The e-procurement bandwagon is rolling, the only question for business now is whether to jump up or be mowed under by its wheels.
By John B. Wyatt III and Leroy H. Graw
What is electronic procurement
(e-procurement) Although it certainly constitutes about 50 percent of e-commerce, procurement professionals may have a different view. Simply defined, e-procurement is the purchase of goods or services using electronic media. The ultimate goal of e-procurement is "paperless purchasing," which contemplates eliminating paperwork for all important documents used in purchasing, including the statement of work, requisition, solicitation, purchase order, delivery/task order, invoice, and payment documents.
How pervasive will e-procurement be in the coming years? A recent study conducted by the Boston Consulting Group ( BCG) indicated that by 2003. a quarter of all business-to-business purchasing in the United States will be conducted online. Such purchasing is expected to increase by 33 percent per year until 2003, and reach $2.8 trillion in transaction value. The BCG estimates that by 2003, the following six sectors will conduct more than 65 percent of all e-commerce purchases: retail, motor
vehicles, shipping, industrial, equipment, high tech, and government.
According to the BCG, most of the e-commerce market share is in North America, with approximately 70 per-cent of the total e-commerce transactions taking place in the United States , Canada , and Mexico . The BCG anticipates most of the growth will take place in Asia, Europe, and Latin American, as more businesses go online in those parts of the world.
Advantages and Applications
In an article from the July 1998 Purchasing Today, Katherine L. Eveleth, supply chain group consult-ant for the Global Supply Group in Plano, Texas, focuses on the differences among information technology (IT), e-commerce, and e-business. According to Eveleth, IT covers a wide array of hardware, software, and net-work services. Information in large computer systems used to be updated only daily, which meant that a change in product price would not be reflect-ed until the next day. Today's technology, however, is interactive and enables companies to change online prices right away. "This fundamental change has led the way into the future with the advent of e-commerce and electronic business," Eveleth states in the article.
As for e-commerce, Eveleth points out how it has streamlined the acqui-sition process. "If you can set up pric-ing and terms and conditions with a supplier and have that supplier pro-vide his or her catalog electronically, then you can drive the point of pur-chase down to the user," she states. The result? A procurement profes-sional who can focus instead on build-ing strategic relationships.
The speed and efficiency of e-busi-ness also has spawned such new tools as digital malls and virtual stores, according to Eveleth. She suggests that advantages such as the opportunity to sell and buy globally, 24-hour-a-day service, and enhanced customer convenience “are truly changing the way purchasers and suppliers do business.”
One of the earliest manifestations of e-commerce was electronic data inter-change (EDI), the computer-to-computer exchange of business data in a stan-dardized format. In her article "e-com-merce Explodes," published in April 1996 in Purchasing Today, freelance writer Cherish Karoway suggests that
Though EDI will probably not disappear, many purchasers believe it, along with e-mail and other forms of e-commerce, will eventually fall under the Internet umbrel-la. In fact, large corporations that cur-rently use EDI to transmit purchase orders, file invoices, and pay bills stand to reap the greatest rewards. While EDI transactions over private or value-added networks (VANS) cost users an estimated $150 per hour, the same transactions over the Internet cost about $1 per hour. VANs currently provide organizations with the technical capability to transmit their data to other connected parties. In the future, many believe the Internet will serve this function.
In another Purchasing Today article, Mike Gordon, manager of e-commerce for contract manufacturer Avex Electronics, Inc., (Avex) in Alabama , said, "Since VANs charge per charac-ter sent, it's cost-prohibitive to trans-mit electronic drawings. On the Internet, transmission charges remain constant, regardless of size." Purchasing Today noted that Avex and its 80 trading partners currently use VAN EDI to exchange purchase orders (POs) and PO acknowledg-ments, PO changes and change acknowledgments, invoices, bills of material, and remittance advice. Gordon "expects the Internet to become Avex's primary communica-tion vehicle for e-commerce."
Avex was a pioneer in EDI on the Internet. It began piloting Internet EDI in 1994. It and California-based National Semiconductor currently exchange invoices acknowledgements over the Internet, and Avex conducts Internet experiments with two additional trading partners. In addition, the company participates in a CommerceNet pilot program to securely transmit requests for quote via the Internet from the original equipment manufacturer to the sub-contracted partner, component suppli-er, and distributor. CommerceNet, a consortium of high-technology com-panies also based in California , pro-motes business use of the Internet. "The infrastructure and security soft-ware are there and our trading part-ners are in agreement," Gordon says. "It's just a matter of time." Gordon indicated that Avex plans to move its entire EDI program, includ-ing payment transactions, to the Internet. The company's Internet EDI format features
• message encryption and user authentication;
• multipurpose Internet messaging extensions capability, which allows bundling of e-mail and data files;
• increased flexibility through translator independence (i.e., companies using different translator software are still compatible); and
• reduced transaction costs due to the Internet's flat-fee cost structure.
Unisys' purchasing division also would like to take the e-commerce concept one step further. Instead of simply conducting its own procure-ment activities online via its fledgling global procurement network (GPN), the Pennsylvania-based computer manufacturer would like to see the entire purchasing profession connect-ed via the Internet.
"The GPN is a micronetwork for Unisys' internal use," says Ed Coyle, former vice president of corporate procurement. "What is needed is a consortium-type macronetwork for all purchasers and their suppliers."
Coyle created Unisys' worldwide integrated GPN in 1994 to establish an electronic link among approxi-mately 400 Unisys purchasing person-nel in the United States and abroad, and to dramatically reduce or elimi-nate all departmental paperwork. Unisys purchasers dial up to the pri-vate network via the World Wide Web.
"We're trying to get synergy going, so maybe if we get other organizations involved, we can get the whole pro-curement world connected," says Coyle, adding that 20 or so companies already have expressed interest in accessing or developing similar sys-tems. "People have come in to see the GPN, and we've helped them to devel-op their own procurement application on the Internet. If we get other people invested in a macronetwork, we can expand the use of the Internet for common benefit."
Currently, the GPN provides internal network links to procurement policies and procedures, contract models, licensing documents, and tools and methodologies for conducting pricing agreements, as well as external net-work links to industry associations and publications. The GPN uses the Internet's public bandwidth (which is cheaper) to make both internal and external network links.
Finally. managers must support the use of e-commerce at the same time that they put limits on employees' Internet access.
A Final Caveat
The application of e-commerce tools in the procurement process has pro-found economic implications. While a business' long term economic viability is by no means established by its suc-cessful implementation of e-com-merce applications, e-commerce tools and programs do eliminate the mid-dleman and certain transaction and information costs? This will lower the costs of production, and implicitly, the costs of goods. The enormous cost sayings will be passed to the con-sumer through lower prices and sup-pliers will be forced to achieve the same cost savings within their value chain.
The widespread application of e-commerce in the private sector will generalize this trend, and should result in a sharp and long deflation. The survival of any business in such an environment may well depend of the fact that consumer prices will fall slower than business prices. Obviously, the e-procurement band-wagon a rolling. At this point, the only question for businesses should be is. "Should we jump on now or be mowed under by its wheels"