Online Purchasing Stalled in Q3

But large organizations aggressively adopting the Internet in their purchasing activities, ISM/Forrester report shows

Tempe, AZ  October 16, 2002  Overall adoption of the Internet for purchasing stalled in the third quarter, but large organizations reported significant progress in fully adopting the Internet in their purchasing activities, according to the somewhat contradictory results of the latest Report on e-Business from the Institute for Supply Management (ISM) and technology consultancy Forrester Research.

In this, the eighth quarterly survey of supply management executives from manufacturing and non-manufacturing organizations, ISM and Forrester found that 82 percent of companies reported purchasing indirect materials online in the third quarter, down from 84 percent the previous quarter. Meanwhile, 63.8 percent reported purchasing direct materials online in the third quarter, against 64.6 percent in the previous quarter.

At the same time, e-procurement appeared to pick up steam within larger companies. The percentage of large organizations (those that procure more than $100 million per year) that reported they were about halfway or further along the way toward fully adopting the Internet in their purchasing activities rose from 18.8 percent in the second quarter to 25.5 percent in the latest quarter, according to the current report.

Moreover, the percentage of large companies that view the Internet as very important or critical to their purchasing and supply management plans over the next 12 months rose from 38.8 percent in the second quarter to 46.1 percent in the latest survey.

"Despite the flat adoption of online purchasing we saw this quarter, more firms are seeing the Net as critical to overall purchasing," said W. Daniel Garretson, senior analyst at Forrester.

Garretson said that the results of the latest survey seem to indicate that companies are figuring out what works best for online buying and focusing their efforts on those activities that provide the most value.

For example, while use of the Internet for auctions decreased from 22.4 percent in the second quarter to 18.8 percent in the third quarter, the use of electronic marketplaces or private hubs notched upwards from 29.1 percent to 32.7 percent, and the use of online requests for proposal (RFPs) grew from 60.6 percent to 64.3 percent among all respondents.

The fraction of large buyers that used enterprisewide procurement tools increased by a third, to 53.6 percent from 40.5 percent. Also, for the first time more than half of both manufacturers and non-manufacturers reported collaborating with suppliers online, pushing the overall fraction of firms that collaborated with suppliers to 53 percent.

Overall, for all organizations, the fraction of total indirect purchases placed online rose from 8.7 percent to 9 percent quarter-on-quarter, while the average amount of direct purchases made online ticked down slightly, from 6.6 percent to 6.5 percent.

Interestingly, the percentage of respondents reporting that the Internet has resulted in significant or dramatic changes in their organizations' purchasing procedures fell from 11.1 percent in the second quarter to 6.9 percent in the third quarter.

"Companies are progressing at varying speeds in the e-business journey," said Edith Kelly-Green, spokesperson for ISM and vice president and chief sourcing officer at FedEx. "For example, we see increases in the use of procurement tools  such as [enterprise resource planning], Web-based procurement and extranet applications  while at the same time there is a reduction in the number of companies that have changed their procurement processes as a result of the Internet."

Kelly-Green attributed these results primarily to economic concerns. "One respondent commented that 'companies are still trying to find the right mix,' while several mentioned they were waiting for standards to be developed before implementation," she said.

In addition, according the third quarter report, tight resources, a lack of standards and supplier connectivity are among the factors working to limit e-business adoption at present. "When asked about issues they were encountering that affected e-business initiatives, respondents continued to mention a lack of budget or resources, as well as the need for standards and integration," the report states. "However, firms also pointed to supplier issues including supplier readiness, the need to connect to multiple suppliers and the need for face-to-face contact with suppliers as significant sources of concern."

The sluggish economy may also have been to blame for another interesting result from the survey: 65 percent of all respondents reported no change in the cost of ownership of products or services from their Internet activities over the past three months, a slight increase from last quarter's 62.4 percent. Significantly, the percentage of manufacturers reporting cost savings decreased significantly from 32.7 percent the second quarter to 24.5 percent in Q3. The fraction of non-manufacturers reporting cost savings increased slightly, from 27.1 percent to 28.8 percent.

For the Report on e-Business, ISM and Forrester Research received survey replies from 350 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 mid-January 2003.

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