Dragging Their Feet
If all of this is going to happen, however, it certainly hasn’t happened yet. Although the few that have made the investment—companies like Federal Express, Chevron, United Technologies, Microsoft, British Telecom, and Texas Instruments—are reaping significant returns, they tend to be the exception rather than the rule. These organizations tend to be culturally progressive industry leaders with strengths in high technology and leading-edge processes. When combined with enormous purchasing budgets, they have found the potential returns on investment from e-procurement to be too compelling to ignore.
Despite the persuasive statistics and the significant returns by the early industry leaders, most companies are at best only in the early planning stages of their e-procurement strategies. Part of the problem is simply that for most companies the procurement process is still seen as tactical rather than strategic—as a cost rather than a benefit—to the company. In fact, a recent survey by Deloitte indicated that despite the fact that some 90% of businesses interviewed claimed that e-procurement is “part of their ongoing business plan,” very few companies have any broad strategy for e-procurement that involves their supply chain, and incredibly, only 1% of respondents to a 1999 survey by W.W. Grainger said they used an Internet-based software platform to purchase office materials. Similar bad news from the suppliers’ side—PriceWaterhouseCoopers found that while almost every company interviewed recognized the importance of business-to-business transactions, more than 25% said that they had no functionality beyond basic online “brochureware.”[15]
Unfortunately, by all indications, an e-procurement strategy for most U.S. companies is still limited to occasional and uncoordinated shopping online for office supplies. Few have associated e-procurement with the purchase of mission-critical, direct manufacturing materials, and despite investing heavily in ERP and advanced planning and scheduling platforms, most manufacturing and distribution companies still admit that their processes for managing procurement are “ill defined or not defined at all.” In fact, despite years of focus on strategic sourcing and VMI (Vendor-Managed Inventory), according to W.W. Grainger, only 14% of large companies in 1999 had an integrated supply chain relationship with their vendors.[16] As might be expected, those relationships are skewed almost entirely toward their largest suppliers. The average Fortune 500 company may purchase from up to 10,000 suppliers, but are seldom connected electronically to more than a handful—25 to 50—of their largest tier-one vendors. Only one half of one percent of suppliers to the Fortune 500 companies are currently connected to e-procurement—mostly EDI (Electronic Data Interchange)—systems.[17]
Europe, for the most part, is even less well-advanced in their preparations. They began more slowly, and Web-based buying from suppliers is still in its infancy. Forrester Research claimed that in 1999, they struggled to find even 20 firms beyond an e-procurement pilot phase that could qualify as “sophisticated multinationals,”—those that had well-developed e-procurement strategies for both indirect and direct goods. They classified a further 600 companies as “aware,” meaning that they had begun to make the necessary investments but were still struggling to implement solutions and get a return on investment.[18] A recent study by Net Profit in Europe found that although there was a very high level of interest in e-procurement among European companies—58% were considering an Internet-based purchasing system and 75% of respondents thought that the Internet would be “very” or “extremely” important for procurement in three years’ time—only 14% of companies had actually installed systems.[19]
When it comes to integrating e-procurement into direct supply chain materials, the U.K. fared poorly. In a survey that covered both small and large-sized U.K. companies, The Chartered Institute of Purchasing and Supply found that only 23% had a comprehensive supply chain strategy, and only 17% reported viewing supply chain procurement as important enough to merit board-level representation. Only 5% of current procurement spending is completed online.[20]
There are many explanations given by company executives for this hesitancy to take the plunge into e-procurement. One obvious reason is that despite today’s general atmosphere of “e-panic” in the media, a huge number of U.S. small and mid-sized companies—around 35%—still have no access to online services. For others, particularly for small and medium-sized manufacturing and distribution companies, the entire concept of e-procurement via the Internet is a fairly recent phenomenon, and they simply have had little time to come to grips with its implications.
More often, companies complain that although they have access to the Internet, there remains such a complete separation between the Internet and any of their company’s legacy systems, that even when they select products from online catalogs, they are forced to work through the same old manual, paper-based requisition and purchase order process. A recent survey by W.W. Grainger revealed that more than two-thirds of respondents said they used the Internet to get product information, even though they couldn’t actually order online.[21]
Other companies explain that they are not slow in realizing the potential benefits of e-procurement for both indirect and direct materials, but are simply too busy and too unfamiliar with all the options to begin the potentially enormous effort required to select, buy, and integrate systems. This is particularly frustrating for procurement officers in manufacturing and distribution companies who feel comfortable moving more rapidly into online procurement of indirect materials—maintenance and repair items, office supplies, travel services—but are held back by corporate leaders who cannot yet decide whether or not their indirect procurement strategy should be part of, or separate from, their wider supply chain procurement and replenishment strategy. And many company leaders are still justifiably concerned about the daunting prospect of integrating multiple systems—demand planning, ERP materials management, payment systems, and so on—particularly in the context of ever-changing major software platforms and e-procurement offerings.
Interestingly, probably the most often-cited reason for not moving immediately into e-procurement has been concerns over security and trust. For most companies, some of their most important assets are their buying plans, their pricing models, and their new product designs. Many executives are concerned that once information goes outside the company firewall, these key assets may be exposed to competitive eyes. In the PriceWaterhouseCoopers survey of senior business leaders in the U.K., Germany, France, and the Netherlands, these types of security issues were cited as the most important factor holding back e-procurement progress. This was particularly true in the case of online procurement of mission-critical direct materials, where issues concerning third-party security and the delivery reliability of unknown vendors made procurement officers hesitant to give up their (admittedly cumbersome) paper-based process conducted with long-time, trusted suppliers.[22]
For these and other reasons, most companies are still in the very early phases of developing and implementing their e-procurement strategy, still trying to understand their many options, weighing up the pros and cons of plunging into the fray, or holding back until more is known about this fast-changing and unpredictable area of e-business. Based on any number of recent studies, it is safe to assume that the majority of organizations—buyers and sellers—will not have a fully implemented and integrated e-procurement process in place for at least the next three years.
This hesitancy, however, does not mean that the e-procurement revolution is not going to happen. Software providers are quickly rising to the challenge, and in many ways, it is software that drives this marketplace. According to Killen & Associates, the combined software, electronic catalog services, procurement payment systems, and implementation services jumped from a mere $300 million in 1997 to nearly $725 million in 2000.[23]
Very real competitive forces are driving companies to extend and integrate their supply chain and to reduce their purchasing costs—both for indirect and for direct inventories. These forces include the enormity of potential savings, the rapid move toward agreement on standards, and the push and pull from powerful industry leaders. And, interestingly, from an economic point of view, the value to each individual participant increases as more suppliers and buyers participate in the e-procurement marketplace.