Feature

E-exchanges: at the hub of industry

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.com offers 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.


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    This was first published in May 2000

     

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