11182019Mon
Last updateMon, 18 Nov 2019 4pm

Online Marketplaces Moving into B2B

In business-to-business (B2B) sales and distribution, as in many parts of the economy, new technologies and new business models are shaking things up. The kind of changes that revolutionized retail sales are working their way into B2B.

SERVING THE DIVERSITY OF THE TAIL SPEND

Online sales present an opportunity for serving a particular class of purchases that companies make.

“If you look at any business customer, there tends to be a break between [their] strategic spend and [their] complex “tail spend,” said Ian Heller, president and COO at MDM in a webinar on “The Coming Commoditization of Distribution.”

In line with the 80-20 rule that shows up nearly everywhere, a company’s “strategic spend” accounts for 80% of spending, but represents only 20% of its transactions, Heller said. For a manufacturer this is likely to consist of the materials that end up in the finished products. The specification and purchase of these materials are typically negotiated directly with suppliers months in advance. This process is not likely to change anytime soon.

The tail-spend accounts for the other 80% of transactions and 20% of spending that goes for things that make the business run—office supplies, HVAC equipment, light bulbs, tools, cleaning supplies—any of a hundred or a thousand items. Distributors have historically dominated the tail spend, Heller said.

In any company there are dozens or hundreds of people with P-cards, like credit cards, or who have access to an internal website called an e-procurement system. They use these to purchase that great diversity of tail-spend items. It’s a big mess for many companies, Heller said; they are buying many different products at many different prices from many different sellers and the processing costs are extraordinary.

Online marketplaces are a good fit to serve the tail-spend environment, Heller said. Because they have so many products they can provide a one-stop online shop to get it all. An article in Forbes magazine defined an online marketplace as “a website or app that facilitates shopping from many different sources.” Most readers will be familiar with the concept on Amazon.com: searching and ordering online and receiving the merchandise in a day or two.

Now, big players, notably Amazon, are offering marketplaces for business-to-business transactions.

Marketplaces now in operation include:

Marketplaces, especially those with substantial money behind them, can offer services such as providing an e-procurement system for a company, not only handling the orders, but also tracking information such as spend analytics, order routing and approvals, taking the burden of these tasks off the company’s staff.

Even at its relatively early stage of its development, Amazon Business handles a significant amount of product. In March 2019 Bank of America/ Merrill Lynch estimated Amazon Business’s 2018 GMV (gross merchandise value) at $9.4B. The potential was to grow to $34B by 2023 and to $125B - $245B over the next 10 years or so.

DISTRIBUTORS MAY TAKE A HIT

Core functions of distributors have historically been to provide manufacturers with such services as geographic coverage, product variety, product availability, financing, technical support and sales/marketing. In the B2B world, hundreds of manufacturers sell through distributors serving thousands of customers.

Marketplaces stand to take over many of these functions.

In setting up a company’s e-procurement system, for example a marketplace such as Amazon Business, would work with the company’s suppliers to sell through the marketplace the wide variety of tail-spend products such as fasteners, office supplies, tools, etc. The marketplace then provides product data, logistics, financial reconciliation and other desired services. It can provide a customized online catalog of the products the company needs to buy. This provides a particular benefit with tail-spend purchases because purchasers often cannot find what they need. This would likely not be a problem with Amazon business because its broad range of products represents something like 500 million SKUs (stock keeping unit numbers), Heller said.

This sort of package, beyond the capability of many distributors, could be quite appealing to companies.

WHAT’S A DISTRIBUTOR TO DO?

The disruptive effects of marketplaces, rapid shipping options and other innovations mean distributors that want to prosper in the new environment will need to adapt, Heller said. They will need to understand digital technology, develop state-of-the-art systems, support independent marketplaces and collaborate with key manufacturers to provide services not available through a marketplace. At the same time, B2B customers will continue to expect easy ordering and faster and faster deliveries, regardless of the source of the product.

DIGITAL NATIVES WILL DRIVE DEMAND

Looking forward, consider that next year Millennials (those born between about 1980 and 2000) will make up 50% of the U.S. workforce and by 2025 they will reach 75% of the global workforce.

Some companies report Millennials already count for two-thirds of their employees. These employees, who have never really known a world without computers and the Internet, are accustomed to ordering online and receiving their orders quickly. They expect the same at work. It’s a short way from telling a smart speaker, “Alexa, order copy paper,” to ordering the myriad of other things a company needs.

PRODUCT EXPERTISE THROUGH ARTIFICIAL INTELLIGENCE

In a 2018 paper on artificial intelligence (AI), the authors describe AI and machine learning. “AI refers to the use of digital technology to create systems that are capable of performing tasks commonly thought to require intelligence. Machine learning is variously characterized as either a subfield of AI or a separate field, and refers to the development of digital systems that improve their performance on a given task over time through experience.”

On the retail side, Amazon and other marketplaces and vendors use AI to make purchase recommendations for customers. In the B2B world, AI and machine learning will likely be harnessed to provide expert advice for customers to, for example, specify valves for their particular application. The marketplace app becomes the product expert.

These changes are happening already, Heller said. The companies that will thrive in this new environment need to understand the technology and trade platforms and prepare to take advantage of them.


This email address is being protected from spambots. You need JavaScript enabled to view it. is web editor of VALVE Magazine.  

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