Boarding Call...

[From iSource Business, February 2001] The analysts' reports and statistical evidence regarding supplier participation in e-procurement are mixed. A study last year from Cambridge, Mass., technology consultancy Forrester Research Inc. concluded that buying organizations currently suffer from "clumsy process links" to their suppliers, including transmissions by fax and e-mail, and that such poor connections are impeding e-procurement implementations on both sides. At the same time, Gartner Group Inc., the Stamford, Conn.-based research firm, has estimated that more than 30,000 private exchanges were under construction as of mid-2000. Clearly, an enormous number of companies are struggling to overcome these "clumsy" links with their suppliers as part of their e-procurement initiatives.

Indeed, Jupiter Research, of New York, has predicted that spending across industries on B2B infrastructure will double by 2003, reaching about $350 billion. This "construction boom" will help fuel what Jupiter's analysts believe to be a coming explosion in online B2B spending from $336 billion in 2000 to $6.3 trillion in 2005. "The online trading tidal wave is about to sweep across U.S. business," says John Katsaros, vice president of Jupiter Research. "We expect unified, online supply chains to become the norm."

Yet, at present, vast numbers of suppliers are not using e-procurement, according to a survey last year by the National Association of Manufacturers, a 14,000-member, multi-trade association with headquarters in Washington, D.C. That survey, conducted in January and February 2000 among 2,500 industrial firms, found that 68 percent of the responding companies were not using e-commerce to conduct business transactions. Moreover, just 10 percent had fully automated their business processes. Upon the release of the survey results last February, NAM President Jerry Jasinowski said: "No one questions the importance of B2B e-commerce, yet relatively few manufacturers are participating in it." A follow-up survey released in August 2000 confirmed that manufacturing companies of all sizes are using the Internet more for purchasing than for selling.

Purchasers at organizations moving toward e-procurement thus face the challenge of moving from "clumsy process links" to "unified supply chains" with suppliers that are only partially engaged in e-commerce or not engaged at all. Pursuing e-procurement not only will involve overcoming the buy side technical issues but also dealing with the issues surrounding supplier enablement. Buy and sell side organizations do share some of the same concerns about getting involved in e-procurement. However, suppliers face additional issues as they move toward e-enabled selling. Given the potentially tremendous benefits at stake for both sides, purchasing practitioners must understand the challenges of supplier enablement and e-commerce's impact on the buyer-supplier relationship to ensure the success of their own e-procurement initiatives.

Shared Concerns

A fragmented marketplace for solutions. The impending shakeout among Net marketplaces. Threats to existing buyer-supplier relationships. Buyers and suppliers alike can relate to these shared concerns. Both buyers and suppliers are struggling to understand which, if any, of the e-commerce tools or models available to them are appropriate for their specific business processes. This may well be the partial fault of solution providers: Several procurement practitioners from medium-sized enterprises interviewed at ePurchasing Week in Chicago last September complained that the technology firms have done a poor job of articulating how their solutions can address specific business problems. As a result, the flood of announcements coming from the solution providers has produced "information overload" in the buying and supplier communities, according to Robert M. Kanze, C.P.M. and A.P.P., president of Cornerstone Services Inc. Cornerstone, based in Half Moon Bay, Calif., is a management consulting firm that helps senior management at small- and medium-sized enterprises increase the productivity of their purchasing departments. "It has become increasingly difficult ... to really figure out what's out there," says Kanze, who spent nearly 20 years in procurement with Procter & Gamble. "It's a very confused marketplace."

In addition, while companies may feel comfortable buying (or selling, for that matter) MRO and office supplies online because such items are essentially commodities that can easily be bought from a catalog, fewer tools exist for buying and selling customized products, according to Tom Orlowski, e-commerce coordinator for the NAM.

Also of shared concern is the much-discussed shakeout among Net marketplaces. A portion of this anxiety is a result of the collapse of numerous B2C markets over the past year. But the technology consultancies are producing glum prophecies for the B2B marketplaces in the next few years as well. Gartner has forecast that as many as 80 percent of the markets will fail in the coming years, and Forrester predicted last fall that within three years only 200 major B2B marketplaces would be operating. This instability has led buyers and suppliers alike to question the wisdom of investing resources, if only their own time, to use the exchanges.

