E-Procurement at Work: a Case Study*
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E-PROCUREMENT AT WORK: A CASE STUDY* EVGENIY A. AGESHIN Northeastern Illinois University, 5500 St. Louis Ave., Chicago, IL 60625 E-PROCUREMENT: CHILD OF THE INTERNET AGE e-procurement will grow 99% annually, meaning the volume of transactions will reach $1.3 trillion by 2003 What Is E-Procurement? and account for 9.4% of the U.S. B2B market [2]. Goldman Sachs, an investment bank, forecasts that The Internet has had revolutionary effects on cor- e-procurement transactions will reach $1.5 trillion porate purchasing practices. It recently became a ma- by 2004 [2]. The increasing number of B2B market- jor enabler of significant productivity improvements places will accompany the growth of e-procurement in various businesses. The companies offering so-called transactions volume. There are currently between e-procurement solutions are positioning themselves as 600 and 1,000 B2B marketplaces and, according to generators of considerable cost savings for those manu- some estimates, their number will increase to 10,000 facturers consuming the largest share of the economy’s by 2003 [2]. tangible inputs. The overall productivity of the manu- The predictions of astounding growth for B2B e- facturers often depends on their efficiency in purchas- commerce are not simple approximations based on ing those inputs. trends. They are backed by the strong attractiveness E-procurement sites, also known as business-to- of e-procurement to U.S. corporate buyers. A study business (B2B) marketplaces, electronic supply chains, of U.S. companies with revenues greater than $1 bil- trading hubs, or trading communities, are essentially lion undertaken by Deloitte Consulting in the fall of Web-based procurement networks in which one or 1999 [18] revealed the following: more companies try to source their suppliers at the • Of the firms that reported using e-procurement so- lowest costs possible [14]. From a conceptual stand- lutions extensively, 85% said they were highly satis- point, e-procurement does what tendering, its pre– fied with the resulting benefits. Internet world analogy, has been doing—it helps •More than 90% of firms have incorporated e-procure- companies source input products and services at the ment into their business plans, and one-third of them lowest cost, while ensuring that those inputs meet tech- have started implementing an initial solution. nical and other (tender) specifications [14]. By making • Most of the firms’ top e-business objectives relate to this process Web-based, e-procurement solution pro- procurement and the supply chain. viders are changing the process in ways that go far beyond its mere computerization and automation. CHARACTERISTICS OF E-PROCUREMENT The Rise and Future of E-Procurement Evolution of B2B Marketplaces The emergence of B2B marketplaces, although not The evolution of e-procurement sites has been so unexpected, has been very fast paced. In the second rapid that it prompted some analysts to say that half of 1999, B2B e-commerce suddenly began to mean “Charles Darwin never saw anything like this” [2]. Still, much more than end-consumer-oriented online auc- there have been several identifiable stages in the fast- tions and digital versions of product catalogs. Despite forward evolution of B2B marketplaces [10, 14, 16]: the fact that it is in its infancy, e-procurement man- 1. Big corporations such as General Electric and Wal- aged to reach about $145 billion in transactions in 1999 Mart created buying and selling hubs in the Internet [15]. Forrester Research, a consulting firm, predicts that designated to cut costs and speed supply procurement. 2. Third-party exchanges appeared, facilitated by in- dependent firms such as PlasticsBIN.com, National Transportation Exchange, and Vertical Net. They *This is an edited version of the prize-winning full-time graduate submission in the 2000 Donald W. Fogarty International Student brought together many buyers and sellers and cre- Paper Competition sponsored by the APICS Educational and Re- ated a genuine market in a number of areas (prima- search Foundation. rily non-production-related goods). 48 PRODUCTION AND INVENTORY MANAGEMENT JOURNAL—First Quarter, 2001, ©APICS Some authors claim that e-procurement consortiums REQUEST based on specific vertical industries (but not dominated by a single organization) represent clear progress in the REQUIREMENT SELECTION REQUISITION APPROVAL evolution of a B2B marketplace [2, 16]. Such a market- place brings all participants of a supply chain together BUY in a single location. This may result in cross-pollination REQUISITION SOURCE NEGOTIATE CONTRACT of cost-saving and market access effects across the whole supply chain. SUPPLY Some other classifications of e-procurement sites CONFIRM PROCESS SHIP INVOICE stress the technical side of their operation. For example, Deloitte Consulting identifies three types of B2B ser- REMIT vices based on the content and features they offer [17]: RECEIVE DELIVER MATCH PAY 1. Online versions of companies’ catalogs with listed products, prices, specifications, and sale and deliv- ery terms. 