Procurement: The Next Frontier in E-Business

E-commerce is in hypergrowth, with many companies spending $1 million and more on systems to put their products and services out on the Web.

However, many issues still hamper the fruitful deployment of such sites, according to Roy Satterthwaite, research director with Gartner Group (Stamford, Conn.). In many cases, companies simply aren't prepared to handle an onrush of visitors, resulting in embarrassing system crashes. "You have to make sure you have enough scalability after you run your Super Bowl commercial," he points out.

Nevertheless, change is coming on fast, particularly in business-to-business e-commerce. "Procurement automation is a big area for 1999, the main boom area of e-commerce on the buy side," Satterthwaite says.

This is an area ripe for widespread automation. Companies that finally get away from manual methods of procurement will start to see some gains in efficiencies and cost savings, agrees a report from The Hackett Group, a division of AnswerThink Consulting Group (Atlanta). Making the first move to automation--such as bar coding and EDI--will cut procurement costs from an average $9.50 per transaction to $1.87.

While top-performing organizations in the study use bar coding to expedite processing, more than 80 percent of material receipts at the average company are still processed manually, says Greg Hackett, president of the firm. Similarly, EDI is still used only 30 percent of the time. Order placement, release and acknowledgement and shipping notices remain manual processes at most companies.

The Hackett Group study also finds that procurement spends the bulk of its time for operational support activities, such as requisition and purchase order (PO) processing, supplier selection and material receipts processing. With 76 percent of procurement's overall time focused on lower-value activities, the study confirms that an appreciable number of managers and professionals are engaged in routine, day-to-day activities, rather than higher value-added decision support, thereby limiting the buying leverage across the corporation.

On the average, a billion-dollar company contracts with 12,200 suppliers, Hackett finds. However, procurement systems tend to be customized, complex and not highly integrated, and the average age is just over seven years. Given that every six to eight years a company typically replaces most of its procurement systems, many companies are due to update and replace their procurement infrastructures.

E-commerce is still in its infancy, however, mainly treated as "experimental projects," Satterthwaite warns. Thus, there is little evidence that companies "develop a business strategy to support the expansion of these projects," he says.

One trend that may hasten deployments is the rise of electronic marketplaces, or "community extranets," Satterthwaite says. These online malls are providing access to products from a variety of competing companies, presented in an objective or product-neutral forum. Examples include: PlasticsNet for the plastics industry; BizTravel.com for business travelers; iShip.com for access to various shipping services; and Chemdex.com for the chemicals industry. The rise of these collaborative online communities will fuel the growth of online procurement and selling systems, as companies try to get on board with their particular industry sites.

Such a convergence of competing companies into common marketplaces lays bare the incompatibility between systems and even semantics, which will "inhibit fluid business-to-business interactions," Satterthwaite says. For example, he illustrates, one computer company may sell products in MIPs, another may sell in MHz. Chemdex.com has a crew of 12 Ph.D.s that spend their days "rationalizing and cleansing content" of information flowing from participating companies.

There is also a growing convergence between buyer-managed catalogs, supplier-managed catalogs and electronic marketplace-managed catalogs, Satterthwaite points out. A hybrid approach to cataloging will assign the most frequently purchased goods--such as paper stock and paper clips--to buyer-managed catalogs.