John F. Troller
John F. Troller, Vice President, PurchasingCenter.com, Inc., Burlington, MA 01803, 781.993.2820, www.purchasingcenter.com, firstname.lastname@example.org
Abstract. Rapid advancements in Internet-based electronic commerce are causing positive effects for supply chain management professionals. The purchase of MRO/indirect materials, utilizing electronic commerce applications and tools, offers an excellent and often untapped opportunity to maximize value by streamlining the MRO transaction process, enhancing communication, reducing acquisition and material costs, improving purchasing performance, and satisfying internal customers.
Companies, including manufacturing and facilities management organizations, are under intense pressure to reduce operating costs and expenses. Maintenance, repair, and operating (MRO) materials are low-dollar and high volume items that account for a substantial portion of operating budgets. The cost of these items, including the necessary high levels of internal service required, a large and diverse supply base, and few opportunities for pricing leverage creates an opportunity for a significant process improvement. Many organizations have begun to look at MRO, or non-production materials, as a significant opportunity to lower overall operational costs.
Manufacturing companies go to great lengths to analyze manufacturing processes and materials to the smallest degree, yet only give a cursory view to MRO and indirect, or non-production goods and services. There is a tremendous opportunity to save a considerable amount of money by paying closer attention to that spend. E-commerce has quickly become the tool of choice to enhance this opportunity, with the Internet leading the charge. This paper will focus on the various types of Internet based e-commerce solutions that are available to the MRO buyer on the Internet, and provide a glimpse into the future of business-to-business e-commerce.
E-commerce and the MRO Buy. The application of e-commerce tools available to manage the purchase of MRO materials is exploding, and MRO buyers are beginning to review a bevy of applications to try and manage the commodity. The current MRO industry represents a market that is approaching $200 billion. This market has proven to be highly fragmented, with the top 50 U.S. based industrial distributors having less than 12% combined market share. The process of identifying and purchasing MRO supplies is inefficient, and often times considered an afterthought in many organizations.
MRO buyers, the purchasing community in general, and many organizations are in transition. Companies are looking at electronic commerce, and especially the Internet, as a way to increase efficiency. Business-to business transactions are doubling each year. In 1998, business to business revenue was 5 times that of business to consumer revenue. Quietly, and with little fanfare, business-to-business transactions are dominating the Internet. Internet based business-to-business transactions are forecasted to approach $1.3 trillion dollars within the next two years, according to Forrester Research.
Many MRO buyers are rapidly coming on-line, with reports showing that 60% have Internet access now, as compared to 10% a year ago. Utilizing the Internet for MRO items can be a frustrating experience for many MRO buyers and requisitioners, and the plethora of MRO software applications can be confusing to MRO buyers as well. The market is in transition and turmoil, but ripe for opportunity. A fragmented market, coupled with the uncertainties of e-commerce applications, organizational demand of lower costs and higher throughput, and the realization that 50% of MRO purchases are unplanned, has created confusion. It is up to the buying organization to sort out organizational priorities and select a method, or combination of methods, to improve overall commodity performance. It is evident that e-commerce will be part of that mix in some manner.
Electronic commerce can be simply defined as managing and conducting business within in a digital information environment, or utilizing electronic business practices. It includes the Internet, e-mail, computer-aided design, drafting, and engineering, file transfer protocol (FTP), and even the use of the telephone and fax machine! E-commerce is an enabler, and it is all around us.
MRO and the Internet. MRO purchasing and the Internet are a natural fit. Communication within the supply web is a critical aspect of supply chain management, and good purchasing and supply managers are strategic communicators with suppliers, buyers, corporate management, and customers. The Internet provides an inexpensive communications network with secure commerce capabilities. E-commerce is far reaching, but for the purposes of this discussion, let's focus on the Internet as the primary vehicle to assist MRO buyers navigate the on-line landscape.
Utilization of the Internet can help MRO buyers, albeit all buyers, to do the following tasks:
Buyers have three critical needs where the Internet may help. First, there is a significant need to identify sources of supply for MRO products and services and to conduct on-line supplier research and analysis. Buyers also may need access to technology trends, news, market reviews, supplier Web sites and other tools to help them do their jobs more efficiently and effectively.
The second major need focuses on communication and sharing of information within the entire supply chain, including suppliers, end-users, and requisitioners, company management, and customers. This communication can be enhanced by the use of e-mail, company intranets (a private network accessed only from within a company), and extranets (a private network accessed only by designated trading partners). The Internet provides for rapid and enhanced communication.
The third main buyer need is for an enabled e-commerce solution that is a correct fit for their organization. Companies come in all sizes, at all levels of sophistication, and with varying needs and requirements. The application that may be a solid fit for one company may fail with another. It is extremely important to understand the organization's business goals and objectives, and perform a thorough analysis and review of alternatives. Form a cross-functional team, determine objectives, research alternatives, interview suppliers, and benchmark other organizations. Be flexible and opportunistic.
