The Future of Purchasing and Supply: Electronic Commerce in the New Millennium

#1 Take the Initiative: Continuing coverage of the trends shaping the profession

By Phillip L. Carter, D.B.A., director of the Center for Advanced Purchasing Studies and editor of The Journal of Supply Chain Management, in Tempe, Arizona.
August 1999 Purchasing Today®, page 33.

Perhaps the most obvious trend facing purchasing and supply professionals, electronic commerce gives a new look to communications, processes, and decision making.

Pretend it's Monday, August 9, 2004. Your agenda for the day includes a meeting that concerns a multimillion dollar investment in additional electronic commerce activities. It's not hard to imagine that by this point in time, electronic commerce will have penetrated all aspects of your organization, considering the astounding rate at which it has made progress even prior to the century mark.

Electronic commerce will have a dramatic impact on purchasing and supply - and all aspects of business - over the next five to ten years. Most professionals agree on this.

The exact nature of the impact is more difficult to forecast. One needs only to consider the pace and magnitude of the changes in the Internet over the past five years to get a feel for the scope of change to come. Let's take a glimpse into the future and speculate on how purchasing and supply will be conducted in the future world of electronic commerce.

Communication

In light of electronic commerce advances, communication, both internal and external, is efficient and effective. It has become an invaluable tool.

Intra-organization communication. Most information is shared within organizations over intranets. All relevant information about purchasing and supply is available by using a browser with appropriate security and authorizations implemented. Information on contracts, suppliers, purchasing staff, and so forth is available throughout organizations on a worldwide basis.

Inter-organization communication. Information is readily shared between firms over the Internet. Security is in place to prevent unauthorized viewing of data, protect intellectual property rights, and authenticate senders. "Extranets" disappear, as Internet security is virtually unbreakable and cheaper than leasing private communication lines. Video and audio are easily exchanged over the Internet, reducing the need for travel.

Purchasing and supply portals are available on the Internet to provide information and pointers to most information needed by supply professionals. Realtime data is available on all commodities that trade on exchanges (all of which are electronic).

Purchasing Processes

In the years to come, purchasing and supply management processes will still be in place to facilitate the supply chain, but electronic commerce will change who performs what functions.

Nonproduction parts and services. The requisitioning process is completely automated, reducing purchasing head count by one-half. Requisitioners access online purchasing and supply systems, review catalogs created by suppliers especially for their organization, select needed products, and launch the requisition. Requisitions are automatically routed for necessary approvals and budget checks, which must be completed within defined time lines. When all the necessary approvals are received, requisitions are transformed into purchase orders and sent electronically to suppliers. Upon receipt, the supplier fulfills the order, delivers it the next day to the requisitioner's desk, sends an electronic invoice, and receives electronic payment.

Automated purchasing and supply management systems bring discipline to the purchase of maintenance, repair, and operating (MRO) and other nonproduction goods and services, now referred to as operating resource management (ORM). Organizations discover how much they are spending for ORM and with whom they are spending it. Demand is aggregated across the organization, resulting in better prices and services. Many small suppliers who serviced local plants and locations go out of business or merge into larger organizations because they are unable to provide the national and global service demanded by purchasing organizations. The number of suppliers is dramatically reduced.

Production parts. Demand forecasts are shared with all organizations in the supply chain. Organizations collaborate on forecasting and production planning by exchanging information over the Internet. The "bullwhip" effect is eliminated. Capacity bottlenecks are forecast far enough in advance to adjust capacity or move production. The principles of just-in-time production (JIT) are extended throughout the supply chain, with the needs of the final customers driving activity throughout the chain. As one more unit is sold to the final customer, every firm in the chain will perform its part in replacing that unit. Production parts continue to be ordered through the use of electronic data interchange (EDI), with the transactions taking place over the Internet. (This is called EDI-I). EDI protocols are updated and implemented on the Internet. The cost of EDI-I transactions drops dramatically, allowing even the smallest suppliers to receive and process EDI-I transactions. All enterprise resource planning (ERP) systems, the software packages that combine various modules throughout the organization, accept EDI-I transactions. ERP systems are developed to run on personal computers for small firms. Valued added networks (VANs) fall into disuse.

Manufacturing and transportation organizations track the location and progress of all orders. Status reports and projected arrival times are available to purchasing and supply firms on a realtime basis.

Supplier evaluation and development. Supplier evaluation is conducted online using data from the suppliers' databases, realtime videos that document supplier processes, and videoconferences with supplier management teams. Supplier development is accomplished by supplier teams viewing online the best practices at the buying firm and other companies in the supply chain.

Cost management. Cost competition continues to be a major competitive priority. Dominant firms manage supply chain costs. The Internet allows realtime tracking of costs across companies, the use of common cost models, and the optimization of costs across supply chains. ERP systems work as promised and are linked across supply chains. Dominant organizations routinely assess cost structures and assign activities to those organizations in the chain that can complete the required activities at the lowest total cost to the supply chain. Low-performing firms are quickly identified and are either improved or replaced.

Decision Making

Decision models that can produce "optimal" decisions are used to solve complex purchasing and supply problems. For example, organizations purchase airline travel using realtime optimization models that consider volume discounts, special pricing, service, and routes. This information is made available in realtime from the airlines on the Internet. All travel is booked on the Internet and tickets are no longer issued. Travelers check in by retina scan.

Heuristic decision making is enhanced by "groupware" that runs over the Internet. The groupware incorporates realtime audio and video and all teams are virtual. The groupware includes artificial intelligence that helps participants process data and reach superior decisions. Professionals are able to participate in virtual meetings at any time and place. The Internet is available on airplanes so many meetings are scheduled and conducted when participants are traveling.

