B2B: Supplier management, investments in information systems, and codifiability
B2B e-commerce requires substantial investments by suppliers and buyers in information systems and related infrastructure. As has become evident recently, generating trade via e-Marketplaces and exchanges is not easy. More than 1,000 exchanges were built in the past few years and B2B trade through those is expected to reach trillions of dollars. However, more than 90% of these exchanges and marketplaces have generated very low trade activity and many have had to close down. Contradicting early predictions, suppliers have not rushed to join these exchanges, for various reasons, the most salient of is fear of margin erosion. In order to analyze supplier management strategy in this context I build an analytical framework. This framework allows analysis of both the selection and control questions. In Chapter 2 the questions of incentives (control) for suppliers' investments in information systems is solved, while in Chapter 3 I analyze the question of how many, and which, suppliers should a buyer use to generate optimal invest meats by suppliers in the resulting relationship. Out of this investigation emerges an important factor in determining strategy, namely the codifiability of transaction knowledge. Codifiability, some level of which is necessary for electronically mediated transactions, is shown to determine how many suppliers can be used. While the concept of codifiability is not new, its application to inter-firm relationships is novel. To examine the framework and the hypotheses generated in Chapter 3, an empirical study on a procurement department of a leading chemical firm is performed. I find that the model is strongly supported and that codifiability and transferability of transaction knowledge are important factors in determining supplier management strategy and performance. Building on these findings, chapter 4 uses an analytical model to examine how codifiability affects the mix of contract and spot-market procurement. I find lower codifiability to shift the mix towards contracts, which allow an orderly negotiation process on the details of the transaction, thus strengthening Chapter 3's results. Details of the resulting market equilibrium arising from various degrees of codifiability are presented as one important implication of this modeling framework.
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