Online Purchasing Activity Up in Q4

Large organizations drive increase, but cost savings elusive for some, ISM/Forrester report shows

TEMPE, AZ  January 24, 2003  Online buying activity surged in the fourth quarter, as organizations across the board increased their e-procurement spend for both direct and indirect goods, although not all buyers are seeing cost savings from using Internet purchasing tools, according to the latest Report on e-Business from the Institute for Supply Management (ISM) and technology consultancy Forrester Research.

The ninth edition of the report, covering the period through December, showed that the average percentage of indirect materials that purchasing organizations were buying online rose in the last quarter by 1.5 percent, to 10.5 percent, and the average percentage of direct materials purchased on the Internet shot up by 2.9 percent, to 9.4 percent.

"Over this past quarter, we have seen significant increases in most of the major areas covered by this report," said Edith Kelly-Green, spokesperson for ISM and vice president and chief sourcing officer for FedEx.

Large buying organizations  those that buy more than $100 million per year  registered the most dramatic increase, with nearly 86 percent of such companies reporting that they had bought direct materials online in the past quarter, up from 71 percent in the previous quarter. Smaller buying organizations  those that buy less than $100 million per year  purchased direct materials in slightly larger numbers in the fourth quarter, edging up to 60 percent from 58 percent the previous period.

The number of organizations buying indirect materials online also inched up, from 90.5 percent to 94.3 percent for large buying groups, and from 75.8 percent to 78.9 percent for smaller organizations.

Buyers from all organizations reported significant increases in the use of online auctions, with 27.2 percent of buying groups using such tools in the latest period, against 18.8 percent in the third quarter. Manufacturers, in particular, expanded their use of e-auctions, with nearly one-third (31.3 percent) having used an online auction tool to purchase goods or services in the fourth quarter, up from 22 percent in the previous quarter.

Use of enterprisewide procurement tools that incorporate the Internet rose from 35.9 percent in the third quarter to 42.6 percent in Q4. Again, manufacturers led the increase, with the percentage of manufacturing companies using such tools rising from 30.8 percent to 41.5 percent quarter-to-quarter.

Notably, despite the online purchasing activity, just 45.6 percent of large buying organizations reported that their online purchasing and supply management activities have decreased the total cost of ownership of their products and services, although that number was up significantly from the third quarter, when the figure was 38.2 percent. In the fourth quarter, 8.1 percent of large organizations reported that e-procurement had actually increased their costs, down from 8.7 percent in the third quarter. The remaining organizations reported no change in their costs.

Smaller organizations seem to be having less success at using the Internet to lower their costs, with just 15.4 percent of such companies indicating that e-procurement had lowered their costs, down from 19.2 percent in the previous period. Moreover, 8.4 percent of small buying groups reported that e-procurement had increased total cost of ownership in the fourth quarter, up from 7.9 percent in the third quarter. More than three-quarters (77.4 percent) of small companies reported that the Internet had no impact on their costs in the fourth quarter.

Kelly-Green noted that many organizations still have return on investment (ROI) and other concerns about e-procurement technologies. "There are still a lot of budgetary concerns, as well as issues dealing with connectivity and return on investment," she said. "One respondent commented, 'It is difficult to integrate with current systems, and has limited value at present time,' while another noted, 'We have stopped attempting to implement an enterprisewide e-procurement solution at this time because the ROI is not there for us.'"

Nevertheless, e-procurement technologies continue to see greater adoption, with the number of buyers reporting that they are at least halfway toward fully adopting e-procurement rising by 2.7 percent over the previous quarter, to 19.5 percent. The survey also revealed that companies are continuing to reengineer their procurement procedures to take advantage of the new technologies: 9.8 of all respondents (including 15.3 percent of large organizations and 5.0 percent of small buying groups) reported in the fourth quarter that the Internet has had a significant or dramatic impact on their internal procurement processes.

For the Report on e-Business, ISM and Forrester Research received survey replies from 294 supply management executives from both manufacturing and non-manufacturing organizations. The report addresses the results of all organizations, a comparison of manufacturing and non-manufacturing organizations and a comparison of organizations that procure more than $100 million on direct and indirect materials per year, versus those that purchase less than $100 million per year.

The next release of the ISM/Forrester Research Report on e-Business is scheduled for April 15.

For information on previous editions of the ISM/Forrester Research Report on e-Business, please see the following iSource Business articles:

" January 24, 2001 - "The Votes Are In"
" April 17, 2001 - "e-Buying Up, But ..."
" July 26, 2001 - "e-Procurement Continues Upswing"
" October 17, 2001 - "e-Collaboration Heats Up"
" January 21, 2002 - "e-Buying Up at Large Organizations"
" April 19, 2002 - "e-Buying Slows at Large Organizations"
" August 5, 2002 - "Online Buying Continues Upswing"
" October 16, 2002  "Online Purchasing Stalled in Q3"
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