Procurement in the Internet Age - Current Practices and Emerging Trends (Results From a Field Study)

Transcription

1 Procurement in the Internet Age - Current Practices and Emerging Trends (Results From a Field Study) Arie Segev, Judith Gebauer, Carrie Beam Fisher Center for Management and Information Technology Haas School of Business University of California, Berkeley Berkeley, CA , USA {segev, gebauer, beam}@haas.berkeley.edu CMIT Working Paper WP August 1998 Abstract New Internet-related technologies clearly have the potential to trigger significant changes in procurement. Although the majority of currently available off-the-shelf systems are in a very early stage, they do hold the promise to enable major improvements in terms of lower administrative overhead, better service quality, more timely location and reception of products, and increased flexibility. With most organizations spending at least one third of their overall budget to purchase goods and services, procurement savings hold significant business value. In this report, we present the summary of results from a field study of purchasing organizations done in cooperation with CommerceNet and the Journal of Internet Purchasing. The results are based on a comprehensive survey of about 80 companies and more in-depth interviews with a selected subset during the period April January The survey covers issues related to purchasing processes, technologies, practices, and supplier relationships, and how the Internet and related technologies are expected to transform them. Keywords: Electronic Markets, Electronic Commerce, Purchasing, Polls & Surveys. Copyright Segev, Gebauer, and Beam. All rights reserved.

2 Contents 1 Editorial Summary Background Overview of Procurement Study Design Study Results Participating Companies Business Areas Size Perceived Stability and Competitiveness of Business Environment Who Filled in the Survey? Purchasing Process and Supplier Relations Written Purchasing Procedures Measures of Purchasing Success Flexibility of Purchasing Processes - Measures to Handle Exceptional Demand Supplier Relationships Negotiation and Pricing IT Use in Linking With Suppliers Different Means of Communication Between Buyers and Suppliers Functionality of Business-to-Business Applications Connectivity of Business-to-Business Applications Intensity of Use and Reach of Business-to-Business-Applications Can We Expect Significant Changes in the Reach of Business-to-Business Applications? Impact of the Internet on Purchasing Processes and Supplier Relations Impact of the Internet on Purchasing Policies Will the Internet Help Cope with Unforeseen Situations? Impact of the Internet on the Number of Suppliers Impact of the Internet on Supplier Relationships Focussing on Specific Technologies Electronic Catalogs Internet-Based EDI Standardization Efforts such as OBI Additional Insights Through Aggregation "IT Savvyness" Internet Attitude The Relationship Between Internet Attitude and "IT Savvyness" Obstacles to Moving Purchasing onto the Internet Copyright Segev, Gebauer, and Beam. All rights reserved. 2

3 5 Conclusions and Outlook Acknowledgments Appendix Questionnaire - Long Form (used to gather data for Sample 1): Questionnaire - Short Form (used to gather data for Sample 2) Determining "IT Savvyness" Determining Internet Attitude References Copyright Segev, Gebauer, and Beam. All rights reserved. 3

4 Figures Figure 1 - Procurement: Spanning Multiple Boundaries Figure 2 - Main Lines of Business (Full Sample) Figure 3 - Company Size - Differences Between the Two Samples Figure 4 - Size of Participating Organizations - Differences According to Main Line of Business Figure 5 - Perceived Stability of Business Environment Figure 6 - Percentage of Purchases Expedited Due to Exceptional Demand Figure 7 - Survey Participants Figure 8 - Written Purchasing Policies and Procedures in Place - Differences According to Size Figure 9 - Purchasing Success Measures Achievement Levels Figure 10 - How are Companies Dealing with Situations of Unforeseen Demand? - Differences According to Size Figure 11 - Measures of Purchasing Success and how Companies Deal with Situations of Unforeseen Demand Figure 12 - Arms Length or Relationship Transactions Figure 13 - Change in Number and Type of Suppliers Over the Last 12 Months - Differences According to Size Figure 14 - Which Areas of Negotiation are Important - The Effect of Company Size Figure 15 - Relative Importance of Negotiating Techniques Figure 16 - Importance of Negotiation Techniques - Effect of Environment Stability Level Figure 17 - Communication between Buying Organizations and their Suppliers Figure 18 - Communication with Suppliers - Differences According to Company Size Figure 19 - Diffusion of Business-to-Business Applications Figure 20 - Diffusion of Business-to-Business Applications - Differences According to Size. 33 Figure 21 - Different Forms of Network Structures for Business-to-Business Applications - Differences According to Type of Business Figure 22 - Different Forms of Network Structures for Business-to-Business Applications - Differences According to Size Figure 23 - Business-to-Business Applications - Reach and Intensity of Use Figure 24 - Reach and Intensity of Business to Business Applications - Differences According to Size Figure 25 - Reach and Intensity of Business to Business Applications - Differences According to Type of Business Figure 26 - Plans for Expansion of Business to Business Systems - Differences According to Type of Business Figure 27 - Plans for Expansion of Business-to-Business Systems - Differences According to Size Figure 28 - Impact of the Internet on the Number of Purchasing Rules - Differences According to Size Figure 29 - Impact of the Internet on How Strictly Purchasing Rules are Enforced - Differences According to Size Figure 30 - Recent Changes in Number and Type of Suppliers - Differences Between the Two Samples Copyright Segev, Gebauer, and Beam. All rights reserved. 4

