the impact of web-based pro

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Author: Croom, Simon R.

Geographic Code: 1USA

Date: Jan 1, 2000

Words: 7030

Publication: Journal of Supply Chain Management

ISSN: 1523-2409

SUMMARY

The focus of this article is on the impact of Web-based order processing systems for

procurement strategy in the management of maintenance, repair, and operating (MRO)supply. The management of MRO supplies has been little discussed in the literature, and inmany organizations is undertaken in a devolved, decentralized, and uncoordinated fashion.Consequently, MRO procurement is often a poorly managed and non-value-added activity,yet MRO purchases may account for many millions of dollars of expenditure for organizationsacross most, if not all, industries. To explore the impact of Web-based procurement systemson MRO purchasing, a Delphi study was conducted providing access and analysis ofcommercially sensitive data. [1]

In this article, it is contended that greater information processing capability achieved throughthe use of electronic commerce, specifically Web-based procurement, will enable significantcost improvements and strategic leverage to be obtained through a more strategic approachto management of the typically low-value, high-variety goods and services that constitute themain category of MRO items. E-procurement of MRO items may be a so-called "killerapplication" on the basis of potential efficiency gains.

INTRODUCTION

Further, an important consequence of the reengineering of the MRO procurement processwill be to raise the professional profile of the purchasing function through enhanced internalcustomer service and significant total cost improvements.

The growing use of the Internet for conducting business transactions is widely regarded as amajor revolution in business practice. This article is founded on a research project about theadoption and development of Web-based electronic commerce in business-to-businessmarkets (Croom 1998). The focus of the study was the management of the procurement ofnon-core products and services, variously known as operating, nonproduction, or MRO(maintenance, repair, and operating) resources. This paper is thus concerned with theimplications of the adoption of electronic procurement for MRO items on purchasingmanagement. This is an area of purchasing practice that has received little relative attentionin the literature, as by far the dominant focus of the purchasing literature has been themanagement of production item procurement.

This article initially examines the literature relating to electronic commerce in order toestablish some of the main implications for purchasing management of the growth inInternet-based trading. Second, analysis from an exploratory study into the nature and use of

Impact of Web-Based Procurement on the Management of Operatin... http://www.thefreelibrary.com/_/print/PrintArticle.aspx?id=60010047

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electronic procurement (e-procurement) systems is presented. This study involvedpurchasing and IS managers who have direct involvement and responsibility for the study,development, or implementation of Web-based procurement systems for MRO procurement.The final section of the article discusses the implications of the study findings for themanagement of MRO procurement.

THE IMPACT OF ELECTRONIC COMMERCE ON GOVERNANCE STRUCTURES

During the past decade, organizational theorists, business consultants, andtelecommunications managers and vendors have directed our attention to the strategic rolethat information can play in the competitive strategy of firms (Bradley, Hausman, and Nolan1993; Keen 1988; Porter and Millar 1985). Throughout the 1980s, widely discussed caseexamples demonstrated how the use of telecommunications networks to link firms to theirsuppliers and distribution chains conveyed important first-mover advantages. The firms citedin the literature are as diverse as Microsoft, Chrysler, Ford, General Electric, BT, Nortel,Siemens, American Hospital Supply, and McKesson. The benefits to the firms deployingsuch inter-organizational networks included: increased efficiency of order processing,reduced costs due to just-in-time inventory management, locking in trading partners because

of the difficulties competitors faced once a network is in place, and greater ability tocustomize products and services based upon information arising from the transactionscarried by the network (Cash and Konsynski 1985; Johnston and Vitale 1988).

The adoption of electronic trading has also been seen as having a direct and significantimpact on transaction costs and, as a result, on the form of governance structures employedto manage transactions (Williamson 1975). In the past, electronic trading networks typicallyhave been put into place by a dominant firm in a value chain, and built upon proprietaryapplications running over private networks. For example, Chrysler required its parts suppliersto participate in its electronic data interchange (EDI) network, while more recently Ford'sintroduction of the C3P CAD/CAM system has effectively delineated its design network. Such

networks are often implemented with the most important existing trading partners. In fact, onthe upstream side, a typical goal for such applications as EDI has been to reduce the totalnumber of suppliers and enhance the quality and efficiency of the overall purchasingfunction (Kekre and Mudhopadhyay 1992).

