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Online Lumber Trading - Hype or Future Reality
Several Internet marketplaces have emerged for buying and selling lumber; special report examines this development and some of the existing marketplace Web sites.
By Chaille Brindley
Date Posted: 9/1/2000
Remember the promise of the paperless office? The "experts" predicted the electronic revolution would eliminate much of the paperwork cluttering up American offices. As everyone now knows, they were wrong. Computers actually caused the mounds of papers to grow because, despite the technology, human nature remained the same. People like the feel and portability of paper, the allure of the hard copy.
Today, many "experts" are making similar predictions about the Internet. They say the Internet provides up-to-date information, cost savings and productivity boosts that cannot be matched by the old ways of doing business. We are all left wondering what will become reality and what is just more hype to sell stock or a business plan. In an industry dominated by deals over the phone and working with just a handful of contacts, will the Internet really provide the benefits that are being predicted?
Even supporters of online commerce admit that the Internet has not been widely embraced yet by the forest products industry. Most of the sites currently involved in online lumber sales mainly offer listings or advertisements. True b-to-b online transactions are few and far between. Many industry portal sites try to be everything to everyone and lack focus. Whereas, the sites that just exist for one purpose - such as online sales of hardwood lumber - lack critical mass, the number of users needed to realize the full power of the Internet.
Predictions – Looking Into
Opinions of what the Internet will bring to the wood industry vary as much as one shipment of lumber to another. The simple fact of the matter is that no one really knows what will happen and who will win the battle for Internet dominance. But several predictions appear reasonable and almost certain.
For starters, the Internet is here to stay, and it will become intertwined and revolutionize business, including the lumber market. According to recent estimates, at least one-third of lumber and paper transactions will be conducted online within the next few years.
Paul Gutchess, president of Paul Bunyan Products in New York, said, "Our industry is difficult for e-commerce to crack because of the nature of the small, independent owners... But in two to three years, there will be no option for leading companies. Ready or not, here comes the Internet!"
Even those who prefer doing business with a handshake admit the Internet appears to be here to stay. Why? Quite simply because the buyers will demand it. "The buyers want to use the Internet because they think they can drive prices down," said Art Willard, southern hardwoods products manager for Coastal Lumber.
Rick Barrett of Hardwood Review has studied the e-commerce lumber potential and he agrees that buyers will drive the transition to online transactions. "Sellers hate it; buyers like it," Rick said.
The Internet will likely result in lower prices. Currently, it may be hard to identify the best deal because of the time involved in bargain hunting. But the Internet could consolidate buyers into a couple of exchanges where prices will become even more competitive. Up-to-date pricing information would allow buyers to more accurately know the real market cost. No matter the system, the Internet has a built-in bias toward the buyer, which should lower prices.
The face of the industry may change, too. Brokers may become a casualty of the Internet revolution. Online trading may reduce the need for brokers as information and leads become easier to find. Internet-based systems, not the broker, become the transaction handler.
But can wires and silicon chips really replace industry veterans with years of experience? Rich Haddad of TALPX, the largest softwood Internet exchange, said that brokers will have to adapt but they will not become extinct. He said brokers offer services that the online companies will not, such as just-in-time inventory, highly mixed loads, drop shipments, credit, in-depth market experience and more. Another major difference between many brokers and most online exchanges is that brokers actually take title of the wood, whereas online marketplaces do not. Rich predicted that the Internet would impact mill direct business, the area where many brokers enjoy their highest profit margin.
Major industry players have jumped into the online scramble by announcing the development of ForestExpress, an open, neutral exchange. Scheduled to debut in the fourth quarter of 2000, ForestExpress was formed by Georgia-Pacific Corp., International Paper and Weyerhaeuser Co. The site’s initial focus will be building materials, printing and writing paper, recovered fiber, and timber.
Will the Internet become a power play for the big companies? Paul believes e-commerce affords small business the same efficiencies as big corporations. Mark Brown, owner of Hardwoods Online, said, "The forest products industry is so fragmented. No one company owns more than a couple percents of the market." Thus, the big companies are not as likely to dominate the online exchanges as in the automotive industry, where Ford, General Motors and DaimlerChrysler control more of the market.
Critics claim the Internet devalues relationships, product quality and service. Paul said, "There will continue to be interpersonal relationships." However, he predicted everyday details will become more automated. Face-to-face meetings and phone conversations will be used for planning major strategies and agreements. No matter what happens with the technology, trust and relationships will continue to play a role. Buyers will want to purchase lumber from suppliers with quality products and service. Sellers will want to supply customers that pay on time and place sizable orders. New, unknown suppliers should have a disadvantage when being compared to a current supplier.
