Some investors continue to believe that on-line business-to-business (B2B) exchanges could improve supply chain management dramatically despite the punishment they took in financial markets last year. Many companies are still eager to jump in: during the year 2000, the total investment in B2B infrastructure exceeded $200 billion—an estimated $10 billion of it for public consortia-backed e-marketplaces alone. Still, the financial markets appear to have caught on to something that experienced supply-chain-management practitioners have suspected for a while. Although B2B exchanges (otherwise known as e-marketplaces) can help companies realize certain purchasing and transaction-processing benefits in the short term, broader improvements—particularly reductions in inventory, improved service levels, faster time to market—are harder to achieve.

The promise of real benefits rests on the potential for seamlessly integrating data flows and work processes across entire enterprises and even industries. To realize this opportunity, the power of B2B exchanges would have to be combined with the enterprise-resource-planning and decision support systems that many companies have adopted in recent years. But this kind of integration is hard to pull off, and for industries with complex, segmented supply chains, it is simply inappropriate.

True improvement will emerge only from the understanding that exchanges can’t affect every...