The Military

Defense procurement is another major area of government spending that has enormous potential for cost savings and improved efficiencies. Many will remember the colossal row that erupted during the mid-1980s concerning inflated prices for the MRO equivalents of military materials—hundreds of dollars paid for a toilet seat or a coffee pot—and although in fact few of these accusations turned out to be accurate (most were eventually explained away as anomalies in the U.S. Department of Defense’s accounting methodology), the U.S. military, particularly, has since been seen as the epitome of bad procurement practice.

Despite this unenviable reputation—and the end of the Cold War and the Peace Dividend, which has meant that procurement budgets were slashed dramatically since their heyday in the 1980s—the U.S. and the EU nations, particularly, still have massive defense procurement needs. The good news is that cooperation between the military and Internet-minded private defense contractors is promising to revolutionize the Defense Department’s approach to procurement.

This move toward e-procurement is taking several paths. First, major suppliers to the military are moving rapidly toward streamlining their own purchasing through dedicated one-to-many enterprise e-procurement systems. General Electric provides a good example of the e-procurement reforms that are beginning to develop among the military’s supplier community. GE Aircraft Engines (GE’s aerospace division) is the world’s largest manufacturer of aircraft engines. As part of GE’s general pledge to quickly move all of its operating units toward e-procurement, Aircraft Engines has begun an online initiative that will provide portal access to over 400 suppliers of spare parts and maintenance materials. The service will include not only online catalogs, but online tendering, order fulfillment, tracking, payment, and access to technical information.

Similarly, Lockheed Martin’s missile division is using its SAP system to provide enterprise ORM and MRO desktop purchasing to employees. Employees are now able to browse supplier catalogs electronically and to purchase and track delivery of indirect materials online. Lower production costs due to the efficiencies gained through these types of e-procurement initiatives by contractors promise to be passed on, at least in part, to the military.

A second area of intense e-procurement activity is being sponsored by the U.S. Department of Defense, which began the Joint Electric Commerce Program Office in 1988, using mostly EDI technologies, and has gone a long way toward developing paperless procurement business practices over the past decade. In 1999, the Defense Department announced a strategy that will encourage electronic procurement throughout the military, and although it still requires greater flexibility and functionality in terms of online payment and order fulfillment, it already claims to complete nearly 80% of procurement electronically.

But the area of the most frenetic activity in terms of defense-related online procurement comes with the recent and rapid development of industry-wide e-markets that provide an online trading community that is independent of any one company or large contractor. As with other e-markets, these trading communities have been sponsored, for the most part, by consortiums of interested and interrelated organizations.

One of the first major initiatives in this area was Exostar, an e-market founded by Boeing, Lockheed Martin, Raytheon, and BAE Systems that focuses on indirect materials purchasing for these large contractors. The amount of materials procured through this online exchange is expected to be over $70 billion, which would account for just less than one-fifth of all defense sector procurement spending. As with most vertical exchanges, several other competing trading portals have arisen to challenge Exostar. These include MyAircraft (founded by Honeywell and United Technologies), AviationX, Tradeair, and Aerospan.

There are many more examples, and each week brings new announcements—by state and federal departments, universities, and national health systems—of intentions to participate in auctions or to sponsor or participate in e-markets—all anxious to take advantage of online procurement opportunities. The sheer magnitude of total government spending—in the U.S. and in the rest of the world—provides a market opportunity so enticing that software vendors, private e-markets, and auction sites, are already scrambling to incorporate the security, contract, and tendering functionality that is required for government bidding. It is not a market that any vendor would choose to ignore, and once ignited, may prove to be a powerful incentive to private companies, to the e-procurement industry at large, and to the global economy as a whole.