Online lumber exchanges will have to find a way to address the whole trust issue. Some online markets will require that listed suppliers be member of a grading organization or association. Grading rules will likely be used as standards for transactions. Buyers may be required to go through credit checks to ensure they can pay. Of course, there are sites that are open to anyone; these tend to serve odd lots and leftovers, not consistent accounts.
"The possibility of getting burnt (on the Internet) does exist," said Mark. Brown’s online hardwood marketplace only lists lumber from quality customers. Mark said Hardwoods Online has sent inspectors to all of its mills. "We insure all of our accounts...We are putting our reputation on the lumber," said Mark.
Will the transition online differ for the hardwood and softwood markets? Internet transactions have taken off faster in the softwood market. Rick said the reason is that the softwood producers largely accept that their product is a commodity. Hardwood producers have raised objections to the Internet because they believe it reduces everything to price. Rick said of the lumber market, "We are fooling ourselves if we think that most
Klaas Armster of Wood Planet, a new hardwood trading exchange, disagrees. He said wood especially hardwood is not a commodity, and Wood Planet’s system allows companies to differentiate the quality of their lumber and services. Klaas said "richer data" provides for exact specifications to be fulfilled. Indeed, matching the right buyers and suppliers has been a problem for the first generation of e-commerce lumber sites. Frequently, the exchanges have offered little true filtering. "The Internet generates a lot of static that you have to weed through to find one or two good leads," said Art of Coastal Lumber. "It produces too much information without being enough information." Even Internet boosters admit the first generation sites have been a bit raw.
The Ideal Exchange!
Several players are working on the ideal exchange. To be successful, online marketplaces must be non-biased, screen participants, allow for online transactions, provide detailed data, and bridge accountability/trust issue. However, strategies differ on the finer points such as credit and pricing. Some sites guarantee payments and the quality of lumber whereas others do not. Tom Westbrook of World Wide Wood Network said, "We will not guarantee credit. We don’t think the industry is looking to pay for that."
Expect a shake-out to occur in the race to establish the major lumber exchange. E-commerce pundits stress the first mover advantage. At last count, with at least 30-40 companies moving to grab Internet gold, is there any room for newcomers? Tom said, "First mover is not necessarily the first company to occupy the space, but the first one to do it right."
Rich of TALPX said, "There is probably room for one to three exchanges." He predicted that auction sites will become the place to sell surplus inventory while closed exchanges such as TALPX will handle most of the consistent, day-to-day transactions. With more competitors in the field, "Prices are going to have to come down," said Tom.
Despite the advantages of the Internet, technology will never completely replace the handshake. Remember the promise of the paperless office!
Nuts and Bolts of Online Lumber Sites
There are "virtually" a sea of online lumber sites. Each one has its own quirks and advantages. Below are reviews of some of the better known lumber sites.
The E-bay of the forest products industry, E-wood offers users both a traditional marketplace format and online auctions for lumber. The site has a fair number of auction listings. However, there are relatively few bidders. E-wood requires a credit card to post auction listings. Both bidders and sellers must register to conduct business. However, users can search listings without registering. E-wood is one of the few sites that actually offers online transactions. But that may be part of the problem. Many people in the industry still like to work over the phone or with a handshake, not online. E-wood’s "Materials Wanted" section allows users to post a wish list of what they want. Suppliers can review wish lists and respond to various lumber seekers. Contact information is not supplied without filling out contact forms.
Cost: Material Wanted ads are free to post or respond. Auctions cost 5-10% of final price to post item. Access is free to buyers.
A general forest products industry community complete with news, forum, classifieds and auctions. The online classifieds and auctions include sections for both hardwood and softwood lumber. Users must register before either viewing or posting ads or listings. Neither process is tailored for the needs of lumber buyers. The search process is somewhat cumbersome, and the site took longer than many of the others to download information. The site lacks volume of lumber postings.
Cost: Free to access or post classified ads or auction listings.
As the name implies, the site focuses only on hardwoods. Users can sign up for a weekly update of the latest deals or track specific needs. Hardwoods Online’s staff personally visits and qualifies all suppliers before allowing them to sell on the site. Users must register before using the site. Hardwoods Online owner, Mark Brown, stressed that only top quality mills are allowed to sell on Hardwoods Online. Currently, the site lists lumber from 55 mills with over 750 buyers. Transaction take place entirely online, and all lumber shipments are guaranteed by Hardwoods Online. Users can search by region, species, grade, thickness and more. Summaries of each supplier and their product are made available to buyers. Hardwoods Online was started out of Clearlake Lumber, which raises the neutrality issue but has contributed to the company’s expertise.