With the increasing standardization of such applications as EDI, as well as the availability oflower-cost public network infrastructures, several researchers have contested that inter-organizational networks will not only proliferate but also will be applied in qualitativelydifferent ways. In particular, as the barriers to participate in electronic transactions diminish,some researchers now believe that the conditions are ripe for the establishment of electronic

marketplaces, with such new electronic markets conceivably including larger numbers ofbuyers and sellers (Malone, Yates, and Benjamin 1987; Wildman and Guerin-Calvert 1991;Hollard and Lockett 1997). In 1987, Malone et al. argued that the development of inter-organizational electronic networks would improve coordination between firms, therebyreducing the costs of searching for appropriate goods and services (they call these electronicbrokerage effects). Consequently, they claimed that one of the major effects of inter-organizational networks would be a shift from hierarchical to market relationships.

"Some of the initial providers of electronic markets have attempted ... to capture customers ina system biased toward a particular supplier. We believe that, in the long run, the significantadditional benefits to buyers possible from the electronic brokerage effect will drive almost all

electronic markets toward being unbiased channels for products from many suppliers."(Malone et al. 1987, p. 492).

Thus, the use of open information systems may be seen to provide greater levels of


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information to buyers, thereby opening up greater competitiveness between providers. Insimple terms, the development of electronic markets providing conditions approaching theeconomic model of perfect competition may be likely to emerge. Indeed, NASA's recentexperiences in opening up contract tenders via the Internet saw a drastic increase in thenumber of responses it received from a global supply base, in certain cases receiving inexcess of 30,000 responses to one request for tender.

However, a converse effect has also been hypothesized, whereby using electronic networksto reduce the costs of tightly integrating a particular buyer and seller, firms can achieve anelectronic integration effect (Malone et al. 1987). An example would be an electronic datainterchange system that connects a retailer's point-of-sale terminals to a supplier's deliverysystem, decreasing the likelihood of the retailer going out of stock on popular goods (Weber1995). Malone et al. (1987) based their predictions about the dominance of electronic marketson the relative benefits that they anticipated firms would receive from electronic brokerageand electronic integration. In a more recent paper, Holland and Lockett (1997) argue that formany companies, as with their non-electronic governance structures, a mixed mode ofmarkets, hierarchies, and networks is the most likely consequence of the growth of electroniccommerce. So, while the literature to date has discussed potential governance structures

arising from electronic commerce, what seems to be lacking is a clear recognition of the mainbenefit to be obtained through Web-based electronic commerce -- namely, the enhancedinformation availability as a consequence of the ubiquitous nature of the Internet, both withinand between organizations. In the following section, the implications of increased informationfor market transactions are briefly discussed.

A MACRO-VIEW OF THE IMPLICATIONS FOR MARKET TRANSACTIONS OF ELECTRONICCOMMERCE

An important consequence of the increased use of Web-based procurement and electroniccommerce systems is their impact on the form of governance structure to be deployed for the

management of transactions. In this section, we briefly explore the implications of greaterinformation on governance structures.

Most economists believe that was it not for the costs of coordination, markets would generallybe more efficient mechanisms for production than hierarchies. These costs of coordinationrelate to the planning, control, management, and administration of economic activity. It isheld that purchasing goods and services on the open market raises the costs of coordinationthrough the additional search costs in identifying appropriate suppliers, costs of specifyingand enforcing contracts, and the administration of the financial settlement (Williamson 1975).For example, customers can have difficulty specifying what they want and searching through

the many alternatives to find the best suppliers and best wares, and suppliers incur costs inadvertising the availability of their goods and services to potential customers (Malone et al.1987).

