Magazine Article | August 1, 2000

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Source: Field Technologies Magazine

If you've considered an e-procurement solution, consider a few more things. Industry professionals raise three questions you should ask yourself before implementation.

Integrated Solutions, August 2000
They're calling it "the Internet explosion." And we've heard all about it…how technology holds "business as usual" in the palm of its virtual hand. The question is: Which technology? When the smoke clears from this initial electronic blast, some say e-procurement will prove most valuable as a catalyst. Electronic procurement puts a single buyer online with many suppliers.

But is it for your business? True, businesses that purchase indirect goods and services will probably benefit the most. In fact, according to Purchasing Magazine, U.S. businesses spend $1.4 trillion on nonproduction (indirect) goods and services, each year. But there's more to consider. When it comes to streamlining this kind of purchasing, industry professionals agree. You should not dash into a compulsive installation just because you buy typical MRO (maintenance, repair, and operations) items. Instead, take three careful steps: Examine your purchasing habits, not just the items you purchase; examine the exchanges available in your marketplace; and examine ways to integrate those exchanges into your daily business. Then, and only then, consider implementing an e-procurement technology.

Examine Purchasing Habits
The first step in examining your purchasing habits should be figuring out what kind of goods and services you purchase. While we know there are basically two kinds of goods purchased (direct and indirect), it seems that indirect is the majority. "MRO items often account for as much as 40% of all company purchases made," states Gregg King vice president of strategic marketing at (Westwood, MA). Steve Jeffery, chairman, CEO, and president of Clarus Corp. (Suwanee, GA) agrees. "Most companies spend 10% to 30% of their revenue on this type of purchasing." But indirect goods may not only consist of typical MRO supplies. Consider other purchasing activities such as the sourcing, acquisition, and replenishment of production materials; asset management; and the purchasing of items and services that traditionally don't fall inside the procurement department. For example, travel and entertainment purchases might be candidates for Internet-based automation. These types of expenses are common to most organizations. And the purchasing of travel and entertainment can be a very decentralized and paper-intensive activity."

"That's why vendors are now beginning to expand product offerings to include support for expenditures such as ordering and expense management for travel and entertainment," relates King.

Next, examine when you make these purchases. Is your purchasing strategic, spot, or transactional? "The strategic buyer says, ‘I'm trying to find a supplier with quality products at a decent price,'" explains Joe Phelan, director of product research at NetVendor (Atlanta). "Spot buying is more sporadic. It's for those items that are unpredictable…you never know when you'll need them." Transactional buying, however, is high-volume purchasing – where the pricing has already been determined.

In either case, if the majority of your purchasing is indirect, a lack of standard monitoring and ordering procedures can promote off-contract, or maverick purchasing. For example, if you're spending 10% to 30% of revenue on MRO supplies, the Aberdeen Group estimates that 40% of that total could account for these unnecessary, maverick buys. So, let's say your average revenue is $1,000,000. According to Jeffery, $100,000 to $300,000 of that could be spent on MRO supplies. And if Aberdeen is correct, $120,000 could account for off-contract spending. King says, "By implementing e-procurement solutions, companies can save (on average) 10% in indirect expenses." In this case, that could be a $30,000 savings.

Now, let's say you've determined what you buy and when you buy it. Before searching for that "perfect solution," consider how you buy. Businesses should examine whether or not their spending is active versus passive. "If you're online, and you're sending out a request for a quote, it's almost like a classified ad," explains Kevin Krause, vice president and chief marketing officer of (Cocoa, FL). "It's passive. Do you really know if someone is going to answer you or not?" If your purchasing is passive – and you're happy with that – then maybe e-procurement isn't for you. But if you want active purchasing abilities, consider an e-procurement system that will aid you in getting a timely response.

But don't start your search just yet. Consider one last thing: Where do I buy? Examine the electronic portion of the procurement process. Do you access a complete marketplace or a partial marketplace? "If you're procuring goods and services from a market of 2,000 companies, you might want to consider accessing a complete marketplace…with at least 20,000 companies," adds Krause. "E-procurement could open up new territories that your company wouldn't have searched before."

What Exchanges Are Out There?
The Internet explosion has made a greater number of exchanges available. Most will tell you, there's one to fit everyone…even the smaller companies. While smaller companies don't benefit from the classic definition of e-procurement, they can benefit from things such as digital marketplaces, or trading exchanges. In the traditional sense, e-procurement puts a single buyer online with many suppliers. A digital marketplace puts many buyers (small businesses) online with many suppliers. "The marketplace forms a community," remarks Jeffery. "In a community, you can have a market maker that acts as a sponsor for that community…and that sponsor drives aggregated buying power across large numbers of small businesses." Phelan agrees, "The idea here is to try generating a critical mass in which the community can purchase through the exchange. The negotiated price will be better because the communities demand a higher volume." The trading exchange will then try to spread the cost over the membership companies associated with the community.

Larger companies have other decisions to make, such as choosing between a remotely hosted system and an in-house system. "I think there are trade-offs," explains Jeffery. "If you have an in-house system inside the corporate firewall, then you have complete control over that environment. The trade-off, however, is a system like that can require internal resources – in terms of equipment, software maintenance, and people." Although a remotely hosted system requires a subscription/rental fee, some argue the cost is still lower than the up-front license fees for an in-house system. This strategy minimizes the sometimes costly alternative of manually building a system using in-house personnel.

The third thing to consider is collaboration. Some exchanges don't let the purchasing agent collaborate with the seller. "They don't let buyers and sellers ask questions or know each other until there is some form of payment. And that isn't smart," adds Krause. "Let's say the buyer is looking for a particular item, and the seller says, ‘I think we could cut your costs by 50% if you switch to something in this material.' The exchange should not stand in the way of that."

Finally, Implementation
By now, you should know what your purchasing habits are, what your needs are, and what's out there. It's time to decide on an exchange. First, look at the purchasing system that's already in place. Do you have existing electronic functions in your business today? "In the past, we've had technologies like EDI (electronic data interchange)," explains Phelan. "You could quickly move that activity to the Internet and probably save some dollars – by still using EDI standards." If you look for a solution that has EDI adaptability, you could convert those existing items and save the costs of the VANs (value-added networks). Even if you keep the same items, it's possible to move them from VANs to the Internet with little modification.

You've made your decision. Now let's talk implementation. "I would start with a test drive for 30 to 60 days on three or four components," explains Krause. "Then begin a pilot phase, to work out the bugs prior to a wide-scale rollout," adds King. According to an Aberdeen survey, on average, only 130 users were on the system during the pilot phase. At the time of the survey, the average number of users per organization was about 1,000. However, all sites surveyed had plans to eventually extend Internet procurement to the entire enterprise.

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