Every business is a purchaser as well as a supplier, with many routinely processing hundreds of buying activities daily. Typically, purchases represent 50 to 90% of a company's cost structure — making procurement strategy and execution a critical lever for effective supply chain operations and superior business profitability.
Electronic commerce offers exciting new possibilities for businesses to improve their performance on this important "upstream" supply chain activity, both for indirect or support items and, increasingly, for materials that are direct components of the products and services that businesses make and sell.
As in many areas of e-commerce, the wide variety of alternatives can be confusing. This article outlines some of the major recent developments in e-procurement and the important strategic and tactical choices that companies need to make in order to answer these questions and to take full advantage of new "buy" side e-commerce developments.
This part discusses how e-procurement can Broaden the Supplier Pool and the pros and cons of this approach to procurement.
About This Article
This article will appear on this site in five parts. Each part will contain links to the preceding parts.
Part 1 discussed the Benefits of e-procurement and included examples of major corporations that are pursuing e-procurement.
Part 2 discussed the potential Efficiency Gains of e-procurement, including relationships and processes that are necessary to obtain these gains.
Part 4 will discuss using e-procurement to Leverage Volume, including leveraging volume through outsourcing.
Part 5 will discuss how e-procurement can Improve Process as well as How to Get Started with e-procurement.
Objective: Broadening the Supplier Pool
- Plethora of horizontal and vertical marketplaces makes comparison shopping easier.
- Don't expect to get the best prices just cruising the Web.
- Repeated switching of suppliers to chase lowest prices can be hard to manage and cause other problems that offset savings.
Broadening the Pool of Suppliers Discussion
Typically, a 1% improvement in the overall cost of purchased materials and services can increase a company's bottom line by 10 to 20% or more — a dramatic impact on profitability and shareholder value. It is no wonder a wide variety of e-procurement solutions have been developed to help companies access a broader range of suppliers and achieve price and service improvements.
This has quickly become a crowded and confusing area, with trade magazines and television ads touting the benefits of alternative Internet sites and start-ups that have emerged to improve the process of bringing buyers and sellers together in a more competitive way. These marketplaces or exchanges offer a defined set of materials and services from a number of different suppliers, where you can view and compare supplier catalogs and price lists, seek supplier quotations for specific needs, and make supplier selection decisions.
These services are typically organized in one of two ways:
- Horizontal marketplaces focus on product lines that companies in a number of different industries utilize, such as Maintenance, Repair, and Operations (MRO) items, office products, and capital equipment. As well, there are sites that focus exclusively on categories of purchased services that have become increasingly important in today's economy — information technology, shipping, management consulting, and others.
- Vertical marketplaces are designed to meet the unique needs of particular industries - plastics, high-tech, and automotive to name a few. Here, you can access information and pricing from suppliers of resins, integrated circuits, castings, and a broad range of other parts and components used extensively in your specific industry. Exchanges have also developed to cover excess inventory, used equipment, and other items and types of transactions that historically have been particularly inefficient or time-consuming.
The primary e-procurement benefit of these marketplaces is that they facilitate much easier comparison shopping. The substantial legwork that used to be required to identify potential new suppliers, understand what they offer and obtain price quotations from them now can often occur in a matter of minutes. In an increasingly global economy, it has become more and more important for companies to find and use appropriate suppliers anywhere in the world, and e-procurement marketplaces provide a valuable method for increasing the access to these new potential supply sources.
These marketplaces and exchanges initially focused mostly on indirect materials and support services, since they were arguably the items that are critical to a business and least risky to buy through these new methods. However, there has been a rapid expansion of categories that are covered, and now just about anything a business needs, including critical raw materials, components, subassemblies, and even basic commodities such as fuel and agricultural products can be bought using horizontal or vertical exchanges.
Dealing With Multiple Marketplaces or Exchanges
In most major categories of goods and services, and in most major industries, multiple marketplaces or exchanges now exist. The "land grab" in business-to-business e-commerce has largely been completed, with dot-coms having obtained venture capital financing, recruited leading industry and category experts, locked up the best Internet addresses, and established their presence in the marketplace through media advertising, industry marketing programs, e-mail discount offers, and other high-visibility activities.
The original concept of these exchanges was for independent operators to facilitate interactions between buyers and sellers in fragmented markets. But new developments occur quickly in electronic commerce. Most recently, in many industries the major buying companies in that industry have set up and are operating their own exchanges — in the automotive industry, high-tech manufacturing, retailing, agri-business, and many others. While these "buyer-centric" exchanges can no doubt be effective, there is a growing concern among suppliers that their purpose is not to broaden the pool of suppliers but to enable the biggest corporate buyers to exert their combined clout over their smaller suppliers and extract lower and lower prices. Using e-procurement tools to achieve volume leverage is discussed in more detail in the next section.
With extensive competition both within and between exchanges, suppliers need to offer sharper pricing, better quality, and more value-added services to differentiate themselves and retain and grow their businesses — at least in theory.
So which of these many alternatives provides the best e-procurement value? And are they significantly better than more traditional methods? A personal market test of the alternatives available to small professional services businesses is described in a sidebar to this article — and concludes there is some modest value that is available but that a substantial amount of legwork is still required to achieve it.
While these e-procurement offerings no doubt provide some new "discipline" in pricing comparable goods and services, they do not directly involve suppliers in bidding for a customer's business — and prices do not typically reflect the volume discounts and other benefits that can be obtained through establishing ongoing preferred supplier contracts. Put your company-as-a-supplier hat back on for a minute — would you post your best prices for your best high-volume customers on your Internet site? Probably not.
Conclusion of Part 3
To achieve the "best" overall procurement results, you may need to repeatedly shop the marketplace, changing suppliers as competitive conditions change. In the grocery aisle, we easily switch from one breakfast cereal or detergent to another depending on what's on sale. But for each new supplier, your company needs to check them for compliance with quality requirements and other business practices, individually add them into your supplier and financial reporting systems, have their inventories separately handled and stored, and have their invoices separately processed and paid. Together, these overhead costs can offset much or all of the savings you achieve by shopping the Web.
The value of deep integration with suppliers is also highlighted by the effect of subtle changes from one supplier to another in technical specifications for raw materials and components. Though small, these changes can have an unfavorable impact on overall manufacturing productivity that may far exceed the savings generated from shopping the marketplace. The longstanding trend has been toward developing strategic relationships with a handful of trusted long-term suppliers who can work with you to drive operating improvements and future technological advantage. Frequent changes in suppliers based on the use of marketplaces or exchanges would clearly run counter to these important initiatives.
This is part 3 of a five part series on e-procurement. Part 4 will discuss the Using E-Procurement to Leverage Volume.
Part 1 discussed The Benefits of E-Procurement.
Part 2 discussed The Efficiency Gains of E-Procurement.
About the Author
Scott A. Elliff is Founder and President of Capital Consulting & Management, Inc. (CCMI), offering high-quality analysis, practical advice, and fresh perspectives to help clients achieve bottom-line improvements in profitability, effectiveness, and market position.
Mr. Elliff has sixteen years experience consulting to a wide range of Fortune 500 and other companies, with particular expertise in supply chain management, including product development, forecasting, procurement, scheduling, manufacturing, transportation, logistics, inventory management, and customer service. He has written and spoken widely about these topics in a number of industry conferences and publications.
CCMI can be found on the Web at www.CCMIservices.com.
Mr. Elliff can be reached at (703) 370-2607 or by e-mail at scott_elliff@CCMIservices.com. All materials CCMI 2001.