Making E-Procurement Real—Now · Making E-Procurement Real—Now Electronic procurement is...

Opportunities for Action in Industrial Goods

Making E-Procurement Real—Now

Making E-Procurement 1/29/01 1:38 PM

Making E-Procurement Real—Now

Electronic procurement is supposed to be the slamdunk of e-commerce: easy, fast, and fun, not to men-tion lucrative. Indeed, many companies have startedto conduct at least some of their procurement activi-ties over the Internet, and they are reporting impres-sive savings: 20 to 30 percent on the cost of indirectgoods and 0.5 to 2 percent on the cost of direct mate-rials (for which most companies already have well-established purchasing programs). In addition toachieving these savings, pioneering companies arestarting to realize other promised advantages of e-procurement, including a broader choice of productsand services, a wider geographic range of suppliers,and improved supplier performance.

But not everyone is finding e-procurement to be thatsimple a shot. Some companies that have taken tenta-tive steps to begin buying over the Internet findthemselves struggling against resistance from theirsuppliers, as well as from their own procurement orengineering departments. And many others are say-ing they want to get into the game but don’t knowhow to begin.

If your company has not yet taken the plunge, a wait-and-see strategy is no longer viable. In fact, for anycompany, proceeding slowly is risky. The potential forsavings is just too big to pass up, and your competi-tors are moving too fast. In a survey of NorthAmerican manufacturers conducted in 2000, TheBoston Consulting Group found that the typical com-pany active in e-procurement is already saving 2.3 per-cent on its gross purchases and anticipates increasingthose savings to almost 6 percent. By putting realenergy into e-procurement efforts as soon as possible,

Making E-Procurement 1/29/01 1:38 PM Page 3

you will enhance your understanding of your currentprocurement tradeoffs, engage your managers’ imagi-nation, and begin to build the momentum necessaryfor a broader program. The following five steps canhelp you get started and get it right.

Run an Auction—Any Auction

Begin by choosing a nonstrategic purchase—say, com-modity packaging or a nonessential service. Use a ser-vice provider such as FreeMarkets or one of theconsortium marketplaces to set up and run a reverseauction for you—that is, an auction sponsored by abuyer, not a seller, in which the bids generally godown rather than up.

The process of specifying what you’re willing to buy—and go without—is powerful. In developing the bid-ding specification for an auction, one buyer ofcommodity metal found that its supplier was actuallyproviding, in addition to the physical product, a veryvaluable set of related services, including technicaladvice, precise delivery times, and custom-billingterms. The buyer learned that it needed either toinclude these services in the terms of the auction orto prepare to forgo them, as well as the value theyconveyed. In our experience, a well-designed auction,in addition to lowering prices, almost invariably helpsthe buyer sharpen its focus on what it values andwants to pay for.

Use E-Commerce Tools to Aggregate Your“Spend”

Many companies have already aggregated at least partof their procurement spending through strategic


sourcing initiatives but have not done it for other pur-chases, such as MRO (maintenance, repair, and oper-ations) supplies. In your own organization, how manydifferent kinds and brands of writing implements—pens, pencils, roller balls, markers, and so forth—doyou buy? From how many vendors do you buy them?It is not unusual for a large company to find that it isbuying more than 50 types and brands of even themost common items.

Focus at first on things that don’t matter strategically.Know what you buy, then aggregate your purchasing.Many software vendors, such as Commerce One andAriba, can put the necessary software on your organi-zation’s desktops, allowing you to automate and easilyaggregate your buying transactions, even across hun-dreds of locations.

Once you can specify what and how much you buy,you can standardize and use the power of your pur-chasing scale to negotiate advantageous prices anddelivery terms, just as you do in classic non-electronic-sourcing initiatives. In its experience with leadingcompanies, BCG has found that aggregation alonecan generate savings of 5 to 10 percent. This does notinclude other process-related savings. Although e-commerce isn’t required for aggregation, it doesmake aggregation easier, faster, and cheaper. E-commerce brings the power of consolidated buying to products and locations for which consolidation was not previously cost justified.