Buyers and suppliers also frequently share an interest in maintaining the relationships they have nurtured with each other. "The suppliers are concerned that the long-standing relationships they've had with these buying entities are going to be reduced to nothing more than a price war," says Kirsten Cloninger, an industry analyst focusing on e-procurement issues at the Scottsdale, Ariz., office of digital-markets research firm Cahners In-Stat Group. But purchasers may be wary of tinkering with the relationship, too, according to Dr. Ralph Oliva, executive director of the Institute for the Study of Business Markets (ISBM) in the Smeal College of Business at Pennsylvania State University. "Where we have seen suppliers rescued from price discovery by a customer, we have seen this rescue occur from ... the procurement department," says Oliva. He explains that purchasers may identify certain suppliers as strategic or may expect ancillary services and support from a supplier and may therefore be loathe to alter the relationship. "In this particular case, the procurement department can be [the supplier's] best friend," Oliva adds.

The Concerned Supplier

Suppliers do have their own set of worries, of course. For example, commoditization and price discovery remain top issues for suppliers considering involvement in e-procurement. Selling companies are naturally worried that e-commerce will not provide them a forum for differentiating themselves from competitors, narrowing buyers' focus to price only. This is a concern for Duane Haugen, owner and president of Mastercraft Precision, a Milpitas, Calif. machine shop that sells about $700,000 in customized metal parts annually to such firms as Solectron, Hewlett-Packard and 3Com. Mastercraft precision has bid on about 20 jobs through online marketplace PartQuoteMedical and has won six jobs. Haugen says he believes the customers putting jobs up for bid ultimately look at the bottom line without considering his company's experience or level of service. "We're realistic about it," he says. "We know we are being judged solely on price."

Orlowski says he is hearing similar concerns regarding e-commerce's impact on margins from many members of the NAM, too. NAM members are also proceeding cautiously in signing onto e-commerce initiatives because they are trying to figure out how to integrate this new sales channel with their existing channels, Orlowski says. Current channels may include both in-house sales departments, external sales reps, distributors and a network of factory reps. Suppliers must take care not to alienate any of these channels. Orlowski explains: "In order to create a selling environment that doesn't conflict with existing channels or destroy relationships, causing sales people to move and take customers with them, [suppliers] are moving much more slowly."

Another issue for suppliers is the extent to which e-commerce will produce genuine sales. For example, Pete Vougiouklakis, president of Diewall Tool and Die Co., a $1.5 million, 12-employee production and prototype machining shop in Utica, N.Y., initially was thrilled when, in early 2000, he won a little over $1 million in new business in reverse auctions on SupplierMarket (since purchased by Ariba in August). But several of the jobs didn't materialize because the buyer backed out before the deal could be completed. "You're not guaranteed any of the work," Vougiouklakis says. "Just because you bid it and you were awarded it doesn't mean you're going to end up getting it." Diewall did win more than $300,000 in new business from several new customers, and Vougiouklakis says that improvements in the Ariba auction system have made such false starts less likely and that he is overall satisfied with the Ariba system. But his comments reflect a wider sense among suppliers that buyers may be using reverse auctions solely for price discovery at least part of the time.

Oliva points out that, for suppliers, a critical issue is the nature of a given market-maker and how fastidious that market-maker is in coordinating bidding events. "In a price-discovery process, one place to be afraid is if the market isn't put together well," he explains. "If lot sizes, specifications and other facets of the suppliers that are being asked to bid against one another aren't well matched, you can create a very interesting lose-lose-lose situation [for the buyer, supplier and marketplace]. In the best of cases, we'll find that our prices get chopped to bits." Suppliers need to know precisely on what they are bidding, Oliva stresses.

Beyond price-related and channel issues, suppliers in certain industries may view e-commerce as the next electronic data interchange (EDI). Kanze, of Cornerstone Services, says some suppliers were left with "a bad taste in their mouth" from buyers' efforts to push their suppliers into using EDI during the 1980s and 1990s. Kanze cites automobile manufacturers as an egregious example of the arm-twisting: "The auto industry took it and used it like a hammer and essentially told most of their supply base: 'March or die. Get onboard with EDI or go sell your wares elsewhere.'" Subsequently, many suppliers have taken a "once-bitten, twice-shy" attitude: believing that they did not see sufficient ROI on their EDI program, they are now reluctant to dive headfirst into e-commerce.

The Silver Lining

Fortunately for the buy and sell side communities, the benefits of e-commerce for selling companies of all sizes are becoming increasingly clear. Understanding those benefits can assist buyers in working with their suppliers to get them involved in e-procurement.

Perhaps foremost, those suppliers that are able to integrate with their customers are reporting reduced transaction costs. Says Guy Manuel, North American vice president of e-business at office supplies giant Corporate Express Inc.: "e-Commerce is a very cost- and time-efficient medium for us and for our customers. It takes fewer steps to enter an order [and] to process and fulfill an order." Corporate Express is currently doing about $500 million in annual sales over the Internet against total sales of $4 billion. Manuel says the company is working to quantify the cost savings from e-commerce, although he asserts that Corporate Express clients already benefit from his company's lower transactional costs.

