E-procurement will save money, rationalise supply chains and
deliver substantial productivity gains, but when? Nick Huber, Hazel
Ward, Bill Goodwin and Mike Simons look at what is really
happening
Time and again the hype around e-procurement and e-exchanges
comes crashing up against commercial and business reality. In the
space between hype and pessimism, something is happening out
there.
Retail
Retailers have been quick to exploit the Internet to place
orders and exchange information with their suppliers. Over the past
two years, well-known high-street names, including J Sainsbury,
Selfridges and Safeway have signed up to services that are
providing them with direct links into their suppliers.
These mini-exchanges are allowing retailers to cut costs by
eliminating paperwork and improving the accuracy of their ordering.
They also provide suppliers with feedback on stocks and sales of
their goods, allowing them to tailor production to demand, and to
collaborate with retailers on special promotions.
Although the third parties that provide exchange services for
retailers are encouraging other retailers to join their systems, so
far the picture is patchy and fragmented. Supermarket suppliers,
for example, often find themselves having to sign up to two or
three different, incompatible Internet services, if they want to
keep valuable contracts.
But the scene is developing rapidly. In recent months, retailers
and suppliers have joined forces to create a new generation of
global Internet exchanges that promise to link retailers with tens
of thousands of suppliers across the world. They are designed to
give retailers the ability to take part in global auctions for
goods, driving down costs and pushing up profits.
The retailers are backing two rival exchanges. The
GlobalNetExchange, which is already up and running, is supported by
French retailer Carrefour, J Sainsbury and Sears. Marks &
Spencer, Tesco and Kingfisher support the WorldWide Retail
Exchange.
But suppliers are not taking the retailers' initiatives lying
down. Fifty of the world's largest consumer products suppliers,
including Coca-Cola and Kellogg's, have joined forces to create
Transora, an electronic exchange that dwarfs its retail rivals.
Transora is so big that the retailers behind GlobalNetExchange
and the WorldWide Retail Exchange may have little choice other than
to link their exchanges to it.
With three global exchanges plus a myriad of private exchanges,
it is inevitable that there will be pressure for consolidation.
"Suppliers are having to deal with a number of different systems,"
said Richard Cuthbertson, supply chain expert at Templeton College
Oxford.
"The growth of these systems will be followed by a period of
consolidation."
Government
The Government set itself some of the most ambitious targets for
e-procurement and e-commerce and has been forced to beat an
undignified retreat.
Last year the Modernising Government white paper said that 90%
of government procurement should be electronic by March 2001.
In April of this year the Office of Government Commerce (OGC)was
established and charged with saving £1bn from Whitehall's
procurement bill, largely through e-commerce.
Last month, however, in a little reported retreat, the OGC froze
its plans for an electronic shopping mall. Officially, the reason
was that technology is moving so rapidly that the OGC feared it
could end up with out of date systems.
Instead, the OGC said it wanted to learn from early adopters and
look at competing business models before finalising a system. In
the mean time it will launch pilot projects for electronic
tendering systems in the autumn.
Jim Norton, head of electronic businesses at the Institute of
Directors, and the former principal spokesman on e-business at the
Cabinet Office, thinks there is another dimension to the problem.
At a SAP breakfast debate earlier this month, he said, "I detect a
degree of frustration, particularly at ministerial level.
"The Government always underestimates the people dimension and
how to persuade people to change the way they do things. It is
immensely difficult."
Away from Whitehall, enthusiasm for e-procurement also comes up
against practical problems. Several local authority IT chiefs told
Computer Weekly that the set-up costs of joining some e-procurement
operations are too high. One said commercial e-procurement sites
are charging more than £150,000, "just to get to the starting
line".
Richard Steel, head of IT contract services at Newham council in
East London, said no electronic procurement is currently taking
place but "it is high on our priority list".
For Steel, e-procurement offers a way to reduce processing costs
on low-value, high-volume goods, but there are three key issues to
be settled - cost, electronic settlement and flexibility, so the
system can be used by the council's partners and the wider
community.
Cardiff council's Crispin O'Connell said e-procurement fell down
on the simple problem that there are no secure payment systems and
because the council would not issue staff with credit cards because
of the dangers of misuse.
Insteadthe council had set up framework agreements with key
suppliersand could order but not carry out transactions online.
Financial services
The main high-street and corporate banks are the driving force
behind e-procurement in the financial servicessector. Insurance
companies are lagging behind the banks, analysts claim, while the
financial markets already have their own stock exchanges.
The banking sector is now using e-procurement services on two
levels.
After establishing Web-based e-procurement systems with their
suppliers to cut internal costs, high-street banks - such as
NatWest, now part of Royal Bank of Scotland - are offering
e-procurement services for their customers.
The Royal Bank of Scotland has e-enabled its traditional plastic
procurement card. The card integrates with the customer's
e-commerce platform and gives the client access to an online
supplier catalogue.
The e-procurement card already has one customer in the brewing
industry and the bank is planning to develop e-procurement portals
for other industries.
A form of application service provision, this brings together
buyer and sellers from different industry sectors in an electronic
marketplace. The next step is to offer online auctions for supplies
and services.
But, according to recent research from Gartner Group, the vast
majority of e-procurement exchanges will be out of business within
a few years.
The research predicted that there will only be room for about
three vertical portals in each industry. Gartner also said that 90%
of all staff involved in purchasing will be linked to a handful of
vertical portals by the end of next year.
Alexander Drobvik, vice-president for e-business at Gartner,
said, "E-procurement and e-marketplaces are merging together."
The main suppliers cashing in on the emerging e-procurement
market for financial services are software heavyweights such as SAP
and Oracle. There are also about 20 small e-commerce suppliers but
these concentrate their business mainly on niche markets, such as
the asset management side of e-procurement.
Manufacturing
The US auto industry shouted loudest about the development of
exchanges and new mechanisms for online procurement. Six months
ago, amidst huge fanfare Ford, DaimlerChrysler and General Motors
launched Covisint, a massive online trading exchange.
But since then things have gone quiet. The world's leading auto
companies may have wanted to merge their supply chain on a single
exchange, but Covisint has yet to begin trading.
The US Federal Trade Commission is investigating anti-trust
concerns about the alliance of the three car industry heavyweights,
and the Justice Department is looking into T2, the US airline
trading exchange. The exchange cannot start processing transactions
until these anti-trust concerns are settled.
According to Lance Doughty, director for discrete manufacturing
at Cap Gemini Ernst & Young in the UK, only the two original
exchanges, Ford's Auto-Xchange and rival GM's Tradexchange, which
merged to form Covisint, are transacting on a small scale.
"Covisint has opened offices in Europe but it will not be
allowed to trade until it gets the green light from the Federal
Trade Commission," he said. "I think it's a safe bet that the
regulatory bodies will allow it to go ahead but there will be some
restrictions put on it."