The production value chain of almost any complex product consists of the acquisition ofvarious raw materials and other components, followed by transforming processes required toconvert them. Each step presumably adds value as the product wends its way toward itsultimate consumer (Porter 1980). Using the value chain as their framework, Malone andcolleagues (1987) argued that the use of electronic communication links between firms couldreduce both the costs of coordinating economic transactions and the costs of coordinatingproduction. Coordination of both sorts consists of communicating and processing information.

Because modem information technology lowers the costs of both communication andinformation processing, Malone and his colleagues hypothesized that the result of reducingcoordination costs without changing anything else should be an increase in the proportion ofeconomic activity coordinated by markets. In other words, lowered coordination costs would


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encourage more outsourcing, enabling firms to buy goods and services less expensively thanby producing them in-house (Malone 1987; Malone et al. 1987; Malone et al. 1989). To theextent that the costs of communication and information processing are reduced, the cost ofthe disadvantage of outsourcing a production process is also reduced.

Empirical tests of this hypothesis are only starting, and this article reports on one such study.Existing evidence at the industry level indicates that increases in investment in informationtechnology are associated with a decline in average firm size and a rise in the number offirms (Brynjolffson, Malone, Gurbaxani, and Kambil 1993). Kambil (1991) also shows thatindustries investing more of their capital stock in information technology also contract outmore of the value of the goods and services they produce to external suppliers (i.e., a higherbuy/make ratio in production), with a two-year lag. From the literature, it may be expectedthat greater information availability will lead firms to increase their level of outsourcing. As aconsequence, an increase in the proportion of bought-out goods and services will place anincreased strategic emphasis on the purchasing process. A key question for purchasing isthus, to what extent will the growth in the use of Web-based procurement impact on the levelof outsourcing?

In addressing this question, some attention to prognoses for the growth of both Internetbusiness-to-business trading and the level of outsourcing may provide some useful insights.

Forecasts for the Growth of E-Commerce

Though there are a number of estimates for the size of the business-to-business electroniccommerce market, a reasonable example is International Data Corporation's (IDC) predictionthat business purchases conducted electronically in the United States will be in the order of$80 billion in 2000. Morgan Stanley's (1997) estimate for business-to-business e-commerce is$88 billion, Forrester Research's estimate is $100 billion per annum, and the YankeeGroup places the figure at around [pounds]134 billion. Estimates for the United Kingdom are

far more speculative, due to the later adoption of the Internet (43 percent of U.K. respondentsin a 1997 survey indicated that they were using the Internet for some degree of inter-organizational communications (Finnegan et al. 1998)).

Figure 1 presents the IDC (1997) forecast growth for business-to-business transactions viathe Internet.

Recent research by Forrester indicated that half of the U.S. Fortune 1000 organizations wereactively investigating the use of the Internet to reach out to their smaller suppliers.

Further developments in electronic commerce have seen the establishment of a standard foracquiring MRO items on the Internet by American Express and the Internet PurchasingRoundtable. The Open Buying on the Internet (OBI) standard is intended to enableinteroperability between companies.

To date, electronic business-to-business commerce can be seen to have progressed throughthree waves of development based upon the mediating technology: EDI, area networks (e.g.,VANs), and the Internet. The advantage of the Internet as an e-commerce medium over VANsand EDI is undoubtedly its ubiquity. This is seen as a major driver in the adoption ofelectronic business-to-business commerce, largely due to the widespread accessibility of theInternet as a transaction mediator. In addition, domestic use of the Internet is raising the

capability of the workforce across organizations. A final factor is the benefit of a non-platform-dependent medium so that any level of personal computer is able, with appropriate browsersoftware, to access the Internet or Web system.


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Forecasts for the Growth of Outsourcing

A number of studies have indicated that the degree of outsourcing will increase over the nextfew years. A major factor in the increasing level of outsourcing cited by Davenport (1993) isthe increased use of information technology for process innovation cuffing acrossorganizational boundaries, while Lonsdale and Cox (1998) identify the benefits accruing fromoutsourcing as the main drivers in the outsourcing trends observed in the United Kingdom.Among these benefits are direct cost reduction, conversion of fixed cost to variable cost,benefits to be gained from suppliers' investment in innovation, and improvement in time tomarket for new products and services. As Table I shows, PA Consulting Group's studyconducted in 1996 forecasts significant increases in MRO category outsourcing.

