IBM Corp.’s massive internal procurement hub touches thousands of suppliers and represents 94%, or $43 billion, of the computer giant’s annual procurement spending. But just 3% of the hub’s activity involves purchase transactions. The vast majority of the activity is in planning, collaboration and information sharing.
The simple truth about e-hubs is that their real value is in streamlining processes within buying organizations or between buyers and sellers, not in mediating electronic sales.
Take agricultural food products processor and distributor Cargill Inc., Minneapolis. Its Electronic Purchasing in Cargill system has delivered significant cost savings in its first year. How? It has taken such steps as freeing up purchasing authority for transactions lower than $2,500, processing payments automatically and reporting on supplier relationships.
Cargill’s goal is to build an entirely digital process for building a requisition to gaining approval and paying for whatever is purchased, said Gayl Bunes, project manager- procurement for Cargill.
Six hundred thousand transactions went through the system in the first year, and when fully operational Cargill expects to save $22 per purchase order by switching from paper-based to electronic processes.
Shift in momentum
At the beginning of Internet b-to-b purchasing, experts predicted that such companies as Ariba Inc. and Commerce One Inc. were positioned to benefit the most because they provided the transactional infrastructure for b-to-b trading.
Now, momentum is shifting toward value-added services, said Dr. Joseph Carter, chair of the supply chain management program at Arizona State University at Tempe. Few companies have adequately prepared for advanced services, Carter said.
"It is easy to get blinded by publicity," Carter said. "The fact is that when you look at the penetration by b-to-b companies to satisfy the functionality required by their suppliers, penetration is quite low."
Beyond Cargill and IBM, Dell Computer Corp. and Wal-Mart Stores Inc. are among the leaders in b-to-b purchasing, Carter said.
Cargill had required a manager’s signature approval in writing for purchases $1 and above, Bunes said. Its paper-based process was not efficient. Cargill tapped technology from Ariba Inc., J.D. Edwards & Co., Cardonet Inc. and MRO Software Inc. to make its year-old purchasing system tick.
Patrice Knight, VP-procurement strategy transportation for IBM Corp., Somers, N.Y., said less than 1% of suppliers were dropped because of its move to an electronic purchasing system.
IBM requires only an e-mail mailbox to provide companies with a valid supplier number, Knight said. The true value of the system lies in 20 or so collaborative applications for the enterprise, Knight said.
For example, IBM allows marketers to provide information on new products set to debut over three years. Marketers input information on the flow of products in a structured format that works with IBM’s infrastructure. Previously, marketers at IBM supplier companies relied on paper-based electronic catalogs and press releases to get the word out on upcoming products.
"We are taking costs out of procurement for both sides," Knight said of the system used by about 4,000 IBM procurement department employees globally. "In order to make one of these systems work, you can’t go into it saying there is one solution. We’ve had to create a breadth of interaction. Over time, we’ve developed a portfolio of options that grasp how quickly companies are grasping the [learning] curve."