Buyers prepare for brave new world of e-commerce
By Mark Vigoroso -- Purchasing, 4/22/1999
Count on this: The majority of purchasing professionals will be conducting transactions over the Internet within a year or two.That said, purchasing pros who are buying online today are still a minority, but their numbers are growing very quickly. Purchasing's most recent reader survey reveals that 25% of purchasing pros currently are conducting transactions over the Internet. But within the next year, a total of 59% of polled purchasers will be buying online. By 2002, 90% of survey respondents will be buying over the Internet, according to the results of our survey.
E-commerce is not yet the predominant reason that purchasing pros use the Net. Today, the most common use is simply to gather supplier and product information. But buyers increasingly are starting to realize how much they stand to gain by using the Net for at least specific portions of their transaction processing. Surveyed buyers report the following benefits of online purchasing:
* Sourcing time saved.
* New sources of supply.
* Ability to easily comparison shop.
* Freeing buyers to work on tasks that have more long-term strategic value to the organization.
* Lower overall operating costs.
* Lower prices paid.
* Optimized supply base.
* More control over spending and inventory.
* More efficient use of personnel.
What's holding it back?
With all the interest in e-commerce among the purchasing community, one would expect that suppliers would be rushing to establish secure and efficient Web sites that are commerce-capable. Security issues have led buyers' concerns in past surveys, but now many purchasing pros who are not using e-commerce say they're being detained more by steep learning curves and slow technology migration by suppliers, rather than by anti-Internet strategies from purchasing or corporate management.
"Internet purchases are defining the direction of purchasing," believes Richard Dethloff, director of purchasing at Arandell Corporation in Wisconsin. "Our problem is that not enough suppliers currently are capable of conducting transactions over the Internet."
Indeed, of those buyers who are not buying online today, 11% plan to in six months and 23% within one year. Another 31% plan to within two to three years, and 2% in three to five years. Only 8% of off-line buyers say they will never conduct commerce on the Web.
Expressing this common sentiment of confidence in the eventual value of electronic commerce, Jim Calvert, purchasing manager at Ohio-based Wiseco Piston, Inc., says, "Purchasing will become very interactive, and online buying will eventually be the fastest and cheapest way to conduct business--more so than EDI."
Suppliers who cannot or will not develop Internet presences stand to lose business from these forward-looking buyers. "New suppliers that have Web sites are more likely to gain our business than those who don't," says Mark Correira, purchasing agent at Whitney Design in Missouri.
Similarly, Myra Saules, purchasing manager at Florida-based Stainless Inc., tasks suppliers with staying current. "As the technological wave moves forward, we hope that more suppliers will be online, accepting purchases and providing shipping information. This will free buyers' time and improve the accuracy of information supplied to our buyers."
What's to gain?
Lower material prices and overall operating costs certainly are major benefits buyers reportedly enjoy through online buying, but they value the "soft-dollar" savings just as much, if not more. In fact, sourcing time saved and new sources of supply are the two most commonly cited benefits of purchasing on the Net, with 76% and 63% of polled buyers' support, respectively.
"Online orders are processed quickly and efficiently," says Joel Barry, corporate purchasing manager at HNC Software in San Diego. "And accuracy is maintained by automatic order processing that eliminates room for human error."
Other benefits include the ability to comparison shop (56%), freeing buyers to work on value-added tasks (51%), lower overall operating costs (47%), and lower prices paid (27%).
Many purchasing pros caution, however, that buyers must always keep in mind that the Internet is a tool that can be used to improve the overall value of the supply chain, and is not a strategy unto itself.
Not all vanilla
Electronic commerce is conducted through a growing number of business and technology models, so buyers can choose from several options, depending on factors like company size, number of suppliers, and products or services desired. At this early stage, most buyers are opting for solutions with low investment and risk requirements.
It comes as no surprise then that "sell-side" supplier Web sites (see sidebar on page S7) are what 64% of polled buyers are using or plan to use for their e-commerce systems. Simply a commerce-enabled Web site maintained by a supplier or distributor, sell-side solutions require no investment from the buying organization. Sell-side sites popular among buyers include Thomas Register (www.thomasregister. com), Digikey (www.digikey.com), Grainger (www. grainger.com), Newark Electronics (www. newark.com), McMaster-Carr (www.mcmaster.com), and Global Computer Supplies (www.globalcomputer.com).
Second to sell-side models is Electronic Data Interchange (EDI), as 56% of buyers attest to using it as an electronic commerce tool. EDI predates the Internet, chronologically and technologically, and it gained a level of acceptance before the Internet was even taken seriously. However, it will likely start to show its age in coming years.
The problem with EDI is that it is conducted over expensive proprietary networks, whereas the Internet is a public network requiring only nominal access fees. For the sake of economy and interoperability, more and more buying organizations will likely opt for private extranets rather than proprietary EDI networks. In other words, current users won't rip out their EDI systems, but there is likely to be little investment in new systems.