SUMMARY

The prognosis from many of the commentators and reports identified in the literature is thatboth the use of electronic commerce and the degree of outsourcing are anticipated toincrease significantly over the next three to five years. The fundamental impact of this forprocurement may be seen in two main areas. First, electronic procurement will greatly

improve organizations' ability to manage a complex of small-value, multiple-transaction, andhigh-variety purchases. Second, the adoption of Web-based systems will impact on thenature of the governance structures adopted for the management of purchased MRO items.Not only could we expect more goods and services to be sourced with external suppliers, butperhaps more important for purchasing management, we may begin to see some majorchanges in the way that MRO supply relationships are managed. However, from theliterature, there is little useful empirical analysis on which to base any examination of theimpact on purchasing of the adoption of Web-based procurement systems. Consequently, aresearch study was undertaken to explore this area.

RESEARCH METHODOLOGY

An exploratory study was conducted during 1998 into the level of deployment and benefits ofWeb-based procurement systems for the procurement of operating resources in the UnitedKingdom, continental Europe, and the United States. Participants in the study included 21procurement executives, 13 information systems executives, and in three cases, key accountsales executives. All of the respondents had involvement in the study, development, orimplementation of Web-based procurement systems for MRO purchases, depending on thestage of development within the organization.

Selection of the respondents was conducted through a convenience sample identified by

searching practitioner-authored papers, practitioner and academic conference presentations,using customer records of an electronic procurement system provider, and through personalrecommendation. Confidentiality of the study data was necessary due to the commercialsensitivity perceived by most of the respondents.

In-depth, semi-structured interviews were conducted by telephone, e-mail, and face-to-facecontact with 37 individuals representing 32 organizations from industry, including national aswell as multinational organizations, public-sector bodies, and government departments.Industrial sectors represented included FMCG, engineering, automotive, financial services,travel and hospitality, and management services.

A quasi-Delphi method was adopted in which three rounds of interviews were conducted withthe respondents, at each stage reporting back the analysis from earlier rounds as well asproviding the opportunity to explore issues in further detail. During the three rounds, 30 ofthe respondents participated in at least one face-to-face interview. The remaining seven


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respondents were interviewed by telephone on at least two occasions. E-mail was used infive interviews, and also to circulate the summaries of each stage to all respondents.

The first round of the study set out to identify the current level of activity in the developmentof electronic procurement for MRO items, and the process of implementation (i.e., in-house oroutsourced, key drivers, dominant function in the process). In all of the responses, it wasnoted that the study organizations had significant difficulties in terms of clear tracking andauditing of the level and nature of MRO procurement taking place. From this, the process ofimplementation and initial objectives and bafflers were identified and summarized. A briefreview was distributed to respondents inviting comment, further elaboration, and alsosoliciting key issues of interest.

The second round of interviews conducted six weeks later employed a highly structuredquestionnaire to guide the interviewer. Key areas investigated were system design, benefitsachieved to date, perceptions of process and functional impact, and the barriers toimplementation. Once again, a summary report was produced and circulated invitingelaboration and clarification. At this stage, five visits were conducted to operating sites andsystem providers to provide further contextual insights into the process of electronic

procurement.

The third and final round of interviews was conducted 12 weeks after round two and wasintended to provide clarification and further elaboration of the summary report, and also anupdate of progress since the second round of interviews.

The analysis of the study provides insight into the impact of electronic commerce on theprocurement process, and the implications it will have on the role and strategy of thepurchasing function.

THE IMPACT OF WEB-BASED PROCUREMENT (E-PROCUREMENT)

From the study, four main areas of benefit were identified and agreed upon by theparticipants, two of which are classed as "operational" and two as "strategic." The operationalbenefits relate to the ability to reduce the administrative costs of the whole procurementprocess by two-thirds, and the improved audit of each transaction throughout the process.The strategic benefits include greater influence and control over expenditure by theprocurement function (in many cases, this was seen as a step toward raising the status andprofessionalism of the function) and greater opportunity to manage the total supply base.

