E-Procurement

RESEARCH BRIEF: Emerging supply-chain e-technologies provide opportunities for growth –

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During the e-boom of the 1990s, academics, consultants, executives and investors alike claimed that e-procurement, and its increasingly central role in supply-chain management, would revolutionize how future business-to-business practices would take place: Efficiencies would be improved and procurement costs reduced; the flow of information along the supply chain enhanced; strategic partnerships between networks of firms deepened. Many predictions about the wide-ranging impact of these transformations proved to be exaggerated. However, it would be unwise to dismiss all this excitement as just smoke and mirrors, because the rise of e-technologies, in fact, has resulted in considerable changes for corporate supply-chain strategies and practices over the past five years.

The widespread adoption of enterprise-resource planning systems, spurred by the Y2K threat, provided a fertile platform for e-procurement growth. The ability to use ERP systems to capture data on companywide spending related to suppliers allowed companies to segment their supply base and separate strategic sourcing from tactical supply. The e-bust of 2000 did instill caution in those advocating for the expanded use of e-procurement; nonetheless, even today, when asked about their future plans, chief purchasing officers point to a diverse set of e-procurement initiatives, ranging from e-sourcing to purchasing process automation to expanded use of reverse auctions (Johnson and Leenders, 2004). So, where should management allocate limited resources? And how are managers to discern promise from pitfall and competitive wins from losses? To address these critical questions, a significant body of research on the advantages and disadvantages of the increasing use of e-technologies in the supply chain recently has begun to emerge.

E-technologies and their applications within the supply chain — including use by suppliers, manufacturers and retailers — range from the simple automation of long-standing business practices to complex networked real-time linkages. One specific area — e-procurement — remains critical to building and maintaining competitiveness for manufacturing and service firms. E-procurement encompasses a number of specific elements, including e-sourcing, e-coordination and e-communities (de Boer et al., 2001; Jap and Mohr, 2002). Current research in the field points to several key factors that favor stronger competitiveness and better performance.

E-Sourcing

E-sourcing includes forward and reverse electronic auctions and online bidding and tendering, which are also referred to as electronic requests for quotations or proposals (eRFx). In particular, electronic reverse auctions, in which online sellers compete to offer a product to a single buyer at the lowest possible price, have attracted a great deal of research attention; for example, Germer et al. (2004) provide a review of the reverse auction literature that includes an analysis of 63 articles.

A growing body of case research has brought to light several interesting insights. Potential benefits of reverse auctions include reducing direct costs, clearly establishing market prices, shortening cycle times and expanding reach, price visibility and market knowledge (Beall et al., 2003). However, other research has identified risks and costs that might justify a reluctance to invest in reverse auctions: risks of interrupting good supply relationships or of developing a poor reputation with the supply base; costs of running the auction versus expected savings; limited potential for savings; and significant discrepancies between actual and bid prices (Johnson, 2003). These observations prompt prudent caution by any manager considering adoption of these technologies.

Reverse auctions are not appropriate for every sourcing process. Katok and Roth (2004) concluded that descending-price auctions work best for commodity-like items, such as plastic resin, personal computers and transportation services, for which markets are well established, whereas these auctions tend to be less appropriate for the market testing of new products. The types of products sourced through reverse auctions also should be stable purchases of nonstrategic products whose value is based primarily on the purchase price, such as those noted above (Jap and Mohr, 2002). Suppliers were found to offer their best prices through either a strategic sourcing process or a reverse auction but did not offer significantly more value when the two were used together (for example, renegotiation). Particularly when potential suppliers experience low-capacity utilization, online reverse auctions can provide a useful way to set price and obtain satisfactory supplier performance.

Several key factors support the successful adoption of reverse auctions: clear commodity specifications; large purchase lots sufficient to justify involvement by a number of suppliers; appropriate supply market conditions; and an existing organizational infrastructure (Smeltzer and Carr, 2002). Appropriate supply market conditions are those in which the market prices of products or services to be auctioned are somewhat elastic; there are sufficient numbers of competitive suppliers; and excess supply capacity or scale economies exist to motivate suppliers. Organizational infrastructure includes qualified employees receptive to the reverse auction tool, accurate demand forecasts and an ability to consolidate purchases. Wagner and Schwab (2004) found that the most important precondition leading to a successful reverse auction was investing time in the preparation stage to understand clearly the competitive situation in the supply market before conducting the auction.

Using reverse auctions has ramifications beyond the potential to obtain better prices from suppliers, as relationships can be reshaped with new, sometimes negative, expectations. At present, a significant gap exists between supplier perceptions of how buyers use auctions and the actual use of these auctions by buyers. On the basis of a study of six reverse auctions and follow-up surveys with participants, Jap (2003) found that reverse auctions increased the belief among both new and current suppliers that the buyer was acting opportunistically. These results suggest that use of online reverse auctions can exert complex relational effects on the supply base.

While reverse auctions dominate the e-sourcing research literature, a survey of CPOs from Fortune 1000 service and manufacturing firms found that reverse auction use was at the same level as online bidding and tendering, and the use of both techniques was highly correlated (Johnson and Leenders, 2004). Moreover, Wu et al. (2003) found that the adoption of e-sourcing was influenced by the organization’s ability to evaluate and exploit external knowledge (that is, learning) as well as by the level of pressure it feels to follow perceived industry norms.

E-sourcing technology does not equate to strategic sourcing, but rather represents one dimension of an overall corporate sourcing strategy. Strategic sourcing, while dependent on significant data mining and analysis, still relies heavily on negotiation and on creating and managing supplier relationships.

