Last week I discussed how consumers are spending more online in spite of the weak economy, and how companies can capitalize on this by continuing to improve their B2C operations. The good news doesn't stop with an increase in consumer spending. B2B spending is also on the rise as companies make greater use of the Internet to purchase what they need. More important, companies that truly integrate online purchasing into their operations receive greater benefits than companies that just tack it onto their existing operations.
The number of companies using the Internet to buy both direct and indirect materials increased significantly in the second quarter of 2002, according to a joint report from the Institute of Supply Management (ISM) and Forrester Research The number of companies that used the Internet to buy direct materials--specialized goods that are components of manufactured product--rose from 53 percent in the first quarter of 2002 to 65 percent in the second quarter.
Online purchasing of indirect materials--general purpose materials, such as stationery, filing cabinets, light bulbs, and fax machines, also grew from 78 percent of the companies surveyed in the first quarter of 2002 to 84 percent in the second quarter.
And there's room for growth. The average company in the ISM/Forrester survey only purchases 6.6 percent of its direct materials and 8.7 percent of their indirect materials online.
The growth in online B2B purchasing is surprising, because the market for e-procurement tools has flattened dramatically in the last couple of years. For example, sales of indirect procurement software shrank from 167 percent growth in 2000 to only 2 percent growth in 2001, according to AMR Research.
Tools don't appear to be the issue. AMR Research found that most large companies with one billion dollars of sales or more had some sort of e-procurement or sourcing project underway.
It appears that large enterprises have the tools but they just aren't buying that much online. That's a shame because companies that buy more goods online realize greater benefits than those that don't. Forty-two percent of the companies that purchased more than 10 percent of indirect materials online decreased their total cost of ownership compared to only 30 percent for lower volume purchasers, according to the ISM/Forrester Research survey. Frequent online buyers are also more satisfied with online suppliers--80 percent reported their satisfaction with the online capabilities of suppliers, compared with 61 percent for infrequent online buyers.
It isn't just a case of increasing online spending. Companies that just tack on e-procurement tools or occasionally use online auctions are least likely to see any benefits from online purchasing. Buying a bigger percentage of goods online is a byproduct of adapting the organization's behavior to take advantage of the Internet.
"When companies support online spending by truly changing their processes as well as the tools they use, it leads to increased online purchasing volumes, and consequently, greater business benefits," says Forrester senior analyst Dan Garretson.
But change isn't easy. People often resist, the status quo prevails, and e-procurement projects fail to produce the hoped-for ROI. Companies that want to skip failure and realize the benefits of online purchasing need to commit to deep and widespread change. Here are four actions companies can take to improve their success with online buying:
1. Develop a data strategy. Valuable spending information usually resides in a variety of unconnected systems throughout an organization. Companies need to find the relevant data and extract it before they can analyze the organization's overall spending patterns. Corporate purchasing staff should be able to access the data with a dashboard or browser view so that they can analyze it properly.
2. Change the corporate buying process. Buying online offers few benefits when companies simply replicate their offline processes. Companies need to change the way they evaluate sources, approve purchases, handle workflow, and work with their suppliers. For example, instead of faxing out RFQs to hundreds of individual suppliers companies can save time by send a group e-mail telling suppliers to visit the company's Web site and fill out the RFQ using online forms.
3. Organize purchasing authority. Internet purchasing is most effective when it consolidates buying activity across the organization. That means companies should take one of two roads: Delegate all sourcing authority to a central purchasing organization, or require departmental buyers to coordinate their efforts as a team. In either case the group must be given the authority to make enterprise-wide purchasing decisions.
4. Lead from the top. No enterprise-wide procurement initiative will work without top level executive leadership. That means that CEO, COO, or perhaps the CFO, needs to champion online purchasing and make sure that it is implemented--not just by talking about it but by establishing clear objectives and checking in regularly to see that progress is taking place.
Without making these fundamental changes, companies aren't likely to see the benefits of online purchasing. "When it comes to online buyers, there are two types of companies: those that look at disjointed tasks and then automate each one, and those that realize that the Internet offers an opportunity to create an integrated buying process," says Forrester's Garretson.