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Will Electronic Commerce Eliminate Purchasing?

Author(s):

Timothy Van Mieghem
Timothy Van Mieghem, Partner, The ProAction Group, Chicago, IL 60601, 312 726-6111, fax 312 726 2666

84th Annual International Conference Proceedings - 1999 

Abstract. Many buying organizations today focus on transactional tasks: order placement, expediting, tracking, etc. As e-commerce takes over these tasks, what will happen to the purchasing organization? Some companies will reduce costs, while others will identify ways for the purchasing department to add value and develop sustainable competitive advantages. What will your company do?

Although many companies recognize that the e-commerce, in any of its forms, is a valuable tool, many fail to prepare to use it to its full potential. The answer to the question at the top of the page is "YES". E-commerce will eliminate purchasing, transactional purchasing, that is. It will not, however, eliminate value added purchasing tasks, or sourcing. For many companies, e-commerce will allow the purchasing department to focus on value added tasks, eliminating many manual and repetitive non-value added tasks.

For example, one telecommunications company designed its supply chain at a time when its market was primarily domestic, and the purchasing procedures were primarily manual. Over time, the market globalized and new tools evolved that competitors used to automate the supply chain. Some of the symptoms this company faced include:

  • US centric supplier base
  • High freight charges were not involved in sourcing decisions (poor metrics)
  • Inventory ballooned to new levels
  • Products were handled multiple times
  • Manual purchase order generation process hindered attempts to ship third party items directly to the customer
  • Poor order fulfillment and delivery times were driven by lack of order visibility

These characteristics of their supply chain are symptoms of the real problem: manual purchasing processes were hindering procurement from under-capable suppliers. To address the problem, this group went through a strategic sourcing process combined with process improvements. As part of the negotiations, the suppliers were asked how they could support a conversion to e-commerce solutions to extend visibility and therefore attack many of the symptoms listed above. Any attempt to use a technical tool alone, or strategic sourcing alone would have failed. It was the symbiotic combination that provided the collective solutions.

To fully address this issue, we will address the benefits and costs associated e-commerce, and the next steps involved in implementation.

E-commerce benefits. One could ask, however, whether the capability of e-commerce to eliminate many of the non-value added tasks means that it will. Building a better mousetrap will only attract attention if catching mice is important to the audience. In the same way, e-commerce will only be used to eliminate manual tasks to the extent that it provides value to the company. The question then becomes, does e-commerce provide sufficient value to companies to sustain the change management and financial investment it will require?

To answer this question, we will perform a simple cost-benefit analysis.

a) E-commerce saves money. General Electric expects purchasing over the Internet to save $500 million over the next 3 years. E-commerce saves a company money because:
i) Incremental w/o Incremental Costs
ii) Orders Placed Can Be Verified for Accuracy (algorithms)
iii) Confirm Order Placement/Shipment via E-Mail
iv) Reduced In-House Customer Service Requirements
(1) All Can Be Answered at No Cost via the Internet
v) Reduce #, Frequency, Size of Physical Catalogs

b) E-commerce reduces inventory. In addition to reducing the administrative costs related to purchasing. E-commerce allows for instantaneous transmission of purchase orders that are created by ERP planning modules, or by planners directly. This allows for earlier visibility of orders to the supplier. In other words, e-commerce allows the companies involved to trade information for inventory.

c) E-commerce provides good service. The internet is global, and is always on, 24 hours a day, 7 days a week. A well-prepared electronic sourcing application provides:

i) Allows customers to perform the following transactions with no supplier involvement, and at a lower cost to the customer:
(1) Select goods
(2) Order goods
(3) Select and direct delivery
(4) Request update or tracking information
(5) Pay

ii) Up-To-Minute Information
(1) 70% of Calls Placed to Companies Are:
(2) What is the price of the product?
(3) Is the product in stock?
(4) What's the status of my order?

iii) Customers Receive Information When It's Convenient for Them

iv) Internet Catalogs Can Be:
(1) Searched
(2) Views Analyzed
(3) Secured
(4) Personalized by Individual/Dept/Company/Group

d) E-commerce provides information that may not be available otherwise:

i) Web Sites Tracking
(1) Where Views Come From
(2) Path Traverse Through the Site
(3) Where They Leave From
(4) How Long They Stay

e) E-commerce enables other systems to become more valuable:
i) Integrate with Existing Systems
ii) Inventory Control
iii) Order Processing
iv) Fulfillment
v) Customer Service

E-commerce costs - risks:

a) Lack of Trust in the Internet (being addressed aggressively)
b) Cost to implement (primarily borne by suppliers)
c) Valid Profitable Business Models (although the market capitalization is high for e-commerce based companies, only business to business sites have proven profitable)
d) Perception of a lack of Privacy
e) Cost to re-engineer in order to take advantage of e-commerce

The reality is, e-commerce provides competitive advantages to its users - both the supplier and the customer. Current estimations of the cost to process manual purchase and sales orders range up to $160 today. The marginal cost of processing an e-commerce order, can be as low as zero, depending on the level of interaction between sales => production planning => po creation => e-commerce => sales input processes for a company and its supplier.

