Beware the pitfalls of 
Internet procurement

Customized electronic marketplace services offer speedy return on investment and low costs.

Peek into the offices in your procurement department. On each desk are there dog-eared office-supply catalogs tabbed with multicolored post-it notes? There shouldn’t be. While companies compete aggressively to improve their end products and services, too many pay more than necessary just to conduct their business. Even if they have embraced Internet procurement, companies may not reap the benefits if their product data is not transactive, searchable, and easily accessible.

For large manufacturing and industrial firms, procuring maintenance, repair, and operations (MRO) products—the supplies not used in a company’s end product—is still very cumbersome. As a result, companies incur high per-transaction expenses for such indirect supplies, which have a relatively low dollar value.

But the expense of indirect supplies is hardly inconsequential. MRO goods and services typically represent 30% to 40% of a manufacturer’s expenditures, according to a July 1999 analysis by Aberdeen Group, Inc., a market research organization based in Boston and Silicon Valley. And while many companies have begun to use the Internet for purchasing, the best way to leverage e-commerce for lower costs and a fast return on their electronic purchasing investment is to subscribe to an electronic marketplace.

Three Choices: One Yields High Savings

Here’s the challenge that trips up many companies eager to streamline their MRO procurement: buying a purchasing application is just the beginning. Like a new store with empty shelves, a purchasing application is dependent on giving buyers easy access to price and product information about the products they want to purchase.

Companies have three ways to “fill the shelves”—to make their suppliers’ product information accessible on line to buyers.

1. Do it yourself
Managing the electronic supplier catalog in-house gives the advantage of control. But it’s an illusory gain when the potential pitfalls are considered. 

To support the content-management process, as many as 10 full-time, permanent employees—along with the expense of hardware, software, office space, and overhead—may be required. These folks then have to work with all the organization’s myriad suppliers to acquire product data, which may be in any number of formats, systems, and platforms. The product data will have to be sorted and normalized to a standard so that it’s searchable—a significant challenge. 

One large Western-based technology company tried to go it alone but finally gave up after spending $2.5 million in one year to ramp the product data from 40 of its suppliers. The enterprise was never able to transform the data successfully into a high-quality, searchable database, and there’s nothing that kills the purchasing experience faster for a buying organization than low-quality data. 

As part of an ongoing survey, Atlanta-based AnswerThink Consulting Group estimates that the average cost for a company to start up and maintain its own electronic catalog content in the first year is more than $12 per part. This number is expected to reach $16 within two years as costs continue to rise. With many suppliers providing hundreds of thousands of parts, the cumulative cost easily stretches into the multimillion-dollar range for most large companies. 

2. Have your suppliers do it for you
Some buying organizations require their suppliers to provide their MRO product data in the same electronic format. The apparent advantage, of course, is that buyers avoid the headache and investment of reformatting their suppliers’ product data themselves. But buying organizations still have to gather the data for their purchasing application, standardize it, and store it—which means they still have to cope with varied data quality and ongoing maintenance themselves.

Another pitfall of this choice is the hidden cost. Suppliers required to provide their product data in a specified format have to mark up their prices to cover the cost of their front-end labor.

3. Choose the Marketplace-Services Model
Buying organizations that subscribe to the marketplace-services model pay a fee for their users to access the electronic marketplace via a seamless integration with their purchasing application. The subscription costs far less than half of what it would cost to manage the process themselves.

Buying organizations provide their key supplier contacts to their electronic marketplace service, which then works with the suppliers to get their data in electronic form, organize, standardize, store and maintain it, and ensure that it’s searchable and transactive.

Buying organizations reap valuable benefits from outsourcing to an electronic marketplace service:

• Accelerated return on their electronic purchasing investment—in as little as a few months;
• Ability to tap one central location for purchases, a big advantage for buyers with hundreds of suppliers;
• Reduction of buying outside of negotiated vendor contracts—so-called maverick buying—which alone can save 5%; and
• Reduction of order-processing errors, which can save buyers another 5%.

What’s in it for suppliers? Suppliers only have to transform their data once and can then leverage that investment to multiple customers with diverse procurement needs and negotiated rates. They also benefit by generating more orders from existing customers, expanding their customer base, and lowering costs of processing orders and maintaining product information.

Suppliers that simply post electronic catalogs at their own Web sites run into other problems. Large corporate buyers with numerous contracted suppliers don’t have time to visit each supplier’s Web site to comparison shop, and most suppliers aren’t able to display negotiated prices for each buyer or enable buyers to track their procurement expenses.

Kicking the tires

Not all electronic marketplace services are alike. To choose which service to outsource to, first be sure the marketplace has a track record—some are still selling concepts and vaporware.

A well-designed electronic marketplace service has the following capabilities:

• Provides buying organizations with their own virtual private catalogs;
• Relieves buying organizations of standardizing data from disparate sources;
• Displays each buying organization’s contracted items, negotiated prices, and other contract terms required for the transaction;
• Provides updated data that reflect price and product changes;
• Delivers accurate, searchable catalog content;
• Seamlessly integrates with the leading electronic purchasing applications to complete the requisition process; and
• Facilitates business document transactions by sending purchase orders to suppliers via electronic data interchange (EDI) or fax.

Buyers and sellers alike can avoid the pitfalls of Internet procurement by outsourcing to an electronic marketplace. There’s one other benefit: those dog-eared office-supply catalogs can be put to good use as coasters for morning coffee.

Welty is vice president of marketing at TPN Register, LLC, Rockville, Md.