5 Figure 31 - Anticipated Changes in Number of Suppliers - Differences between the Two Samples Figure 32 - Anticipated Changes in No. of Suppliers Over the Next 5 Years (Impact of the Internet) - Differences According to Size Figure 33 - Anticipated Changes in No. of Suppliers over the Next 5 Years (Impact of the Internet) - Differences According to Business Type Figure 34 - Impact of the Internet on the Number of Suppliers over the Next 5 years - Differences According to Stability of Environment Figure 35 - How Will the Internet Impact Procurement? Figure 36 - Impact of the Internet on Procurement - Differences Between the two Samples 44 Figure 37 - Current and Potential Use of Electronic Catalogs Figure 38 - Use of Electronic Catalogs - Differences According to Type of Business Figure 39 - Use of Electronic Catalogs - Differences According to Size Figure 40 - Use of Internet-based EDI - Differences According to Size Figure 41 - Use of Internet-based EDI - Differences According to Type of Business Figure 42 - Current and Planned Use of Internet-based Systems - Differences According to Type of Business Figure 43 - Current and Planned Use of Internet-based Systems - Differences According to Size Figure 44 - Impact of the OBI Standard on Internet-based Procurement Expected over Next 12 Months - Differences According to Type of Business Figure 45 - Impact of the OBI Standard on Internet-based Procurement Expected over Next 12 Months - Differences According to Size Figure 46 - Categories of "IT Savvyness" (Determined by Percentage of Maximum "IT Savvyness" Points) Figure 47 - "IT Savvyness" - Differences between Sample 1 and Sample Figure 48 - "IT Savvyness" - Differences According to Type of Business Figure 49 - "IT Savvyness" - Differences According to Size Figure 50 - "IT savvyness" - Differences According to Stability of the Business Environment54 Figure 51 - "IT Savvyness" and Level of Detail of Purchasing Procedures Figure 52 - "IT Savvyness" Related to How Closely Purchasing Procedures are Followed.. 57 Figure 53 - "IT Savvyness and Relationship Transactions Figure 54 - "IT Savvyness" Related with Change in Number and Type of Suppliers Figure 55 - Anticipated Impact of the Internet on the Number of Suppliers Over the Next 5 Years and "IT Savvyness" Figure 56 - Internet Attitude (Full Sample) Figure 57 - Internet Attitude - Sample 1 vs. Sample Figure 58 - Internet Attitude (Sample 1 vs. Sample 2) - Differences According to Size Figure 59 - Internet Attitude and Recent Changes in Number or Type of Suppliers Figure 60 - Internet Attitude and "IT Savvyness" Copyright Segev, Gebauer, and Beam. All rights reserved. 5

6 Tables Table 1 - Size Categories Table 2 - Measures of Purchasing Success Table 3 - How do Companies Handle Situations of Unforeseen Demand? Table 4 - Which Areas of Negotiation are the Most Important? Table 5 - Most Important Areas of Negotiation - Differences According to Size and Main Line of Business Table 6 - Negotiation Techniques Table 7 - Modes of Communication and Stability of Business Environment Table 8 - Categories of "IT Savvyness" Table 9 - "IT Savvyness" as a Function of Who Filled in the Questionnaire? Table 10 - Purchasing Success Measures and Categories of "IT Savvyness" Table 11 - Categories of Internet Attitude Table 12 - Internet Attitude and the Person who Answered the Question Table 13 - Internet attitude and measures of purchasing success Table 14 - Determining "IT Savvyness" Table 15 - Deriving Internet Attitude Copyright Segev, Gebauer, and Beam. All rights reserved. 6

