ix months ago, Geoff Wild, chief executive at TheSupply.com, an online business-to-business procurement company for the global electronic-materials industry, was explaining to OEMs why they should go to an e-commerce model.
"Today, we would get yawns if we made such a presentation," the San Jose-based executive said. "Between then and now, things have shifted from a focus on what the benefits are to an attitude that it's mandatory."
But despite that shift in attitude, the Internet has not yet proved to be anywhere near as popular a purchasing vehicle for industries, including electronics OEMs and contract electronics manufacturers, as it has for consumers.
Manufacturers-especially those with factories and supply partners spread over the globe-have begun to accept the Internet as a means of information exchange and design work. But when it comes to procurement, the Net is still being used mostly for MRO (maintenance, repair, and overhaul) buys and small-quantity purchases during the design phase-not for large-scale, strategic purchasing of components.
"Today, companies are buying pencils and paper clips and other tactically oriented items," said Karen Peterson, an analyst at market research firm the GartnerGroup Inc., Dallas. "For strategic buys, however, you need more support than is available today. Those capabilities are still immature."
Purchasers, for example, are beginning to find online auctions useful, but they are more practical for spot buys than for strategic ones.
"I see auctioning as an interesting and good addition to the tool kit, but it really assumes you can auction to get the lowest price on a component," said Andrew Gort, senior vice president of global supply-chain management at Celestica Inc., a Toronto-based CEM.
Moreover, many times, "there's a lot more involved with a supply agreement than just price, such as an agreement to hold materials or to provide upside supply. These are all nonprice terms and conditions that are available to us," Gort said. "Auctioning can provide a fast way of getting input on pricing, but it has the drawback of not providing these kinds of options."
Companies are also leveraging the Internet to solve global spot shortages of supply by purchasing through online exchanges, or to get rid of excess inventory.
"I think the most positive trend is excess and shortage, where someone has excess when production changed at the last moment and they can sell to someone who needs it," said Tom Hallam, president of Arrow Inc.'s Internet Business Group in Hauppauge, N.Y. "The bigger the market you can sell into, the more likely you are to find a good buyer who is anxious to have that product."
Many companies are also participating in private exchanges, which link large customers with their suppliers, distributors, and contract manufacturers. Celestica is involved in half a dozen such projects, Gort said.
"Typically, they are organized by the customer and are unique to each customer. The idea is to share data rapidly so that when a change of demand comes about, you can signal back in a short period of time."
Despite these positive developments, purchasers are discovering that leveraging the Internet for global procurement of components in production quantities is much more complicated. This is due partly to tradition and how partners work together to create long-term relationships and contracts.
"At the simplest level, the majority of components going back and forth is controlled through distribution channels in some fashion," said Stan Bentley, chief executive at Diversified Systems, a contract manufacturer based in Indianapolis. "These agreements are steeped in antiquity and have complex compensation schemes buried in them."
In addition, there is uneven regional development, with some areas of the world much further behind than the United States when it comes to using the Internet. OEMs and suppliers report that the infrastructures of China, India, and South American countries are less sophisticated. Europe, meanwhile, faces tariff issues that can make online buying from other regions difficult.
Methods of payment is another major impediment to the adoption of online procurement. "Two issues that arise are how we collect money and how we deliver products," Arrow's Hallam said. "Our experts have helped to design a global credit-card system, so we don't worry about getting paid. In China, though, the credit card is not a common thing, so I doubt that we're processing many orders from China."
Another issue is how far along countries are in incorporating online buying into their rules and regulations. "Different countries are in different stages of passing legislation relating to electronic commerce," said James Hatcher, vice president of strategic alliances at global trade exchange ECNet Inc., Mountain View, Calif. "In Mexico, for example, an electronic invoice is not considered legal."
Distributors at the forefront
In terms of overcoming some of the obstacles to online global procurement, distributors appear in many instances to be leading the way. Arrow's Internet Business Group, for example, has an online system that enables its sales reps to do an instant search on the company's global industry database to find a part for a customer.
"In a critical situation, we can check the entire inventory in real time to find whether we have product in Australia or South Africa and then go through what needs to happen to get the parts to the customer site," Hallam said.
Recently, the broad-line distributor has put its worldwide inventory, consisting of more than 2 million parts, for sale online at its www.arrow.com Web site. Although the company currently ships domestically, in August it will start accepting credit-card orders from customers anywhere in the world.
Hallam notes, however, that "since this is for first-column kind of pricing, the great majority of users are engineers doing designs and people doing repairs," Hallam said.
Avnet Inc., meanwhile, has created a sales unit to deal exclusively with global customers, although currently only a handful of companies are using the group's services.
"We're in the process of globalizing the IMS portion of Avnet," said Greg Frazier, president of Avnet Integrated Material Services (IMS) and vice president of Avnet Inc., Phoenix. "We now have established people and process people in all parts of the globe and take care of customers on a regional basis. Our global unit deals only with global customers who make decisions centrally and execute them around the world."
The growth rate in that customer segment is on the order of 45% a year, Frazier said.
