© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Planning 10. Purchasing and supply strategy, electronic marketplaces and e-procurement

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Program Investing in e-procurement solutions Electronic market places and electronic procurement Possible IT strategies for purchasing Different purchasing solutions for different purchasing objectives Reverse auctions Agent technology and the Internet

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Investing in e-procurement solutions How should a company respond to an initiative to set up an electronic market place with similar companies? 1.To what extent does electronic purchasing support current purchasing and supplier strategies? 2.To what extent will electronic purchasing contribute to the realisation of a sustainable competitive advantage? 3.What are the technological implications of the initiative for the enterprise and how dependent will the company become on its IT provider? 4.Which investments are necessary and how long will it take to earn them back and what are the chances of success? 5.Which electronic solutions can be imagined in the field of purchasing and which are the most suitable for the enterprise? 6.How can one obtain a view on these questions and what is the first step one needs to make? 1.To what extent does electronic purchasing support current purchasing and supplier strategies? 2.To what extent will electronic purchasing contribute to the realisation of a sustainable competitive advantage? 3.What are the technological implications of the initiative for the enterprise and how dependent will the company become on its IT provider? 4.Which investments are necessary and how long will it take to earn them back and what are the chances of success? 5.Which electronic solutions can be imagined in the field of purchasing and which are the most suitable for the enterprise? 6.How can one obtain a view on these questions and what is the first step one needs to make? Initial questions related to investing in an electronic market place

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Electronic market places and electronic procurement Electronic marketplace: a place on the internet where actual transactions can take place between buyers and sellers. Variants:  Website: a place where a buyer finds a single seller or vice versa (1-1)  Buyer-centric portal: a market place set up by several sellers with the objective offering the potential buyer an integrated product line (n-1)  Seller-centric portal: a place where a seller finds several buyers at the same time (1-n)  Electronic market exchange: a market place where several sellers and buyers are present at the same time (n-m)

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Electronic market places and electronic procurement Web site Buyer-centric portal (shopping mall) Buyer-centric portal (shopping mall) Seller-centric portal Electronic Market Exchange 1-1 n-1 1-n n-m

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) A distinction can be made between Vertical and horizontal market places  Vertical: aims to encourage, facilitate and realize transactions between parties that belong to the same value chain (E.g. com, comwww.covisint.comwww.transora.com  Horizontal (i.e. e-Hubs): electronic version of buying consortia focussing on facilitating transactions between parties which operate in different value chains (E.g. and Electronic market places and electronic procurement

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Exchanges Yield managers Catalog Hubs MRO hubs Spot buying Operating inputs Systematic sourcing Manufacturing inputs Business to business matrix as presented by Kaplan and Sawhney (2000:99) Electronic market places and electronic procurement MRO hubs: horizontal marketplaces Yield managers: horizontal marketplaces Exchanges: vertical marketplaces Catalogue hubs: vertical marketplaces

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Possible IT strategies for purchasing Some examples Purchase of a separate (‘front office’) application that is integrated into the ‘back office’ systems already present… Extension of the available back office (Enterprise Resource Planning) system to include an E-procurement function, which stops integration from being an issue… Use a front office application that is available within the market place (e.g. Ariba, Netscape or CommerceOne)… These applications can be acquired in various ways…

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Various ways to acquire e-tools: Purchase and implement E-Procurement software… Hosting of E-Procurement application by the ASP on behalf of the user: the user puts his or her product catalogues on the ASP system, which takes care of the technical management. Content management and development are in the hands of the user…. Making use of an application including its content. The user not only makes use of the technical platform of the ASP but also of its product and supplier catalogues … Possible IT strategies for purchasing

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Bottleneck products ‘Secure supply + search for alternatives’ Routine products ‘Systems contracting + E- Procurement solutions’ Strategic products ‘Performance based partnership’ Leverage products ‘Competitive bidding’ Impact on financial results Low High Supply risk Purchasing product portfolio Electronic data interchange Supplier specific E-solutions Virtual auctions E- Procurement solutions Corporate Purchasing Super Site Different purchasing solutions for different purchasing objectives Most companies need to apply a variety of electronic purchasing solutions

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Consultants and suppliers of E-solutions claim great advantages: 1.E-market places: Increased market transparency and the improved competitive bidding lead to lower purchasing prices (direct goods: 1-15%, indirect goods 15-30%) 2.By using E-catalogue systems, more purchasing transactions can be contracted which can reduce the percentage of maverick buying 3.Transaction costs can be reduced by using integrated ordering, logistics and payment systems BUT, Different purchasing solutions for different purchasing objectives

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( )..... some warnings (1) broader supply market orientation and greater competition can lead to lower prices, however this only applies for enterprises that have had an unprofessional purchasing policy in the past. Advantages gained in this way will be temporary. Surveys show that top managers are more positive about E- Procurement and E-market places than purchasing managers. The latter resist the opportunistic attitude and short term advantage. Different purchasing solutions for different purchasing objectives

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( )..... some warnings (2) Reducing maverick buying is a good resolution, but it’s hard to realize due to all sorts of political considerations and sensitivities in the field of purchasing with enterprises…. Transaction cost are mostly related to personnel and system costs, which are very inflexible in most European countries … Different purchasing solutions for different purchasing objectives

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Reverse auctions E-auctions have developed into the most popular e-procurement solution. They are, however, not without criticism. They come in different forms:  Open RFI/RFQ: potential suppliers are requested to qualify before the actual auction. Or, prior to the actual auction, the buyer may want some initial offer from the supplier to test his competitiveness.  Reverse auction: the buyer sets an initial target price which suppliers need to meet. If this price level is not reached the contract will not be awarded. During the auction suppliers may be able to follow the actual bids made.  Forward auction: the seller sets the target sales price. Several buyers need to provide bids to the auctioneer. The seller may decide on the same parameters as in the case of a reversed auction. Reversed auction is most popular among buyers

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Reverse auctions Example of a reverse auction INSERT HERE FIGURE 10.5

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Reverse auctions Auctions are useful when the following criteria are met:  High volume, standard products that can be supplied by many suppliers  Buyer has no specific preference for one supplier  Supply market can be characterised as a buyers market  Buyer should be sufficiently interesting for suppliers Benefits for the buyer  Auction generates competition among suppliers  Considerable savings in terms of money and time are possible (savings have been reported ranging from 5% to 40%)  The process is well documented Some barriers..  All parties need to be carefully briefed beforehand  Buyers and suppliers need to be trained  Buyer should prepare all documentation and communicate this timely in advance Buyers should execute auctions with the highest professional standards, based upon fair play. If not, it will harm the relationship with their suppliers.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Agent technology and the Internet A software agent is a piece of software that can operate more or less independently, is capable of learning (intelligent agents) and sometimes can move across the Internet (mobile agents) Agents are presently used to locate websites that offer the best price for a given product… Software agents are expected to play an important role within E-procurement in the near future…