7 1 Editorial Emerging Internet technologies are raising high hopes of changing the picture of costly, timeconsuming, and inefficient procurement processes by enabling major improvements in terms of lower administrative overhead, better service quality, more timely location and receiving of products, and increased flexibility. With most organizations spending at least one third of their overall budget on purchasing goods and services, procurement holds significant business value (Zenz and Thompson 1994, Killen and Kamauff 1995). Growing pressures from increasingly open and competitive markets and increasingly tight budgets in the public sector reinforce the need to reorganize and streamline inefficient procurement procedures. Procurement is also a ripe area for electronic commerce, in part because procurement often involves a large number of highly repetitive tasks which lend themselves well to automation. However, despite the presence of EDI and other technologies, electronic procurement is still in its infancy. Obstacles to extreme growth for electronic procurement include fragmented systems, the high cost to implement truly integrated solutions, a lack of standards, and no effective leadership yet (Sollish, 1998). Despite some use of information technology (IT) in procurement and increasing use of Electronic Data Interchange (EDI) systems, most purchasing transactions still rely on paper and telephone methods. Available IT systems usually do not cover the full process or are very expensive to set up. The Internet and World Wide Web-based applications promise alternatives that are cheaper and easier to set up. In fact, they have the potential to trigger even more radical changes. Consequently, even traditional users of EDI for procurement are facing significant reengineering and change management challenges. Given the rapid development of IT-based procurement systems and the profound impacts that they might have, current and reliable data on the user side is important. To date, many questions still remain open. How are procurement processes organized today and what role is IT currently playing? What is the state of the practice of Internet-based procurement and how will emerge technologies impact procurement in the future? Are system vendors meeting user requirements and are buying companies open to emerging technologies? In order to help answer these questions, the Fisher Center for Management and Information Technology at the UC Berkeley conducted a field study in collaboration with CommerceNet and the Journal for Internet Purchasing. From April of 1997 until early 1998, we collected information through survey and phone interviews with purchasing managers and electronic commerce experts about the impact of the Internet on corporate purchasing practices and supplier relationships. Given the fast pace, at which changes occur with respect to all aspects of electronic commerce, our research can only highlight part of the full picture and it provides a snapshot in time. Nevertheless, the study does reveal interesting results, and many practices and obstacles are likely to remain present in many organizations for some years to come. Copyright Segev, Gebauer, and Beam. All rights reserved. 7

8 This document outlines the design of the study and reports its results in detail. Preliminary results were published in (Gebauer, Beam, and Segev 1998) and (Segev, Beam, and Gebauer 1997). A forthcoming report (Segev, Gebauer, and Färber 1998) focuses on transforming indirect procurement and reports the results of in-depth interviews with vendors and early users of web-based desktop procurement systems. Prof. Arie Segev Dr. Judith Gebauer Carrie Beam, Ph.D. Candidate Fisher Center for Management and Information Technology Haas School of Business University of California, Berkeley Copyright Segev, Gebauer, and Beam. All rights reserved. 8

9 2 Summary The goal of this study was to document the impact of the Internet and information technology on current practices and procedures and to identify emerging trends. Data was collected through an online Web-based survey form as well as via telephone interviews and paper-based questionnaires. Seventy-nine surveys were filled out in two samples between April and June 1997 and between September 1997 and January Most of the participants indicated they were purchasing managers (54%); 10% are IT managers, and 14% indicate they belong to both groups. The entire sample covers a broad range of industries with manufacturing (18%), computer software (14%), government (12%), and retail and sales companies (8%) accounting for the biggest chunks. Large companies with annual sales over $1 billion, more than 10,000 employees, and a minimum annual purchasing volume of $50 million represent 38%. Twentyeight percent are small organizations with annual sales of less then $10 million, less than 500 employees, and an annual purchasing volume of $1 million or less; 25% are of medium size. Information technology and especially the Internet have not yet revolutionized procurement. Telephone and fax are still the most important modes of communication between users and buying companies. The attitude towards emerging technologies, however, is positive and inquisitive. It also seems to be growing as the differences between the two samples are indicating. Forty-four percent of the participating companies currently transfer data electronically; 42% have the opportunity to place orders online; 39% can track orders online; and 24% have access to suppliers internal data. Half of the participants of the earlier sample indicated they were using electronic catalogs, while only 6% of the later sample report the current use of Internet-EDI. Forty-two percent, however, have plans to do so by the end of Our sample shows clear differences between companies of different sizes. There are differences in the use of information technology, which is much more widespread and sophisticated in larger organizations, as well as differences in the intensity of the relationships with suppliers. While participants from smaller companies frequently indicate they would like to become closer with their suppliers, larger organizations are more likely to have close relationships in place already. "Established" IT instruments, such as EDI, electronic funds transfer, Just-in-Time arrangements or other business-to-business applications that are integrated with backend systems support these relationships. Smaller companies are pinning high hopes on the Internet and emerging technologies to help establish electronic links with suppliers and strengthen their position. Participants point to cost and time as the most important measures of purchasing success. Given their importance, however, the objectives are not very well met. This means there is a huge opportunity for the Internet and WWW-based technologies to help companies achieve their objectives and reduce process cost and time. In order to do so and to gain widespread acceptance, however, emerging technologies have to be improved in several ways. According to our participants, the main problems with Internet use are currently security issues, Copyright Segev, Gebauer, and Beam. All rights reserved. 9

10 difficulties in locating and comparing information, and the level of effort necessary to establish links with existing infrastructures. Our research indicates that the current gap between first movers and followers in terms of use of information technology will probably widen in the future. We find that the current use of information technology is strongly correlated with a company s attitude towards the Internet and related technologies. Copyright Segev, Gebauer, and Beam. All rights reserved. 10

