e-Procurement at 100 mph
At a speed that's almost literally breathtaking, the Internet is changing forever the way in which goods are bought and sold.
By Kevin Fitzgerald, Purchasing -- Supply Chain Management Review, 5/1/2000
For the past couple of years, the Internet has been all the rage in business circles. It has joined a long list of business tools and practices promising to raise management processes to a higher level. Most if not all of the time, business people using these tools or practices were disappointed with the final results. But in the case of the Internet, the hype is true.
It's difficult to overstate the effect that the Internet already has had on how industrial companies approach purchasing and supply chain management. (The accompanying graphic shows how heavily purchasing professionals now rely on the Internet.) But it's relatively easy to envision what the Internet will enable leading manufacturers to achieve in the near future: true supply chain management through the transparent, real-time connection of all supply chain links.
I'm not talking simply about enabling manufacturers to view sales data from retail outlets immediately. Although this capability certainly is important, the Internet's reach is far greater. I'm talking about seamlessly connecting every link in the chain, all the way back to the raw-materials suppliers. Integration of supply chains will change the basic nature of the competitive marketplace. No longer will companies compete with other companies, or products with other products. Supply chains truly will compete with other supply chains.
Today, most manufacturing companies are just dipping their toes into the e-procurement waters. Their initial efforts usually are targeted at reducing the cost of the transaction process and/or getting lower prices through activities such as online "reverse" auctions. Most early e-procurement strategies involve buying nonproduction goods, such as maintenance, repair, and operations (MRO) supplies and office products.
Though limited, these early strategies make a lot of sense. Reducing transaction costs through e-procurement will provide immediate cost savings that are relatively easy to document. Plus, it's always a good idea to use new technologies and systems to buy noncritical supplies before using them for parts and materials that actually go into a product.
Without question, all of these efforts can reduce a company's costs and improve its performance. But the long-term value of the Internet lies in its ability to enable manufacturers and their suppliers—and their supplier's suppliers—to react to market changes as one entity.
Real-time communications via the Web enable manufacturers and their suppliers to minimize inventory levels at every link in the chain—with potentially staggering cost savings. When supply chains are connected end to end, manufacturers will be able to establish true "pull"-type demand systems, where future materials-requirements plans are based on actual use not on a "best-guess" forecast. A sale to a final customer will automatically trigger appropriate actions at all links of the chain. Manufacturers also will be able to identify shifts in customer desires more quickly and fulfill custom orders much faster than is possible today.
Arrival of the Dot-comsNot to be overlooked in the new world of e-procurement is the arrival of a new player—the third-party "dot-com" supplier. Although it's much too early to gauge the long-term effect of these new entities, dot-com suppliers offer the potential to continually drive down purchase prices of industrial commodities. And by empowering small-volume buyers to act as a buying consortium, they give these buyers some of the same benefits once enjoyed only by their large-volume counterparts. The benefits include greater volume leverage, access to more suppliers, access to a larger knowledge base, standardized bidding and requisitioning processes, and greatly reduced transaction costs.
But at this point in the game, leading purchasing professionals have a lot of doubts about these new dot-com suppliers. Simply put, purchasers are not yet convinced that the dot-coms can deliver the promised value. The next couple of years are likely to be a very lively time in the dot-com world, as buyers separate the long-term, high-value players from the pack.
In the meantime, supply management professionals should not forget that e-procurement is a tool—a very powerful tool, but a tool nonetheless. For decades, marketers of various types have been trying to sell purchasing pros the "silver bullet" that will solve all of their purchasing and supply management problems. But silver bullets exist only in fiction. In manufacturing markets, there simply is no substitute for a sound business strategy, implemented by dedicated supply professionals who understand their company's business and know intimately the global supply bases on which that business depends.
People still are—and will continue to be—the most important strategic weapon in a manufacturing company's arsenal. And e-procurement enables best-in-class manufacturers to get even better by maximizing the value of their most valuable resource: people.
Manufacturers can maximize the value of their people because the Internet enables complete automation of transaction processing and financial recordkeeping throughout the supply chain. And this, in turn, allows both manufacturers and their suppliers to concentrate their human resources on far more strategic activities than processing transactions. Such strategic activities include long-term negotiations, global market research, relationship building with strategically important suppliers, evaluation of outsourcing opportunities, analysis of business plans, supplier training ... the list goes on. In fact, most senior-level purchasing pros identify this benefit—the ability to shift purchasing resources from the business of processing transactions to more strategic activities—as the most important long-term potential benefit of Internet-based e-procurement. The purchasing professional of the future will not be a transaction processor; he or she will be a strategic supply manager.
Insight From IBMPerhaps the words of Gene Richter, a lifetime veteran of the purchasing function and recently retired chief procurement officer of IBM, best sum up the impact of the Internet: "Electronic procurement is a big trend that is having an enormous effect on us. It's coming down the track at 100 miles per hour. It's amazing to me. I've been in procurement for 37 years, and I have never seen such a revolutionary change happen so fast."
Richter's words are backed up by the rapid deployment of e-procurement systems through IBM's supply chain. By the end of last year, the company was doing business with 12,000 suppliers over the Internet, with the World Wide Web as the transaction-processing structure. This number represents 95 percent of IBM's supplier base and a transaction value of $36 billion out of a total annual spend of $45 billion. IBM's goal this year is to have all of its suppliers capable of doing business over the Web.
The extent of IBM's e-procurement certainly is not typical. But the company's fast progress shows how much can be achieved—and quickly. The Internet provides purchasing and supply management professionals with the most powerful tool ever to arrive at their door. And most major companies are now formulating a strategy that will shift buying and supply management activities to the Internet.
The ability to electronically connect various links in the supply chain has existed for some time. Unfortunately, prior technologies, such as electronic data interchange, were expensive, proprietary, difficult to implement and use, and ignored by entire industries. Getting different information-technology systems to talk to each other has been a decades-long challenge for manufacturers, and attempts at standardization proved fruitless.
The Internet has changed all that. The Internet is inherently open, global, easy to use, and inexpensive to use. And with its coming, the world of purchasing and supply chain management will never be the same.
| Author Information |
| Kevin Fitzgerald is editor-in-chief of Purchasing magazine, published by Cahners Business Information. He can be reached at kevinf@cahners.com. |
View All Blogs