Concerns with Web-based transactions related to the supply of services and issues

pertaining to information and data security.

OPERATIONAL IMPLICATIONS

Procurement Process Cost

An initial cost analysis was conducted with a large European pharmaceutical organization.The data was adjusted and simplified to demonstrate the scale of administrativecost difference between manual and electronic procurement processes. The original analysiswas then circulated to the organizations participating in round two of the Delphi study inorder to gain a wider validation of the data analysis. The resulting data in Table II represents

a synthetic model agreed upon by the study participants.

Expenditure Control


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In a typical large organization context, each budget holder may be engaged in MROprocurement activity ranging from petty cash items (less than [pounds]1,000) to[pounds]5,000 transactions. Due to the fragmentation of budget holders in organizations asvaried as retail banks, government departments, and international food productmanufacturers, it is very difficult to establish the exact size of the internal customer base (i.e.,those individuals who would raise requisitions). It has only been possible through this studyto obtain estimated numbers. However, Haacker (1999) states that Motorola considers everyone of its employees a de facto nonproduction buyer.

In order to represent this, a ratio of the number of internal customers per [pounds]1,000 ofMRO procurement has been developed, excluding petty cash purchases. This serves toadjust for organizational size and variety within the sample. It must be noted that this is not astatistically significant metric due to the size of the sample and the validity of the data.

Number of internal MRO customers: 2 per [pounds]1,000

With a wide internal customer base and variety of transaction value, a major administrativeissue was the lack of clear information and, consequently, a weak audit trail. This was an

important factor for major and/or global financial services, retail, food manufacture, andautomotive sector organizations. The e-procurement process provides visibility of theorganization's many MRO transactions by individual budget holders, and thus offers aconsiderable improvement in the audit trail.

Increased Procurement Control

The variety and variation of MRO items presented all respondents with considerable difficultyin terms of developing specialist knowledge regarding product and service technicalcharacteristics, and supply market conditions. The ability to consolidate andcategorize suppliers, services, and MRO goods is seen as an enabler in the move toward

greater professional contribution to MRO procurement, without losing any level of service tointernal users.

In fragmented, large organizations, procurement is carried out by numerous functions, eitheras local purchasing offices or outside of the purchasing line of management (i.e., with budgetholders). Furthermore, purchasers may be remote from the user, often never having contactother than via telephone and requisition. The consolidation, transparency, and real-timedata benefits of Internet procurement enable greater coordination between the user groupsand purchasers. In addition, any centralized purchasing function was able to exert greatercontrol over sources of supply, purchase price, and inventory policy. Coupled with the

enhanced status of purchasing, the ability to gain influence over MRO procurement was seenas being a critical factor in the decision to adopt an e-procurement system.

Benefits for the Management of Suppliers

Greater visibility of total procurement is seen as an enabler for supply base reduction in MROprocurement. Typically, a supply base consisting of 5,000-plus suppliers was cited in thelarger respondent organizations. A prerequisite for many e-procurement systems is acomprehensive supplier catalog, and thus a supply base reduction strategy was seen as acomplement to the adoption of e-procurement. Supply base reduction brings with itconsiderable benefit in terms of consolidation economies arising from the reduction in the

number of supplier relationships and the ability to increase the volume of transactions witheach supplier without a commensurate increase in the level of process activity.

As a result of greater visibility of the procurement expenditure and categories of MRO items,


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the ability to apply leverage over suppliers through centralization of procurement authoritywas seen as a key driver in adoption of Internet MRO procurement by every respondent.However, there was a real concern relating to the extent of dependency on the suppliersonce they are tied in to the supplier catalog system. The distinction was made earlier in thisreport between electronic hierarchies and electronic markets. The intermediating catalogsystem serves to tie customers in to the chosen supplier, and at the same time serves as areal barrier to entry for noncatalog compliant suppliers. In particular, this may have anexcluding effect for SMEs.

