The Lumber Clearing House Case Study

The Lumber Clearinghouse Case Study

The Lumber Clearinghouse, an Internet-based exchange started in November 2000, serves all members of the wood products supply chain, including service centers, mills, fabricators, original equipment manufacturers, converters and trading companies. The exchange is neutral, which means that investors and partners do not have a direct interest in either the buy-side or the sell-side. To date, the company has been funded by US$25 million in venture capital, of which only US$9 million remains; most has been spent to fund losses, create awareness of services and develop back-end technology for the exchange.

The Lumber Clearinghouse management chose to focus on the wood products industry for the following reasons:

* The industry is highly fragmented, offering the potential of thousands of players on one exchange.

* Precise supply chain data for the industry is hard to obtain.

* Accurate demand planning is difficult to achieve.

* Pre-launch research indicated that an eCommerce approach to lumber procurement could significantly lower transaction costs: Savings on mill orders could be reduced from the current range of US$30-US$70 to a range of US$20-US$40, and service centre transactions that currently range from US$125 to US$225 could be cut by US$75 to US$125 per transaction.

Other benefits include a reduction in transaction time, improved inventory management, better scheduling and expanded market reach.

Early Results

Unfortunately, things have not worked out as planned. Even though The Lumber Clearinghouse has been around for more than a year, it has less than US$500,000 in aggregate revenues, of which 80% is attributable to advertising fees. Although management initially projected that transaction fees would account for 35% of revenue, to date only 13% of revenues have been generated in this way.

The Lumber Clearinghouse has spent US$5 million on advertising and promotion, which has resulted in a modest 1.75% month-to-month increase in site traffic. Furthermore, few of the participants in the exchange have completed more than one transaction.

Customers have complained that the data generated by the exchange have to be manually converted so that it can be used with expensive Enterprise Resource Planning (ERP) software. Some participants who have engaged in international transactions have also complained that they do not know how to store and finance their purchases. Others have expressed disappointment with the website content. Management is looking into these complaints.

Analysis

What additional steps might The Lumber Clearinghouse management take to ensure that B2B critical success factors are met during the next fiscal year?

Speed and Flexibility

It is not clear that The Lumber Clearinghouse is currently setting its direction in response to the changing needs, wants, and specifications of its participants. In fact, it appears that the opposite might be true: The Lumber Clearinghouse appears to be "pushing" content and features