Procure this

In the early days of e-procurement — way back in the late 1990s — only the largest companies could afford to implement the necessary systems. For business-to-business suppliers, that meant they didn’t have to worry about integrating their operations with their customers’ e-procurement systems, unless their customers were among the Global 2000.

But the cost of e-procurement systems — modules used by purchasers that allow for highly personalized, automated bidding and buying of products from cooperating vendors — has declined. In 2001 the average license fee for an e-procurement system was more than $1 million a year, according to Boston-based research firm Aberdeen Group. At the end of 2004, that figure was down to about $380,000.

With the high end of the market for e-procurement systems nearly exhausted, major e-procurement system vendors are beginning to tailor offerings to the needs and budgets of midsize companies. And companies that specialize in business support services, such as IBM, Ketera, Perfect Commerce, and USInternetworking (USI), are providing hosted e-procurement services, dropping the barrier a bit lower.

As a result, b-to-b suppliers that didn’t need to worry about offering e-procurement compatibility now have to, or risk losing even their midsize customers to competitors that do enable the technology.

“A big company like Target might say, ‘If you want to sell to us, you have to make yourself compatible with my system.’ That involves anywhere between $25,000 and $250,000 of IT work,” says Leonard Lee, a spokesperson for Shelton CT-based e-procurement system supplier Vinimaya. “But you either cough it up or lose Target as a customer.”

Becoming compatible

On the bright side, the cost of becoming compatible as a merchant has also declined, and the degree of complexity has decreased. Four years ago it was up to the b-to-b merchant to make its catalog available in the electronic format preferred by each customer and to continually update it. That was no easy task, given that there were dozens of e-procurement system suppliers, and they frequently had different file formats and protocols. Experience integrating with customer A’s e-procurement system from SAP, for example, was likely to be of minimal help when having to integrate with customer B’s system from Oracle.

Fortunately for merchants, today’s e-procurement systems enable customers to assume responsibility for catalog acquisition. Some e-procurement systems can take your uploaded catalog, format it, and display it in resident software. This relieves you, the merchant, from having to do the work.

There is, however, a problem with that solution, says Dianne Ahrens Kibbey, director of business development and Internet partnerships for Chicago-based electronic components distributor Newark InOne: You end up with static catalogs that can get out of date quickly.

Alternatively, an e-procurement system can be set up to automatically go to the merchants’ Websites, extract the relevant product and pricing information, and format it for the purchasing agent to view. The process is typically referred to as “roundtrip” or “punch-out,” in that the buyer “punches out” of his own system to the merchant’s system.

One benefit of punch-out systems is that the catalogs tend not to get stale. But they are typically not capable of displaying product attributes and prices from competing suppliers for comparison, making it tough for buyers to shop for the best deals. And the merchants often need to rebuild their Websites using a standard format, which increasingly is XML. Although that’s better than having to support several dozen e-procurement systems from different suppliers installed by multiple customers, XML has in fact fragmented into a nonstandardized standard. There are differing implementations of XML — dialects, if you will — making the situation more difficult than it ought to be.

“We had an oil company that told its suppliers, ‘We’re going punch-out. Get your sites ready in a year, or we get different suppliers,’” Vinimaya’s Lee recalls. “Not one supplier made the deadline. You need people with experience in XML. There’s an IT investment you have to make. You could go to a contractor, but building a punch-out still takes longer than promised. It’s very complex.”

Cooperation among competitors

Although more corporate buyers are investing in e-procurement systems, analysts say it is not uncommon for only 10%-20% of a company’s suppliers to integrate with their e-procurement programs. Some larger suppliers are helping smaller merchants become e-procurement compatible — even when those smaller merchants are direct competitors.

Business supplies conglomerate Corporate Express is a case in point. Say a Corporate Express customer buys the bulk of its office supplies from Corporate Express but wants to get janitorial supplies (also available from the Broomfield, CO-based company) from a local or regional supplier. “If the other vendor has an outstanding Website, we’ll simply do a punch-out,” says Wayne Aiello, Corporate Express’s vice president, e-business. “If not, we can integrate with the other vendor — take items from their catalog, list them in ours, and route orders to that vendor. And if the other vendor doesn’t have a Website, we can build a custom branded page for them.”

The benefit for Corporate Express? Because the customer has to go through Corporate Express to access the other supplier, Corporate Express still keeps the customer in its Web universe.

Supplier networks or hubs are another example of cooperation among potential competitors. Multiple suppliers and customers in a defined market segment participate in an integrated, sometimes dedicated, network that supports the transfer of information, transactions, and processes among the multiple trading partners. Participation requires using an agreed-upon set of formats and protocols; typically vendors also have to pay to belong. One example is Exostar, a five-year-old hub for the aerospace and defense industries; Exostar claims more than 21,000 participants. Exostar charges vendors up to $999 if the volume is significant or nothing if the volume is fewer than 20 transactions a year. It would cost a merchant much more than $999 to build separate connections with multiple customers. (Corporate Express, for one, interfaces with an estimated 40 e-procurement systems.)

And Vinimaya has recently introduced an e-procurement system built on agent technology that promises to make the procurement process easier and cheaper for suppliers. “Say I need a case of staplers,” says Lee. “I tell the e-procurement system, which will launch an applet that will go to Corporate Express and The applet will collect the info and give me the data. I’ll choose, then the system will place the order.”

Perhaps more important for the supplier, the solution allows it to integrate with a customer’s e-procurement system without having to modify its existing Website — without having to re-create the site in XML, for instance. So while before it might cost a supplier a minimum of $25,000 per customer to participate in a punch-out e-procurement system, Vinimaya might charge as little as $5,000 to prepare a b-to-b supplier’s online catalog and provide the agent-based applet.

Brian Santo is a freelance writer based in Portland, OR.

The flip side: buying via e-procurement

You say you’re sold on the idea of e-procurement — so sold that not only do you want to become compatible with the systems of your customers but you also want to buy from your suppliers via e-procurement. After all, companies with e-procurement systems reduce requisition-to-order costs by an eye-catching average of 58%, according to a 2004 survey conducted by the Aberdeen Group.

But don’t expect that simply installing an e-procurement system will be enough to improve your supply chain management and allow you to reduce purchasing expenses. Four years ago immature technology contributed mightily to the failure of e-procurement to live up to the hype about it. Today most systems work pretty much as advertised; the key problem is lack of participation.

Following are some recommendations from e-procurement vendors, users, and industry analysts to help you get the most out of a conversion to e-procurement:

  • Get corporate management to understand the potential benefits of e-procurement and approve the investment.

  • Establish metrics for success, ideally based on data derived from procurement processes now in place.

  • Detail e-procurement rules — who can buy what, from whom, under what circumstances, and at what prices.

  • Have management dictate as a matter of policy the fullest possible internal use of the system.

  • Evaluate your suppliers’ ability to comply with the requirements of integrating with your system. Assess how much assistance they will need to be compatible with your system, and then be prepared to provide or find that assistance.

  • Educate your suppliers about the system, require integration with your system with the greatest possible number of suppliers, and provide assistance when necessary.

  • When possible, integrate e-procurement with other financial and corporate performance systems.

  • Rely on corporate partners. Customers and suppliers alike may already have expertise in e-procurement and possibly the ability to provide training, IT support, and other types of aid.

    Or as Wayne Aiello, vice president of e-business for office supplies marketer Corporate Express, suggests: “Never create your own system. Leverage your suppliers. Building your own is just crazy. It costs tens of millions of dollars.”
    — BS

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