Concern for the Management of Services Supply

An unresolved issue was the application of Internet systems for the more complex issue ofservice provision such as facilities services (e.g., cleaning and catering). Means of real-timemeasurement of service performance were regarded as necessary for such systems in orderto achieve effective supplier monitoring. Research into out-sourced service provision hasdemonstrated considerable difficulty in service quality measurement. Although advanceshave been made, they are principally people-based systems.

Concern for Security

A major concern for any open protocol is that of data security. For all of the respondents inthis study, the issue of security was a major concern, especially in the context of electronicpayments. While data encryption advances appear to have secured electronic paymenttransfer, the level of resistance expressed was considerable. The capability of any system toprovide secure data transfer was regarded as a major criterion for both existing and potentialusers of e-procurement systems.

Supply Database Maintenance

At the heart of all of the electronic MRO systems considered or used by the respondents inthe study is a central supply database. This database typically contains and maintainsdiverse information relating to process concerns such as authority levels for order-placers,supplier details, product/service details, and pricing scheme agreements. The location andmaintenance of the central database may reside within the customer or the supplier for eachdiscrete category of procurement. Here, we found that three specific structures existed for thelocation and maintenance of the supply database.

First, it was found that all of the public-sector and local-government purchasing bodiesparticipating in this study located and maintained their supply database internally. A number

of IT companies also had total control over their supply database. Second, small-sizedorganizations (less than 250 employees) used supplier catalogs only. Finally, the remainingrespondents employed a mixed structure in which internal customers had access via anintranet to the e-procurement system which provided access to both internal catalogs andexternal (supplier) Web-based catalogs.

At the heart of the supply database, it was considered that two elements were "strategicallyimportant": the terms and conditions of supply, and access to communication with internalcustomers. Suppliers preferred to be able to collect information relating to users of theirsystem, particularly expenditure profiles, as a means to develop their database marketingcapability. Customers wished to possess the same information for control and audit

purposes, but also as a means of developing retrospective volume and activity discounts withsuppliers.

Organizational Implications


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Haacker (1999) states that the adoption of e-procurement for MRO purchasing represents the"killer app" to Motorola due to the potential cost savings available through greater strategicmanagement of such items. One of the key benefits of using Web-based systems -- theirubiquity -- may be a countervailing force to improved professionalism in procurement withoutclear controls and intervention by professional buyers. Some of the respondents involved inthis study believed that their e-procurement systems would make purchasing a "redundant"function, since each member of the organization could now purchase directly through his orher Web access. It was notable that this was typically the case where the development andimplementation were IT department driven.

A key human resources issue identified was the need to broaden the strategic purchasingmanagement capability of the purchasing function. This was expressed succinctly by onerespondent:

"Since we will no longer need to process orders, invoices, or chase delivery either we dissolvethe function or we have to take a long, hard look at the value we add to the organization. Forme, that means we must start acting like our production-buyer colleague and become more

astute in the strategic management of supply and suppliers."

Adoption of e-procurement thus requires training and development in both systems andpurchasing capabilities.

STRATEGIC IMPLICATIONS

The impact of e-procurement on purchasing strategy is believed to be a major factor in theadoption of MRO systems. Currently, many MRO items are managed as tactical,administrative commodities or services. As a consequence, there is considerablesub-optimization in current MRO procurement. This is largely due to the high variety and low

value of many MRO items. However, improved information will enable greater consolidationand increased economies of purchase leverage. This, in effect, means that organizations willbe able to manage their MRO low-value items in a more strategic manner through suchactions as the establishment of single-source arrangements, consolidation andrationalization of commodities and services, and increased buying power over the supplybase.

The use of e-procurement for the management of MRO items will provide an immensestrategic advantage to the purchasing organization. We have seen how the management ofcore production purchases has developed into a strategic and critical capability (Lamming

1993). From this study, it is concluded that such benefits and methods of purchasingmanagement will be available for MRO goods and services due to improved informationavailability. Providing buyers with accurate and comprehensive data relating to the cost,range, and usage of MRO items enables sourcing and pricing arrangements to be conductedunder conditions of greater purchase leverage, and also delivers a concomitant increase inpurchasing's internal service level.

