NASDAQ's B2B sweethearts of 2000 are floundering for more reasons than rapid expansion and a declining stock market-based capitalization: Despite efforts to implement procurement controls and reduce costs, corporations have not yet been able to fully capitalize on the benefits that automated purchasing systems promise. The same is true for government organizations, at both the national and local levels. The introduction of limited tools like purchasing cards provided some measure of control and cost savings for business and government, but for maintenance, repair, and operations (MRO) procurement, these tools, and others like them, have been largely ineffective. In particular, they have not significantly reduced off-contract, or maverick, purchasing. Additionally, they have not provided buying organizations the kind of detailed spend information that is required to forecast, plan, and cost-effectively manage supplier relationships.
Enter Internet-based, automated purchasing systems that:
· feature work flow to enforce the buying organization's policies and procedures,
· offer a quick and easy buying experience based on point and click ordering from electronic catalogs, and
· provide detailed spend information from centralized databases.
Is this Nirvana for both buyers and suppliers? Well, not exactly. The hard lesson that wasn't learned in time is that if you can't create a cost-effective marketing channel for suppliers, they will fall back on prior practices of phone- and faxed-based orders and paper catalogs. In terms of catalog-based purchasing systems, the requirement for an effective marketing channel means providing an efficient, feasible means for creating and maintaining a supplier's electronic catalog. The business case for meeting this need is clear and compelling: When the majority of a buying organization's suppliers don't participate in a new automated purchasing initiative, the entire effort is seriously undermined, if not doomed. Simply put, without suppliers' catalogs to provide the purchasing stock, buyers have nothing to purchase.
One might think supplier enablement (creating and maintaining an electronic version of a supplier's catalog) is the problem of small- and minority-enterprise (SME) suppliers who may lack the resources to participate in automated solutions. However, even major B2B suppliers, like Boise Cascade, Grainger, VWR International, Newark Electronics, Dell and others, are participating in dozens, if not hundreds, of electronic marketplaces, all of which demand a unique catalog. Along with those unique catalogs come the attendant problems of increasing IT costs and taking the customer further away from the services these companies have linked to their products and that distinguish them from their competitors.
The most critical factor that will drive the adoption of Internet-based B2B procurement is that the re-engineering of purchasing processes offers a greater and more reliable benefit than the re-engineering of sales practices. This course of action is supported because procurement savings flow directly to the bottom line, whereas, the impact that increased sales have on profits depends on the profit margin of the product or service being sold.
MRO procurement represents one of the biggest opportunities for improvement and savings in the majority of organizations. In the United States alone, businesses spend $1.4 trillion on non-production goods and services each year. However, MRO purchasing is one of the few operational areas that has yet to be effectively automated. Traditional material requirements planning (MRP) and manufacturing resource planning (MRP II) systems are focused on the acquisition and management of production materials. Enterprise resource planning (ERP) systems are designed for purchasing professionals and require significant user training.
MRO procurement is an especially attractive target for automated purchasing systems, because MRO orders are primarily low-dollar purchases that are comparatively costly to process. In fact, order processing costs often exceed the price of the items being purchased and constitute an inordinate portion of a procurement professional's workload. By introducing automated workflow and speeding the approval process for orders and order transmission to suppliers, labor costs (the most expensive factor in order processing) can be slashed.
By now, most buyers have realized the substantial benefits that e-procurement offers, but suppliers remain reluctant. However, the benefits for suppliers are just as real.
In the past, orders were mailed, phoned or faxed in by the buying organization, which prevented the direct interaction between a supplier and the end consumer of their goods. The direct interaction provided by an online catalog comes with a number of benefits, the most notable ones being:
· a reduction in order errors and, therefore, reduced return rates;
· improved customer service; and
· the establishment of a direct marketing tool.
In addition to these softer benefits, online catalog ordering also affords a measurable reduction in the cost of acquiring an order. Online ordering eliminates the need for phone- or fax-based ordering where a customer service representative is acting, in most cases, in merely a data entry capacity. The same is true for fax-based order placement.
An additional benefit to the supplier is that once an online catalog presence has been established it can create new marketing opportunities that can reach clients that are not under contract.
Why then, with so many potential benefits dangling before them, have buying organizations and suppliers failed to realize the promise of Internet-based purchasing systems?
One of the main obstacles to supplier buy-in relates to the problem of open standards.
To realize the benefits of automated purchasing systems as applied to MRO procurement, stakeholders require a cost-effective means to create and maintain electronic catalogs and to make catalogs readily available for multiple purchasing solutions. Without the rule of build a catalog once; use it many times, suppliers both large and small are inhibited from full participation in the B2B marketplace. And, as discussed above, the effectiveness of purchasing systems for buying organizations is directly dependent on the level of supplier participation. The benefits of the build once approach are substantial and can be summarized in the following areas:
· Suppliers will be more motivated to invest in electronic catalog development because they will be able to increase their market share by participating in a variety of buying organizations' purchasing systems.
