives most of the advantages of the solution, and
has more control. The buying organization may also be the owner of the
system, and thus may have the most influence.
- Sell side bias: this is opposite to the buy side solution. The selling
organization receives most of the advantages of the solution, and has more
control. The seller may also be the owner of the system, and thus may have
the most influence.
- Neutral: this refers to unbiased solutions, where both the buying and selling
organizations receive similar benefits and advantages. Most often neutral
solutions provide benefits by aggregating both buyers and sellers thus
creating liquidity for goods and services sold.

3.7 Interaction patterns

Interaction pattern factor refers to the relationships with other organizations,

specifically the pattern of the relationship. Interaction patterns for models
supporting online procurement system, have been limited to the following:
- One-to-many: Usually a company interacts with various businesses on
another tier. For example a manufacturer purchasing raw materials from
various suppliers.
- Many-to-many: A many-to-many interaction pattern allows many companies
to integrate with many other companies in different tiers. A many-to-many
interaction pattern allows dynamic, short-term relationships to be established
between companies.
A Comparison of Procurement Models for B2B Electronic Commerce 7

3.8 Ownership

B2B models supporting online procurement may be owned by a particular

company, a group of companies, independent intermediary or by the industry.
The ownership of the system determines the most influential parties and the
controlling parties. The following is the description for the various ownership
entities:
- Buyer: The buyer may own the B2B market and may be the most influential
party. In general the buyer may adopt standards and protocols for integration
and communication, which the supplying companies will have to adopt in
order to integrate with the buyer. This usually occurs if there is a large
influential buyer, and smaller dispersed suppliers. Buyer focused markets
usually have private accessibility but some also offer public accessibility to
decrease costs of products by increasing supply.
- Seller: The seller may own the B2B system or application and involve
numerous buyers to participate through electronic transactions. This usually
occurs if there is a large supplier, and many smaller fragmented buyers. In
this case the supplier is the most influential party and the buyers will have to
adhere to the standards, infrastructure and technology adopted by the
supplier. Seller focused markets are usually private, although some offer
public accessibility to increase buyer demand and increase the product price
as a result of increased demand.
- Industry: Marketplaces can be organized by industry consortiums to provide
mutual benefits to all businesses operating within the particular industries, or
participating in similar transactions. Solutions owned by industry
consortiums are usually vertically focused because they are industry specific,
and therefore are not considered in the comparison of procurement solutions,
which are horizontally oriented.
- Intermediary: Marketplaces can be owned by Intermediaries that provide
mutual benefits to all businesses participating in the solution.

4. Comparison of the Procurement Models

This section compares the models identified in section two, according to criteria
set in the preceding section. The comparison is vital in understanding the relative
strengths and weaknesses of the models and providing a thorough evaluation.

4.1 Advantages to buying organization

The following table lists the relative advantages of the models to the buying
organization, for online procurement purposes:
A Comparison of Procurement Models for B2B Electronic Commerce 8

Table 1. Advantages to buying organization.

↵
Advantage Buy Sell Yield MRO
Side Side Manager Hub
Low initial investment costs for No Maybe Yes Yes
buyer
Low maintenance costs for buyer No Maybe Yes Yes
Buyer control Yes No No No
Prices driven by buyer demand Yes No Maybe Maybe
Access to large number of Yes No Yes Yes
suppliers
Buyer side bias Yes No No No
Support buyer catalogues Yes Yes Maybe Maybe
Support for reverse auction Yes No Yes No
Support private accessibility Yes Yes No Yes
Support public accessibility Yes Yes Yes No
Support long term relations with Yes Maybe Maybe Yes
suppliers
Support short term relations with Yes Yes Yes No
suppliers
Buyers don’t need to adopt Yes No Yes Yes
supplier standards
Buyers don’t need to adopt Yes Yes No No
intermediary standards

From the above table it is evident that the buy side solution provides the most
benefits to the buyer in terms of control, bias, large supplier base, support for
reverse auctions and diminishing the need to support supplier or intermediary
based standards and protocols. However, supplier may be reluctant to participate
in a solution that provides excessive control to the buyer.
Yield managers and MRO hubs offer low cost and maintenance advantages and a
large supplier base, although they remove the bias and buyer control that is
evident in the buy side solution. A sell side solution has the least advantages for
the buying/procuring organization. It may offer low maintenance and investment
costs, however the buying organization has to adopt supplier based standards and
the supplier base is restricted.

4.2 Disadvantages to buying organization

The following table lists the relative disadvantages of the models to the buying
organization, for online procurement purposes:
A Comparison of Procurement Models for B2B Electronic Commerce 9

Table 2. Disadvantages to buying organization.