11 3 Background 3.1 Overview of Procurement Procurement encompasses all activities involved in obtaining material and services and managing their inflow into an organization toward the end user. It includes obtaining manufacturing supplies for an assembly line as well as obtaining paper and pencils for a bank (Hough and Ashley 1992, Zenz and Thompson 1994). Positioned between an organization s internal customers in need of material to fulfill their tasks and external suppliers providing goods and services, this function has to bridge multiple gaps in order to simultaneously manage external and internal relationships, and to balance participants different goals (Figure 1). Supplier Customer Internal Processes Marketing Sales Distribution Procurement Internal Processes 3rd Parties Financial Institutions, Logistics, Shipment, Legal Advice, Consulting etc. Figure 1 - Procurement: Spanning Multiple Boundaries Purchasing, i.e., the act of buying goods and services, can be divided into three basic steps: information, negotiation, and settlement (Zenz and Thompson 1994). Information. Prospective buyers identify their needs and evaluate potential sources to fulfill them, gathering information about market conditions, products, and sellers. Negotiation. Individual business partners start to interact with each other and determine prices and availability of goods and services as well as delivery terms. Successful negotiations are usually finalized with a contract. Settlement. The terms of the contracts are carried out and goods and services are transferred in exchange for money or other forms of compensation. For a richer, more detailed framework see Nissen (1997). The simpler framework is sufficient for discussion purposes and allows us to highlight the electronic commerce developments, which are applicable to each of the steps. Most organizations want to manage procurement with the lowest possible levels of risk and of investment while still ensuring adequate quality, avoiding duplication and waste, and sustaining the organization s competitive position and outside image (Perlman 1990, Zenz and Thompson 1994). While qualitative measures like the level of customer satisfaction or Copyright Segev, Gebauer, and Beam. All rights reserved. 11

12 the quality of supplier relationships are emphasized by corporate managers and match strategic requirements, they are relatively hard to gauge. Many purchasing managers prefer more operational transaction-oriented measures like cost, speed of reaction, or delivery time (Fearon and Bales 1997). Although the biggest payoffs are usually achieved when different methods such as organizational changes and IT are used together to comprehensively reengineer a process, the bottom line results might still be gauged in terms of quantitative measures, such as cost and lead time (Taylor 1997, Hammer and Champy 1993). Much has been written and said about the potential of the Internet to revolutionize the way business is done. In fact, its unique features such as fast growing rates of diffusion and connectivity, immediacy and interactivity, multimedia capabilities and a universal interface (Web browser), make it a very powerful platform to support all aspects of procurement: Internet search engines support the information phase. They help users find items by using keywords supporting the information phase, in particular to find new sources or to fulfill unexpected requirements. Internet-based catalogs allow buying organizations to browse, search, and/or place orders online. They combine and extend many features of existing channels, such as the rich content of printed catalogs, the convenience and intimacy of online shopping, and the sophisticated searching capability of CD-ROM catalogs. Additionally they let suppliers provide different "faces" to different buyers, and allow all parties to immediately track orders electronically (MacDuffie and Helper 1997, Perlman 1990). Internet-based EDI links can be less costly than traditionally used leased lines and Value Added Services regarding network access and data transmission. As a result, the breakeven point in terms of transaction volume becomes lower, especially favoring smaller organizations (Gebauer 1996). The special features of the Internet and the Web allow the development of interactive applications, enhanced by a graphical user interface with full multimedia support, and thus enable the communication of complex information. A growing number of Internet-based online auctions and bidding systems supports the negotiation phase by providing a simple negotiation mechanism confined to price alone (Segev and Beam 1998, Gebauer and Hartman 1997, Wilder 1997). Their success is a testimony to the ease with which the Internet connects a large number of dispersed users. The most vivid developments in Internet-based procurement systems are probably happening in the area of indirect procurement where numerous organizations and initiatives are trying to be the first to present viable business models and software. 1 They are developing systems that let buyers combine catalogs from several suppliers, check the availability of items, place and track orders, and initiate payment over the Internet. Vendors realize the need to streamline procurement processes and to push systems beyond pure transaction processing by adding workflow elements. By integrating individual organizations purchasing and approval rules, it becomes possible for procurement to let end users do individual purchases, while maintaining control over the process. 1 For example, Actra Business System (now owned by Netscape), Ariba, CommerceOne, and Elekom. Copyright Segev, Gebauer, and Beam. All rights reserved. 12

