THE PROCUREMENT CHALLENGE

Though the industrial channel is readying for e-procurement, transaction and communication standards still pose a problem for trading partners

By Alan Earls, Contributing Editor -- Industrial Distribution, 1/1/2001

Is the industrial world really ready for e-procurement? Yes, mostly, according to several analysts and the results of recent studies.

Consider, for example, a statistical snapshot taken by Carpenter Technology Corp., a supplier of ferrous and non-ferrous metals. Research by Carpenter last year found that three-quarters of machine shop managers were open to using the Internet for business purchases, while four in ten already used the Internet for that purpose, either from home or work. In contrast, only 16 percent of the overall U.S. population had shopped online, according to a worldwide study of e-commerce by Taylor Nelson Sofres Interactive completed last July.

Similarly, MRO buyers, suppliers and distributors are likely to almost double their use of the Internet to transact orders within 12 months, another survey reports. The findings from mid-2000 show that one-third of the trading partners are developing and incorporating e-commerce strategies to fulfill their bottom-line business objectives. That number is expected to increase to 67 percent by this year, and 83 percent in four years.

That survey was conducted by Harris Interactive, a market research firm, and IndustrialAmerica, an online business-to-business industrial supply trading site. (In October, IndustrialAmerica merged with eCatalogs to form MROLink, a B2B marketplace and e-commerce services provider.)

Challenges to old relationships

The sponsors of the two surveys, Carpenter Technology and IndustrialAmerica (MROLink), represent two examples of the many emerging challenges to traditional supply chain relationships. Carpenter, which once sold direct only to large customers, is using e-commerce technology to attract a whole new level of buyer.

"Internet technology now helps us reach an entirely new class of customers, who generally purchase smaller quantities and require less technical guidance," explains Scott D. Myers, general manager of ebusiness for Carpenter.

MROLink, for its part, is an Internet start-upwith an online trading site for buyers, sellers and distributors of products such as electrical components, power transmission items and metalworking tools and supplies. MROLink also prepares and hosts custom catalogs, and prepares digital content for manufacturers.

"The true value of the Internet in business today is providing a common ground for buyers, sellers and distributors to conduct transactions quickly and profitably," notes Chuck Sheridan, MROLink CEO. "These online exchanges are particularly valuable in markets where e-commerce is still in its infancy, such as the industrial supplies industry."

It's a vision that haunts the distribution industry-the supply chain shortened by a few links, sometimes with the distributor out of the picture. And while cooler heads point out that distributors do add value and expertise to the supply chain, there are still enough revolutionaries out there to make the times ahead look uncomfortable.

Technology analysts offer cold comfort. Looking at the whole B2B phenomenon, Forrester Research predicts Internet sales will reach $2.7 trillion by 2004. GartnerGroup has an even more rosy vision of the future of B2B e-commerce, estimating that world online sales will reach $7.29 trillion in 2004.

Despite such numbers, it's still no stampede. AMR, another research company, noted in a recent report that supply chain managers are still largely "on the fence" regarding their electronic options, using them mostly to gather information rather than transact business.

It's a matter of the devil you know rather than the devil you don't know, according to distribution consultant Bruce Merrifield, principal of Bruce Merrifield Consulting in Chapel Hill, N.C. "The shop guys say, 'to hell with the planners, my butt is on the line and everything I need to solve my problems is available at my regular distributor,'" he says.

Obstacles: systems and standards

Aside from cultural attitudes and a general feeling that e-procurement may still not be ready for prime time, technical hurdles remain such as product identification standards.

"The major obstacle to e-procurement with our customer is the lack of an evolved set of standards," says Kevin McCloskey, vice president of Dodge-Newark Supply Co., Inc., a Fairfield, N.J., distributor. In particular, McCloskey faults vendors for not adhering to common information standards. On the positive side, he notes that the Power Transmission Distributors Assn. wants to adopt the well-defined version of the ANSI x.12 standard, which defines a standard set of fields that all vendors will be asked to use. Thanks to this effort and the endorsement of other trade associations, McCloskey says, "this hard standard is still slowly permeating the industry."

McCloskey also says suppliers are pushing small distributors like his company to adopt e-procurement more than his customers are. He says an example of that is Dodge/Rockwell's PTPlace.com. This e-business platform gives all customers online access to the Dodge product line, but gives distributors with significant ongoing business an opportunity to move into e-business with immediate paybacks in reduced transactional costs. Dodge also instructs these distributors on the necessary system upgrades needed to exploit this opportunity.

"The universality of acceptance and use of e-commerce will be driven by large customers and suppliers until standard practices exist to which smaller companies with limited resources can connect," McCloskey adds.

Chicago-based R.R. Donnelly & Sons is one large company that is taking steps to build the supply chain its way. Donnelly's fast growth in recent years brought logistical and coordination problems. So two of the printing firm's divisions recently worked with a vendor called ActionWorks to implement Prism, software that gives division managers the power to involve suppliers and customers in collaborative commerce. As a result, R.R. Donnelly says it can effectively match suppliers' offerings with customer requirements. The company claims the system has contributed to significant productivity gains of up to 14 percent.

Kate Searls, director of strategic services with ASI, a Minneapolis-based consultancy, says other, bigger companies are eager to get more from their procurement function. This is driving the implementation of new technology.

"The people in the executive suite are aware of the potential and they are asking 'What have you done for shareholder value?'" says Searls. The result has been implementation of everything from procurement cards to strategic linkages with suppliers.

The XML 'villain'

Business and cultural issues aside, there is at least one technology "gotcha" waiting for the unwary. According to many folks in the technology community, the villain is XML, or Extensible Markup Language, the e-commerce standard that was supposed to fill the role of Rosetta Stone. Instead, XML more resembles a tower of Babel, with over two dozen variants currently in use and lots of interoperability issues.

"Although most of the new e-procurement marketplaces are built using XML-based technologies, they are finding that many potential participants in the marketplace cannot exchange XML documents but instead want to leverage their existing investment in EDI [electronic data interchange]," says Dennis Freeman, director of product marketing for Peregrine Systems in Atlanta, Ga., a provider of e-commerce support and services. "So the marketplaces are now implementing integration tools to communicate with legacy EDI systems. Simultaneously, many suppliers are turning to e-market integration products ... to provide the flexibility to exchange documents in any format (EDI, XML, or flat file), depending on their business partners' level of sophistication."

What's the bottom line? It may just be something old-fashioned: Trust.

"With the advent of online transactions, people thought that buying would simply go to the transaction by transaction level, and that relationships were dead," says Searls. "But now there isn't a procurement person I know who believes that. Instead, it's relationships that are important and relationships that protect your operations."