Suppliers can further benefit from the exposure to a broader customer base that e-commerce can afford them. This is particularly true for small- and medium-sized suppliers for which the Internet is making it possible to identify new customers more easily. For Mid-West Materials Inc., the Internet provides an additional sales channel and "a new audience that we might never have met," according to the company's CEO, Brian Robbins. Based in Perry, Ohio (near Cleveland) 48-year-old Mid-West Materials is a steel service center with about 100 employees who ship more than 100,000 tons of steel every year and generate $50 million in annual sales. The company used Ariba's reverse auction platform as a prospecting tool and won a $1.5 million job to provide a leading trailer maufacturer, a new customer, with hot rolled carbon steel sheets. Robbins says the supplier-paid fee was "hard to swallow," although Ariba has since switched to a buyer-paid model that makes it free for suppliers to participate in auctions. (Ironically, Mid-West Materials first become involved in e-procurement from the buy side after several of the company's metal suppliers urged Mid-West to purchase certain materials through such vertical metal sites as MetalSite and e-STEEL. Ariba contacted Robbins about participating in reverse auctions as a supplier after an article mentioning Mid-West Materials' use of e-procurement as a buyer appeared in a national business magazine.)

Ariba, PartQuoteMedical, e-Steel and other Net marketplaces clearly afford suppliers the opportunity to sell off excess inventory or find customers for excess capacity. Less obviously, e-commerce benefits suppliers by increasing the amount of data that comes from customers. "You are really increasing your visibility and your flow of information across that entire supply chain, whereas before it was much more silos of information," says Cahners' Cloninger, who explains that more freely flowing data opens up possibilities for demand forecasting and design collaboration with customers.

The final bit of good news for suppliers is that, despite their fears, e-commerce may not be driving down prices to the extent once thought. "The Internet should really only reflect what the market is doing," says Robbins, who adds that, regardless of the affect on price, e-commerce also promises to bring in additional business. Vougiouklakis echoes that sentiment, noting that Diewall has won bids in which the company did not have the lowest price because the Ariba system allowed them to demonstrate experience, capabilities and past performance.

Interestingly, Ariba has moved to assist suppliers in maintaining their margins by partnering with Maxager Technologies to provide cost analysis tools the supplier can use when compiling bids. The Maxager technology lets the suppliers calculate profit-per-minute in addition to profit-per-unit, so they theoretically can refocus their marketing and sales efforts on products that generate the highest per-minute profit.

Rough Waters

Even when buyers understand the potential risks and benefits of e-procurement for suppliers, several things stand in the way of a fully e-enabled supply base. Resources, cost and size are issues for smaller suppliers, while commoditization and connectivity issues affect selling companies of all sizes.

The NAM second-quarter e-commerce survey in 2000 showed a "striking gap" between large and small companies in terms of their involvement in e-commerce. In explaining the gap, NAM president Jasinowski says: "Perhaps the key reason for the differing large and small company responses ... can be attributed to the gap in in-house IT staffs. More than 53 percent of small manufacturers do not have an internal IT staff, whereas only four percent of large manufacturers are without this vital e-business resource."

Small- and medium-sized enterprises also lack the financial resources of a Corporate Express or other large player, so their ability to invest in IT infrastructure, let alone set up their own marketplace, may be constrained. Some of the Net marketplaces, including Ariba, FreeMarkets and others, have overcome this barrier by configuring their systems to allow suppliers to participate using nothing more than an Internet-enabled personal computer and a Web browser. Other marketplaces, such as the PartQuoteMedical site that Haugen uses as well as Ariba and FreeMarkets, charge no fee to the suppliers, making those sites inexpensive marketing channels. Of course, that may be fine for participating in Web-based auctions, but more robust connectivity with buyers remains problematic for smaller suppliers. Senior Procurement Manager for Capital and e-Commerce at Sappi Fine Paper North America John Guerin says his company, a $1.6 billion, Boston-based division of South Africa's Sappi Limited, is working on a Web-based e-commerce strategy to automate connections to smaller suppliers. But, in the meantime, the media of necessity with these suppliers are still fax, phone and mail rather than the EDI that the company uses to connect to its larger suppliers.

Cornerstone's purchasing consultant Kanze further notes that the major providers of e-procurement platform solutions have focused their efforts on Fortune 1000 clients. Perhaps more important, e-commerce success stories have been slow in coming, even at the high end. So while providers such as RightWorks and Delano may be offering more affordable solutions for mid-tier and small companies, suppliers are still proceeding slowly to make the investments necessary to move beyond anything more elaborate than a Web-based information storefront.