A procurement matrix may be employed to illustrate how re-positioning of MRO items maybenefit the purchasing function and the company as a direct consequence of theinformational advantages of e-procurement (Elliot-Shircore and Steele 1985). As illustrated inTable III, typical MRO items are located in respect of their current (i.e., pre-e-procurement)

position within the matrix (Haacker 1999).

It is clear that information is seen as a critical resource in attempting to raise MRO items to amore strategic profile. Traditionally, much MRO expenditure has been viewed as dominated


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by tactical purchasing policies including devolved decisionmaking, budget-limitedprocurement authority, and a complex and large supply base. One of the main early benefitsof e-procurement has been consolidation of purchased items. One respondent stated that hisorganization reduced its variety of office stationery products from 235 items to 38 items withintwo months of commencing its e-procurement trial. As a result, improved informationtransparency makes it possible for purchasers to adopt more "strategic" procurementapproaches such as supply base reduction, lean logistics, partnership relationships, andlong-term supply contracts (Lamming 1993; Hines 1994).

CONCLUSIONS

This research has been exploratory in nature, intended to identify key concerns andopportunities for electronic procurement rather than examine the scale and relationshipsbetween dominant variables in the adoption of e-procurement. It is contended that suchresearch is a useful development from the study reported here.

A number of key observations can be made regarding the impact of open Web-basedtransactional channels on business-to-business markets:

* Electronic commerce may be conducted through a range of electronic governancestructures from electronic markets to electronic hierarchies.

According to economic theory, (electronic) markets will be more efficient mechanisms for theconduct of transactions (i.e., achieve lower costs and higher value) than (electronic)hierarchies, In practice, imperfect knowledge (a consequence of imperfect information) andopportunistic behaviors serve to distort transactions and lead to less than optimal conditions.

* It has been posited that electronic commerce improves knowledge assets, thereby leadingto economic transactions near to optimal efficiencies.

However, while economic theory provides an insight into the impact of e-procurement ontransaction costs, a significant weakness of transaction cost theory is its handling ofbehaviors and relationships. Dietrich (1994), for example, highlights the inconsistencies inWilliamson's handling of opportunism and bounded rationality, caused by the confusionbetween exogenous disturbances and strategic behavior. Thus, we need to consider thestrategic behaviors available to firms utilizing electronic commerce for procurement or supply.The development of strategic supplier relationships or, by the supplier, strategic accountmanagement (McDonald, Millman, and Rogers 1997), will serve to impact upon thelongevity closeness, and strategic effectiveness of the customer-supplier relationship.

* While the economics of transactions may change to provide lower competitive barriers tosupply, closer ties, expanded service, and improved value-adding activities can tie insuppliers through the use of partnership sourcing processes.

Internally, the speed and cost of requisition processing have been found to be significantlyimproved for two reasons. First, much MRO procurement is acquisitional and decentralized innature; second, the use of IT systems brings internal customer service benefits through rapidand ubiquitous data transmission.

* The internal service provided by e-procurement is not achievable in non-e-procurement

environments due to the fragmented, high-variety low-value, and decentralized nature ofmuch current MRO procurement.

The opportunities for strategic management of MRO items were perhaps the most important


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considerations cited by participants in this research in terms of their decision to adopte-procurement. By raising the service levels to internal customers, and by providing greatlyimproved and robust information relating to the procurement process, the benefits of anyform of e-procurement system are far greater than the frequently cited process costreductions. While these are undoubtedly important in their own right, the ability to apply"professional" purchasing practices and policies across the range of an organization's supplycatalog is likely to have significant benefits for profitability and the status of the purchasingfunction.

In summarizing the findings of this research, Table IV contrasts e-procurement withnon-electronic procurement for the management of MRO purchasing.

