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ISM/Forrester Research Report on eBusiness
April 2003

CONTACTS:

Kristen Kioa Mariko Zapf
ISM Forrester Research, Inc.
+1 800/888-6276, extension 3015 +1 617/613-6025
kkioa@ism.ws press@forrester.com

Executive Summary

For the first quarter ending in March 2003, the number of organizations purchasing both direct and indirect materials expanded upon growth experienced in the prior quarter (Q4 2002). All segments increased their online indirect materials spending as a percentage of total spending. Online direct materials online spending grew on the whole, as a 1.9% drop in spending by larger purchasers was offset by a 2.4% increase in online spending by small-volume purchasers. The adoption of the Net for purchasing is marching onward. Nearly twice as many large-volume purchasers reported that the Net is critical in their overall purchasing plans (from 11.3% in Q4 2002 to 20.5% in Q1 2003).

Methodology

The ISM/Forrester Research Report on eBusiness measures the adoption of Internet-based procurement and tracks online activity for both manufacturing and non-manufacturing organizations.

The Report is based on data compiled from a survey sent to supply management executives in more than 600 manufacturing and non-manufacturing organizations belonging to the ISM Business Survey Committees. Membership on these committees is diversified by standard industrial classification (SIC), based on each organization's contribution to gross domestic product (GDP). All geographical areas are represented on the committees.

This Report is composed of the survey responses of 291 organizations. To understand the difference in onl ine behaviors of these organizations, responses were analyzed along three classifications: 1) the results of all organizations; 2) a comparison of manufacturing and non-manufacturing organizations; and 3) a comparison of companies that procure more than $100 million per year and those that procure less than $100 million per year.


  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year* Buy less than $100 million per year*
Number of respondents 291 156 135 119 164
Median annual purchases (millions) $75 $75 $75 $375 $17

*Eight respondents declined to provide overall purchasing and revenue data.

The adoption rate for new online activities is measured by the eBusiness Adoption Momentum (eBAM) index. The eBAM index ranges from +5.0 to -5.0 and evaluates the number of organizations engaged in online activity, as well as the increasing or decreasing pace of change in their usage. The index points to the following pace of adoption:

3.1 to 5.0 Extremely positive
1.6 to 3.0 Significantly positive
0.6 to 1.5 Moderately positive
-0.5 to 0.5 Negligible
-1.5 to -0.6 Moderately negative
-3.0 to -1.6 Significantly negative
-5.0 to -3.1 Extremely negative

Overall Internet Adoption
  • Internet adoption continued to grow for the fourth consecutive quarter. The number of buyers reporting that they have fully or mostly adopted the Internet for purchasing activities rose by 5% over last quarter, from 7.2% to 12.2%. Non-manufacturers and large purchasers led the way, with the gain in those mostly or fully adopted at 10.3% and 6.8%, respectively. The percentage of companies that have made at least some progress toward adoption of online purchasing grew 4.3% to 86.3%.

    How much progress have you made toward fully adopting the Internet in your purchasing activities?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Don't plan to use the Internet 5.6% 5.6% 5.5% 3.6% 7.2%
    None, but thinking about it 8.1% 11.2% 4.7% 2.7% 11.8%
    Some progress 64.1% 64.3% 63.8% 61.8% 65.8%
    About halfway adopted 10.0% 9.8% 10.2% 15.5% 5.9%
    Mostly adopted 10.0% 8.4% 11.8% 13.6% 7.2%
    Fully adopted 2.2% 0.7% 3.9% 2.7% 2.0%

  • Suppliers limit eBusiness adoption. When asked about issues they were encountering that affected eBusiness initiatives, respondents continued to mention slow progress of trading partners limits eBusiness adoption. Even when suppliers don't offer the full capabilities to complete an order online, respondents are still turning to the Internet to locate suppliers.

  • The Net is growing in importance in all segments. Looking ahead to the next 12 months, 84.1% of organizations said that the Internet would be important, a 1.8% increase over last quarter. Nearly twice as many large-volume purchasers described the Net as critical in Q1, a 9.2% increase to 20.5% (compared with 11.3% last quarter). The Net is becoming increasingly important for small-volume purchasers as well. 80.5% of small purchasers described the Net as important for purchasing, a 4.1% increase over last quarter. Also, 9.7% more small purchasers (32.7%) describe the Net as very important or critical compared with last quarter.

    How important is the use of the Internet in your overall purchasing plans for the next 12 months?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Not important 15.9% 18.7% 12.8% 11.1% 19.5%
    Somewhat important 43.5% 47.3% 39.1% 36.8% 47.8%
    Very important 28.6% 23.3% 34.6% 31.6% 26.4%
    Critical 12.0% 10.7% 13.5% 20.5% 6.3%

  • Purchasers are not as positive about cost savings compared with last quarter. The percentage of companies that reported an increase in their total cost of ownership grew 2.4% to 10.3% in Q1. 28.9% of purchasers reported a decrease, while most (60.8%) continued to report no change to their total cost of ownership from purchasing on the Internet.

    During the past three months, how have your online purchasing activities affected the total cost of ownership of your products or services?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Significant increase 1.5% 1.4% 1.6% 2.7% 0.6%
    Minor increase 8.8% 8.2% 9.5% 7.1% 10.3%
    No change 60.8% 63.9% 57.1% 50.0% 67.7%
    Decrease 23.4% 19.7% 27.8% 29.5% 19.4%
    Significant decrease 5.5% 6.8% 4.0% 10.7% 1.9%

  • Companies are changing their procurement processes more slowly. After a large jump last quarter in the percentage of companies that made significant or dramatic changes to their procurement processes, this quarter's percentage dropped slightly (0.5%) to 9.3%. The percent of small-volume purchasing organizations that made any changes increased 6.0% to 51.6%, with a 6.5% increase in the percentage of organizations making minor changes.