Referenced Research »

E-Coordination

E-coordination technologies automate business processes, both within the organization and between a purchaser and existing suppliers. Examples include electronic purchase-order systems, online catalogues and online linkages with suppliers to exchange information regarding fulfillment activities (for example, order and inventory information). While much of the research and the popular press tends to focus on e-sourcing, CPOs report greater use of e-coordination technologies; moreover, further implementation of such systems continues to be a high priority (Johnson and Leenders, 2004). Managers are attracted to the benefits of improved productivity, faster response times and an overall perception of low-risk in implementation.

In a series of case studies, several drivers were observed to spur implementation of e-coordination (sometimes termed “buyerless tools”): outdated information technology systems, competitive pressures to reduce cost and dissatisfaction with the performance of the supply function by other members of the organization (Flynn, 2003). Smeltzer and Ruzicka’s (2000) study of a receipts-settlement technology identified a five-stage implementation sequence: analysis and segmentation of spending (strategic sourcing), redesign of process, use of multiple technologies to support new process, supply-base rationalization and reduction, and electronic payments to suppliers. Thus, given the significant up-front design work, it is not surprising that the reported benefits of e-coordination are diverse and varied, including cost savings from process improvements and price reductions, greater visibility of orders, improved supplier competition and fewer requests for proposals that elicit no bids from suppliers (Flynn, 2003).

The adoption of technologies related to e-coordination is not solely driven by the purchaser. In fact, suppliers have been found to play an important role in e-procurement adoption and implementation. Survey research by Deeter-Schmelz et al. (2001) found evidence that supplier support — in terms of guidance, encouragement, incentives and convenient communication — positively influenced adoption by customers.

E-Communities

While categorizing e-communities is difficult, they can be broadly classified by the type of participants and the range of their interests. Research has identified at least three e-community models: public e-marketplaces; industry-sponsored e-marketplaces; and private exchanges, sometimes labeled intranets and extranets (de Boer et al. 2001). However, firms appear to be taking a cautious approach through relatively low-risk trials. One-third of the respondents to a survey done in 2003 indicated that some materials had been purchased through an online marketplace, although the overall amount of products purchased (in terms of total dollar amounts) remained low (Bartels et al., 2003). Drawing from a survey of 39 firms, Joo and Kim (2004) found that e-marketplace adoption was greater for larger firms and whenever managers perceived greater external competitive pressure.

The popularity of public e-marketplaces, the initial focus of the e-boom, underwent substantial decline during the e-bust, and industry-sponsored e-marketplaces also have experienced consolidation. Industry-sponsored e-marketplaces appear suitable when there is an opportunity to leverage technology costs across companies in an industry, and where cross-enterprise collaboration is needed to capture the benefits from redesigning a process, for example, airline spare parts (CAPS Research and McKinsey, 2002). In contrast, private exchanges have continued their growth and make sense where there is opportunity for competitive advantage or where there are no public- or industry-sponsored e-marketplaces.

Implications for Performance

While it is essential to understand what and how e-technologies have been applied to procurement, implications for performance and firm competitiveness always remain a central concern. Wu et al. (2003) found that e-coordination did indeed positively affect performance outcomes, while e-sourcing generally did not. However, the generally low adoption level of e-sourcing may have attenuated any linkage to performance, and thus it may be too early for an accurate assessment.

Similar results were uncovered by Frohlich (2002). This research found that that e-coordination had a strong effect on e-business performance (that is, percent of procurement and sales revenues conducted using the Internet) and operational performance (that is, faster delivery times, reduced transaction costs and enhanced inventory turnover). Finally, Boyer and Olson (2002) found that costs were reduced and inventory accuracy improved through e-procurement tools.

Using a large-scale survey, Pearcy et al. (2004) found that there is not a single solution to successful implementation of e-procurement systems. Implementation must be designed to support the corporate goals and strategies of the individual firm. For example, a low-cost corporate strategy may employ e-sourcing technologies to identify low-cost sources of supply. However, there are risks. Knudsen (2003) noted that such an emphasis pushes firms toward transactional relationships with suppliers and away from a relational, partnership orientation. In contrast, a firm pursuing a corporate strategy of differentiation tends to exhibit greater use of e-coordination technologies (Pearcy et al., 2004).

However, Frohlich (2002) found that the barriers to effective e-coordination are created by suppliers, customers and the firm itself. Of these, firm-related shortcomings are the most influential; existing business models, current business practices, a lack of technical skills within the organization, and inadequately demonstrated costs and benefits were cited as well. To partly address concerns over how to measure benefits, Narasimham et al. (2003) developed a metric that captures both tangible and intangible elements.

Linkages to Strategy

Collectively, these research findings provide some clues regarding where e-procurement is heading and how managers can leverage links to corporate strategy. At a strategic level, managers can identify both the scope of their supply chain and range of partners that they seek to involve in e-procurement, as well as the form that involvement takes. Once identified, over time the proper mix of e-sourcing, e-coordination and e-community in the supply chain can be developed.

Although e-sourcing technologies have been adopted to a relatively limited degree, it does appear that reverse auctions and eRFx systems will have a place in the e-procurement toolbox of the future. While larger firms tend to lead the way in this area, many others may still be exploring how and where e-sourcing can be used effectively. Barriers limiting adoption, such as limited levels of familiarity and significant up-front investments, are likely to decrease over time as applications diffuse more broadly.

Finally, there appears to be growing interest in private exchanges (for example, intranets and extranets). A careful examination of both the financial and broader competitive benefits (in addition to comparable costs) of these will encourage the development of effective long-term strategies.

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