Disadvantage Buy Sell Yield MRO

Side Side Manager Hub
Large initial investment costs for Yes Maybe No No
buyer
Large maintenance costs for Yes Maybe No No
buyer
Supplier control No Yes No No
Prices driven by supply No Yes Maybe Maybe
Access to restricted number of No Yes No Maybe
suppliers
Seller side bias No Yes No No
Buyers need to adopt supplier No Yes No No
standards
Buyers need to adopt No No Yes Yes
intermediary standards

The above table indicates that a Buy side solution has the least associated
disadvantages for the buying organizations. The main disadvantages are high
investment and maintenance costs. The sell side solution has many more
associated disadvantages including, possibly high investment and maintenance
costs due to adoption of supplier standards, supplier bias, and prices driven by
supply of goods or services. A yield manager offers access to a larger supplier
base than MRO hubs, which only offer private access.

4.3 Advantages to selling organization

The following table lists the relative advantages of the models to the selling
organization, for online procurement purposes:

Table 3. Advantages to selling organization.

Advantage Buy Sell Yield MRO

Side Side Manager Hub
Low initial investment costs for Maybe No Yes Yes
supplier
Low maintenance costs for Maybe No Yes Yes
supplier
Supplier control No Yes No No
Prices driven by supply No Yes Maybe Maybe
Access to large number of buyers No Yes Yes Yes
Supplier side bias No Yes No No
Support supplier catalogues Yes Yes Maybe Maybe
Support of forward auction No Yes Yes No
A Comparison of Procurement Models for B2B Electronic Commerce 10

Support private accessibility Yes Yes No Yes

Support public accessibility Yes Yes Yes No
Support long term relations with Yes Yes Maybe Yes
buyers
Support short term relations with No Yes Yes No
buyers
Suppliers don’t need to adopt No Yes Yes Yes
buyer standards
Suppliers don’t need to adopt Yes Yes No No
intermediary standards

The review of the advantages offered by the solutions clearly indicates that a sell
side solution offers the most advantages to the supplier. Both MRO hub and
Yield manager provide similar benefits, although MRO hub only provides private
access, and yield manager provides public access. Another difference is that a
yield manager can support both long term and short relationships for a supplier
with buyers, whereas an MRO hub only supports long term pre-negotiated
contracts. The buy side solution has the least advantages for the supplying
organizations, and may only be opted if the buyer has substantial power in the
market and will provide extended benefits to suppliers.

4.4 Disadvantages to selling organization

The following table lists the disadvantages of the models to the supplying
organization, for online procurement purposes:

Table 4. Disadvantages to selling organization.

Disadvantage Buy Sell Yield MRO

Side Side Manager Hub
High initial investment costs for Maybe Yes No No
supplier
High maintenance costs for Maybe Yes No No
supplier
Buyer control Yes No No No
Prices driven by buyer demand Yes No Maybe Maybe
Access to limited number of Yes No No Maybe
buyers
Do not support forward auctions Yes No No Yes
Buyer side bias Yes No No No
Only support long term relations No No No Yes
with buyers
Only support short term relations No No Maybe No
with buyers
A Comparison of Procurement Models for B2B Electronic Commerce 11

Suppliers need to adopt buyer Yes No No No

standards
Suppliers need to adopt No No Yes Yes
intermediary standards

The review of the disadvantages to the supplying organization indicates that a sell
side solution offers the least disadvantages to the supplier, and the buy side
solution offers the most disadvantages.
An MRO Hub is more restrictive than a Yield Manager and cannot support
forward auctions, or short term relationships. However it provides the advantage
of lower competition for the suppliers through private access, and pre-negotiated
contracts.

4.5 Pricing mechanisms supported

The following table is used to identify the pricing mechanisms that can be
supported by the identified models. The table will be used to compare the
advantages of the solution through provision of multiple pricing mechanisms.

Table 5. Pricing mechanisms supported.

Pricing Mechanism Buy Side Sell Side Yield MRO

Manager Hub
Buyer Catalogues Yes Maybe Yes Yes
Supplier Catalogues Maybe Yes Yes Yes
Forward Auction No Yes Yes Maybe
Reverse Auction Yes No Yes Maybe
Pre negotiated contracts Yes Yes Maybe Yes

A Yield manager solution provides the most flexibility in terms of the various
pricing mechanisms that can be supported. It offers both auctions and catalogue
based solutions for both buyers and sellers, and may also support pre negotiated
contracts for long term relationships between buyers and suppliers. An MRO Hub
is also somewhat flexible, and may offer forward and reverse auctions for short
term procurement.
Buy side solutions do not offer forward auctions and may not support supplier
catalogues in order to lower prices. Similarly, Sell side solutions do not offer
reverse auctions and may not support buyer catalogues in order to increase prices
of goods and services.