    How has the Internet changed your internal procurement procedures?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    No change 45% 48% 41.7% 40.5% 48.4%
    Minor change 45.7% 43.9% 47.7% 43.1% 47.1%
    Significant/dramatic change 9.3% 8.2% 10.6% 16.4% 4.4%

Online Buying Activities
  • Online purchasing of indirect materials continued to climb. 88.4% of respondents bought some indirect materials online in Q1 2003 -- a 3.1% increase over last quarter. Small-volume purchasers led this growth, with a 5.1% increase in the number of online indirect materials purchasers. These small-volume purchasers increased their online indirect materials spending by nearly 1% to 9.3%.

    Did you purchase indirect goods/services on the Internet via any means?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Bought some indirect materials on the Internet 88.4% 87.9% 89.1% 93.9% 84.0%
    Average amount of indirect materials purchased online 11% 9.5% 12.9% 13.8% 9.3%

  • Small-volume purchasers increased online direct materials purchases. More purchasers in all segments reported buying direct materials online last quarter -- 74.5% of respondents bought some direct materials online during the past three months, versus 70.3% in the previous quarter. Small-volume purchasers gained on large-volume purchasers -- the percentage of small companies purchasing online grew 10.6% to 70.5%, while the percentage of large companies using the Internet for direct purchases fell 6.2%. Small purchasers increased the percentage of their total spend online 2.4% to 9.1% of purchases. Large purchasers decreased their use 1.9%, from 13.4% in Q4 to 11.5% in Q1.

    Did you purchase direct goods/services on the Internet via any means?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Bought some direct materials on the Internet 74.5% 71.8% 77.6% 79.5% 70.5%
    Average amount of direct materials purchased online 10.0% 7.9% 12.4% 11.5% 9.1%

  • Online auction use decreased slightly in Q1. 26.4% of respondents indicated that they bought products or services through an online auction, a decrease of 0.8% from last quarter. Manufacturers reported the largest decrease in the use of online auctions (from 31.3% to 28.6%). Large-volume purchasers continued to use online auctions significantly more than smaller-volume purchasers (38.9% versus 17.2%). The overall eBAM index remained 0.3, the same as last quarter.

    Did you purchase goods/services through an Internet auction via any means?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Bought some materials through an online auction 26.4% 28.6% 24.0% 38.9% 17.2%
    eBAM index 0.3 0.3 0.2 0.5 0.1

  • Manufacturing and large purchasers increased their use of online marketplaces. Large purchasers continued to lead the way in the use of online marketplaces, growing 2.7% to 44.9%. Manufacturers had the largest jump in Q1-- up 5.4% to 33.6%. Use of online marketplaces by non-manufacturers dropped 4.6% to 31.7%

    Did you purchase goods/services via an online marketplace?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Bought some materials through an online marketplace 32.7% 33.6% 31.7% 44.9% 24.2%
    eBAM index 0.3 0.4 0.3 0.5 0.3

  • Companies scaled back their use of the Internet for RFPs in Q1 2003. 65.8% of companies used the Net for RFPs in Q1, a drop of 2.6% from Q4 2002. Despite this drop, 59.9% of companies are using the Net for RFPs as much or more than they were in the previous quarter. The overall eBAM index remained moderately positive at 0.6.

    Did you use the Internet as part of an RFP process?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Used the Internet as part of an RFP process 65.8% 64.8% 66.9% 68.5% 63.5%
    eBAM index 0.6 0.6 0.7 0.9 0.5

  • Use of procurement tools falls slightly. 40.1% of respondents used an enterprisewide procurement tool that incorporates the Internet in Q1, down from 42.6% in Q4 2002. Usage by manufacturing companies fell 5.3% to 36.2%. 4.9% fewer small-volume purchasers used enterprisewide procurement tools in Q1 (26.1% in Q1 versus 31% in Q4). The overall eBAM index for the use of enterprisewide procurement tools remained positive at 0.5, 0.1 above the 0.4 reported for Q4 2002.

    Did you purchase goods/services using an enterprisewide procurement tool that incorporates the Internet?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Used an enterprisewide procurement tool 40.1% 36.2% 44.4% 58.7% 26.1%
    eBAM index 0.5 0.4 0.5 0.8 0.3

Supplier Relationships
  • Companies continued to increase their online collaboration. 59.1% of companies used the Internet to collaborate with suppliers, a modest 0.9% increase over last quarter. Small-volume purchasers closed the gap on larger companies this quarter, increasing online collaboration 5.2% to 53.6%. Large purchasers decreased their online collaboration with suppliers by 5.4% to 64.2%. The overall eBAM index remains moderately positive at 0.9 -- a slight increase from last quarter's level of 0.8.

    Did you use the Internet to collaborate with suppliers?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Used the Internet to collaborate with suppliers 59.1% 58.7% 59.5% 64.2% 53.6%
    eBAM index 0.9 0.9 0.9 1.1 0.8

  • Purchasers' satisfaction with suppliers' online capabilities fell. The number of buying organizations reporting that their preferred suppliers' online capabilities were either very bad or poor rose 2.5% from last quarter (from 30.0% to 32.5%). Non-manufacturers reported a 3.9% increase in the percentage of companies rating suppliers' online capabilities as very bad or poor, although 1.0% more rated capabilities as very good or excellent compared with Q4 2002.

    How would you rate the online capabilities of your current preferred suppliers?

      All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
    Very good/excellent 13.8% 10.6% 17.6% 16.1% 12.0%
    Good 53.6% 52.8% 54.4% 52.7% 54.7%
    Very bad/poor 32.5% 36.6% 28.0% 31.3% 33.3%


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