LEARNING FROM FAILURES MetalSite Although a number of small steel manufacturing plants (called minimills) have opened in the past 20 years, most of the world's steel is still produced in very large steel mills. In these steel mills, it is economical to produce steel only in large batches. Because of the high cost of reconfiguring machinery, a steel mill set up to create one type of steel (for example, rolled sheets) requires significant time and money to change over to produce another type of steel (for example, bar steel). To minimize these changeover costs, steel mills produce steel products in large batches to meet estimated demand rather than actual orders. Because production quantities are designed to meet estimated demand instead of actual demand, steel mills often have overproduction of some items.
Companies such as Bethlehem Steel, with annual revenues of more than $4 billion and 14,000 employees, solved this problem in the past by sending faxes to potential buyers of their excess production. Buyers would respond with a bid on the product in which they were interested, and Bethlehem would negotiate with them to determine price and delivery terms.
In 1998, MetalSite was one of the first metal trading exchanges to begin doing business on the Web. These exchanges offered manufacturers such as Bethlehem an efficient way to reach a larger market for their excess production. By mid-2000, there were more than 200 metal exchanges operating on the web. These exchanges were following a reintermediation strategy; that is, they were entering the supply chain of the steel industry to provide some added value that had not existed in the supply chain before. However, most industry analysts agreed that there was no need for more than one or two exchanges in the steel industry. In 2001, metal trading exchange sites began to fail.
MetalSite had grown rapidly. With more than $35 million of investors' money, MetalSite was able to sign up 24,000 registered users and by mid-2001, was trading about $30 million worth of steel each month. However, its commissions of between 1 percent and 2 percent on each trade did not yield enough money to cover operating costs. The steel business was in a downturn along with the rest of the U.S. economy, and the downward pressure on commissions from competing exchanges was increasing rapidly. The major steel companies were discussing ways to form alliances to operate their own exchanges. After three years of operation and a desperate last-minute search for new investors, MetalSite closed in August 2001.
MetalSite had entered a business that could not support more than a few companies, and it was unable to become one of the survivors. The lesson from MetalSite's experience is that a reintermediation strategy must add significant value to the supply chain, and the company pursuing that strategy must be able to construct significant barriers that competitors must overcome to enter the business. MetalSite was unable to do either and thus failed. Many other B2B exchange sites that found themselves in similar competitive situations have also failed.