As discussed earlier, the location and maintenance of the supply database catalog bysuppliers brings with it benefits of a tie-in through Web-based sales systems, and in manycases cited in the business press over the last few years, early adopter benefits may drive thedevelopment of business-to-business e-commerce from the supply rather than the buyerside. (See, for example, Amazon, CDNow, and Calyx & Corolla in the United States, andFisher Scientific and R.S. Components in the United Kingdom.)

As Holland and Lockett (1997) argued, we are likely to see mixed modes of governancestructures for MRO e-procurement emerge. The consequence of this will be to alter thenature and contribution of MRO procurement, but not necessarily to the sole advantage ofthe purchaser.

Simon R. Croom is a lecturer at the Warwick Business School of the University of Warwick.He earned his Ph.D. degree from the University of Warwick. Dr. Groom's research interestsinclude JIT purchasing, supplier design involvement, global account management, andelectronic commerce.

(1.) The author wishes to acknowledge the support of Infobank International, and the activeinvolvement of the 37 participants, who for reasons of confidentiality prefer to remainanonymous.

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TRENDS IN OUTSOURCING (PA CONSULTING GROUP SURVEY 1996)

(Percentage of Respondents)Will Have

Business Outsourced by Outsourced by Outsourced by

Activity 1991 1996 2001

Property services 13 42 46

Application 5 29 41

development

IT technical 4 21 34

support

Legal services 7 19 27

Distribution/ 9 21 24

support

Infrastructure 4 10 14

maintenance

Manufacture/ 6 9 12

assembly

ADMINISTRATIVE COST ANALYSIS

Process Stage Manual Process E-Procurement System

Using the manual


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system costs as the

base index (=100)

(Adjusted Costs) (Adjusted Costs)

Requisition Generation 65.77 29.2

Requisition Distribution 6.05 0.0

Order Generation 9.87 1.5

Order Distribution 0.87 0.0

Expediting 0.91 0.3

Goods Receipt 3.83 1.5

Invoice Processing 9.40 0.7

Material 3.31 0.0Total 100.00 33.2

PROCUREMENT PORTFOLIO

Acquisition Critical Leverage

Low Spend/Low Risk Low Spend/High Risk High Spend/Low Risk

Activities Aim to move into Contingency Maximize

leverage or planning: competition using:

minimize effort by: Removal of entry Enquiries

Consolidation of barriers Conditioning

spend Collaboration with Negotiation --

Simplification of other purchasers simple purchase

procedures FMEA Purchase price cost

Standardization of analysis

requirementsBehaviors Well-organized Analytical Competitive

Focused on process Innovative Professional

Attention to detail Multifunctional Arm's length

Teamworking Tactical negotiator

Illustrative Accessories, Office products; Software; Public

MRO training materials, Industrial supplies; relations; Facilities

Categories promotional items Consumables;

Temporary staff

Strategic

High Spend/High Risk

Activities Strategic:

Longer-term

contracts

Principledagreements

Detailed PPCA

In-depth

market/supply

chain analysis

Supplier

management

Behaviors Creative

Options generator

Relationship builder

Strategic negotiator

Illustrative Computers;

MRO EngineeringCategories equipment;

Communications

COMPARATIVE ANALYSIS OF "TRADITIONAL"

VERSUS ELECTRONIC PROCUREMENT

Procurement Current Procurement

Metric Process Web-Based Procurement

Potential for Low High

Strategic

Relationship

Process Cost Index 100 33.2

Process Time 15 days 2 hours

No. of Buying Multiple, unknown Multiple, known

Points

Audit Trail Decentralized -- Centralized --difficult clear activity trail

Data Warehouse Often negligible Integral element of

for low-value items e-procurement

Management of Transactional Strategic/relational


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MRO Supply Base

Information Favors supplier Favors buyer (system

Asymmetry (suppliers have more provides data warehouse

complete view of their of expenditure activity)

customer's expenditure)

Internal Customer Poor Considerable speed and

Service responsiveness

Total Acquisition Very high "Lean" supply

Cost (as cost per

unit)

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Copyright 2000 Gale, Cengage Learning. All rights reserved.


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