The Unique Nature of B2B E-Procurement

So, what is it about the nature of B2B e-commerce that gives rise to this magnitude of change and savings? The answer seems to be that, unlike online e-commerce sales that may or may not expand revenues, B2B e-commerce will fundamentally restructure the way in which an organization purchases goods, resulting in significant process efficiencies and permanently lower costs. Organizations are finding that the more they can integrate e-procurement processes and systems directly into their supply chain, the greater the effect in terms of cost savings and process improvement. Those improvements come about in several broad areas.

First, online procurement significantly reduces the day-to-day cost of purchasing. Electronic procurement of goods is not only far less expensive but far more efficient than the current manual, labor-intensive phone and fax-based purchasing process. Research indicates that 40% of the total cost of purchasing materials comes from transaction costs associated with processing and managing the order.^[10] Not only is it faster and cheaper, but online procurement promises to reduce invoicing and ordering errors, on average, by up to 2%. This can all add up to considerable savings when these total transaction costs are taken into account. For those (at this point, usually large and albeit sophisticated companies) that have successfully adopted e-procurement, it is not unusual to see process cost reductions of up to 90%, with additional reductions in price (through contract buying and via e-exchanges) of up to 11% for the direct costs of all goods and services that they buy.^[11]

3M provides a good example. Traditionally, the company has created hundreds of thousands of purchase orders for everyday office materials at an average cost of some $120 each. These orders accounted for some 70% of the volume of the company’s total purchasing transactions (and, therefore, effort), and yet amounted to only 2% of the total purchasing dollars spent. Each requisition took from one to three days to process, and nearly a third of all orders required rework. Even then, an estimated 45% of purchases were made in violation of prearranged contracts with the vendors.

Over the past two years, 3M has implemented an e-procurement solution that has greatly reduced these transaction costs, almost entirely eliminating rework and errors, and has cut the internal order cycle time, including approval, to less than an hour. They estimate that the improvements will drop the average cost per purchase from $120 to $40.^[12] It is a good, but not unusual, example of the magnitude of savings to be made.

A second key area of potentially revolutionary improvement can be seen in the rapid development of online electronic auctions and e-marketplaces. These provide an electronic forum in which a large numbers of buyers and sellers can meet and exchange information and bids online, greatly expanding sales opportunities for sellers, and often greatly reducing the purchase price for buyers of bulk or difficult-to-find items. There are additional benefits for small and middle-size firms—which normally lack buying power by themselves—in that the marketplace intermediaries essentially negotiate discounts on their collective behalf, creating economies of scale normally reserved for large and powerful firms.

These electronic marketplaces have developed explosively since 1999, and there are now more than 1,000 (serving as an electronic exchange for everything from wine to bananas, steel to chemicals, automobiles to aerospace) in the U.S. and more than 250 in Europe. In fact, research carried out by Deloitte Consulting in July 2000 identified 1,447 separate electronic marketplaces that had been either launched or announced, and at least in the short term, these numbers will continue to grow. If they continue at their present growth rate, Net Market Makers estimates that there will be as many as 20,000 by 2003.

Although most analysts agree that there will be a severe “shake out” of exchanges through mergers, acquisitions, and failures in the next several months (Deloitte predicts no more than 400 e-marketplaces will still be trading in four years’ time), the development of these electronic markets promises to revolutionize the way companies purchase materials worldwide.^[13]

One of the most important and economically curious developments in this area, has been the collaboration of large and powerful industry leaders working together to sponsor vertical industry e-marketplaces and trading communities. Known as market creators, these collaborative exchanges are backed by levels of industry knowledge and financial clout that promise to drive their supplier networks quickly toward adopting e-procurement policies. One highly publicized example is Covisint, a joint electronic exchange being sponsored by GM, Ford, Daimler Chrysler, and Renault-Nissan, with a turnover of $250 billion and 60,000 suppliers. Major tier-one vendors, such as Dana Corporation, one of the world’s largest suppliers of parts for automobile manufacturers, have already agreed to participate, hoping that the Covisint exchange will provide them with a primary link directly into the supply chain of major auto manufacturers. Covisint estimates that once all of their suppliers are connected online, they can achieve cost reductions of up to 14% on the production of the average car.

Again, the advantages accrue from a combination of greater efficiencies and lower negotiated prices. And the important thing to note—at least from an economic point of view—is that while price reductions simply shift money between buyers and sellers, greater efficiencies create a permanent gain in productivity, and therefore profit, for both parties and the for the economy as a whole.

Finally, and possibly most importantly, online procurement—and eventually totally electronic materials management—can completely revolutionize a manufacturing or distribution firm’s supply chain, making a seamless flow of order fulfillment information from customer to supplier (see Figure 1.3). This was something that was inconceivable just a few years ago when Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and supply chain systems remained physically and logically separated and piecemeal. It was only with the shift from client-server to Web-based technologies that a true consolidation of data—a single, extended enterprise-system approach—became possible.

This can greatly improve efficiency in several obvious ways. First, better information concerning customer demand means that firms can move much closer to the ideal of Just-In-Time (JIT) manufacturing and greatly reduce the amount of excessive inventories and expensive safety stock. Electronic replenishment also eliminates the multiple, inefficient layers within a firm’s supply chain. Not only does a fully-integrated online supply chain system allow firms to purchase goods from their vendors easily and accurately, on pre-agreed terms, but it provides them with opportunities to communicate changes in design and manufacturing requirements quickly along the full length of the supply chain, through multiple levels of suppliers.

All of this means that for the first time in history, a manufacturing firm can truly incorporate JIT manufacturing techniques, eliminating safety stock, excess carrying costs, and production of unwanted goods. Bringing transparency and continuity to that extended supply chain means that firms can edge much closer to achieving what Dell’s CFO Tom Meredith suggested nearly three years ago—that “when the customer clicks the mouse, our suppliers will feel the ping.”^[14]

This level of collaborative fulfillment—the seamless integration of software and process that allows for complete visibility of the realtime order fulfillment process to all partners—is of course a distant ideal for most manufacturing firms. And yet many progressive companies are even now moving closer to an “available to promise” electronic process that will eventually mean they achieve the nirvana of manufacturing gurus—the “sell one/make one” supply chain.