13 New technologies clearly show the potential to trigger significant changes in procurement. The majority of currently available off-the-shelf systems, however, is in a very early stage. Most search engines are not yet sophisticated enough to help locate information in an efficient way. A lack of common standards prevents the easy integration of electronic catalogs from different suppliers and the development of highly valuable "meta-catalogs" (Catalog 1998, Bichler and Hansen 1997). Flaws regarding security and reliability as well as a lack of adequate systems, e.g., to support payment in a flexible way, hinder the widespread use of Internet-based EDI systems. "New generation" MRO procurement systems have yet to prove their viability beyond pilot stage. Several organizations have coped with lack of readily available systems by developing highperformance applications in-house. In this context, government organizations play a leading role: The Defense Logistics Agency (DLA) and the U.S. General Services Administration (GSA) both have developed Web-based systems for the procurement of commodities, MRO supplies, and services. Users in military and federal agencies can now browse electronic catalogs from a multitude of suppliers, review delivery options, place orders online, and pay via corporate credit card. Both projects are remarkable because of their size alone: DLA s system holds nearly 4 million items and GSA estimates the current transaction volume handled by the system will double to $55 - $60 million annually by September Besides, the sophisticated built-in security and payment mechanisms may well serve as models for private corporations and other government agencies. In both cases, the IT systems enabled major changes in the way procurement is done. The central procurement agencies established a general infrastructure in terms of procurement procedures, overarching contracts with suppliers, and the Web-based system that empowers end users to handle purchasing operations by themselves. As a result, purchasing lead times and the related administrative overhead have dropped dramatically. Lawrence Livermore National Laboratories (LLNL) developed a Web-based system for the procurement of prototype parts (Jordan et al. 1997, Gebauer and Schad 1998). The approach is remarkable because it falls in an area that is usually not very well supported by IT but where the overhead costs often surmount the value of the items purchased. Although the process lead times were frequently unacceptable, EDI was not an option due to infrequent demand patterns and the complexity of the items. The new system supports the entire workflow, from the end user requesting an item through all the steps of setting up and handling a request for quote (RFQ) to the final payment. While the technical specifications for the parts are stored on LLNL s Web server, individual actions are triggered via s internally (e.g., for approval) as well as between LLNL and its suppliers. Setting up secure areas and individualized access rights turned out to be an essential part of the system. With its built-in approval processes and other features ensuring compliance with LLNL s procurement policies, the system, like the systems of DLA and GSA, allows end users to circumvent the procurement department for routine operations. Direct IT-based communication between the "technical experts," i.e., the end user and the parts supplier, greatly improves the purchasing processes in terms of cost, speed, and errors. These examples can be considered as first steps on the way to more substantial changes. The actual implementation and broad acceptance of new solutions, however, will not only Copyright Segev, Gebauer, and Beam. All rights reserved. 13

14 depend on the availability of the technical systems, but also on the bottom-line value that they will eventually provide to all prospective user organizations. To offer a starting point and to help overcome the current lack of empirical data necessary to assess future developments, we conducted a field study among buying organizations, the design of which is outlined in the following section. The results of the study are discussed throughout the remainder of this report (Section 4). 3.2 Study Design The goal of this study was to document the impact of the Internet and information technology on current purchasing practices and procedures and to identify emerging trends. This includes a look at how procurement processes are organized today as well as the current role of information technology and the Internet. It also encompasses identifying the attitude of buying organizations towards emerging technologies as well as current obstacles of utilizing new systems for the different aspects of procurement. Rather than an overview of what is possible, which would be the state of the art, this study is concentrating upon what is actually being done, which is the state of the practice. The questionnaire covers four fundamental areas: 1. Basic information about the company, such as size and line of business. 2. Elements of a company s purchasing process and supplier relationships. How exactly are supplies being bought, and from whom? 3. Mechanics of negotiation and pricing. 4. Use of information technology and especially the Internet. Is technology a fundamental part of the purchasing process? How are organizations anticipating it would change with the advent of the Internet? The data was collected through an online Web-based survey form. Participants filled the form out remotely and the data was automatically collected. Telephone and paper-based surveys were also available for participants without sufficient Web resources to fill out the online survey. 2 Participation was solicited through cold calls, advertisements on the Fisher Center Web page, and partnerships with CommerceNet, the Journal of Internet Purchasing, and Cambridge Management Consultants. The data was gathered in two samples. Sample 1 was gathered between April and June 1997, and consisted of a longer survey. Sample 2 was gathered between September and January 1998, and consisted of an abbreviated version of the survey. The time frame over which the samples were collected is an important variable. "If you d asked me these questions six months ago, I would have given you very different answers!" This comment by a purchasing manager in a September 1997 survey stresses the high rate of change in purchasing and information technologies. What is available here, then, has to be considered a snapshot of a moving target. 2 Some companies did not have Internet access, and others did indeed have Web access but the single Internet connection was considered too valuable to tie up for 30 minutes while filling out the survey. Copyright Segev, Gebauer, and Beam. All rights reserved. 14

15 4 Study Results 4.1 Participating Companies This section will cover the basic demographic data of the companies and institutions that participated in the survey Business Areas The entire sample is 79 data points, and is dominated by manufacturing, computer software, government, and retail and sales companies (Figure 2). Insurance 4% Electronics 4% Other 10% Manufacturing 18% Participants cover a broad range of businesses; largest groups: manufacturing, computer software, and government Consulting 4% Aerospace/Defense 5% Computer Software 14% Health Care 7% Financial services 7% Government 12% Telecommunications 7% Retail and Sales 8% Figure 2 - Main Lines of Business (Full Sample) Of the full sample, 39% of the participants indicate they belong to the manufacturing sector, and 61% consider themselves being a service organization. There are some differences in the two samples. Sample 1, the earlier sample, consists of 48 data points, dominated by computer software companies, manufacturing companies, and governmental agencies (including educational institutions.) Approximately one-third of this sample was manufacturing companies (29%). Sample 2, the later sample, consists of 31 data points, and is dominated by manufacturing, government, and aerospace/defense companies; it is over half manufacturing companies (55%). 3:2 ratio of service vs. manufacturing firms Overall 79 participating firms (sample 1: 48, sample 2: 31) Copyright Segev, Gebauer, and Beam. All rights reserved. 15