2. Online auctions, which can be useful for dumping FIGURE 1: Operations included in the process of excess inventory and picking up bargains. purchasing 3. Online exchanges, which match buyers and sellers through bids. It is quite possible and, even likely, that the pool of 3. Major players of some vertical industries, such as potential B2B marketplace models is not exhausted, GM, Ford, and DaimlerChrysler, are joining in e- and that in future we shall see new forms of e-pro- procurement consortiums. curement services. These new forms will bring new These different marketplace forms coexist although advantages to participants of such marketplaces. How- they represent different stages of e-procurement evo- ever, even today the benefits offered by B2B e-com- lution. Whether all of them survive depends on the merce are enormous, and most businesses cannot way the industries whose needs they serve will be afford to neglect them. structured in the future. Currently, two extreme struc- tures determine the organization of the industries. Advantages of E-Procurement Some are organized in an asymmetric, “pyramid- shaped” manner, with a limited number of either buy- B2B marketplaces in the Internet could prove to be ers or sellers; others are “butterfly-shaped,” that is, the most radical innovation in modern business since highly fragmented on both sides [16]. the assembly line was invented. Like assembly lines th The first type of structure tends to generate “bi- in the beginning of the 20 century, e-procurement ased markets” [16] that “naturally favor one side of sites promise significant increases in productivity the deal flow” [16]. These marketplaces approxi- across many industries of the economy. Their most mately correspond to the first and third model of a often quoted advantage is their potential to cut costs B2B marketplace mentioned above. They have the of purchased goods and services [8, 13, 14]. The phe- advantage of low cost, associated with persuading nomenon of cost saving allowed by e-procurement is the critical mass of users to join the marketplace. And based on the new processes that cut all costs associ- they can be financed and/or owned by market par- ated with purchasing, that is, the cost of goods and ticipants without compromising themselves, since services purchased, ordering costs, and holding costs small firms are used to the idea of working alongside [2, 7, 13]. big ones [16]. The availability and generally low cost of information The butterfly-shaped markets are “neutral” [16]. and technology provided by Internet-based purchasing They lend themselves to independent, third-party ex- create absolutely different economics characterized by changes that are closer to the second model. They have the following: the advantage of being more like true markets such as • Low barriers for market entrance [12, 13]. stock exchanges and, thus, are better able to lower • Price transparency [2, 13]. prices and improve liquidity by matching buyers and •Better opportunities to avoid “maverick buying” and sellers [16]. The potential for these exchanges is great, to use preferred supplier networks [13]. but gaining critical mass of users is difficult, which • Better balance of power between sellers and buyers undermines the future of many of the exchanges. [2]. E-PROCUREMENT AT WORK: A CASE STUDY 49 These new economics of purchasing lead to compe- But apart from these astonishing opportunities, e- tition that is closer to perfect and, as a result, to goods procurement poses a number of disadvantages that and services of better quality purchased for lower cost. may make some of its potential users employ a “wait A survey conducted by Aberdeen Group in Novem- and see” strategy. ber 1998 found that early adopters achieved a 5%–20% reduction in prices paid for operating resources [7]. Disadvantages of E-Procurement Reduction in ordering cost, the second area of large cost savings, is associated primarily with the techno- One of the greatest impediments to e-procurement’s logical advantages of e-procurement. The ordering pro- fast adoption is a gap between the expectations of the cess, as shown in figure 1, contains four key stages, two sides of the transaction—suppliers and buyers— each with four substages. Costs associated with each about the way B2B marketplaces should affect them. of those purchasing process stages are effectively re- On one hand, buyers adopting e-procurement are duced when e-procurement systems are implemented becoming increasingly dependent on suppliers because [2]. Estimates made by Goldman Sachs, an investment of the wider adoption of JIT practices, shorter order- bank, reveal that the ordering cost savings in manu- ing cycles, increased involvement of suppliers in prod- facturing associated with e-procurement vary between uct development, and so on. On the other, suppliers 2% and 39% of the costs of goods and services pur- may be reluctant to adopt the idea of e-procurement chased.