Take a (Global) Risk

Use the Web to expand the geographic reach of yoursupply base. Start with relatively easy purchases—items that are simple to manufacture, easy to specify,


and not core to your final product. Use electronicmarketplaces and participating vendors that havesolid track records. Most full-service providers of auc-tions and many of the consortium marketplaces arebuilding substantial databases of suppliers’ offerings,capabilities, and performance. As the databases con-tinue to expand, they will include increasingly de-tailed information on an ever widening pool of poten-tial suppliers. Such resources, coupled with vendorqualification procedures that are already in place atmost companies, can greatly expand the number ofqualified suppliers available to a given company.Increases of 300 to 500 percent are not uncommon.

You may be surprised at how much you can save byventuring a bit farther afield than usual. For example,one Fortune 100 company has started to buy many ofits tools directly from China, and another has startedto buy carton-packaging products from the MiddleEast. In both cases, by moving to electronic sourcing,the purchasers broadened the range of suppliers theyexamined, and they built the confidence to moveeven more widely in the future. The savings fromsuch geographic explorations can exceed 50 percent,depending on the products companies buy and thechoices they make.

Track Your Suppliers’ “E-Readiness”

The advantages of enabling your supply chain to col-laborate electronically can be significant. As Ciscoand Dell have demonstrated, the ensuing lower costs,build-to-order processes, and short lead-times can bepowerful competitive weapons. The first step is deter-mining where you and your suppliers stand today. Askyourself these questions about each company in yoursupply base:


• Are we currently doing business electronically? Ifso, what portion of our purchases is electronic?

• Which functions are already online? Informationsharing? Negotiation? Contract management?Order status monitoring? Order receipt and con-firmation? Payment?

• How long will it take before we are able to do busi-ness system-to-system, and what specifically must wedo to make that happen?

Choose the Right Champion

Every successful initiative needs a champion. Yourprocurement organization is clearly the place to lookfor that leader. It is likely, however, that you will findthe right person a bit outside the organization’s core.That is because the switch to e-procurement threatensestablished ways of doing things and can strain rela-tionships with suppliers.

The right leader is someone who can think verystrategically about what the company buys: Whatproducts are (or should become) commodities? Andwhich products really provide differentiation andrequire true supplier partnerships? Some of BCG’sclients have instituted programs for systematicallyreviewing their purchases with an eye toward increas-ing the percentage that they are prepared to put upfor auction. It’s important to make these decisionscarefully and to have solid justification for your plan,because you are likely to get complaints from yourlong-term suppliers—and even from some of yourown buyers. We have seen promising e-procurementefforts hamstrung by reluctant procurement organ-izations.


Another trait of a successful champion is the ability tomove beyond the “tyranny of the metrics.” Most pur-chasing organizations are measured on the percent-age of price reduction they achieve. A successfulauction that generates substantial decreases in pricesinvariably raises questions such as, “Why were we over-paying in the past?” One company executive, whentold that one of his buyers had conducted an auctionthat had yielded a 25 percent price cut, responded byasking whether that buyer had been fired yet. Your e-procurement champion will need to educate others inthe organization about the unprecedented power ofthese new tools, as well as act boldly in the face ofresistance.

Finally, your champion will need to know when andwhere it makes sense to move beyond e-procurementto e-supply-chain management. For many companies,the greatest benefit of e-commerce will come notfrom lower prices but from new levels of collaborationall along the value chain, from product developmentthrough production and distribution to managing thecustomer relationship. The ability to use e-commercetools in order to collaborate with suppliers, distribu-tors, and customers in all these activities will helpdetermine tomorrow’s winners. And the right e-procurement champion can both deliver savingstoday and position your supply chain for futurestrategic advantage.

* * *

E-procurement is a high-return investment. GeneralElectric estimates that it will soon be saving $10 bil-lion per year through e-procurement. If your com-pany hasn’t even started to experiment, you need toget going. Accelerate your pilot programs. Expand


the range of products you buy online. Understand theprocess and then aggregate your purchasing. Reachbeyond your current supplier base. Start moving, sav-ing, and learning—now.

James P. Andrew

James P. Andrew is a vice president in the Chicago office ofThe Boston Consulting Group.

You may contact the author by e-mail at:

[email protected]

© The Boston Consulting Group, Inc. 2001. All rights reserved.


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Making E-Procurement Real—Now · Making E-Procurement Real—Now Electronic procurement is...

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