Cost: Free to view or post listings. A fee is attached to each order completed through the site.
Developed by the publisher of the Weekly Hardwood Review, the site serves only the hardwood lumber market. Interactive features include lumber and company trackers and an online forum. HardwoodTrackers lets you know via email when the lumber you are looking for becomes available. Visitors must register before using the site. Most of the listings are for grade lumber. Searches are conducted by pull-down menus by lumber type and company. One of the largest and most established hardwood lumber sites. The only major drawback is that Hardwood Search does not allow online transactions.
Cost: $50 per week to post unlimited listings in lumber database
TALPX links softwood lumber and panel producers to buyers across North America. With 123 mills supplying 17.1 billion feet and 672 buyers, TALPX is among the most popular and successful online softwood lumber exchanges. A closed exchange, companies must join to be able to participate, and TALPX conducts credit and other background checks for all applicants. TALPX’s main system allows buyers to view and bid against offers made by suppliers. If a supplier accepts a bid, the deal is finalized. TALPX provides credit to the buyer, eliminating one of the highest new customer acquisition costs to suppliers. TALPX offers complete electronic commerce, from locating leads and prices to financial settlement.
Cost: Memberships cost between $1,000-$2,000 per month per location plus a 1% transaction fee.
The Lumber Market
The Lumber Market will initially serve the hardwood grade lumber industry and expand into softwood and low grade hardwood lumber. The site will launch toward the end of October. Companies must apply for membership, which includes a credit check, before being able to use the exchange. The Lumber Market will target the wholesale trade dealing in truck-load volumes. Both buyers and supplier can utilize an online negotiation system that is similar to the process currently used in lumber transactions. From finding sources and customers to closing the financial transaction, the entire process takes place online. The Lumber Market will offer credit, transportation/logistics support and back office integration with commonly used accounting software.
Cost: Membership and transaction fees
Timbex Online Trading System
Timbex is a private community and marketplace for qualified wood products manufacturers, suppliers, dealers, and end users. Members can share information, track markets, locate new suppliers and new market outlets, buy/sell products, and resolve business and product quality disputes through a centralized marketplace. Timbex services both hardwood and softwood lumber markets. Services include online exchange, trading partner directory, market price reporting system, conferencing, messaging, and a secure document exchange.
WoodPlanet is buyer-driven request-for-quotation (RFQ) system. Buyers describe their needs and submit a RFQ to the system and are matched with appropriate suppliers. Then buyers can research suppliers by evaluating company profiles. Finally, buyers can send a RFQ to 20 selected suppliers with one click of the mouse. WoodPlanet serves mainly the hardwood market, especially professional woodworkers, such as cabinet and furniture makers. Currently, WoodPlanet has an active database of 800 suppliers receiving quote requests from 200 buyers. WoodPlanet’s staff evaluates each buyer to weed out hobbyists and others who do not fit the site’s mission.
Cost: Initially is free to both buyer and supplier. But supplier can obtain preferred status for RFQs by paying a $500 yearly fee.
World Wood Exchange
Online softwood and hardwood marketplace within Forestindustry.com, a major hub site for the forest products industry. Users do not have to register to search listings, but suppliers must register before posting ads. Users can search via species, region and product. Covers both hardwood and softwood markets, but most listings tend to be for hardwood lumber. Offer free e-mail alert service to inform user when a listing is placed that matches criteria. Listing summaries are displayed by alphabetical order (lumber species name) in groups of 10. For more specific information, users must click on an individual listing. There are no posting dates.
Cost: Available free for a limited time. Suppliers must register first.
World Wide Wood Network
World Wide Wood Network will launch in November as an online exchange and industry portal site. Initially, the site’s exchange will focus on the Western U.S. softwood market and will expand into other areas, including hardwoods, within the first year of operation. A closed membership marketplace, all members will be checked. Sellers will be able to open up supply to the entire membership or just select companies. The buying/selling process will take place online as participants negotiate bid price. World Wide Wood Network will also offer full back office integration between its system and any inventory, purchasing or accounting system used by a member. The portal side of the site will include news, classifieds, a database of links and more.
Cost: Membership fee of $250 per month plus transaction fees ranging from .2-.5%.