Regarding commoditization, suppliers of all sizes will naturally want to protect the value of their products as they become involved in any e-procurement initiative. Cloninger says suppliers should focus on enabling a richer association of content so that a buyer can continue to view them as more than just a line item. Cloninger believes that buyers setting up private exchanges may have an easier time assuaging suppliers' apprehensions in this regard because private exchanges involve the e-enabling of existing supply chain interactions. "It's the [same] way you've always interacted with your suppliers, it just happens that you are now conducting it online." By contrast, suppliers will be more cautious when approaching a public marketplace because "a lot of the markets that are focused on the public space tend to be more spot buying opportunities. It's a question of just having the right commodity at the right time for the right price. [Suppliers] are facing more of a challenge in that arena."

Some suppliers will actually benefit from commoditization, according to Oliva. As e-procurement removes ambiguity in the market, buyers will get a clearer understanding as to whether any given product or service is a true commodity or is truly special. Suppliers that can provide the lowest price on a product may want to push toward commoditization. On the other hand, companies looking to differentiate themselves will need to examine their storehouse of knowledge and know-how, understand the value of that information, and figure out how to mix it with their current offerings in order to come out with new, differentiated products and services. In fact, Oliva says the ISBM does "value-coaching" for companies that seek to leverage their existing knowledge base. Ultimately, buyers can benefit in this scenario from new products and services.

Suppliers can also counter the hazards of commoditization by adding value for their customers. At Corporate Express, for example, Manuel says: "We have developed and continue to develop value-added functionality for our overall e-commerce tool. Our entire offering is focused on superior customer service." Corporate Express has also pursued an aggressive campaign to extend e-commerce connectivity to its customers. In fact, Manuel views connectivity as the key issue for his company, since extending connections to customers helps Corporate Express both to provide a more error-free environment in which to interact with its customers and to cement relationships with customers.

The Buyer-Supplier Relationship

It's still too early in the game to say with certainty how e-procurement will ultimately reshape the buyer-supplier relationship. "It's something that both of them are circling," Cloninger says. "Both groups recognize that this is something they need to do. But understanding how to have this be a win-win situation is something both sides of the equation are still working on." Cloninger notes that the end goal is the same for buyers and suppliers: streamline the processes, "but they are still working on how to maximize that in both cases."

Nevertheless, analysts already point to several trends. First, because robust e-procurement systems automate much of the purchasing process and eliminate what Kanze calls "the tyranny of transactions," purchasers using those systems can focus greater attention on supplier relationship management building strategic relations with key suppliers. Moreover, Kanze adds, "When you get transactions out of the way, it allows buyers and suppliers together to approach the relationship without a lot of old baggage."

Prudent suppliers can actually benefit from this increased attention. Kanze explains: "Suppliers have traditionally been more adept at relationship cultivation than buyers have. But now they are going to see the buyer approaching them on an equal footing. Taken in the proper spirit, the buyer and supplier can use this as an opportunity to really build some solid bridges." The buyer will get to know the supplier's costs, and the supplier will get to know the buyer's manufacturing foibles, cycle times and sensitivity points much better than when everyone was confused by the paper blizzard.

Larger suppliers can use e-commerce proactively to establish closer relationships with their customers by building custom extranets and sharing what Oliva calls "deep applications" with their buyers, creating a preferred supplier status with certain customers.

However, smaller suppliers may have a way to go before e-procurement begins to have any noticeable impact on relationships with their customers. Haugen, of Mastercraft Precision, says that he has seen no difference in relationships with offline and online customers. Nor has Robbins, of Mid-West Materials, seen any real impact on the buyer-supplier dynamic. Some suppliers may fear that e-commerce will make those relationships impersonal, Robbins explains, but his company will continue to provide the same level of service to all customers.

Don't Miss the Boat

If Gartner is correct that 30,000 private exchanges were in some stage of development by mid-2000, clearly large numbers of buyers and suppliers are working to build links to one another. To all appearances, the trend is toward increased transactional automation and greater collaboration throughout the supply chain, with the ultimate goal being collaborative planning, forecasting and replenishment.

While larger suppliers such as Corporate Express are forging ahead with their own e-commerce initiatives to keep pace in their particular industries, many small- and medium-sized companies are still testing the waters and waiting for the pool of solutions to trickle down to their level. Regardless of size, all suppliers share one thing in common with buyers: They need to be thinking calmly about how they can leverage e-commerce and e-procurement to their best advantage. Says Oliva: "The companies that are least fearful have a portfolio of experiments going on and are beginning to see what works and what doesn't. The companies that are most fearful are waiting on the sidelines now, and that's a very scary place to be. They have every reason to be worried. If they are not engaged in some way of learning about this, their options are shutting off, whether they know it or not."

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