· Deploying one universally accessible catalog reduces information technology costs that can be applied directly to the bottom line or reinvested in customer service improvements.
· Through increased supplier participation, buying organizations will benefit by being able to purchase the full spectrum of MRO goods and services they require to justify and sustain new purchasing systems.
For Internet-based purchasing systems, the key to achieving these benefits lays in the promulgation and adoption of supplier enablement and content management tools based on OBI (open buying on the Internet) standards. Full migration to OBI-based tools represents the third (and just beginning) phase in the evolution of supplier enablement/content management: supplier-neutral standards for supplier-managed content. Prior phases included buyer (or marketplace) managed content, followed by supplier-defined standards for supplier-managed content. Solutions developed during both these phases suffered from serious drawbacks, because they offered so many different and incompatible standards for B2B order processing. In a very real sense, these solutions hampered (and continue to hamper) the entry of small- and middle-enterprise-sized suppliers into the B2B Internet marketplace. And even for very large suppliers, the need to generate multiple catalogs to meet multiple standards makes continued growth in the B2B marketplace an increasingly costly venture.
In today's marketplace, solutions exist from each of the three phases described above. OBI-based tools represent one of three widely used standards:
· OBI - supplier-neutral and used by 90 percent of all the major B2B buy-side procurement suppliers
· cXML Punchout - primarily used by Ariba, but lacks the data required to manage procurement when compared to OBI
· OCI Roundtrip - used by Commerce One and SAP, but lacks even more of the relevant procurement information required by purchasing organizations than does Punchout
Of these three standards, only OBI eliminates Vendor Lock, whereby trading partner relationships are influenced by the technology employed by either the buying organization in their choice of a procurement system or by the supplier and the B2B protocols supported by their catalog. And only OBI offers the ability to promote what many participants see as the future of B2B: one marketplace. This future will mean that, regardless of the marketplace utilized or supplier software employed, buying organizations can buy from any supplier of their choosing.
Diversified Supplier Base
While adopting open standards will eliminate one significant barrier for supplier participation in B2B solutions, this alone will not enable all suppliers to fully participate in the electronic marketplace. For small, midsize, and minority suppliers, limited resources may slow or prevent their entrance. Both business and government realize the need to include SME suppliers in their B2B solutions. In the United States, for example, minorities represent approximately 29 percent of the population and, according to estimates of the U.S. Department of Commerce, will represent majorities or near-majorities in many states by the year 2025. Similarly, minority purchasing is forecast to grow from a current $1.33 trillion to between $4 trillion and $6 trillion by the year 2045. For business the implications that pursuing supplier diversity may increase market share in minority communities is clear. For government organizations, increasing supplier diversity is in keeping with mandates that government-purchasing patterns reflect the demographics of the populations these organizations serve. For both business and government, increasing supplier diversity makes sense because, as reported by the U.S. Small Business Administration, small businesses represent a significant source of innovation and, in some cases, offer lower price structures than do larger, more bureaucratic businesses.
To promote SME supplier participation in the B2B marketplace, buying organizations can pursue a variety of initiatives, such as:
· Instituting or expanding SME supplier outreach efforts to make SME suppliers aware of a buying organization's B2B objectives and programs, and to promote the benefits of participation.
· Developing and implementing specific programs for SME supplier participation in B2B solutions, as well as monitoring and evaluating the effectiveness of these programs, and modifying them as the B2B marketplace evolves.
· Seeking out and implementing financing programs in which SME suppliers can participate in order to fund the resources needed for them to participate in the buying organization's B2B programs. For some SME suppliers, resources as basic as personal computers and access to the Internet may need to be addressed. For others, programs may be required to electronically enable suppliers' catalogs.
For SME suppliers, the critical need is to engage now with prospective buying organizations to learn how business practices should be adapted and how resources should be targeted to meet the requirements of the B2B marketplace. In addition, suppliers should seek out organizations that offer open standards tools and solutions to create electronic catalogs that many buying organizations can access. Suppliers also need to consider the potential increase in revenue B2B opportunities can provide and balance that against the cost of entering and participating in the electronic marketplace. Most important, suppliers should consider the cost of not participating in the B2B marketplace, especially the potential for revenues to decline as buying organizations increasingly look to Internet-based purchasing solutions to meet their purchasing needs.
Dave Liggett is the chief information officer of Enabling Business Technologies. He has served for two years on the Board of Directors for the OBI Consortium and currently chairs the OBI Compliance Workgroup. Natalie Johnson is the vice president of client services for Enabling Business Technologies and has 20 years of consulting experience in such areas as large-scale financial management and procurement systems implementations.