Large firms in the traditional industries are forcing suppliers
into online trading hubs. E-exchangescan slash procurement costs -
but it's a buyer's market.Ambrose McNevin surveys the issues raised
by the new online exhanges - and profiles some of the the solutions
on offer
Recent moves by industry giants to set up online exchanges have
put e-procurement under the spotlight. For example, Ford, General
Motors and Daimler-Chrysler set up an Internet e-procurement portal
across which all of their suppliers will trade.
But while the large firms have pioneered the "industry hub"
approach, it is a game anyone can play.
E-procurement is a relatively straightforward proposition. By
putting the purchase of direct and indirect goods and services
online, it is possible for the buyer to make big savings.
Indirect goods are also referred to as maintenance,
repair and operations (MRO) supplies and include any item necessary
for the running of an organisation from paperclips to desktop
computers or stationery.
According to market researchers, the Aberdeen Group, early
adopters of Internet procurement have realised a 5-10% reduction in
their operating resources bill.
Savings like this derive from cutting the cost of purchasing
transactions and also from rationalising the number of suppliers
and negotiating bigger discounts through buying in bulk.
Direct goods are the products or services created by your
enterprise. Trading these online again cuts the cost of
transaction, but being part of a network offers a new dimension:
you can tender for new bids and to find new markets.
However, e-procurement is getting confusing not just because of
the variety and diversity of figures that are bandied about, but
also because of the different models for e-procurement that are
emerging.
One analyst predicts that $7.4 trillion will be spent across
business-to-business networks by 2004.
Industry giants are getting interested in e-procurement, not
just as purchasers but as market-makers. It is not every day that
someone will offer you a 15 per cent reduction in the operating
costs of your business - figures that go straight to the bottom
line - while at the same time offering you the promise of new
revenue streams for your business.
When choosing the most appropriate e-procurement model for your
company's trading purposes, you'll need to sit down with the buying
department and review how indirect goods are currently
purchased.
Angus Gregory, managing director of Biomni says: "Businesses are
looking for a product what will engage their customers and bring
down the cost of transaction. They want a flexible product that
will integrate with existing systems. Some companies have started
offering auctions and other applications. While auctions have their
place, they are mostly used for getting rid of excess stock."
Whether not your company needs to join a portal, and thus have
access to auctions and other trading facilities, will depend on how
important it is to retain negotiated service levels with suppliers.
Exchanges, for the moment, seem to be focused on knocking bids down
to the lowest price and finding new markets, rather than on
negotiating business relationships.
If you are considering taking part in an e-procurement venture,
the business considerations have to be approached before you choose
a technology partner.
That said, making the choice is tricky - if only because a host
of different IT solutions - from enterprise resource planning
software to order management and consultancy - are now rapidly
converging on the e-procurement space.
Most e-procurement suppliers will claim to offer single document
entry, automated requisition and authorisation forms, supply chain
management, aggregated purchasing, security and transaction
management tracking of requisitions, purchase orders, expense
reports and service requests. Not all will offer auctions and
ancillary services amid contention as to the amount of market
demand from customers for these additional services.
As with any hotly contested new business, there is much hype and
putting down the competition. Peter Robertshaw, UK product
marketing manager for German ERP supplier SAP says: "There has been
a rush to get into the marketplace arena by a lot of companies with
a desire to be seen to be doing something."
Chris Philips, UK marketing director at CommerceOne, says the
selling side of e-procurement is well developed, with companies
such as Compaq and Dell using the technology. It is on the buying
side that the next developments will occur: "The real opportunity
is to provide supply side and the buy side, not [just] order
management within organisations. The aim is many buyers trading
with many sellers. The portal model provides this. One connection
give multiple trading opportunities and it is very effective when
trading with different systems."
Philips believes there will never be a single document standard
for B2B - as business is too complex. But he advocates the portal
model in general: "Portals allow you to deliver hosted services the
companies that have just a browser and big companies -Êbuyers or
sellers - can integrate portals with their own systems."
There are pitfalls to go with the promises of e-procurement.
Issues that will emerge are the multi-currency, multi-lingual
products that will allow users to trade in real time across
borders.
Trading on an open market runs the risk of making your
purchasing transparent to your competitors. And squeezing the
margins of your suppliers may rebound on the quality of services or
goods provided. There are huge efficiencies to be made in business
but driving down costs can have its drawbacks. Angus Gregory,
managing director at Biomni, says, 'Would you want to fly in a
helicopter which had been fitted with the cheapest blades?'
However, with large corporations from the "old economy"
investing heavily in e-procurement hubs, sooner or later your
business will run up against one.
E-procurement solutions
If you are considering buying and selling through a
business-to-business exchange, the technology will come closely
wrapped in a business proposition from the supplier. Many suppliers
offer joint ventures or consultancy on top of the technology.
Ariba
Ariba offers ORMS (operating resource management system) an
enterprise-wide e-procurement system for managing maintenance,
repair and operating purchases. Payment is based on purchasing
transaction volume per year. ORMS pricing typically includes
provisions and fees for access to the Ariba Network, an online
e-community of buyers and sellers. ORMs integrates with existing
ERP applications such as Oracle and SAP.
