AN E-PROCUREMENT MODEL FOR B2B EXCHANGES AND THE ROLE OF E-MARKETS Doug Thomson
[email protected] BHP Billiton, Australia Mohini Singh
[email protected] School of Business Information Technology RMIT University 239 Bourke Street, Melbourne 3000 Victoria Australia
Abstract This paper will present an e-procurement model to facilitate online B2B exchanges. Large organizations in Australia and around the world are increasingly implementing e-procurement, which has increased the need for services of intermediaries such as ‘emarkets’ to facilitate the process. However, both being new and unproven require theories and models to support their roles in the online procurement process. The model The model provides a framework to reduce procurement costs to both buyer and supplier by addressing e-enabled strategic marketplace sourcing, e-enabled supply chain and e-enabled acquisition and purchase to pay process. The role of e-markets that act as trusted intermediaries between the buyer and supplier are also discussed. This paper is a research in progress. At the conference some of the findings from a large Australian organization and at least one e-market will be presented. Key Words E-markets, E-marketplace exchanges, B2B Exchanges, E-procurement, E-hubs 1. INTRODUCTION After downsizing and outsourcing non-core business processes, large Australian organizations are increasingly resorting to Web enabled procurement as the next significant opportunity to reduce costs, move to a democratic organization and improve shareholder value. E-procurement enables volume purchase, a wider choice of buyers and suppliers, lower costs, better quality, improved delivery, and reduced paperwork and administrative costs. The benefits of e-procurement as described by Kalakota and Robinson (2001) fall into two major categories; effectiveness and efficiency. Effectiveness benefits include increased control over the supply chain, proactive management of key procurement data, and higher quality purchasing decisions within organisations. Efficiency benefits include lower procurement costs, faster cycle times, reduced maverick or unauthorised buying, more highly organised information, and tighter integration of the procurement function with key back-office systems.
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Although B2C e-Business has captured the headlines for a while, it is B2B that has been predicted to deliver the most value in the take-up of e-Business. Some of the predictions concerning the future of B2B marketplaces are that there will be a broad adoption of e-marketplaces across multiple industries, with large organizations leading the way (Forester Research Report 2000). The large amount of bid, order and transaction management for the B2B procurement of parts and supplies require assistance from auxiliary services such as e-markets. An ‘e-market’ functions as a trusted intermediary whose well-integrated business procedures and technology save costs and streamline the purchasing and sales processes. e-Markets are proliferating at an astounding rate because of the benefits they offer buyers and sellers. For buyers e-markets lower purchasing costs while reaching new suppliers. For suppliers e-markets lower sales costs and help the supplier reach new customers. E-markets play a major role in industries that have a large market size, fragmented supply chain, unrecognised vendor or product differentiation, high information costs, high product comparison costs and high work flow costs. This paper presents a theoretical procurement model in a familiar marketplace framework where every product procured by a business is the outcome of the product’s marketplace positioning, delivery through a supply chain and an acquisition process. The model provides a framework for optimizing the e-procurement process and enhances interrelationships between buyers and sellers via e-markets. The framework is based on value propositions specific to an industry consortium that includes a small number of very large Australian organizations. The model will be tested via case studies with Australian organizations, the results of which will be published at a later date. The role of e-markets in the facilitation of e-procurement is also discussed. 2. LITERATURE REVIEW With an increased adoption of the Internet as a business medium procurement is migrating from traditional paper based processes to e-procurement. Businesses buy a diverse set of products and services, ranging from paper clips to computer systems, from steel to machinery. At the broadest level these purchases have been classified by Kaplan et. al. (1999) into manufacturing inputs and operating inputs. Manufacturing inputs are raw materials and components that go directly into the manufactured product or manufacturing process. Manufacturing inputs tend to be vertical in nature, because the finished products that they go into are industry specific. They are sourced from industry specific suppliers and distributors, and they require specialised logistics and fulfilment mechanisms. Operating inputs include indirect materials and services that do not go into finished products. These are sometimes called MRO (Maintenance, Repair and Operating) inputs which include industrial supplies, capital equipment, services and travel related goods. With the exception of capital equipment and some industrial supplies operating inputs are generally classified to be horizontal. Systematic sourcing and spot sourcing of goods and services dominate business purchases. Systematic sourcing is buying through pre-negotiated contracts with qualified suppliers, is relationship oriented and contracts are long term. Spot sourcing is transaction-oriented and rarely involves a long term or ongoing relationships.