Another sell-side model that's growing in popularity is the aggregated supply site, or electronic marketplace, where a third-party firm brings the products from multiple suppliers in a vertical industry together into one site. Indeed, 31% of buyers use or plan to use these aggregated sites. Representing a gamut of industries, today's electronic marketplaces include The Plastics Network (www.plasticsnet.com), E-Chemicals (www.e-chemicals.com), NetBuy (www.netbuy.com), Chemdex.com (www. chemdex.com), and MetalSite (www.metalsite.com).
Some larger companies are making the sizable investment in "buy-side" Internet procurement solutions that reside within the company firewall and allow requisitioners to source from pre-approved suppliers at pre-negotiated prices. These systems enable buying organizations to track and control spending patterns, reduce unauthorized and costly "maverick" buying, and shorten cycle times. However, due to high price tags and the requisite lengthy supplier rosters, only larger firms with strong financial resources are choosing this route. Indeed, just 25% of polled buyers use or plan to use buy-side systems.
Regardless of which e-commerce model buyers use, some parts and materials are better suited for online purchase than others. These types of purchases typically are high-volume, low-unit-cost buys where the cost of processing transactions is disproportionate to the actual cost of the item. Indeed, in some cases transaction costs actually exceed the cost of the item.
High-volume, low-dollar goods like MRO, janitorial supplies, office products, and laboratory supplies are the "low-hanging fruit" for which many companies spend haphazardly and where improved efficiency can greatly impact the bottom line. Not surprisingly, 56% of buyers say they buy or plan to buy MRO supplies online, more than any other single type of product. In addition, 36% of survey respondents buy or plan to buy software, 34% indicate computers and peripherals, 31% say electronic components and assemblies, 17% say chemicals, and 15% buy or plan to buy metals online.
Generally, standard products that don't require a lot of customization or negotiation are most appropriate for online buying. Broad-scale e-commerce may not make sense for buyers who source obscure or highly specialized items. For instance, one purchasing manager from Auburn Hills, Michigan, says, "Most products we purchase are not 'off-the-shelf.' Negotiation, design, building, and testing are still very necessary."
No about-face...yet
While most buyers will indeed be conducting business online before too long, very few perceive e-commerce as a complete reengineering of transaction processes. Most see it as another buying tool to compliment phones and faxes, that will effectively enhance, but not revolutionize, the purchasing function. Much of this sentiment comes from buyers who work with smaller, less technologically advanced suppliers, and are less enthusiastic about the impact of the Internet.
"E-commerce will never completely replace other buying techniques," says Jim Hasting, purchasing manager at Monarch SeaKing in Houston, Texas. "Some sellers will not convert."
"Multiple avenues of communication need to exist because of varying circumstances and needs," adds one director of purchasing.
Many buyers value highly the personal contact with suppliers that has been so integral to their job, and are wary of its disappearance. But even this camp acknowledges that the Internet will bring some value to purchasing. "Purchasing and selling are personal situations, and the Net removes this factor," says one Los Angeles purchasing manager. "My best deals are made when I can speak with an actual human. The Net is only good for pre-arranged situations."
Similarly, Russ Tippett, purchasing manager at Seaga Manufacturing, Inc. in Illinois says, "Successful purchasing agents have the gift of interpersonal communication, and they will lose this edge through the Internet. But the pluses of Internet purchasing outweigh any drawbacks."
Other buyers imply that while Internet purchasing will not immediately displace traditional transaction models, its relative prevalence will become more measurable in a few years. For instance, Purchasing Manager Chris Jenkins of the Laminating Company of America says, "Online and off-line commerce will co-exist for the next three to five years."
And an Alabama purchasing manager says, "For the next two to three years, the Internet will only be used to enhance or initiate processes."
Persistent obstacles
In the meantime, what is behind buyers' reluctance to pursue online purchasing? Security and privacy concerns continue to weigh most heavily on their minds. "Security is still a concern," says Joel Barry of HNC Software. "I often have to use a company credit card, and I'm not convinced that secure servers are fail-safe."
In the same vein, Jim Calvert of Wiseco Piston, Inc. says, "The supplier must ensure a secure, private transaction. If not, there will be no chance of negotiating a unique 'best price,' different from others' prices."
Buyers also cite computer and server malfunctions, slow download time, extensive training time, difficulty in finding qualified sources, and time wasted on non-work-related Web sites as drawbacks to Internet purchasing.
Electronic commerce business models
There is more than one way to conduct business over the Net. Here's a brief rundown of major e-commerce models, along with advantages and limitations of each:
Sell-side system: A commerce-enabled Web site administered by the selling organization. Examples: Digikey (www.digikey.com), Grainger (www.grainger.com), Newark Electronics (www.newark.com), McMaster-Carr (www.mcmaster.com), Global Computer Supplies (www.globalcomputer.com).
