Big bosses have traditionally paid little attention to their companies' purchasing departments. Why should they? Procurement was boring.
You flipped through a catalogue of ugly office furniture, then left the mundane details to the purchasing peons in the bowels of the building. That's all changing. Purchasing used to be "perceived as a cost centre, kind of an afterthought", says Greg Doman, VP of e-commerce at Hilton Hotels, which began testing purchasing software from Commerce One last year. Now purchasing is "at the forefront of our business-to-business e-commerce strategy".
Purchasing officers still don't get the best parking spots in the company lot, but they are receiving more attention from the corporate brass - and some fancy new toys to play with. Online procurement systems automate the process of ordering supplies and approving payments. They let employees browse product catalogues. They list preferred providers with which your company might have negotiated group discounts. They can even be set up to allow different buying privileges for different employees.
Pipes and pencils
Sales of e-procurement software soared from $US150 million in 1998 to $US800 million in 1999, according to the Aberdeen Group. So far, most companies are using online b-to-b services to buy so-called nonessential supplies - things like pipe fittings and office furniture - rather than raw materials. Corporations that bought the complex software to automate procurement are betting that their long-term savings will offset the upfront expense. More optimistic estimates suggest companies can cut the cost of processing a purchase order from more than $100 to less than $10, thanks mainly to the reduction in paperwork and administrative hours. So far, few companies have anything more than estimates of the return on their investment in the technology - which typically runs several million dollars at a large company. And it isn't easy to translate entrenched purchasing processes to software.
For one thing, the software needs to be meshed with systems running in other business departments - such as accounting, manufacturing, inventory management and human resources. Not surprisingly, procurement software has mostly been a game for the big boys. One way to ease the transition to online purchasing is to tack on procurement software provided by the same vendors that automated other departments.
Users of Oracle accounting software, for example, can add Oracle Internet Procurement. Competing in the same market are a number of enterprise software companies, including SAP and JD Edwards. There are pure-play vendors like Ariba and Commerce One and second-tier contenders like RightWorks and Intelisys.
Ariba software is streamlining the purchasing process at a Chevron oil field. The company shelled out more than $US1 million for the software, which now handles $US3 million to $US5 million worth of purchases a month, roughly 80 per cent of the supplies necessary to run the oil field.
But the company still doesn't quite have a handle on the return on its investment (ROI), says Jerry Jacobson, procurement manager. "Most of these ROIs have two components," he said. First: does the software lower the administrative cost of completing a transaction? Second: does it help you get lower prices on supplies?
Those questions aren't easy to answer. It's costly to maintain a lot of electronic connections, so automated procurement often means doing business with fewer suppliers. And if doing business with fewer suppliers leads to volume discounts, how much credit should the software get? Jacobson says Chevron at least has a better handle on what it's buying and that, in itself, is valuable information.
When Chevron and Hilton decided to automate their purchasing, installing software on their own systems was the only viable option. The market is different today, though, and both companies say they might decide in the future to rent the applications from an external company and access them via the Internet.
A lot of companies just now switching to automation may go directly to renting, which is increasingly seen as an efficient way to deliver enterprise applications to corporate users. Companies are starting to realise that gathering and maintaining data from a lot of different suppliers is harder than they thought.
Large or small, a company's purchasing tends to involve three processes: finding and ordering the product, getting it to the door and handling payment.
Software packages typically handle the purchasing and payment steps. But online marketplaces, which are an extension of the trend toward hosted purchasing applications, are trying to cover all three steps in the procurement process.