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A business-to-business electronic marketplace has several buyers and several sellers. It is an arena on the Internet where a trusted intermediary (e-market) offers trading functionality to registering companies (Swedish Trade Council, 2001). An example of B2B e-Market is eSTEEL (www.esteel.com) that can be used by suppliers to expand their marketing reach, grow their customer base, and reduce their transaction costs. Buyers depend on eSTEEL to grow their base of suppliers, find better prices, and lower purchasing costs (Weill and Vitale (2001). Kalakota and Robinsin (2001) suggest that e-Markets play a major role in industries that have a large market size, fragmented supply chain, unrecognised vendor or product differentiation, high information search costs, high product comparison costs and high work flow costs. E-markets or e-hubs that enable B2B purchases have been categorised by Kaplan et al (2000) as: • MRO (maintenance, repair, operating) hubs, which are horizontal markets that enable systematic sourcing of operating inputs. Operating inputs tend to be low-value goods with relatively high transaction costs. Instead of licensing their software to individual companies, e-hubs provide an open market on their own servers, giving buyers access to consolidated MRO catalogues from a wide variety of suppliers; • Yield managers, which are horizontal markets that enable spot sourcing of operating inputs such as manufacturing capacity, labour, and advertising. This type of e-hubs add value in situations with a high degree of price and demand volatility, such as the electricity and utility markets, or with huge fixed costs assets that cannot be liquidated or acquired quickly, such as manpower and manufacturing capacity; • Vertical exchange markets that enable spot sourcing of manufacturing inputs and commodities. These online exchanges allow purchasing managers to smooth out the peaks and valleys in demand and supply by rapidly exchanging the commodities or near commodities needed for production. These exchanges maintain relationships with buyers and sellers, making it easy for them to conduct business without negotiating contracts or otherwise hashing out terms of relationships; and • Vertical catalogue hubs that enable systematic sourcing of non-commodity manufacturing inputs. They bring together many suppliers at one easy-to-use web site. They can be industry specific, buyer focussed or seller focussed. Evolution of B2B e-Business B2B e-marketplaces have evolved from the traditional buyer to seller interactions over the period from 1995 to 2000. 1995/6 saw the introduction of EDI networks, which were expensive, closed and difficult to expand. 1996/7 saw the use of brochure ware for publicising products and services on-line while the actual selling took place offline. 1998/9 saw the mushrooming of B2B e-commerce and the aggregation of the many buyers to many sellers e-marketplace. 2000/1 is realising collaborative emarketplace hubs where there are networks of linked e-marketplaces (Thomson, 2001). While EDI was for a time the primary source of connecting buyers and sellers electronically, there are reasons for evolution away from EDI. These include restricted number of participants due to the high cost of EDI implementation, the need
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for customisation of trading documents for example, purchase orders, invoices, and shipping notes, high software costs and the perpetuation of closed communities (Thomson, 2001). Internet enabled capabilities make marketplace exchanges more efficient through low cost and improved speed. Little special software (eg catalogue software) or hardware is needed to set up, and a greater range of trading partners is easily found. As a result, robust centralised global marketplaces have boomed (Attar, 2000). With an increased adoption of the Internet as a medium of business, e-marketplace growth continues at a rapid pace giving purchasers a new range of tools such as online buying and auctioning to exert price-pressure on suppliers. Businesses have no choice but to participate in e-marketplaces to survive, and to remain or become globally competitive. By March 2000, the automotive, aerospace and forest products industries all created their separate e-marketplaces; in April 2000, utilities, food, airline and rail individual e-marketplaces were established; and in May 2000, the mining and metals, hospitality and electronic industries created another set of individual e-marketplaces (Morgan Stanley Research Report, 2000). In the year 2000, more B2B exchanges evolved from 'dotcom' arrangements in Australia. These are evolving into interconnected marketplaces, particularly industry trading hubs and vertical exchanges with broad functionalities. Industry trading hubs enable improved supply chain integration between buyer and seller if they both have a web-based procurement capability, links between the participant's enterprise resource provisions (ERP) and emarketplace, catalogue management and value added services capability (Stevenson, 2000). The appeal of doing business on the Web is clear. By bringing together huge numbers of buyers and sellers and by automating transactions, ‘e-markets’ expand the choices available to buyers, give sellers access to new customers, and reduce transaction costs for all the players. According to a recent estimate by the Economist, (2000) over 750 networked marketplaces have been developed worldwide. Some of these cover a wide variety of products and a diffuse group of buyers and sellers. Some sites offer broader functions for more targeted client groups. Australian ‘e-markets’ that have evolved in the last two years include corProcure (www.corProcure.com.au), BOMWeb (bomweb.com.au), Cable and Wireless Optus (www.cwomarketsite.com.au), Quadrem (www.quadrem.com.au) and more recently the State governments’ procurement of goods and services. As Australian organizations move to conduct purchasing online, the need for apt business models to endorse e-procurement for different businesses, products and services is realised. The model discussed in this paper is theoretical mostly derived from literature and information on globally competitive businesses. The model addresses e-enabled strategic sourcing, e-enabled logistics and e-enabled acquisition. E-Marketplace Exchange There are generally different value propositions for participating in a trading exchange or an industry consortium. Public trading exchanges provide reach to new groups of buyers and suppliers, low entry risks and wide participation. In industry consortia, there is the opportunity for improved operational integration between buyers and suppliers. E-marketplace shareholder businesses (usually buyers) have a say in establishing exchange rules and standards, and their buying power for strategic sourcing.
