Procurement executives may see the Internet as a key part of their purchasing plans, but corporate cost-cutting measures have shortened strides in the area.
The quarterly Report on eBusiness, released last week by the Institute for Supply Management and Forrester Research Inc., found that nearly twice as many large-volume purchasers -- those that buy more than $100 million annually -- reported that the Internet was "critical in their overall purchasing plans," said Jennifer Chew, an analyst at Forrester, Cambridge, Mass.
Of the 119 large-volume manufacturing and non-manufacturing executives polled, 20.5% cited the Internet's importance during the first quarter, up from 11.3% in the fourth quarter.
However, while the Internet ranked as a priority, buyers still must overcome a number of challenges to realize additional efficiencies, cost savings, and improvements in purchasing practices.
For example, 60.8% of the survey's 291 respondents said they have seen no change in the total cost of ownership of products or services as a result of online purchasing activities. Although that's slightly better than the fourth quarter, when 64.3% of 294 participants reported no change in total cost of ownership, it leaves about two-thirds of those polled struggling to post a savings.
About 10.3% said they have seen an increase in total costs in the recent quarter, up 2.4% from the previous period, while 28.9% said they logged a decrease, up from 23.2% in the fourth quarter.
Additionally, companies appear to be changing their procurement practices more slowly than in the past. In the first quarter of 2003, about 9.3% of those surveyed said they made significant changes to their processes, down a half a point from 9.8% in the fourth quarter of 2002. On the flip side, 45% said they made no change and 45.7% reported minor adjustments.
Without a change in processes, the related cost reductions are difficult to realize, said Chew.
"What is contributing to the slight increase in costs is the slower change in processes," she said. "There is a correlation between the amount of process change that is taking place, the technology that is being adopted, and the cost reductions that are being realized.
"Changing processes is a major part of the e-procurement strategy," she said. "In times of cost-cutting, companies are not as willing to invest in process re-engineering. They have to be committed to that if they want to see the total cost-of-ownership costs shift."
Purchasers also voiced concerns about their suppliers' e-business offering, Chew said.
The number of buying organizations that said their preferred suppliers' online capabilities were either very bad or poor rose 2.5 points from the last quarter, to 32.5%. More than half said supplier capabilities were good, and nearly 14% said the offering was very good.
"We have been hearing about this frustration for a long time. In the past, people may have gone after the low-hanging fruit and worked with 10 suppliers. Now they are trying to bring the next 10 suppliers online and do more strategic purchasing," Chew said. "As you go down the supply chain, the buyers may have less influence and smaller companies have less technology. This is part of the normal growth pattern."
The slowing of process re-engineering and frustration with supplier capabilities may also stem from the fact that many companies, particularly small and medium-size organizations, are only starting to see how the Internet can benefit them, noted Mark Withington, a principal at market research and consulting firm PLMresearch, Plymouth, Mass., who works with companies in the $50 million to $100 million range.
"Many of the smaller guys have no concept of what the Internet can do for them," he said. "We are just starting to get to the 'Aha!' response when we explain how online auctions work, what design collaboration can do for them, and what benefits they may realize from e-business tools."
That response is becoming more apparent to ISM and Forrester, as well, added Chew.
"The small purchasers are catching up to the big purchasers," she said.
For direct materials, 74.5% of purchasers in all segments indicated that they bought some direct materials online in the most recent quarter, compared with 70.3% in the fourth quarter. The number of small-volume purchasers buying direct materials online outpaced the activity of larger buyers, growing by 10.6 points, to 70.5%.
The percentage of large companies using the Internet for some of their direct material purchases fell 6.2 points, to 79.5%.