16 4.1.2 Size The size of the companies varied over a broad range. There were three measures -- the annual sales volume, the annual purchasing volume, and the number of employees -- which were combined and collapsed into a single measure of size. In case of conflicting data, a higher weight was placed on the purchasing volume. This is shown in Table 1. Size Annual sales Volume Table 1 - Size Categories Number of Employees Annual Purchasing Volume Small $10 M or less 500 or less $1 M or less Medium $10 M - $1 B ,000 $1 M - $50 M Large $1 B or more 10,000 or more $50 M or more Overall, the respondents were rather evenly spread among small (28%), medium (25%), and large (38%) companies; the average size of companies in sample 1, however, is lower (2.0) than in sample 2 (2.3), which contains 47% medium size and 40% large companies (Figure 3). Size of participating firms: 28% small 25% medium 38% large Percentage of Participating Companies 50% 40% 30% 20% 10% Small Medium Large blank Sample 1 Sample 2 Figure 3 - Company Size - Differences Between the Two Samples While service companies were relatively evenly spread between small, medium, and large companies, manufacturing companies were slightly more heavily weighted towards large companies (48%) (Figure 4). 100% Percentage of Participants 80% 60% 40% 20% Large Medium Small Manufacturing Service Figure 4 - Size of Participating Organizations - Differences According to Main Line of Business Copyright Segev, Gebauer, and Beam. All rights reserved. 16

17 4.1.3 Perceived Stability and Competitiveness of Business Environment Asked about the stability of the company s business environment, the average respondent rated her environment as a 3.44 on a scale of 1 (very stable) to 5 (extremely dynamic) (Figure 5). Although this is a somewhat self-biasing question, the answers are relatively evenly distributed across the range from 1 to 5 (standard deviation is 1.13), which is the reason that we are using it as a basis for subsequent analysis. Average stability 3.4 on scale from 1 (very stable) to 5 (extremely dynamic) % of Companies 40% 30% 20% 10% 34% 20% 23% 4% Very stable Somewhat stable Dynamic Very dynamic 19% Extremely dynamic Figure 5 - Perceived Stability of Business Environment The companies in Sample 1 3, on the average rated their environments as slightly more dynamic (3.65), than did the companies in Sample 2, which rated their environments at 3.13 on average. The service companies rated their environments as more dynamic on the average (3.70) than did the manufacturing companies (3.30 average), although a healthy 17% of the manufacturing sample said it faced an extremely dynamic environment (compared with 22% of the service sector). At times, purchasing departments will need to expedite purchases due to unforeseen exceptional demand. Overall, 42% of the companies felt they experienced some problems with exceptional demands, which is another indicator of unstable environments. 4 In addition, we asked about the percentage of their purchases that companies expedite due to unforeseen changes in supplier lead times. Over 60% of the companies expedite less than one fifth of their purchases, but a small group (8%) expedites between 40% and 50% of their total purchases regularly (Figure 6). On the average, the participants reported that they have to expedite 19% of their purchases. Sample 1 reports a more dynamic environment than sample 2 3 Sample 1 had smaller companies in it, and more of them were located in the San Francisco Bay Area. Sample 2 companies were more likely to come from Oregon or Florida, possibly more stable environments. 4 This question was only asked of sample 1. Copyright Segev, Gebauer, and Beam. All rights reserved. 17

18 Participating Companies 40% 30% 20% 10% 0-10% 11-20% 21-30% 31-40% 41-50% Percentage of Purchases Expedited Due to Exceptional Demand Figure 6 - Percentage of Purchases Expedited Due to Exceptional Demand Who Filled in the Survey? There was potential bias in the position of the person filling out the survey. Both IT managers and purchasing managers were invited to fill it out. Over half (54%) of the full sample was filled out by purchasing managers; this is partially due to the fact that three-quarters (77%) of the respondents in Sample 2 identified themselves as purchasing managers. 5 (Figure 7). Participants: more than half purchasing managers, one tenth IT managers 60% 54% 40% 20% 10% 14% 22% IT Manager Purchasing Manager Both Other Figure 7 - Survey Participants Perhaps the most important bias to recognize is that all the companies that responded were self-selecting to participate in a survey about the impact of the Internet on purchasing practices. This probably gives a sample that is biased towards more technology oriented companies that have interest in Internet-based procurement. 4.2 Purchasing Process and Supplier Relations One major goal of the study was to document the current purchasing processes in place at the responding companies. The answers to these questions give insight into the degree of automation currently in place, 5 This, in turn, can be traced to the distribution of Sample 2 at conferences intended for purchasing managers, while participation in Sample 1 was solicited from a broader range of people. Copyright Segev, Gebauer, and Beam. All rights reserved. 18