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An e-Market offers services that facilitate transactional and service needs. Services such as online auction applications provide sellers and buyers with basic information about products, prices and partners. Weill and Vitale (2001) advocate that e-Markets provide easy search of products and services, product specifications which reduce communication costs for both buyers and sellers, dynamic pricing based on demand relationships, sales transactions that include payment and settlement, product delivery, market surveillance for stock market or auction results and enforcement of proper conduct by buyers and sellers. Benefits to those involved with operating emarketplaces include equity appreciation and a revenue stream through transaction and hosting fees and other value added services they provide. Buyer benefits include efficiency gains from better pricing of goods and services, cost savings in the administration of procurement processes, consolidation of buyer's sub entities into a single buying unit, and reduced costs through purchasing aggregation for some items. Other benefits that are not easily quantified include improvements in operations support, employee productivity, visible purchasing habits of business partners and supplier performance. Reduction in procure to pay cycle time, streamlined procurement operations, avoidance of costs associated outsourcing procurement, and cost savings in invoicing, financing, goods insurance, and delivery are achieved (McGagh, 2000). Suppliers on the other hand enjoy the benefits of lower administrative costs, use of standard catalogues which can be quickly updated, more effective targeting and access to a wider range of buyers, and lower inventory and warehousing costs McGagh, 2000). Other benefits include lower marketing, selling and service costs, an expanded product and service offerings, improved cash flow through improved inventory turns and accounts receivables, pull versus push orientation with buyer organisations, a more detailed insight into a buyer's purchasing needs, and immediate responsiveness to a buyer's needs and virtual product or service bundling. However, for each e-marketplace participant, the benefits will vary according to the participant's position. As buyers go to the e-marketplace for e- procurement, suppliers may not have any choice but to join in. Most suppliers are also buyers, therefore net effect is an increasing participation in e-enabled procurement. 3. PROPOSED E-PROCUREMENT MODEL This proposed model is based on three major dimensions of e-enabled procurement: • e-enabled strategic marketplace sourcing; • e-enabled supply chain/value chain logistics, and • e-enabled acquisition and procure to pay processes. Every product procured by a business is the outcome of the product's marketplace positioning, delivery through a supply/value chain and an acquisition process. The proposed model aims to enable businesses to optimise the relationship between strategic sourcing, e-enabled supply/value chains for product delivery and e-enabled acquisition arrangements ie back office systems in the 'procure - to - pay' processes for value maximisation. Each quadrant in the Model has its own peculiar requirements, the knowledge of which will enable product placement based on selected value drivers. These include
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shareholder and business value through greater efficiency and improved pricing. The four quadrants of the model and their relationship with the supply chain and acquisition arrangements are briefly explained in the following section.
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An e-enabled procurement model
The four quadrants of the model are: Buyer Model (few Buyers, many Sellers) The buyer model is appropriate in cases where there are a large number of potential sellers and this may result in multiple or fragmented formats, where the buyer is able to leverage its buying power through the use of reverse auction tools. A reverse auction is where the winning bid is the lowest, rather than the highest. Such auctions are common where buyers desire to pay the lowest price for a product and so put the product to auction with suppliers. The supplier making the lowest bid offer wins. This is the reverse of the so-called 'English' auction, where the highest bid offer wins.
