Chemunity - Pragmatic Procurement of Chemicals

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	ChemUnity success formula based on methodical growth Arnhem, The Netherlands - July, 2000 Herman Rijks, CEO and founder of Europe's ChemUnity, www.chemunity.com, is building the foundation of his company's online chemicals marketplace in a fashion his traditional, off-line counterparts could appreciate: One brick at a time. Chemical by chemical, supplier by supplier, ChemUnity is assembling its offerings. It begins trading in a commodity only after it has recruited enough European suppliers to represent 50% or more of the region's production capacity. So far, ChemUnity has lined up suppliers representing 60% of the European production capacity of acetone and MEK and has begun handling inquiries on those products. By the time this article appears, Rijks expects to have begun trading in caustic soda, with suppliers representing 70% of the target region's non-captive production capacity. MIBK, soda ash, MEG, DOP and phosphoric acid will be close behind. Plans call for the marketplace to offer 150 commodities within 18 to 24 months. It's a slow, painstaking way to build a marketplace but, Rijks believes, the only way that makes sense. "Our value proposition to buyers is that if they give us their inquiry, we'll make sure that everyone who could supply that chemical gets a chance to react," Rijks said. "It's the only way the buyer can be assured of getting the best possible offer. If we began trading with only one supplier, there would be no competition." When ChemUnity receives an inquiry from a buyer registered with the marketplace, it sends the information to every registered seller by e-mail or to their mobile phone by SMS or WAP, giving them 25 hours to respond. At that time, the lowest-priced, qualifying offer is forwarded to the buyer by e-mail. Under terms of their agreement with ChemUnity, buyers are obligated to accept the lowest bid received when it is within their indicated price range, and to pay on time. Sellers are obligated to provide products that fully meet the specifications, delivered on time. Any deviation by either side leads to arbitration. Numerous safeguards are built into the system. For example, if any supplier's product deviates from the required specifications, the supplier is banned from receiving any more inquiries for that specific grade until they can demonstrate a consistent improvement. "The nice thing about demanding compliance is that it actually helps those suppliers who offer consistent quality," Rijks said. "They don't have to worry about being under-bid by a lesser supplier who is a little off-spec. It's really an improvement over the 'old economy' world where a lower-quality producer can misrepresent themselves to buyer after buyer without anyone recognizing the pattern. With ChemUnity, if they do it once, they never get a chance to do it again to any of our buyers." As another safeguard, any buyer or seller who backs out of two deals is suspended from participating in the marketplace for a minimum of six months and may resume trading only if they can convince ChemUnity that they will be reliable traders in the future. The product quality, credit worthiness and health/environment/safety readiness of participants is independently verified by ChemUnity, at the exchange's expense, before a participant is permitted to enter or respond to inquiries. Buyers never pay a fee, and sellers pay a commission of 1.5% to 2% of the transaction value, depending on the commodity traded, but only on those bids they win. All transactions are covered by credit insurance supplied by NCM/Swiss Re. "There really is no reason not to join unless you're a big fan of ostriches and wish to put your head in the sand," Rijks said with a chuckle. Buyers who enter an inquiry are supplied with an MPI - market price indication - that shows the average value of the last 10 trades in the commodity they are seeking. Buyers then enter their BPI - buyer price indication - or the price at which they wish to buy. Buyers also enter a percentage range above that target price that they are willing to pay. Suppliers see the BPI, but not the percentage range. Most suppliers bid higher than the BPI, Rijks said, but a supplier who has lots of product to sell may choose to bid below the MPI to increase its chances of winning orders. ChemUnity accepts suppliers as members regardless of their geographic location, but those who have inventory in Europe - either directly or through an agent - are most likely to receive inquiries because of the short lead times specified by most buyers. Buyers are accepted from Western Europe, the United Kingdom, Hungary and Poland. Rijks said suppliers like the ChemUnity model because it avoids the price erosion common in reverse auctions. "I've spoken with suppliers who absolutely dread those reverse auctions," Rijks said. "Reverse auctions are very powerful tools for buyers, but you're only going to be willing to spend an hour or two online for a single purchase if you're buying very large tonnages. Most of our buyers are looking for 20, 40 or 60 tons at a time." Since announcing the service at the end of 1999, ChemUnity has spent six months working with CSC to build the trading platform, which required 7,000 hours of programming, Rijks said. "It was a big learning curve for both companies but we now have a very nice, functioning platform." Registering buyers and sellers is now the marketplace's top priority. As of June 28, ChemUnity had 35 registered sellers and 100 registered buyers. The company is aggressively hiring sales representatives to step up the pace. "We think of the second half of 2000 as the timeframe during which we will reach proof-of-concept level," Rijks said. "We won't be reaching huge volumes, but we hope to do enough volume to show investors we're ready for a second round of funding." ChemUnity won its first round of funding from Gilde and Optimix. Because it is consuming capital at the modest rate of 6 million Euros per year, Rijks says the company has enough funding to carry it through the middle of 2001. "We don't believe in excessive burn rates," Rijks said. "That isn't something we would emphasize just a few months ago when other marketplaces were burning through capital at tremendous rates, because it made investors think we weren't 'thinking big' and would be at a competitive disadvantage. Now, however, after the stock market correction, it is an advantage, because the more you have spent, the more you need to earn back eventually." In the Phase II platform, which ChemUnity hopes to have ready by year-end, the market-place plans to add functionality that will offer a parallel transport platform so suppliers can choose to quote on an 'ex-works' basis. Service offerings around the transaction also will be expanded to include financial settlement, shipping, inspection and HES. Rijs said ChemUnity also plans to build a true market for trading futures, where financial investors can exercise price spreads. Ultimately, however, the biggest ChemUnity differentiator may be a feature he believes will be unique to the marketplace: a telemetry system that allows buyers to comparison shop on an ongoing basis for vendormanaged inventory services. "There are really five steps to an automated transaction: automatic inquiry; automatic offer generation; automatic selection of best offer; automatic order entry into both the buyer's and the seller's ERP system; and automatic monitoring of delivery and payment. We already do automatic inquiry and automatic offer generation. We already have pilot projects for the ERP connections and delivery and payment reminders. But the one thing we think we can do that no one else has even dreamed of doing yet is Step Three, the automatic selection of best offer. "Tank telemetry already exists, but it isn't used as much as it could be because buyers don't want to be limited to a single source, and that's the only option today with telemetry," Rijks said. "We see a situation not more than 12 months down the road where the buyer has the telemetry on their tanks. When it reaches the trigger level, the inquiry comes to us and goes out to their approved suppliers. One of them will get the deal, fill the tank, both ERP systems will be triggered and it will be handled absolutely from A to Z without a finger touching the keyboard. The next time the telemetry is triggered, maybe someone else wins the deal. The buyer gets vendormanaged inventory without tying themselves to a single supplier, and all of the manual intervention is eliminated." Source: e-commerce for Chemicals Newsletter, July 5 2000