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The Future of E-Procurement

Aug 28, 2001
By

Michael Pastore






Most organizations are taking a "wait and see" approach toward investment in electronic procurement technology, according to a study by a team of academic researchers.

The "E-Procurement Benchmark Survey" was conducted by Mahendra Gupta from the Olin School of Business at Washington University in St. Louis, Richard Palmer from Eastern Illinois University and Antonio Davila from Stanford University. It was based on survey data collected in the first quarter of 2001.

The study examined the progress of four models of e-procurement technology: e-procurement systems; Internet market exchanges; Internet B2B auctions; and Internet purchasing consortia. It found that 38 percent of respondents use, and 13 percent plan to use, one or more of the four types of e-procurement technology. About 43 percent of the survey respondents currently use or plan to use an e-procurement system, 24 percent Internet market exchanges, 20 percent Internet B2B auctions and 14 percent Internet purchasing consortia. The most popular form of an e-procurement system is software acquired from a third party vendor. Online auctions are used primarily at large national and global corporations, while Internet market exchanges are more popular with governmental, educational and non-profit entities.


Those using one of the four e-procurement technology models have routed about 3 percent of their spending through e-procurement mechanisms. However, significant increases in e-procurement-enabled spending are expected by organizations that have invested in these technologies. Over the next two years, e-procurement system-enabled spending is expected to grow by about 445 percent, public Internet market exchange spending by about 116 percent and Internet B2B auctions spending by about 370 percent.

But right now, most e-procurement is used on a small scale. The bulk of e-procurement spending for most organizations goes to inexpensive, indirect goods, such as office supplies, computers and maintenance, repair and operating goods, where the incremental benefits of purchasing leverage and standardization enabled by e-procurement technology are less robust, the survey found. Only a small number of respondents acquire significant amounts of inventory or capital goods through their e-procurement systems or through online auctions. According to the study, the limited spending activity and inability to move e-procurement beyond inexpensive, indirect goods purchases has clearly negative implications for the economic viability of many providers of e-procurement solutions.

"The big challenge for e-procurement solution providers is to integrate their technology with inventory processes," Palmer said. "If this cannot be done within a reasonable time frame, the market's interest in this technology may drop considerably. Large investments in technology and resources are not justified on the basis of leveraging small-dollar purchases such as office supplies."

The five items of greatest concern to all respondents about e-procurement are integration of e-procurement solutions with legacy/ERP information systems; lack of a technology standards; dealing with anonymous vendors; general lack of awareness as to which solutions best meet company needs; and lack of organizational readiness for e-procurement technology. Organizations that are not involved in e-procurement perceive the technology to be a greater threat to system security and data integrity. Across all e-procurement technology models, organizations identify lack of participation by suppliers as a major concern.

The National Association of Purchasing Management (NAPM) and Forrester Research, Inc. have been tracking online activity for both manufacturing and non-manufacturing organizations. Their third report, published in July 2001, found that nearly 73 percent of organizations use the Internet for indirect purchases -- an increase from 71 percent from the previous quarter. During the same period, 54 percent of buyers reported using the Internet to purchase direct materials -- an increase from the previous quarter's level of 46 percent. The online buyers reported sending 9.8 percent of their total direct materials order over the Internet.

"The full impact of economic conditions are seen in a mixed progress by many of our responding companies. While the general trend is positive, I believe there is now more of a tendency to wait and see before making major strides. This does not mean that the goal is being reassessed, but that the timing may not be as quick as initially planned," said Edith Kelly-Green, vice president, sourcing and procurement at FEDEX.

The NAPM/Forrester report also found that the use of online auctions has significantly expanded. More than 20 percent of organizations bought products or services through an online auction, up from 15 percent in the previous quarter. The number of large-volume buying organizations reporting online collaboration with suppliers dropped to 46 percent from the 56 percent level reported the previous quarter. At the same time, small-volume buyers increased their online collaboration activity to 41 percent from nearly 35 percent last quarter.

"The Internet continues to expand as a buying channel but the panacea has lifted," said Bruce Temkin, group director at Forrester. "Buyers realize that e-procurement takes more than surfing on supplier Web sites. That's why we're seeing a growing number of organizations changing their procurement practices -- and running into the difficulties of integrating their purchasing systems."

The NAPM/Forrester report is based on replies from supply management executives from both manufacturing and non-manufacturing organizations.


 

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