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Value proposition for buyers are that they can demand a common format for all electronic applications, specifications and contracts across all sellers; enforce compliance through workflow and supply chains; achieve process efficiency; automate and integrate back office systems to achieve seamless purchase and accounting efficiency. In this quadrant buying power is with the buyer. The sellers could end up incurring a high cost while upgrading systems and integrating it with buyer backend systems. Implications for the e-marketplace are that there could be a large number of suppliers selling commodity items and high purchasing costs relative to the value of items. Marketplace Model The Marketplace Model is appropriate where value can be created through third party mediation of the matching process between buyers and sellers, or through aggregation of buying or selling volumes. This model is appropriate for spot buying and sourcing in cross industries (horizontal) and within industry (vertical) markets for non-core (indirec') and core (direct) business products respectively (Kaplan, et al, 2000) Value proposition for buyers and sellers is that aggregation reduces transaction costs and mediation improves supply/demand matching. In this quadrant revenue generation potential for e-markets is high. This model is strategically complex because of existing alliances, contracts, and supply chains. The focus is on price of product which tends to ignore the repercussions of supply chain issues and the need for new skills. E-marketplaces offer ‘one stop shop’ for families of products such as stationery, or aggregation of service requirements such as catering and cleaning. Also supports indirect spot purchases such as A4 paper or hotel rooms. Commodities are catalogued and presented in some detail by sellers, and industry specific catalogue items are easily provided in detail, such as assemblies, sub assemblies, components, etc. Longer Term Relationship Model The Longer Term Relationship Model is appropriate for items requiring a high degree of planning between buyers and sellers either in the design stage or in fulfilment, typically strategic items. The importance of planning can be either due to technical complexity or demand characteristics driven by a time or phase requirement. Value proposition for buyers and sellers is that concurrent design leads to reduced cycle time and improved manufacturability because the suppliers are part of the buyer’s supply chain. Supply chain integration between buyers and sellers also improves customer service. Strategic relationship leads to few buyers and sellers which results in improved service, and reduces risks due to immature technical solutions. E-marketplace exchange enables the procurement of customised engineering and capital equipment from a small number of specialised suppliers, and sourcing of products where supply assurance is more important than price. For example, components, assemblies or systems required for 'core' products such as car manufacturers’ dependence on one paint. Seller Model (few sellers, many buyers) The Seller Model is appropriate for situations where the supplier hosts value added services on its Web site.
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Value proposition for buyers is that seller provides product info on the Web, and buyers have ‘24x7’ access to product information. Seller manages Web content and catalogue at the seller's expense. This is an effective opportunity for Small and Medium Enterprises (SMEs) and individual buyers and sellers who would otherwise find it too expensive to join a marketplace. In this quadrant the seller aims for monopoly/oligopoly advantage, the buyer has one catalogue to search with facilities for cross cataloguing for product comparisons. The buyers may be faced with the costs of integrating their technologies with the supplier’s back office Materials Requirements Planning (MRP) /Enterprise Resource Planning (ERP)/legacy systems or increased dependence on e-markets. The above quadrants of the model enable businesses to clearly identify: • where it and its products are in the marketplace; • where it wants to be; and • how to e-enable itself to get there. Users of this model can plan to move themselves or their products (goods or services) from one quadrant to another to achieve better outcomes. For example, the Longer Term Relationship Model is typically the start or end point when the buyer or seller organisation wishes to consider changing from current arrangements. This may be moving from a medium to long term contract situation (the Longer Term Relationship Model) to another Model (quadrant) seeking improved arrangements. Once this process has run its course, the entity may then complete the progression and again end up in the Longer Term Relationship quadrant. The difference is that using the model, this route can now be planned rather than handled on an ad hoc basis. Supply Chain Management and Logistics Supply chain management is the coordination of material, information and financial flows between and among all the participating parties (Kalakota and Robinson 2000). It is an important entity of e-procurement. Logistics is common across all business buy, do (manage) sell functions. With the advent of e-commerce, traditional logistics is being radically transformed to meet the demands of agile, high-velocity, granular approach (Bayles, 2001). There are two main components to e-enabled logistics. These are the supply chain itself, and the eenablement of logistics. Analysis of the supply chain arrangements is a vital component of e-procurement. It leads to disintermediation, reintermediation, or infomediation of some steps in the supply chain, based on their contribution. To deliver within the specified time frame and to have a returns policy, there is a need to process each web placed order for personalisation, to track the order status, and to keep the customer informed. Logistics On both the sell side and the buy side, it is necessary to provide an underpinning delivery service. E-enabled logistics order fulfilment process starts once the on-line customer clicks the ‘buy’ option. It is then the responsibility of an order management logistics system to confirm inventory availability, manage each item, make delivery arrangements, track the order through its lifecycle to completion on confirmation of its delivery by the carrier. Organisations with logistics services already in place will have an advantage, since logistics may well become a new 'core' business within the
