E-procurement: the next frontier
Evidence builds that Internet procurement benefits sellers, too
By Ken Brack -- Industrial Distribution, 1/1/2000
Last summer Fastenal converted its print catalog of 85,000 products to an online storefront. By November, its Web site was attracting more than 900 visits each month. Fastenal didn't stop there.The distributor also partnered with an Internet procurement firm that offers industrial, utility and other buyers one-stop shopping. Joining ProcureNet Inc.'s MRO buying site -- also called a portal in today's electronic vernacular -- gave Fastenal access to hundreds of new buyers who can do parametric searches for products, customize their contracts, save and trace purchase orders, and more.
While many MRO buyers have known the benefits of Internet purchasing for a couple of years, until recently the opportunities for distributors to save money appeared murky at best. Like all things in e-commerce, this is changing rapidly. Evidence is building that sellers benefit by growing their sales and substantially reducing their process costs via the Web. Automating order taking frees up your customer service and inside sales staff to prospect for customers, for example.
The pluses for both sellers and buyers are enormous and far reaching, according to industry researchers and distributors that are integrating their catalogs with Internet procurement systems.
A recent study by Grainger Consulting Services estimates distributors could see incremental sales gains of 10 to 20 percent by selling online and reduce their process costs by nearly one quarter.
"I think it complements Fastenal's other e-commerce initiatives," says Brian Fihn, marketing logistics manager of the Winona, Minn.-based company, which did $503 million in sales last year.
"Not only with our own Web store, but other avenues are being sought and are forthcoming in the B2B market. We've given them [ProcureNet] probably 85,000 SKUs. It goes through our whole offering, from fasteners, hydraulics, pneumatics to safety, etc."
"It's such a powerful and pervasive force," Del Merenda, president of e-commerce software provider I-Mark, Inc., says of Internet purchasing. "I think that anybody with an innovative bent will see an opportunity to get away from bricks and mortar to clicks and mortar. It will be so compelling that customers will move away to that."
Merenda contends selling and buying MRO goods online is not just being driven by -- nor applies to only -- Fortune 500 suppliers and end users. Rather, "the market is demanding that this will happen. The radio guys had better start selling TVs."
The risks of jumping into online selling are also big. Industry analysts warn that firms must consider a fundamental shift occurring throughout the industrial supply chain: it is becoming demand driven, with more buyers making "self-service" purchases online, which includes sending RFQs to hundreds of potential suppliers, aggregating their buying and more. No longer do new manufacturers' products drive the market; buyers rule. Hence, distributors may fail to realize a return on their investment if they merely put a catalog online for a few customers and don't highlight or offer important services that link many customers and their suppliers.
"You will not survive by selling products," says David Hough, director of supply chain management at Precision Systems Concepts, a Chicago consulting firm. "You will survive by service."
The buyer's jury has known this for some time: Internet procurement saves them huge dollars on MRO goods and services. Essentially, Web buying enables more speed and more information. Yet until recently the benefits for sellers have been more obscure, and convincing distributors of the value remains a challenge.
U.S. firms spend as much as $1.4 trillion on MRO supplies and services each year and for individual companies that accounts for up to 60 percent of their total expenditures, Grainger Consulting Services says.
On average it costs $107 to process an MRO purchase order using traditional, paper-based processes, with an average cycle time of 7.3 days from order to fulfillment, according to Aberdeen Group, a technology research firm. Purchasing via the Internet results in an average $30 in administrative costs and reduces cycle time to two days.
Aberdeen Group says early adopters of Internet procurement have benefited from reduced prices for goods and services, shorter order and fulfillment cycles, lower administrative costs, increased control and over-off contract purchases, and improved inventory practices.
In addition, the Aberdeen Group and others believe there is untapped potential for end users to save on their spot buys, or off-contract purchases, which are estimated to account for between 30 and 45 percent of all MRO spending at most firms.
Still, some distributors are not yet convinced that e-commerce transactions save them money nor grow sales substantially.
"Your larger customers certainly purchase with a PC, but if your niche is a 15-person shop, you may not be that concerned," says Steve Short, president of Updike Supply Co. in Dayton, Ohio.
In fact, some distributors say the Internet's major impact so far has been more manufacturers selling direct. Mark Sheehan, a vice president at Motion Industries, suggests that e-commerce reduces costs mainly when a customer "bypasses all of a distributor's bricks and mortar, if it bypasses the whole fulfillment system," including branches and logistics. Still, MI will soon integrate itself with online purchasing systems that the major automakers and other customers plan to adopt.
Short suggests establishing a Web site with a product catalog linked to customers may hold off the direct online marketing efforts of suppliers such as Milacron -- at least for a while. He is concerned the Internet also enables price shopping. For example, his salesman might research specifications for a particular carbide insert application and the end user's purchasing agent may take that information, go online and "get the cheapest price."
Many distributors are afraid of the expense to set up Internet transactions. During a roundtable discussion of e-commerce issues that about 75 distributors attended during the ASMMA/I.D.A. Fall Convention, many said they remain unconvinced of the benefits but don't want to miss out. Some want the Industrial Distribution Assn. to provide guidance on how to implement e-commerce. As a result, I.D.A. plans to invite Internet procurement and software vendors to its Spring Convention in Dallas.
Sell-side potential
While it is too expensive for many distributors to plunge into online selling themselves, joining alliances, buying groups or one of the growing number of MRO procurement portals may be the answer.
Fastenal's Fihn sees more alliances emerging, similar to Grainger's OrderZone site, which links suppliers of lab safety equipment, office products and other goods to Grainger's MRO catalog. Consortiums such Affiliated Distributors' new company, supplyFORCE.com, will use e-commerce to obtain lower prices for national contracts which get serviced by local distributors.
Merenda, of I-Mark, says economies of scale will kick in for both distributors and manufacturers, who will enjoy dramatically reduced lower selling costs as their volumes increase.
"The value of an online selling system to a distributor and a supplier is very high and they have very high intangibles, not the least of which is a high technology image enhanced within your industry," says Merenda.
A recent study by Grainger Consulting Services points to significant savings distributors can achieve by integrating their catalogs with other systems and to Internet procurement systems. Grainger contacted buyers and sellers of six Fortune 500 companies last summer in a project commissioned by data software provider SAP. Distributors cut their process costs through Internet procurement by 22 percent below their traditional transaction costs.
In those cases, the savings involve costs generated by accepting and fulfilling orders via e-commerce but do not include other potential savings in non-transactional costs like printing catalogs, phone centers and customer service.
The study acknowledges that implementing B2B e-commerce may "cannibalize" traditional sales channels. Grainger reports that sometimes it did, causing growth to shrink in those channels.
The study also reports that Internet orders were 62 percent larger than traditional ones and customers utilizing e-commerce transactions had annual sales growth of 20 percent.
Aberdeen Group says the benefits identified so far for both buyers and suppliers amount to the tip of an iceberg. Many e-procurement solutions address only a portion of total MRO goods and services, focusing on the purchasing of operating supplies such as computers and office supplies. Aberdeen says firms will also reap rewards by adopting procurement systems that link to the company's bill of materials, storeroom inventories and enterprise asset maintenance systems.
Meanwhile, distributors have their work cut out for them to make online selling work.
"There still is [traditional] selling that must go on," says Fastenal's Fihn. "I think it won't be easy to convince people to go online. It's not true that all buyers have desktop access now or the resources ... A lot of it is kind of scary. You're bringing a whole new technology into a business partnership. Do they have the architecture, can they handle the volumes, can this be made seamless?"
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