19 and the degree to which these processes can be automated, either directly or through reengineering efforts Written Purchasing Procedures Eighty-five percent of the companies said they had procurement policies and procedures in place. The larger the company, the more likely it was to have written policies and procedures in place; overall, 63% of the small companies had them, while 100% of the large ones did (Figure 8). 85% have written policies in place; percentage increases with size of company Participating Companies 100% 80% 60% 40% 20% No purchasing policies Purchasing policies Small Medium Large Figure 8 - Written Purchasing Policies and Procedures in Place - Differences According to Size There was not much difference between manufacturing and service companies along this dimension. Companies with no established procedures see themselves in slightly more unstable environments on average; the companies with no procedures in place rated the instability of their environments as 3.6 (with 5 being extremely dynamic), compared with an average rating of 3.4 from companies with written policies and procedures in place. However, the data is quite variable and it is not possible to draw strong conclusions from our current samples. Of the companies which have procurement procedures in place, 43% report problems with exceptional demand, compared with only one third of the organizations without written procedures. This may be a chicken-and-egg effect: the companies which most experience problems with exceptional demand may have a greater need to have written procurement procedures in place, while companies with smoother demands may not feel the need as strongly. Copyright Segev, Gebauer, and Beam. All rights reserved. 19

20 4.2.2 Measures of Purchasing Success In order to assess the impact of IT to improve procurement, we need to know what the objectives that organizations set for this business function are. Departments that value high transaction turnover will likely have different purchasing rules and technology implementations than departments that value building strategic alliances with suppliers. A section of the questionnaire asked the respondents about their three most important measures of purchasing success. This was a free response section, and after collecting the data, the answers were grouped into categories. The top three measures were assigned 3, 2, and 1 points respectively, and these yielded a composite list of the most important measures of purchasing success (Table 2, Figure 9). Table 2 - Measures of Purchasing Success Most important measures of purchasing success: cost, time, and (internal) customer satisfaction Category Description Importance Points Cost Total cost of purchasing item, including inventory and usage costs (total cost of ownership) Time Timely delivery of items, fast order processing 70 Customer satisfaction Service that purchasing delivers to its internal customers (might be broken into price, quality, order fulfillment in terms of accuracy and time), selection, and characteristics Quality Ability to provide high quality goods 42 Stock Inventory management; ability to keep sufficient stocking levels Value Overall value delivered to the company 26 Find Ability to locate hard-to-find goods, maybe even new kinds of material or services Control Ability to ensure standards compliance 6 Leverage Ability to use buying power effectively 6 Accuracy Ability to get exactly what customers ordered The respondents were also asked how well they met their purchasing goals (Figure 9). They indicated general success (not surprising, given it was a self-evaluation!) Cost and time show the biggest discrepancies. Although they are seen as the two most important issues, they only rank 7 th and 8 th in terms of success and achievement. This represents a big opportunity for improvement, especially given the fact that these categories also lend themselves well to information technology and Internet-based procurement. It is easy to electronically compare costs of the same parts from multiple suppliers, and the Biggest discrepancies between and importance and success for cost and time Copyright Segev, Gebauer, and Beam. All rights reserved. 20

21 improved supply chain management enabled by electronic commerce may address the time issue as well. Importance Points Success (5: most successful) Importance of success measures How well are the measures met? Cost Time Satisfaction Quality Stock Value Find Other Control Leverage Accuracy Figure 9 - Purchasing Success Measures Achievement Levels There is a difference in the profiles according to company size. Larger companies put less emphasis than average on satisfaction. Mediumsized companies ranked timeliness before cost and stocking concerns, and small companies emphasized cost and satisfaction over time and quality. The small companies which rated "finding the right goods and services" as a very important concern report especially little success with this measure. There is a discrepancy between service and manufacturing companies as well. Manufacturers rank cost especially highly, followed at some distance by time, quality, and stock. Service companies see cost, time, and satisfaction as most important and then rank quality, stock, and value in the next tier. Manufacturers report more frequently problems with meeting their success measures, while the service companies see themselves as quite successful. Cost issues are most important for manufacturers Flexibility of Purchasing Processes - Measures to Handle Exceptional Demand When considering automating or reengineering a purchasing process, a fundamental question is how flexible the process is currently. Very rigid processes can sometimes be easier to automate, while highly flexible, ad hoc processes can be difficult to program into a computer. On the other hand, flexibility in process design makes changes quite obviously easier. Several questions asked about how the participating organizations handle situations of unforeseen demand and whether these situations play a significant role in the everyday business climate. As we already outline above, many (42%) of the respondents said they do regularly experience problems with unforeseen demand. Copyright Segev, Gebauer, and Beam. All rights reserved. 21