Markets

Marketplaces are dramatically changed by electronic commerce. Purchasers and suppliers have information on virtually all potential suppliers from around the globe and can do online supplier evaluation. Similarly, suppliers have information on all sources of potential demand. Many products and services are bought strictly on price through electronic auctions. The auctions match purchaser demand with supply capacity at the lowest possible prices. Suppliers are able to clear surplus inventory and book business when excess capacity is available.

Quality, delivery, services, and responsiveness remain important considerations. Organizations continue to enter into partnerships and long-term relationships. However, new products, processes, and technologies continually drive the need for new suppliers and supply chains. Intelligent agents are launched on the Internet to find suppliers for the new products and technologies. Buy agents meet supply agents

in electronic markets and conduct initial negotiations. The agents generate reports for supply professionals to evaluate. Supply chains are routinely redesigned to meet changing customer needs. Common standards are developed that allow all organization information systems to be "plug compatible."

Disclaimer

The above forecasts are wrong, as are all forecasts. They will probably err in two ways. First, the forecasts will likely prove to be conservative. That is, the real state of the world in the next five to ten years will be more advanced than the above statements suggest. The second, and more important, type of error is that new tools and technologies will be developed that we do not envision today.

Currently, security is viewed as the major inhibitor. However, once the security issues are fully addressed, Internet use for purchasing transactions will reach new heights. Today's purchasing and supply managers, as well as business executives in general, see this coming. "What I see is using the Internet to communicate information, share agreements, share information with suppliers on strategic alliances, and share cost information or technology information on a worldwide basis in a much more responsive time," said one participant of a CAPS focus study. Others predict that "50 percent of the procurement budget will disappear at the head-count level from fulfillment teams, and then will be moved into other strategic areas." Obviously, these will have major impacts on purchasing and supply. It will be interesting and exciting to watch their development.

What to Do Next

Electronic commerce is a complex, multifaceted topic. It's not always clear what to do next. However, it is clear that all organizations should be gaining experience with using the Internet and progressing toward implementing electronic commerce tools. Ask yourself these questions:

  • Does my organization have an intranet? If not, formulate plans for installing one.
  • Does my organization have access to the Internet? If not, formulate plans to become connected.
  • Do all purchasing and supply professionals have Internet access on their desktops (at reasonable speeds)? If not, formulate plans to give them access.
  • Does my organization have the resources and knowledge to train purchasing and supply professionals on intranet and Internet use as we introduce these tools?

After your purchasing and supply professionals have access, review how the Internet and intranet can be used to help them do their jobs better in the short run. Tasks that can be readily accomplished without a big investment include searching for new suppliers, acquiring information on suppliers, communicating with suppliers, communicating with internal customers, and sending documents.

After the basics have been mastered, it's time to move to more ambitious projects. A good way to start is to map out the more important processes in which purchasing is involved. This should at least include the flow of requisitions and purchase orders. Next, explore what new electronic commerce tools and techniques are available in the market place that could help "electrify" these processes. Be aware, that processes often need to be reengineered before they are automated. Go to conferences, surf the Web, and visit other organizations. The objective is to find e-commerce tools that match the requirements and budget of the department. Always keep in mind that the field is changing rapidly and that today's brilliant solution may become tomorrow's dead end. So proceed with caution, but proceed. The worst solution is to get left behind with little chance of catching up.

Initiative #1: Electronic Commerce

"Box page 34"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies, A.T. Kearney, Arizona State University, and Michigan State University, details 18 initiatives that will shape the purchasing and supply management function in coming years. Each month, Purchasing Today® provides commentary on an aspect of the study.

Initiative #1, Electronic Commerce, says that:

  • The trend toward electronic commerce will accelerate over the next 10 years.
  • The Internet will become the backbone of electronic commerce.
  • A very powerful communication integration is under way matching future improvements in the Web with the adoption of enterprise-based systems.
  • Trends are being driven by the need for speed in both decision making and product and service fulfillment.
  • The Internet will be used to support demand-pull throughout the supply chain.
  • Once Internet security issues are fully addressed, purchasing transactions will explode on the Internet.
  • The Internet's effect on the supply chain will rival the interstate highway's impact on the transportation industry.

18 Initiatives, 18 Opportunities

"Box page 35"

In May 1998, NAPM and the Center for Advanced Purchasing Studies (CAPS), in conjunction with A.T. Kearney, Arizona State University, and Michigan State University, released "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." This comprehensive study, which included interviews with and surveys of CEOs and hundreds of purchasing and supply professionals, outlined 18 key initiatives that will affect the purchasing and supply function in the coming years. In order to detail and more fully understand the implications of these trends - not only for purchasing and supply professionals, but for organizations as a whole - Purchasing Today® presents this ongoing series. Each month we will examine a portion of the study, providing insights that allow readers to examine their own status and the possible implications of these trends. The 18 initiatives:

1. Electronic Commerce

2. Strategic Cost

3. Strategic Sourcing

4. Supply/Chain Partner Selection and Contribution

5. Tactical Purchasing

6. Purchasing Strategy and Development

7. Demand-Pull Purchasing

8. Relationship Management

9. Performance Measurement

10. Process Uncoupling

11. Global Supplier Development

12. Third-Party Purchasing

13. Virtual Supply Chain

14. Source Development

15. Competitive Bidding

16. Strategic Supplier Alliances

17. Negotiations Strategy

18.  Complexity Management