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Ten E-Commerce Questions All Purchasing Managers Must Answer

Author(s):

Brian G. Long, Ph.D., C.P.M.
Brian G. Long, Ph.D., C.P.M., President, Marketing & Management Institute, Inc., Kalamazoo, MI 49024-3119, 616/323-1531, brian@mmii.org

86th Annual International Conference Proceedings - 2001 

Abstract.
Since purchasing became a profession over one hundred years ago, one of the greatest challenges to the profession has been technological change. The telephone and various forms of the telegraph have altered communications. The computer has altered the way purchasing records have been processed, tabulated, and stored. Transportation technology has sped up the delivery of goods and services from all over the world. Therefore, it is fitting that this paper concentrates on ten of the more important aspects of E-commerce which must be conquered by the purchasing professional.

At this or any other time, it seems that there is no end in sight for technological innovation and the impact it may have on how purchasing is done. Clearly, the most talked about new innovation of today is internet. Everyone agrees that it is here to stay, but almost no one agrees about how it will be used or what the long-term impact will be on the purchasing profession. Over the next few years, here are some of the major questions that most modern purchasing managers will need to answer:

E-Commerce Question #1: What on-line MRO contracts should you write?

In the age of supply chain management, it is easy to see that the major expense of small, low- dollar transactions relates to paper. The average cost of a purchase order, by most estimates, has grown from about $15 in 1965 to $150 in 1999. In addition, the cost of packing slips, receiving reports, invoices, checks, and various other reports have now made it easy to conclude that the transactional cost for most shipments may actually exceed the value of the merchandise.

By using the internet, many of these costs can be reduced or eliminated for BOTH the buyer and seller. Furthermore, it seems clear that at least some MRO suppliers will be forced to charge a premium price for non-internet transactions because of the inefficiency of staffing inside sales people and generating unnecessary paper documentation.

Several categories of MRO suppliers have already taken the lead. Office supplies, safety supplies, low dollar computer hardware and software, and low dollar MRO supplies constitute some of the more notable internet contracts that are already being established. Although nothing about the future is certain, it seems obvious that almost all low-dollar transactions will be handled on the internet within the next few years. Furthermore, if the purchasing professional elects not to participate, then the individual departments will probably be forced to set up their own contracts and bypass the purchasing function altogether.

E-Commerce Question #2: What should you bid on line?

With the apparent success of consumer firms like E-Bay and Priceline and the resulting reports of huge savings for certain types of transactions, the thought has been advanced that significant savings must also be available for the goods and services that firms and organizations must purchase. Non-purchasing people, who have tried to influence these changes, fall easy prey to "dot com" firms who promise that millions in savings are just a point-and-click away.

In Purchasing 101, we learned that bidding is primarily used when specifications are relatively easy to define, plenty of non-collusive competition exists, and that lots of supplier management is not required. We also learned that some industries, such as construction, are geared toward bidding and expect to participate in some form of a bidding process.

However, most people outside of the purchasing function have not had Purchasing 101. They have little or no understanding of the role that relationships play in obtaining positive delivery and price performance. They fail to understand the difference between price and total cost. They believe that all sources are approximately equal, and that saving a few cents per unit on a bid will translate to immediate savings for the firm.

Until recently most modern firms were developing cost savings with the concept of strategic alliances. Through the development of a close relationship with a supplier it is possible to mutually identify unnecessary costs of doing business and hence lower prices. The goal is to maintain the seller's level of profitability and provide the incentive for continued business expansion.

Therefore, when over applied, the concept of bidding tends to be a throw-back to the 1950's when the role of purchasing was to try to beat a lower price out of the supplier base. Conversely, there are still at least SOME opportunities where bidding DOES result in significant savings. Some of these opportunities are:

  • Short run machining, where the components are relatively simple.
  • Surplus, where the web can open up the whole world.
  • Short run material requirements, where the materials relate to established standards such as ASTM specifications.
  • Non-critical items where the margins are high but the delivery does not have to be immediate. Cutting tools, bearings, and other power transmission equipment are examples of things that may fall in this category.
  • Firms in isolated locations where the web will open their business up to the entire world.

