The Internet has changed dramatically the way that companies and people communicate, both within the enterprise and between enterprises. The time dimension of communication is collapsing to an almost instantaneous condition and, simultaneously, the breadth of communication reach has become global. Integration and collaboration possibilities are now at levels never before experienced. e-Procurement is about value creation, for both buyer and seller. e-Procurement is about making the enterprise more efficient and effective. Focus must be on the transactional efficiency of procurement and, most importantly, the effectiveness of your process. Lowering the cost of the purchase order or invoice, for example, is necessary. To lower the cost or eliminate the need to buy goods or services is a major benefit to the bottom-line profitability of your company. The current dramatic rate and pace of Internet-driven change will pale in comparison with what is ahead of us over the next two to three years.

Efficiency : Speed and Cost of Electronic Transactions. 

The Internet has enabled companies to realise the potential of electronic data interchange (EDI), namelywith regard to process transactions, such as purchase orders and invoices, completely electronically. It offers any organisation with a desktop computer thecapability to send and receive electronic documents more quickly and at a fraction of the cost of processing paper documents. Today, IBM uses not only EDI, but also an application called Forms Exchange and XML. Both Forms and XML have enabled IBM to move its procurement process to the Internet without disrupting its progress made via EDI. With a 30-minute conference call, suppliers can receive purchasing orders via a Web browser and mail box; with one click the supplier, using Forms Exchange, can automatically create an invoice from an IBM purchase order. The invoice is sent to the Internet server and converted to a standard EDI format for processing through IBM accounts payable, removing several days from the old purchase/ invoice/payment cycle. At IBM, we run a virtually paperless process and have just under 20,000 suppliers doing business with us electronically.

Global Reach

We continually hear a great deal about globalisation and its implications. Many factors contribute to this phenomena, and perhaps none more than the Internet. With the click of a mouse you have access to information – a collaborative environment around the globe. For procurement, this means Web-enabling the procurement process from market information through to execution of the order.

Content

Coupled with the global reach of the Internet is the available content. Initially, in 1994 and 1995, content was static and mostly text. Companies that had Internet sites offered information describing their business with little or no product information. Later, product catalogues began to appear, but little e-commerce occurred because the catalogue content was not tailored to individual customers. It is a challenge to create and maintain content, but catalogue-based procurement has become widespread because it offers the promise of significant savings in processing expense and cycle time. Content means more than catalogue information. From a procurement standpoint, it means that suppliers will maintain and manage content. Content can and will grow to cover all types of information: information about installed equipment, configurations, possible upgrades, etc. It means information about the warranty and service concerning individual products already purchased. The personalisation of Internet content will mean that professional buyers can and will have information structured and focused to assist in routine and complex aspects of their work flow. All of this leads to a reduction in cost and a shorter cycle time.

Integration

As the suppliers enrich the content maintained on their websites and create transaction-based systems, the integration of buyer and supplier systems is possible, bringing true process-to-process and server-to-server connection. This has been the goal of many enterprises for some time. The traditional approach to this objective, database-to-database transaction system, has The Effects of the Internet on Procurement not provided the streamlined and realtime business solution required. This results in business systems with inherent roadblocks to successful integration, such as:

• Redundant data;
• Redundant repositories;
• Redundant transactions;
• Data synchronisation/data co-ordination challenges; and
• Incompatible data structures.

The Internet offers the opportunity to overcome these inhibitors and achieve buyer-to-supplier integration. When this is achieved, the expense and cycle time for transaction processing will be measured in the same infinitesimal dimensions as the computer technology driving the integration. For integration across enterprises to work, standards for content, structure and processes must be used. It is important to recognise these standards throughout a company as it transforms it into a complete, customer-facing e-business.

Collaboration

Collaboration on a common product or objective offers great potential for pooling the creativity and knowledge of buyers and sellers at the speed and reach of the Internet. Collaboration touches every aspect of the buyer/seller relationship. For instance, by working together, sellers can help buying companies to make better and quicker product-development decisions. At IBM we use Web-based applications that allow suppliers to obtain design and technical-drawing files via the Internet. When a supplier requests a product file using a Web browser, the requested design file is obtained from the central IBM repository, automatically translated into the requested view/file format, and forwarded to the requester. A part can be displayed in a variety of views and computer-aided design/computer-aided manufacturing file formats. Suppliers can obtain design drawings throughout a project’s life-cycle. The Internet makes this possible. We use another tool to standardise and simplify the exchange of component pricing information with our contract manufacturers. This application enables procurement to make fast and accurate bid evaluations and component price comparisons to ensure the lowest cost. The entire bill of the material cost-generation process for assemblies is automated. Electronic spreadsheets and templates provide a standard format for data exchange that simplifies negotiations, reduces production cycles and speeds time to market.

Networks and e-Markets

The above descriptions illustrate how the Internet is changing the speed and scale of the way that buyers and sellers interact, and perform basic purchasing transactions. The Internet is changing dramatically the markets themselves with all of the following major effects:

• Transaction speed and cost;
• Global reach;
• Content;
• Integration; and
• Collaboration.

These combine into the phenomenon known as business-to-business (B2B) trading networks or e-marketplaces.

A trading network is a group of suppliers and one or more buying companies that agree to use a common system to conduct business. Over the past 18 months, there has been an unprecedented growth in the number of trading networks that have been established.

The efficiency and effectiveness of electronic B2B commerce must be realised by the buyers and suppliers. Buying companies are pushing hard to establish electronic systems for their procurement operations. The suppliers are under a great incentive to establish electronic interfaces for the procurement systems of their important customers. However, to develop a unique interface for every customer is costly and may be beyond what most suppliers can do. If there are multiple buyers, the networks offer a partial solution. In this scenario, the supplier can establish one interface in order to accomplish business with several customers through the same interface and process.

There must be strong incentives for both buyers and suppliers to agree on standard systems and develop interoperable systems that networks can offer. This is where the concept of a network ‘backbone’ is applied. The backbone would connect multiple networks in such a way as to make it apparent to the users that they were operating outside the networks. Suppliers could minimise the number of networks they joined – ideally one, but probably more – but would still have widespread market presence because buyers from other networks could find them and, more importantly, transact business with them in an efficient electronic B2B environment. Networks linked in this way would become a single virtual network. While the best world would be a backbone that linked all the networks and formed one virtual network, it is more likely that there will be several large backbones that create a few large virtual networks. That is still a better situation than the hundreds of networks that are present today.

Creating value for your company and your shareholders is within your grasp. Create your strategy, set plans in motion and take action now. The Internet is a tremendous opportunity for buyers and sellers. Professional procurement communities must recognise the potential of the Internet and seize the day.