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e-enabled company. E-enabled supply chain logistics fulfilment options include insourcing, outsourcing and virtual warehousing through suppliers. Logistics efulfilment requires a high degree of flexibility in infrastructure, people, and IT skills to adjust to various product mixes and unpredictable demand patterns. Whether efulfilment logistics is in-house, outsourced or virtual, costs of technology upgrades, re-engineered business process and an infrastructure to support logistics has to be put in place to attain efficiencies. Product Acquisition The proposed model suggests that product acquisition can be managed by normal commercial relationship, close commercial relationships or direct support relationships. In the normal competitive commercial relationships (Marketplace Model) the buyer is not a dominant buyer (unless all buyers combine their individual buying power – Buyer Model) or the individual seller is not particularly important. Where a buyer is a more significant buyer, or there are fewer sellers, a buyer may need to take action to develop close commercial relationships through arrangements with suppliers in a less competitive environment (Seller Model). In the limited situation of suppliers of strategic importance and a buyer’s dependence on the seller, a direct support relationship (Longer Term Relationship Model) may be the most appropriate. The Role of E-markets E-markets play an important role in e-enabled procurement by providing services such as search and evaluation. Search for suppliers, buyers, product mix, quality and other related information supports all the four quadrants of the model as well as logistics and acquisition. In some cases it enables buyers to assess their needs and match product and service providers. By providing buyers with accurate information about products and allowing a return policy for unsatisfactory goods e-markets offer buyers a purchasing insurance. Many e-markets play an important role in the logistics and distribution of goods either by outsourcing delivery services, or by linking buyers and sellers electronically for updated, accurate information about purchasers, deliveries and payments. In addition to information services sellers also value services related to influencing buyer purchase choices. E-markets facilitate commissions, payments, special discounts that also influences high volume purchases. In addition to buyer influence e-markets support suppliers by managing the risks of buyer and seller errors, inaccuracies and unmatched needs. 4. CONCLUSION There is an explosion of e-enabled procurement information available to businesses, as well as an increased application of e-market facilitated procurement. The model presented above enables a business to participate in global e-enabled procurement. It provides a dynamic macro level business model and framework for e-procurement with technological developments and evolving business models. It also indicates that value drivers of the new business need to be consistent with the business’s corporate
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strategy while at the same time taking advantage of the unique features of the eenabled marketplace. Depending on the size of an entity's procurement spend and the degree of sophistication and compatibility of the buyer's and supplier's procurement arrangements, the model provides the framework to reduce procurement costs to both buyer and supplier by supporting savings in an e-enabled strategic marketplace sourcing, e-enabled supply chain (logistics) and e-enabled acquisition and purchase to pay processes. The next phase of our research will test this model for the procurement process at a large Australian organization, which deals with various products, suppliers and buyers. It is also dealing with a recently evolved e-market to facilitate its procurement online. The findings of this phase of the research are expected to lead to an investigation of other B2B exchanges facilitated by e-markets in Australia. REFERENCES Attar, G. (2000), 'B2B e-Commerce Overview', Andersen Consulting, September. Attar, G. (2000), ‘Making the Marketplace a Reality – B2B eCommerce Overview’, Andersen Consulting, May. Bayles, D., 2001, E-Commerce Logistics and Fulfillment, Prentice Hall, New Jersey. Forester Research Report, August, 2000. Goldman Sachs, (1999), 'High Technology - b2b',The Goldman Sachs Group Inc; www.gs.com/hightech/research/b2b/ Kalakota R. and Robinson M, 2000 'e-Business: Roadmap for Success', Addison – Wesley, Canada. Kaplan, Steven, Sawhney and Mohanbir, 2000, ‘E-Hubs: The New B2B arketplaces’, Harvard Business Review, May/June 2000, Volume 78, Issue 3, pp 97. McGagh J (2000), 'From Vision to Technology to Value', Rio Tinto, www.riotinto.com. Morgan Stanley, 2000, Internet Research Report, September. Newton CJ (April 2000), 'The Report on Supply Chain Management', AMR Research Inc. Orlikowski, W. J., 1993, CASE Tools as Organisational Change: Investigating Incremental and Radical Change in Systems Development, MIS Quarterly, September pp 309 – 340. Posco: http://www.uss-posco.com/ ‘Seller Beware’, The Economist, March 4, 2000, p 61 – 2. Stevenson T (2000), 'Making the Marketplace a Reality - Vision, Strategy, and Value', Rio Tinto; www.riotinto.com. Swedish Trade Council http://www.emarketservices.com/about_emarket_places/main.htm Thomson, D., 2001, A Macro Level Business Model for E-Enabled Procurement, MBA Thesis, Victoria University, Melbourne, Australia. Whitely, D., 2000, e-Commerce: Strategy, Technologies and Applications, McGraw Hill, U. K. Weill, P. and Vitale, M., 2001, Place to Space, Harvard Business School Press, USA. Yin, R., 1994, Case Study Research Design and Methods, SAGE Publications, New Delhi, India.
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