E-Commerce Question #3: What, if anything, should you reverse auction?

In accordance with our previous discussion on bidding, Purchasing 101 provides some valuable lessons:

  • Auction bidding has been around as long as bidding itself.
  • Sellers DETEST hardball practices like this.
  • At best, actual savings are often short term.
  • Good suppliers will often drop out, resulting in an eroded suppler base.
  • Auction bidding will destroy any form of a partnering arrangement that may be in place.

On the other side of the coin are a limited number of opportunities where auction bidding may actually work and result in cost savings. Obviously, the auto industry has been somewhat successful in squeezing a captive supplier base for cost reduction. However, most observers note that the size of the bid package itself must be significant before the sellers will be attracted to the opportunity. Furthermore, the market conditions themselves must be favorable. Horror stories abound about firms who have tried auction bidding in tight markets only to find that they have now INCREASED their purchase price.

E-Commerce Question #4: What commodity prices should you track on the web?

In an ideal world, purchasers would regularly update themselves on price trends and availability for all of their major commodities. However, the pressure of today's fast paced purchasing makes trips to the library all but impossible. By identifying certain key sites on the web, purchasing professionals should be able spend a couple of minutes per day updating themselves on the current market trends. Commodities that already lend themselves to this kind of analysis include plastics, copper, gold, and petroleum, as well as all of the other commodities that are regularly traded on the worldwide commodity markets.

E-Commerce Question #5: What Should You Establish For An Internet Policy?

For good reasons, upper management in most firms is suspicious that the internet will become a work distraction, rather than the business tool it is intended to be. Therefore, a written policy becomes almost essential. Such a policy should include provisions that emphasize:

  • The internet is a business tool designed for business purposes, not as a desktop toy.
  • Personal use is acceptable, but should be limited to a few minutes per day.
  • Personal use after hours is acceptable if it DOES NOT place any additional financial or security burden on the firm or violate current policies.
  • Logging, downloading, or otherwise using the internet for porn or hate sites should be prohibited at ALL times.
  • Inadvertent unauthorized intrusions to porn or hate sites should be logged off immediately.
  • Clear notice of the company rights and intent to monitor internet usage, and take disciplinary action when necessary.

E-Commerce Question #6: What should you tell the financial people about portals and catalogs?

The concept of the so-called purchasing portal is that a third party internet service firm establishes an E-commerce link between both the buyer and seller. Such an arrangement is particularly beneficial to both buying and selling firms who have no organized internal electronic commerce effort of their own. However, to most firms, the high cost of most of these services means that the portal concept probably has a limited life span. In general, these facts are already known to purchasing professionals. Therefore, the financial people, who are not used to handling salespeople, have become the prime targets of most portal marketing efforts.

What appears to be attractive to the financial people is the ability of the portal firm to build a custom catalog for all the firm's purchases, especially on the MRO side. The financial people are enticed with the detailed reports that are promised by the portal provider without necessarily figuring out how these reports can actually be used for managerial purposes. For large firms, these catalogs can cost millions of dollars and provide no additional value. Furthermore, regularly updating these catalogs can cost additional millions.

Since the industrial catalog was invented over 100 years ago, sellers have been trying to figure out how to get buyers to pay for them. As previously noted for MRO purchases, the fact remains that the catalog should reside at the seller's site alone. Sellers should provide a user-friendly catalog that allows the requisitioners to easly find the products they are seeking. Behind these sites should rest the accounting software that will provide the necessary managerial reports that allow for the efficient management of the MRO purchases. Numerous examples abound for firms that are embracing this concept today. However, numerous examples also exist for firms who have spent millions on internal catalogs only to find that their use is not only limited but also an almost unending expense to maintain.