Pros: Usually free to buyers.
Cons: Difficult to locate on the Web.
No way for buyers to track or control spending.
Electronic marketplace: An aggregate of electronic catalogs from suppliers in a vertical market, administered by a third-party firm. Examples: E-Chemicals (www.e-chemicals.com), The Plastics Network (www.plasticsnet.com).
Pros: One-stop sourcing solution for buyers.
Cons: Still no way for buyers to track or control spending patterns.
Buy-side system: A Net-based procurement application hosted and administered by the buying organization. Requisitioners source from preferred suppliers on their company intranet, within the limits of automatically enforced buying rules set by purchasing management.
Pros: Buying organization can reduce off-catalog buying and build leverage with fewer suppliers.
Reduced cycle times.
System integrates with back-office systems, automating administrative tasks and freeing buyers to add value.
Cons: Very expensive ($250,000 to $5 million) to implement.
Costly and cumbersome catalog management.
Can "wash out" distinctions of supplier-buyer relationships.
Online trading community: (also known as transactive content intermediaries) An online marketplace maintained by a third-party technology vendor, where multiple buyers and multiple suppliers in a vertical market can conduct business.
Pros: Does not require buyers to invest in costly buy-side procurement software.
Provides e-commerce opportunities for smaller firms.
Eases catalog maintenance for suppliers, with a 'publish-once' model.
Preserves quality of buyer-supplier relationships
Cons: Not many suppliers currently offer service.
Internet auction: Mostly a sell-side application, where companies can move excess and obsolete (E&O) inventory. Multiple buyers place bids for goods, normally against upward price pressure. There are commodity auctions (oil, natural gas, electricity), independent auctions (first-run and surplus manufacturing goods), and private auctions (geared toward resellers and dealers, rather than end users).
Pros: Buyers may realize marginal savings in transaction costs.
Cons: Benefits accrue mostly to sellers, who can make revenue on inventory normally written off as zero at the bottom line.
Like any sell-side model, buyers cannot track and control spending patterns.
Note: Buy-side auctions are much less common than sell-side. Buy-side auctions provide buyers with a new way of handling RFQ responses, and allow multiple suppliers to bid on new business, with downward price pressure. They are administered by the buying organization.
Glossary for buyers
Here's a glossary of commonly used Internet and e-commerce terms that can help purchasing pros wade their way through the world of e-commerce.
Digital cash: Issued by the bank, these electronic dollars or 'e-cash' are numerical reference numbers, similar to serial numbers on real currency, that let buyers pay for a product or service electronically.
E-mail: Messages sent in digital form via the Internet or a private network.
Electronic commerce: The application of e-mail, EDI, electronic funds transfer, extranets, and other information-sharing technologies to conduct business online.
Electronic data interchange (EDI): Transferring business information from one computer application to another in a standard electronic format. EDI messages usually travel over a private, value-added network (VAN) but could go over the Net. Software at either end of the transmission translates the data into a format useful to users.
Encryption: Using computer hardware, software, or both to transform data from its original form into a cipher form for the purpose of security or privacy.
Extranet: A private network that uses Internet-based technology to link companies with suppliers, customers, and other partners.
Firewall: Software or hardware (or both) designed to protect a private network from unauthorized access.
Home page: The main page or directory of a Web site.
HTML (hypertext markup language): A computer language used to write and encode documents and files on the World Wide Web.
Intranet: Based on Internet technologies, an internal network that operates much like the World Wide Web, accessible only to employees and other authorized users and protected by a firewall.
Internet: A global network connecting other networks and computers.
Open Buying on the Internet (OBI): An attempt to establish industry-accepted standards and practices for message transport and business-to-business purchasing over the Net. The OBI standard is primarily intended for MRO supplies procurement.
SET (secure electronic transmission): An industry standard to enable secure credit card transactions on the Internet.
SSL (secure socket layer): A protected data "tunnel" on the Internet for the secure transmission of funds and other private documents.
URL (uniform resource locator): The address of documents and other resources on the World Wide Web.
Web browser: Software applications that make it easy to access and navigate the World Wide Web.
Web page: A document on the World Wide Web.
Web server: A computer that hosts Web sites and pages.
Web site: A location on the World Wide Web containing subject- or company-specific documents and files.
World Wide Web: A system of Internet servers that support documents formatted in html, which allows electronic links to other documents and files.
XML (Extensible Markup Language): Sophisticated computer language that structures and standardizes data elements, allowing for the open and efficient transfer of business documents over the Internet.
SOURCES: PURCHASING, SMALL BUSINESS ASSOCIATION, INDUSTRY SOURCES
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