4.6 Bias

Buy Side Marketplace: A buy side marketplace is biased towards the buying
organization/s, and offers substantial advantages to the buyers over the supplying
organizations.
A Comparison of Procurement Models for B2B Electronic Commerce 12

Sell Side Marketplace: A sell side marketplace is biased towards the supplying
organization/s, and offers substantial advantages to the supplying organizations
over the buyers.
Yield Mangers: Yield managers are neutral electronic hubs that provide similar
advantages to both the buying and supplying organizations.
MRO Hubs: Like Yield managers, MRO hubs are also neutral electronic hubs
that provide similar advantages to both the buying and supplying organizations.

4.7 Interaction patterns

The following table compares the Interaction patterns adopted by the models for
online procurement.

Table 6. Interaction patterns.

Procurement Model Interaction Patterns

One-to-Many Many-to-Many

Buy Side Marketplace Yes

Sell Side Marketplace Yes

Yield Manager Yes

MRO Hub Yes

Buy side and Sell side marketplaces are one sided marketplaces that support One-
to-Many relationship pattern between businesses. A buy side solution supports a
relationship between a single buying entity and many supplying organizations,
and a sell side solution supports a relationship between a single supplier and
many buyers.
Both Yield managers and MRO Hubs support many-to-many relationships,
enabling many suppliers to link to many buyers and vice versa. In this manner
these models also create a true marketplace where the price of goods and services
reflect the demand and supply.

4.8 Ownership

Buy side Marketplace: Usually owned by buying organizations.

Sell side Marketplace: Owned by supplying organizations
Yield Manger: Owned by an Intermediary.
MRO Hubs: Owned by an Intermediary.
A Comparison of Procurement Models for B2B Electronic Commerce 13

5. Conclusions

In conclusion, this paper identifies the problem of online procurement and

identifies four models to support online procurement: Buy side Marketplace, Sell
Side marketplace, Yield Manager and MRO Hub. A framework for comparing
these models is developed, and a number of criteria for the comparison are
detailed. A comparison is then made between the identified models using the
developed framework.

Analysis and evaluation of the comparison provides a number of conclusions that

can be drawn. Firstly a Buy side marketplace is the most advantageous solution
for the buying or procuring organization. It offers many advantages to the buying
organization, but offers limited advantages to the selling organizations. The
solution is ideal as an online procurement if the buying organization is
developing the system, and already has substantial power over its suppliers. A
sell side marketplace is the most advantageous solution for the supplying
organization. It offers many advantages to the suppliers, but many disadvantages
to the buyers. The solution is ideal as an online procurement if the supplying
organization is developing the system, buyers are fragmented and the supplier
already has substantial power over its buyers.

Both Yield Manager and MRO Hub solution provide similar benefits to both
buyers and sellers. Although, a Yield manager solution can support short term
relationships between buyers and sellers and can offer both forward and reverse
auctions. Yield Managers also offer public accessibility and increase the market
base for both buyers and sellers, creating competition and a true marketplace. A
MRO Hub solution is more beneficial for long term contracts and for developing
longer term relationships. It protects the buyers and sellers from fluctuating
prices, through pre-negotiated contracts. MRO Hubs only offer private access
and insulate both buyers and suppliers form additional competition.

The evaluation of the models based on the comparison framework reveals that all
models have distinct advantages and disadvantages, and hence may be used in
different situation suiting distinct organizational needs.

↵References

Archer, N., and Gebauer J.: Managing In the Context of The New Electronic
Marketplace. Presented at 1st World Congress on the Management of
Electronic Commerce, 19-21 Jan, 2000, Canada.
Bichler, M., Segev, A., Beam, C.: An electronic broker for business-to-business
electronic commerce on the Internet. Working Paper, Fischer Center for
management and Information Technology, Haas Scholl of Business,
University of California, Berkeley.
 A Comparison of Procurement Models for B2B Electronic Commerce 14

Ginsburg, M., Gebauer, J., Segev, A.: Multi-Vendor Electronic Catalogs to

Support Procurenet: Current Practise and Future Directions. Twelfth
International Bled Electronic Commerce Conference, Bled, Slovenia,
June 7 –9 (1999).
Kaplan, S., and Sawhney, M.: B2B E-Commerce Hubs: Towards a Taxonomy of
Business Models. Business 2.0, September 1999.
Klein, S.: Introduction to Electronic Auctions. Electronic Markets Journal. Vol.7,
No.4, 1997, pp. 3-6.
Lefebvre, L.A., Cassivi, L., Lefebvre, E.: Business-to-Business: A Transition
Model. Proceedings of the 34th Hawaii International Conference on
System Sciences (2001).
Lucking-Reiley, D., and Spulber, D.F.: Business-to-Business Electronic
Commerce. Journal of Economic Perspectives, November 2000.

View publication stats