22 Table 3 summarizes the options that were given to the companies on the survey. Each participant could check several techniques. Table 3 - How do Companies Handle Situations of Unforeseen Demand? Flexibility Measure Sample 1 Sample 2 Full Sample Our purchasing department is very efficient at locating needed goods in a short period of time 71% 58% 66% We have agreements on emergency orders with our suppliers We avoid these situations by carrying sufficient inventory 44% 48% 46% 29% 42% 34% Two thirds consider their purchasing departments as very efficient, 46% use emergency orders, and one third carries sufficient inventory Although the indication that there is an efficient purchasing department in place reflects some self-evaluation bias, it is not necessarily related to who answered the question: 70% of the IT managers agree with this statement and 75% of the purchasing managers. The numbers are lower for participants who indicated they are affiliated with both functions (55%) and the ones who primarily have other tasks (59%). The absolute numbers, however, especially for the last two groups are relatively small. The biggest difference according to size was the agreements on emergency orders, which are in place at almost 68% of the large companies, 42% of the medium sized, and only 16% of the small companies (Figure 10). This is clearly a sign of purchasing power. 80% 60% 40% 20% Large Medium Small Large companies are more likely to have agreements on emergency orders with suppliers than smaller ones Sufficient Stocking Agreements on Emergency Orders Efficient Purchasing Dept. Experience Problems Unforeseen Demand Does Not Play a Major Role Figure 10 - How are Companies Dealing with Situations of Unforeseen Demand? - Differences According to Size The biggest difference between manufacturing and service companies lies in the efficient purchasing department - found in 77% of the manufacturing companies but only in 58% of the service companies. This may be because purchasing, especially production line procurement, is extremely important to manufacturing companies, while service companies may see procuring these types of supplies as somewhat secondary. Efficient purchasing departments found less often at manufacturers than at service companies Copyright Segev, Gebauer, and Beam. All rights reserved. 22

23 Very stable companies seem more likely to prevent situations of exceptional demand by sufficient stocking of materials, or to say that unforeseen demand does not play a large role in their business. Additionally, companies in moderately dynamic environments seem to think their purchasing departments are extremely efficient at locating materials in a short period of time (81%) more often than do either the very stable (33%) or the extremely dynamic (47%). While in very stable environments, the need for a very efficient purchasing department is probably not that urgent and its lack not perceived as a problem, the ability to efficiently locate items on a short term basis could in fact make a difference in the case of very dynamic settings. We see the relatively low figure here as a starting point for improvement. It seems reasonable that an organization s success measures would affect its purchasing policies and procedures. More organizations which rank cost, time, satisfaction, quality, and sufficient stocking highly also tend to believe they have efficient purchasing departments, and try to avoid running out of stock (Figure 11). These companies seem to have resolved the trade off between cost and sufficient stocking by choosing to pay more for inventory costs to maintain sufficient stock of material. Perhaps they believe that the overall cost of operations is lower when sufficient stock is maintained, despite the higher inventory holding cost. Efficient purchasing departments are found less often in very stable as well as in very dynamic environments Many companies that rank cost highly as measure of purchasing success also report they deal with situations of exceptional demand by sufficient stocking Measures of Purchasing Success Cost Time Satisfaction Quality Stock Value Find Other Leverage Control Experience Problems with unforeseen demand Internet will help in situations of unforeseen demand Agreements on emergency orders in place Situations of unf.oreseen demand do not play a role Sufficient stocking Efficient purchasing department Figure 11 - Measures of Purchasing Success and how Companies Deal with Situations of Unforeseen Demand Supplier Relationships Looking at the types of relationships companies have with their suppliers, we defined a "relationship transaction" as one in which the Copyright Segev, Gebauer, and Beam. All rights reserved. 23

24 buyer and seller have known each other for a long period of time, share information, work together for mutual gain, and expect do to business together in the future. On the other side, we defined an "arms -length" relationship as one in which the companies do not know each other well, share little information, the companies do not often cooperate, and there is little expectation of future business. Average 80% 60% 40% 20% Small Medium Large Transactions Done at Arms Length Transactions Done in Relationships Figure 12 - Arms Length or Relationship Transactions On average, the participating organizations buy 67% of their total purchasing dollar volume in relationship transactions and only 33% at arms length. Large companies tend to purchase more in arms length transactions (Figure 12). Given that small company answers to this question showed especially high variability we should treat this result with some caution. The answers given to some other related questions, however, generally support this result. Although the question is heavily debated in academia as well as in the business press, there is no general agreement among researchers as to whether we are seeing a general trend towards more "market" or towards more "closed shops," i.e., hierarchy type relationships. While in the first case an almost infinite number of organizations from around the world are considering each other as potential business partners, we are talking about small groups of companies in the latter case. These groups are forming network-like structures characterized by relatively tight relationships between the nodes or even integration, e.g., through mergers and acquisitions. The results of our study mirror this discussion in the way that they show the same ambiguous picture - a general trend is not obvious. Almost half the sample (49%) reported a general reduction in the number of suppliers over the last 12 months, while 32% reported an increase and 27% reported a change in type of suppliers. Relationship transactions prevail compared to transactions done at arms length - the larger the company, the tighter the relationships Number of suppliers being increased or reduced? No clear trend observable Copyright Segev, Gebauer, and Beam. All rights reserved. 24