E-Commerce Question #7: What do you plan to put on your purchasing department home page?

Purchasers in the future will make use of two different kinds of home pages. The first type will be for use within the company, and generally provide information about requisitions, purchasing procedures, commodities handled by certain buyers, and detailed purchasing procurement policies.

Another variety of home page will be presented to the entire internet, and will function like an electronic purchasing department receptionist. This page will describe in some detail exactly how to do business with your firm, including contract requirements, ethics policies, payment systems, and other information that will make dealing with your firm easier.

A second major function of the public departmental home page will be to provide information about products and services that are wanted or needed by the firm. Some of these needs will involve R&D related request, while others will involve contracts up for renewal and other needs.

E-Commerce Question #8: How will the new E-commerce laws change the way we do business?

It has been said by many that the wheels of justice turn slowly. Hence, an obvious rift exists between the demand for a new E-commerce legal system and the lethargic pace of change for most legal revisions. Beginning with the Electronic Signatures Act which became law in June of 2000, the National Conference Commissioners on Uniform State Laws (www.nccusl.org) has set forth potential changes in the Uniform Commercial Code as well as posting statutes such as the Uniform Electronic Transaction Act. However, the complexity of the American legal system involves a mix of state and federal laws as well as court decisions handed down by hundreds of courts throughout the land. In short, even well-seasoned attorneys are having a great deal of difficulty providing sound legal advice regarding concepts that seems to change daily.

In general, many legal scholars believe that it will probably take another three to five years before the uniform statutes can be adapted by most of the states and a new edition of the Uniform Commercial Code can be agreed upon and presented. In this same time frame, the courts will be able to establish some uniform standards of their own regarding electronic commerce. Although it is safe to say that the new laws will allow electronic digits to be substituted for paper, the exact form that will finally be agreed upon is still just in the speculation stage. The purchasing and legal communities will find it necessary to update themselves on a weekly basis as these changes unfold.

E-Commerce Question #9: What new skills will be required by purchasing personnel for E-commerce?

Twenty years ago, purchasing managers made a big mistake by not embracing the computer as the future of almost all forms of business. Unfortunately, other departments such as accounting, finance, inventory, production planning, and even customer service embraced the computer as the future, leaving the purchasers to play catch-up. The result has been software that is not friendly to the purchasing function, necessitating the need for slow, painful, and expensive revisions in order for purchasing to operate within the firm's synergistic cyber-ring of information.

Therefore, it goes without saying that computer and internet must be at the top of the list of required skills for the future. However, another set of skills will lie at the core of the way suppliers are evaluated on the web verses more traditional supplier evaluation systems. Furthermore, new skills for writing E-commerce contracts mean that purchasers will need to readjust the way they do business.

The flexibility of internet purchasing, along with the communication aspect of E-mail, opens the opportunity for at-home professional purchasers. Indeed, as many as a third of all purchasers may operate from their homes in as little as ten years.

E-Commerce Question #10: What do you plan to tell the internet pseudo-purchasing experts?

Around every water cooler in country are new throngs of internet surfers with tales of terrific purchases that they have made of the internet. Unfortunately, these are the same people who believe that industrial purchasers can save millions or even billions of dollars by simply purchasing on the internet.

If the year were 1901 instead of 2001, they would probably be right. However, the fact remains most of the unnecessary costs have already been taken out of the distribution channel, and that we must look toward cooperation as the major cost reducer in the future.

The bottom line is that there is no free lunch out there on the net just waiting to be discovered.

Conclusions:

The internet is a powerful tool for purchasing, but it is just that: A tool. Nothing more. Nothing less. It does not DO the entire job of purchasing. It just makes it easier. For small dollar purchases, the reduction or elimination of paperwork alone results in significant cost savings. In other instances, buyers discover new sources that can do the job better, faster, easier, and often cheaper. Hence, we will soon come to recognize that the internet is just one more of the many essential tools for running a successful purchasing operation.


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