GETTING ON
THE E-PROCUREMENT
BANDWAGON
© American Certification
Institute, 2004
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 ?003. 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, equip-ment, 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 transac-tions 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 differ-ences
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 technol-ogy, 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?comput-er 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"