Business-to-Business

B2B, Phase One

The integral element involved in the B2B business model is what's known as the supply chain. Consider the example of an auto manufacturer. Cars contain thousands of individual pieces that range in size from the body chassis all the way down to plastic clasps that hold hoses in place. Car manufacturers create some of the largest and most important pieces in their own factories, but they usually do not make radios, or plastic brackets, or any of thousands of other pieces that go into their cars and trucks. Instead, the car companies hire smaller manufacturers—suppliers—to make, ship, and deliver those components instead. It is a complex and expensive process to sort through the many would-be suppliers, take bids on components, and arrange contracts, shipments, and delivery for all of those individual pieces.

That's where the idea of B2B comes in. Instead of poring over numerous catalogues, filling out forms, and faxing them, the manufacturer's purchasing agent can go onto the Web, search a site for a needed component—say, radio antennae—instantly find the best prices among thousands of potential client vendors, and place the order immediately. It has been estimated that if that entire process could be put online, auto manufacturers could charge as much as $2,000 to $3,000 less for a car that now costs $19,000.

The possibilities of B2B do not stop there. The antenna maker, for example, might have bought its aluminum via some B2B exchanges. The company that mined the aluminum ore might have found a source for the metal the same way. Such a potential bonanza was just about enough to make any would-be Internet entrepreneur forget about building the next http://Amazon.com.

And many of them did. In April 2000, just as the dot-com bubble burst on consumer-oriented Internet retail sites, B2B became the new 'Net buzzword. The composite value of good and services bought and sold between businesses totals about $30 trillion a year, while only $10 trillion worth of consumer goods are sold annually. If the business supply chain could be shifted from the physical realm onto the Internet, the logic went, companies that facilitated those transactions by creating “B2B exchanges,” something like electronic middlemen, could grow wealthy beyond their imaginings by taking just the tiniest slice of the overall B2B market.

Soon there was a B2B gold rush not unlike the one that was witnessed during the glory days of the dotcom (or B2C) boom of 1998 and 1999. During 2000, venture capitalists who had shut down the flow to consumer Internet businesses pumped more than $23 billion into more than 1,200 business-to-business companies, according to a May 2001 Industry Standard report. Merrill Lynch analyst Henry Blodget told the Washington Post that a B2B-fueled Internet could “have as profound an impact on the economy as the Industrial Revolution.”

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