Dealing with the new reality
The reality of manufacturing today, in which U.S.-based companies maintain production locations throughout the world, is forcing CEMs and distributors to look at global procurement issues.
"We ship internationally, but don't market internationally-these activities are more a byproduct of the general globalization of industry," Diversified Systems' Bentley said. "Any large company is multinational today, and any large OEM has manufacturing facilities all over the world. Typically, we supply to those facilities as a byproduct of working with a U.S. headquarters."
When dealing with facilities or customers in multiple countries, suppliers face a variety of issues, including different time zones, languages, and cultures. In this context, the Internet has helped them smooth over some supply-chain issues by providing real-time information regardless of who or where the recipient is.
"The Internet has made an enormous difference in that it has made it possible and seamless to deal with our global customers," Bentley said. "We use Internet-based tools to share messages, documents, and files quickly, and to put information in a secure location to allow access to our partners."
While the systems for strategic online component procurement continue to develop and procedures get worked out, many companies are using Internet tools to support their design efforts. Today, some of the best tools are being used by engineers to share the huge number of documents, including bills of materials, blueprints, and assembly drawings, that must be created and disseminated during the design and manufacture of a product.
"The Internet can play a good role in improving the design process and making it interactive between the customer and us," Celestica's Gort said. "When the customer is going through a design change, we can offer through the Internet a list of preferred suppliers. They can keep in mind which suppliers to steer the business to so that we have a large inventory of those components on hand and can get its product launched quickly."
Celestica uses SupplyFlex from i2 Technologies Inc., Irving, Texas, a front-end component database that stores information on preferred suppliers and other data on how much supply is in the pipeline. The company also is part of an online design consortium known as E4enet that focuses on online engineering collaboration.
"Development is very disjointed in terms of geographic location," Diversified Systems' Bentley said. "In many cases, engineers may not ever meet each other when they're working together on a system. It becomes very critical in that environment that you have tools that allow you to share files, but to control revisions of those files."
And this, in turn, can affect the way companies improve their supply chains. Even when customers and suppliers are spread out across the globe, the Internet is a strategic way of sharing pertinent information for making better design and sourcing decisions.
"The Internet is going to help us share information across the supply chain because there aren't boundaries today in terms of sharing data," Celestica's Gort said. "If one of our customers needs information out of facilities in South America and Europe, they can readily get it, and it isn't different than getting it from a factory next door. It's a real advantage for globalization because you're dealing with the same standards and approaches."
Smaller customers are also using the Web as a way of getting the best price by comparing suppliers worldwide. Larger companies, however, continue to rely on previously negotiated pricing.
"Most companies that are procuring on a global basis negotiate a price globally with their suppliers," Avnet's Frazier said. "Lots of people are using it as a price-shopping tool, but big global procurers have already negotiated strong prices."
Perhaps the Internet's biggest virtue at this point is that it allows trading partners to access real-time updates on a variety of factors to enhance their position with their suppliers. "From five years ago to now, everything has been speeding up," Gort said. "We do more frequent negotiations now and exchange more information with suppliers than in the past, including product data and pricing on an almost real-time basis. In the past, it just wasn't possible."
Large OEMs are doing their part to further real-time information access. Dell Computer Corp., for example, has created a password-protected portal called valuechain.dell.com, on which the company shares information such as product quality and inventory with its suppliers.
"We're extending the use of the Internet to also provide more real-time views to suppliers so they can see the demand we're getting from customers and, from a Dell standpoint, we can see the suppliers' availability," said a spokesman for the Austin, Texas, PC OEM. "Given that we have deep relationships with strategic suppliers-about 30 to 35 of them provide us with about 90% of our materials-we need this visibility."
In the future, the global supply chain will become more sophisticated and will use the Internet even more heavily, including for strategic procurement, according to analysts.
"We're going to find the idea of supply chains competing against supply chains," the GartnerGroup's Peterson said. "Companies are hooking more closely with trading partners, and those who can overcome the obstacles [building trust, creating compatible business processes, etc.] are going to make themselves more agile and responsive and increase their ability to compete, reduce their costs, and gain greater market share."
And as this develops, the Internet will help streamline the purchasing process and bring about major changes in the role of purchasers.
"One of the things the Internet is going to do is simplify transactions and enable just about anyone to reach out and get the services they need," said William Michels, chief executive of ADR North America, a consulting firm based in Ann Arbor, Mich. "All of the people in purchasing who are there simply to facilitate those transactions are going to go away.
"In strategic purchasing, people are going to get more in tune with the supply chain," Michels added. "We'll see some integration of business systems through the Internet to link suppliers and make them more strategic. I also see a change in the way we negotiate. More negotiations are going to be written rather than oral communications."
As such activities become automated and Internet-based, purchasers will have to redefine their role or, as Michels puts it, "go away."
"Change management is the number one problem for procurement," Peterson said. "The role of the procurement professional doesn't go away, but it becomes more strategic. As purchasers save time in some areas, they will have to turn to new activities, such as strategic supplier assessment and planning."
Hailey Lynne McKeefry is a freelance technical writer based in Belmont, Calif.