Next Steps. Assuming that e-commerce will continue to grow (according to Secretary Daley's report on the internet, Business-to-business transactions on the Internet will likely surpass $300 billion by 2002), a company needs to assess how it will incorporate e-commerce.

Like anything else in life, we can only expect to be successful in something if we prepare to be successful. E-commerce will not eliminate non-value added purchasing tasks if it is used as a stand-alone tool, or is not viewed as a strategic directive requiring full attention. Specifically, however, in order to prepare to take advantage of e-commerce a company must:

  1. Understand the capabilities of e-commerce. E-commerce is the symbiotic integration of communications, data management, and security capabilities that allows business applications within different organizations to automatically exchange information related to the sale of goods and services.

  2. Understand what tasks the purchasing department completes. A traditional purchasing organization will source the products they wish to buy, develop an agreement with a supplier to purchase those products, plan and order the products, select delivery methods, pay for the products, and monitor and track the supplier. Understanding these steps will allow the company to identify the steps it wants to automate. Each step will have components that can be leveraged to the web, and steps that can not. Identifying them is the first step.

  3. Select the appropriate e-commerce package (or supplier that provides the software). Many suppliers today offer e-commerce packages as a normal part of their services. This is especially true for integrated suppliers who want to make it as easy as possible for a customer to order all of their needs fast and with little effort. Additional value can be added by integrating the e-commerce package with other modules. Some suppliers will even provide the resources to program the necessary hooks.

  4. Reengineer purchasing procedures to incorporate e-commerce (not vice versa!). The tool will not be enough. The organization will need to learn how to use the tool, and the procedures will need to be updated. In addition, in order to take advantage of automated purchase order development, the company will need to develop and program bills of material, sourcing guides, routing guides, and internal controls.

  5. Review and test supplier base for e-commerce preparedness. Like any new procedure or approach, the least risky avenue normally includes selected testing and monitoring. Through this step, transition suppliers to e-commerce processing one at a time.

Clearly, e-commerce will take on many of the traditional transactional tasks, as well as some basic tactical sourcing duties. This will provide great benefit to companies. The greater benefit, however, will come from redirecting the resources to strategic sourcing efforts, including:

  • Driving alliances with selected suppliers
  • Product evolution
  • Reengineering the process to fully utilize the information available through e-commerce, as well as utilizing the information channel

Conclusion. Michael Dell, Chairman of the Board and CEO of Dell Computer Corporation commented that "In the future, it will be possible for component suppliers to have a direct window into factory workflow via the Internet. This will enable them to use information to deliver parts in real time, essentially eliminating inventory and further accelerating the pace of commerce."

The Harvard Business School published a supply chain game called "The Beer Game". In this exercise a group of people simulates the supply chain that supports a liquor store. Each group is assessed points for inventory and back orders at the end of each week of the simulation. In the first half of the simulation, the groups place orders in a traditional series format. In the second half, the demand information is immediately shared with the entire chain. No physical movements in the supply chain are changed; the only difference between the two halves is the exchange of information. When we have facilitated clients through this simulation, we have documented a 35-40% reduction in the amount of inventory and back orders. 35% - 40%!

What these two snippets illustrate is the importance of information in managing the supply chain to minimize costs and improve service. E-commerce provides the technology that enables companies to effectively share the information they will need to drain the chain of inventory, operating expenses, and delays. Never before has the purchasing department been so able to provide competitive advantages to their company. Utilizing e-commerce to refocus efforts from transaction tasks to strategic sourcing tasks is an opportunity now.

References

VanMieghem, Timothy, Implementing Supplier Partnerships. New York. Prentice Hall, 1995.

Anthony J. Bingham, director of operations, Apartments.com. Interview conducted in September, 1998.

CNEC; "CNEC - Insights into Electronic Commerce." www.cnec.org/ecinsight/insight.html. June 17, 1997.

Bronwin Fryer "Straight from the screen. Newfangled software may revolutionize procurement, but not without some old-fashioned reengineering." CFO Magazine (November, 1998)

Harvard Business School "The Beer Game." February 24, 1997


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