eProcurement Takes on the Untamed Supply Chain

Purchasing and supply management professionals entering the virtual marketplace as buyers discover that you can still reduce your supply base and enter into online procurement


On the surface, it might seem like a tug of war. First came supply base rationalization and the mandate to achieve supply chain efficiencies by decreasing the number of suppliers. Now e-procurement and online marketplaces come along, and you are supposed to leverage the Internet's search capabilities and give your company access to an expanding roster of potential new suppliers.

Reduce and expand at the same time? Next thing you know, you'll be leaping tall buildings, too.

Actually, purchasing and supply management professionals at companies entering the virtual marketplace as buyers are finding that e-procurement can support supply base rationalization. As long as their focus remains on rationalization as a strategy and on e-procurement as a tool to facilitate that strategy, companies achieve a smaller supplier base, reduced maverick spending and long-term relationships with strategic suppliers.

The Mantra
Supply base rationalization has been the mantra in purchasing and supply management since the mid-1990s. The goals of rationalization include reducing administrative costs associated with numerous suppliers, streamlining purchasing processes and improving control over inventory.

Rationalization strategies of recent years have met with some degree of success, according to a 1999 report by KPMG Consulting, titled, Global Supply Chain Benchmarking and Best Practices Study: Phase II. The report, prepared in conjunction with the Massachusetts Institute of Technology, showed that 42 percent of responding companies in a cross-industry survey had trimmed their supplier base by zero to 20 percent over the previous two years. An additional 13 percent reported supply base reductions of 20 percent to 60 percent during the same period. 75 percent of respondents indicated they made 80 percent of their purchases from fewer than 100 suppliers. Rationalization strategies appear to be producing closer relationships with a smaller number of strategic suppliers.

Compared to supply base rationalization, e-procurement is a Johnny-come-lately. In fact, although the business-to-consumer model has been hogging online bandwidth since the mid-1990s, the market for e-procurement solutions is only just now taking shape.

eProcurement is, to some extent, an extension of Electronic Data Interchange (EDI), which promised to eliminate the need for paper invoices, thereby reducing transaction costs and cutting turnaround times. But EDI required substantial upfront investment that discouraged smaller suppliers from signing on. On the other hand, the low initial cost of Internet-based procurement whether through electronic catalogs, virtual marketplaces or online auctions is attractive to companies of all sizes. As a result, buyers have access to a greatly expanded number of potential suppliers, whether for maintenance, repair and operating (MRO) items listed in electronic catalogs; transportation services posted on an online spot exchange; or commodities sold through online auctions.

Indeed, the KMPG report indicates that at least some buyers are taking advantage of the Internet to identify new sourcing options. According to the study, 37 percent of responding companies had actually increased their supply base by up to 20 percent over the past two years, and an additional six percent had seen supply base growth of 20 percent to 40 percent in the same period. The study cites decreasing transportation costs, generally lower tariff barriers and less governmental intervention as possible factors contributing to this countertrend, but the authors also mention the continued globalization of the marketplace combined with the increased information flow across and within global regions at a significantly lower cost.

The potential benefits of the virtual marketplace appear to be at odds with the goals of supply base rationalization. But purchasing and supply managers at several companies implementing e-procurement systems make just the opposite assertion that e-procurement can and does support ongoing rationalization strategies.

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