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The Case for Internet Procurement

Two key factors will fuel the shift to internet-based procurement. First, business-to-business transactions conducted on the Internet will continue to dwarf on-line business-to-consumer transactions. Aberdeen Group research indicates that the value of business-to-business transactions currently conducted on the internet is 10 times to 20 times greater than the value of on-line business-to-consumer transactions. This gap will widen as more companies increase their level of interaction with trading partners over the Internet.

The second - and more critical - factor that will drive the adoption of internet procurement is that reengineering of purchasing processes offers greater and more reliable benefits than does reengineering of sales practices. The reason: procurement savings flow directly to the bottom line. By contrast, the impact that sales have on profits depends on the profit margin of the product or service being sold.

For example, a $5-million reduction in procurement costs increases profits by a corresponding amount. Thus, even a company with a healthy 10% profit margin would need to increase sales by $50 million to attain a similar boost in profits.

MRO procurement represents one of the biggest opportunities for improvement and savings at most organizations. All told, U.S. businesses spend $1.4 trillion on non-production goods and services each year, according to estimates from Purchasing Magazine. Yet, until recently, few organizations have had an effective strategy for managing and controlling MRO expenditures. The lack of standard monitoring and ordering procedures for such purchases can promote significant off-contract or "maverick" purchasing. Maverick buys account for as much as 40% of all MRO spending at some organizations, limiting an organization's ability to effectively track MRO purchases; diminishing opportunities to take advantage of pre-negotiated prices and volume discounts; and, reducing leverage for future negotiations with suppliers under contract.

In addition, MRO orders are primarily low-dollar purchases that are comparatively costly to process - with order processing costs often exceeding the price of the items being purchased - and constitute an inordinate portion of a procurement professional's workload.

MRO purchasing is also one of the few operational areas that has yet to be effectively automated. Traditional Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRP II) systems are focused on the acquisition and management of production materials. Enterprise Resource Planning (ERP) systems are designed for purchasing professionals and require significant user training. Many of these systems do not support comparative buying practices, parts substitution, or supplier consolidation.

By comparison, Internet Procurement automation applications are based on open, Internet Protocol (IP) technologies, incorporate an intuitive user interface, require little or no user training, and can be easily disseminated to multiple desktops via a corporate intranet or extranet. Internet Procurement reengineers the purchasing process by transferring order generation to the requisitioner level while supporting the authorization hierarchies and business rules established by the procurement department.

User organizations surveyed by Aberdeen identified six key benefit streams used to justify acquisition of Internet Procurement software:

• Improve data gathering and reporting on MRO expenditures

• Tighten control over off-contract or "maverick" purchasing

• Enhance negotiation of reduced material and service costs provided by the increased use of preferred suppliers

• Lower procurement administration costs

• Shorten requisition and order fulfillment cycles

• Reassign procurement professionals to more strategic tasks, such as supply chain management. User organizations also expected Internet Procurement to provide support for supplier rationalization initiatives and improved and/or reduced inventories

The above benefits can translate into significant dollar savings, particularly for organizations that rein in off-contract spending. Rerouting maverick purchases onto existing corporate agreements enables organizations to take advantage of contract prices and volume discounts previously negotiated with approved suppliers. Controlling maverick purchases also provides buying organizations with increased leverage to negotiate more favorable pricing and service arrangements with suppliers, resulting in significant and recurring cost savings.