Biomni
Biomni's offers a combination of consultancy and product. The
company maps its Directa buy-side e-procurement software onto a
customer's processes and not the opposite with services such as
training wrapped around the tool. Biomni's portal business is based
on a joint venture approach where the company will take an equity
share in the company and take a fixed transaction fee on its
Provida network.
CommerceOne
CommerceOne takes the joint venture approach to creating
e-procurement portals. It has a vision of globally interconnected
portals allowing trade across all systems. Its pricing model is a
combination licence and revenue share and in some cases it will
take an equity share in the portal.
Infobank
Offers a "hub in a box": it emphasises speed to market as the
key to success in the B2B world. On the portal side the company
claims to have a variety of products to allow suppliers to trade
with each other. On pricing, it has a variety of options from
software licenses on a per user basis and the number of servers
running the software. For portals its prices are transaction
based.
Oracle
Despite landing the Ford contract - which has since evolved into
the global market for a large part of the automotive industry -
Oracle appears slower than the rest to come to the wider market.
Its Oracle Exchange was launched at the end of January 2000 after
numerous delays.
SAP
Mysap.comoffers three "flavours" of
SAP:
- The generic approach, where users can register and trade across
an SAP managed network with companies registered on the site. This
is currently free of charge as SAP seeks to build a critical mass
of users - but SAP is looking at the pricing model.
- The joint venture approach, where SAP will integrate a
marketplace with a company's existing supply chain technology, as
it has for chemicals giant BASF.
- SAP sells workplace software to enable users to set up their
own marketplace.
Three flavours of e-procurement
Internet exchanges
The appeal online business-to-business exchanges lies in the
ease of access to a wide range of trading mechanisms from a web
browser.
Typically, exchanges provide:
- access to online catalogues to advertise and search for
products,
- the ability to conduct secure transactions, and
- the ability to post bids, tenders and reverse auctions - where
a buyer posts a specification and awaits offers.
Members of an exchange can initiate or engage in a deal by
entering a password to enter the domain. Further customisation of
the screen would reflect his or her buying priorities.
Exchange portals that are emerging as the global players use the
web to more efficiently control their suppliers. The model also
creates opportunities for industry giants to make their own
markets, and to create revenue streams from transaction charges or
commissions. For example:
- Shell and BP have teamed up with CommerceOne to create an
online market where energy companies, their suppliers and customers
can meet in a virtual trading place to buy and sell products. The
market is expected to represent $500 billion of business spending
and Shell expects the venture to save £4 billion on procurement
costs.
- In the retail sector, US chain Sears Roebuck and French outlet
Carrefour are have teamed up to create a retail portal. The venture
claims that the combined supply chains of these two mega players
alone will create a $80bn market for direct and indirect goods and
services.
Buy-side E-procurement
Companies interested in shaving 15- 20 % off the cost of buying
goods and services should invest in buy-side e-procurement
software.
E-procurement packages control internal spending, cut operating
costs, automate processes such as requisitions, expenses, service
requests, form tracking - and involve serious thinking and a
strategic approach.
The software typically sits on the company intranet and can host
multiple product catalogues, enabling individual employees to
browse for availability pricing of items. A key function of
buy-side e-procurement is to integrate all the various ordering and
approval transactions that can make procurement of mundane but
essential items for corporations such an arduous and expensive
process.
The workflow-based system transforms e-procurement into a
seamless process enabling anything from paper-clips to catering
provisions and company cards to be ordered by a click of a mouse.
Catalogues can be pre-specified so the buyer can to meet any
technical standards they care to determine. Without the benefit of
streamlined software, many companies continue to buy operating
resources through paper-based or semi-automated processes. Research
company AMR estimates that the cost per procurement transaction can
be as high as $175, often exceeding the price of the product being
purchased.
- US investment bank, Greenwich Nat West implemented Biomni
software because it was flexible enough to accommodate different
department's buying patterns. Procurement can now be done from the
desktop and a recycling function ensures that duplicate orders are
not processed. Stricter supplier management has been another key
benefit, says Jim Johnson, head of global technology services: "We
have been able to negotiate better discounts and reduce maintenance
and support costs, all of which helps make positive contributions
to the balance sheet".
Creating a mini market
If you are too small to build a global trading exchange for your
suppliers, then registering with one of the big markets is easy and
companies can start trading now.
You can do this through shrink-wrapped products, which are
available now from Infobank or Biomni, or join one of the existing
markets.
However, suppliers are also looking for the best business plans
for setting up new branded markets to add critical mass to their
own marketplace portals.
While these branded "markets within markets" will mostly operate
within vertical sectors, horizontal markets will also be viable,
especially in Europe.
Companies that can show a business case for a good level of
trade to be transacted across their network could find suppliers
willing to set up joint ventures and take an equity stake in their
market.
Some are more willing to do this than others, but with the
e-procurement model changing rapidly, no-one involved in e-business
is ruling it out.