E-procurement: How to make it a part of your business strategy

To compete in the e-world, small- and midsize companies must make buying and selling on the Web a part of their business strategy. Read more for expert advice on making it happen.

According to a recent study by The Boston Consulting Group, business-to-business e-commerce will reach $2.8 trillion by 2003. Internet-based transactions will grow at a staggering rate of 80 to 90 percent over the next three years, the study said.

A similar study by Wilton, CT-based Deloitte Consulting found that procurement will drive a good part of that increase. According to the study, electronic procurement—buying goods and services electronically—is a key part of nine out of 10 companies’ business plans.

And e-business application providers are introducing products specifically for the mid market. Vendors such as RightWorks,FileMaker, Inc. , and Ariba are offering hosting of e-procurement applications for smaller and emerging companies.

So what does all this mean for your business? Read on to find out.

Buying and selling in the e-world
The question for many small- to midsize companies is how to prepare for e-procurement, both as buyers and as sellers. Some experts recommend that they begin with a seed and gradually build e-commerce into their business strategy.

“The evolution from step one, to two, to three, and so on, that time cycle is going to become very short,” said Claude Watson, president of CIBER, Inc.’s enterprise application solutions group. “We recommend that they start small, get a concept, get something up and running. I don’t think companies have the luxury like with an ERP implementation, where you might have a three-year time span. People in today’s market don’t have time to wait three years. They’ve got to come up with a partial solution to get to the market faster.”

Fred Studer, director of e-business for Denver-based e-business software vendor J.D. Edwards, said the Internet is “leveraging the trading community not only to bring different buyers and sellers together, but also to bring different types of capabilities together, such as auctioning, business intelligence, and symmetrics.”

Heather Ashton, a senior analyst for electronic business strategies for the Hurwitz Group , said e-procurement—no longer exclusive to the large enterprise—is moving down-market.

“Recently, we’ve seen more activity down in the mid market, mostly automating things like indirect goods and office supplies. This is a big opportunity for the mid market to utilize e-business through e-procurement.”

As sellers, smaller companies can penetrate markets at a much lower cost by taking their products to the Web.

“The seller gets an expansion of markets. So even though there is pressure on their revenues, there is a tremendous expansion of markets, which allows them to earn more money,” said Prashanth Narasimha, director of corporate marketing for SAPAG . “If a seller today wanted to have an office in China, they would have to have a considerable amount of expense. If a seller wanted to be present in 50 catalogs or 50 different companies, every time the seller wants to make a change to his pricing it has to be done at 50 different places.”

E-procurement is also a benefit on the buyer side, where purchasers get price transparency, which makes them strong negotiators. For example, at Chemdex, a Silicon Valley-based life sciences and biotech e-business marketplace, buyers can save money by completing an online purchase order versus the traditional paper catalog. “Companies in the life science and chemicals industries have a need for a specific type of products. This is their primary paying point, so that’s why they’re drawn to the vertical marketplace,” said Ashton.

Roadblocks to e-procurement
Experts are quick to point out, however, that small- to mid-size companies will face a number of obstacles in establishing e-procurement practices. While it’s relatively easy for them to buy and sell goods and services online, they may have difficulty in supplying to larger companies.

“We’re going to see a contraction in the supply chain. It’s not that dissimilar to what we saw with GM, deciding to push EDI standards on a lot of companies. They would send their EDI transactions to their smaller suppliers to get that information out on the other end and re-key it into their system. I think we may see some of that as the large, Fortune-500s embrace business-to-business e-commerce and the smaller suppliers aren’t ready to. We remove work at the tier-one level, but they push some of the work level to the smaller supplier.”

The fragmentation of suppliers and buyers can be a stumbling block for purchasing agents as well. Smaller companies often lack an overall picture of their spending with a given supplier. Consequently, they can’t take advantage of the discounts available under corporate purchasing contracts. One solution to that may be for small companies to aggregate all of their spending to get better volume discounts, Ashton said.

Ashton also recommends that smaller organizations adopt a business strategy that will enhance and manage communications among partners, suppliers, and customers. “It’s important that they be able to capture and store information about their customers’, partners’, and suppliers’ behavior—whether it be through a Web site, a portal or an extranet—and use that intelligence to apply to their business model and respond with the appropriate products and services.”

While e-procurement will allow small- and midsize companies greater presence than ever before, it still won’t completely level the playing field.

“The Internet provides a greater opportunity for companies to seek out bargains and best prices, but you can see (vendors) still catering to the large companies and purchasers by offering them special prices and discount rates,” Ashton said. “Aggregated buying takes a step in that direction by allowing small companies to band together to buy something for a better price. But the largest companies, the GMs of the world, are still going to be able to negotiate a better price than the small- and mid-market companies.”
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