Examples of e-commerce applications include sell-side, buy-side, electronic marketplaces, on-line trading communities, and auctions. These e-commerce models provide unique advantages and disadvantages to the organization. No service provides an "all things to all people" solution. It is paramount to objectively understand the needs of the business and not be victimized by a solution that may not work. The various e-commerce models are discussed below.
Sell-side systems. Sell-side systems are commerce enabled supplier or distributor web sites that are administered by the selling organization. Current research indicates that over 60% of buyers plan to use this model, and many buyers may be comfortable utilizing a supplier's web site due to positive experiences in their personal business to consumer transactions. Advantages to sell-side applications include low cost to access the Web site, little risk in commitment to the supplier, and the maintenance of the site is the responsibility of the supplier.
There are drawbacks, though. The seller controls access to the site, and product choices are often strategically limited. The software is proprietary, and not all selling organizations are willing or able to launch a commerce site. It may also be difficult for the purchasing organization to control spending throughout their company.
Buy-side systems. Buy-side systems offer an end-to-end electronic procurement application that is hosted and administered on the buying organization's intranet. It offers an element of control to the purchasing organization. Buy-side systems are a distributed purchasing model, whereas end-users place orders, but purchasing management sets the buying and approval rules that automatically govern spending. In this application, catalogs from preferred suppliers are aggregated into a master catalog, which is updateable by the suppliers. Integration with the buyer's and supplier's back-office ERP and accounting systems is a key element of the success of buy-side systems.
Advantages include shorter transaction and fulfillment cycles, reduced maverick buying and more control, lower administrative costs, and an optimized supply base The application may also free buyers to add value in other areas. The disadvantages to the buy-side system include a potentially prohibitive cost ($250,000 to $5,000,000) and a time to benefit of 3 to 5 years, subsequently justifiable for only the very largest organizations. These systems are poorly equipped to handle unplanned purchases, (up to 50% in some organizations) and a significant amount of transactions are managed "off-line" because of a lack of supplier enablement, as well as cumbersome and costly catalog management and maintenance. Buy-side systems may also minimize supplier-buyer relationships.
On-line trading communities. On-line trading communities are also known as "service bureaus". They are vertical intermediary communities hosted by third-party technology vendors, where multiple suppliers post and maintain catalog data and multiple buyers aggregate demand and drive costs down. Suppliers publish their catalogs once and make updates in real-time. Buyers access the portal through Web browsers and pull private "views" of catalogs behind their firewalls. On-line trading communities address the buy-side problems of cost, content management, and diluted business relationships.
With on-line trading communities, third party hosting service bureaus provided control of a buy-side system without the huge expense. The leverage of the buying group brings prices down for everyone. Distributors share in the cost of enablement, making products much more accessible. There are tailored and personalized views of content and catalogs. Content is relevant and updated in real-time. On-line trading communities offer all of the benefits of the buy-side systems without the high cost of implementation and without suppliers maintaining multiple buy-side catalogs. Also, value-added relationships are preserved. In the near-term, on-line trading communities will likely bring the most benefits to the most diverse population of MRO buyers and sellers.
Auctions. There are two types of business-to-business auctions in which MRO buyers may be interested, sell-side auctions and buy-side auctions. Business-to-business auctions are gaining in popularity due to the success of the consumer auctions that are prevalent today.
The seller administers sell-side auctions. These feature multiple buyers bidding on products against upward price pressure. Buy-side auctions are administered by the buyer, with multiple sellers bidding on new business, with downward price pressure. Auctions provide an opportunity to liquidate excess inventory and offers benefits to buyers, sellers, and manufacturers. Sellers get much more value than dealing with brokers and buyers can buy good usable items at reduced costs. Manufacturers get a chance to connect with users without disrupting existing channels.
Summary. Internet based business-to-business is expanding, and at the same time transforming the MRO marketplace. MRO buyers have a whole menu of choices and opportunities when it comes to utilizing electronic commerce applications to enhance their own performance and that of their organizations. This paper discussed sell-side, buy-side, electronic marketplaces, on-line trading communities as examples of currently available applications. Yet, no single solution will dominate. It depends on the size and type of organization, the needs of the organizations, and the solution that fits best. Enablement and economics will drive the use of these tools.
What does this mean to the MRO buyer? Plenty. This often underrated and underutilized buying function is now in the forefront of the electronic commerce maelstrom. Many organizations are testing the electronic commerce waters with MRO commodities and buying organizations. These purchases are now not only important to keep plants and facilities running smoothly, but to also prove out the e-commerce techniques and processes that may eventually be adapted to other materials and processes in the organization. MRO buyers need to take advantage of this increased visibility and renewed importance. Their value to their organizations is at an all-time high. Take advantage! The future of MRO e-commerce is now!