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

id=60010047

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 in
many 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 organizations
across most, if not all, industries. To explore the impact of Web-based procurement systems
on MRO purchasing, a Delphi study was conducted providing access and analysis of
commercially sensitive data. [1]

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

INTRODUCTION

Further, an important consequence of the reengineering of the MRO procurement process

will be to raise the professional profile of the purchasing function through enhanced internal
customer service and significant total cost improvements.

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

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

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electronic procurement (e-procurement) systems is presented. This study involved

purchasing 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 the
management of MRO procurement.

THE IMPACT OF ELECTRONIC COMMERCE ON GOVERNANCE STRUCTURES

During the past decade, organizational theorists, business consultants, and

telecommunications managers and vendors have directed our attention to the strategic role
that information can play in the competitive strategy of firms (Bradley, Hausman, and Nolan
1993; Keen 1988; Porter and Millar 1985). Throughout the 1980s, widely discussed case
examples demonstrated how the use of telecommunications networks to link firms to their
suppliers and distribution chains conveyed important first-mover advantages. The firms cited
in the literature are as diverse as Microsoft, Chrysler, Ford, General Electric, BT, Nortel,
Siemens, American Hospital Supply, and McKesson. The benefits to the firms deploying
such 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 to
customize products and services based upon information arising from the transactions
carried 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 significant
impact on transaction costs and, as a result, on the form of governance structures employed
to manage transactions (Williamson 1975). In the past, electronic trading networks typically
have been put into place by a dominant firm in a value chain, and built upon proprietary
applications running over private networks. For example, Chrysler required its parts suppliers
to participate in its electronic data interchange (EDI) network, while more recently Ford's
introduction 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, on
the upstream side, a typical goal for such applications as EDI has been to reduce the total
number of suppliers and enhance the quality and efficiency of the overall purchasing
function (Kekre and Mudhopadhyay 1992).

With the increasing standardization of such applications as EDI, as well as the availability of
lower-cost public network infrastructures, several researchers have contested that inter-
organizational networks will not only proliferate but also will be applied in qualitatively
different 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 of
buyers 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, thereby
reducing the costs of searching for appropriate goods and services (they call these electronic
brokerage 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 in
a system biased toward a particular supplier. We believe that, in the long run, the significant
additional 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. In

simple terms, the development of electronic markets providing conditions approaching the
economic model of perfect competition may be likely to emerge. Indeed, NASA's recent
experiences in opening up contract tenders via the Internet saw a drastic increase in the
number of responses it received from a global supply base, in certain cases receiving in
excess of 30,000 responses to one request for tender.

However, a converse effect has also been hypothesized, whereby using electronic networks
to reduce the costs of tightly integrating a particular buyer and seller, firms can achieve an
electronic integration effect (Malone et al. 1987). An example would be an electronic data
interchange system that connects a retailer's point-of-sale terminals to a supplier's delivery
system, decreasing the likelihood of the retailer going out of stock on popular goods (Weber
1995). Malone et al. (1987) based their predictions about the dominance of electronic markets
on the relative benefits that they anticipated firms would receive from electronic brokerage
and electronic integration. In a more recent paper, Holland and Lockett (1997) argue that for
many companies, as with their non-electronic governance structures, a mixed mode of
markets, hierarchies, and networks is the most likely consequence of the growth of electronic
commerce. 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 main
benefit to be obtained through Web-based electronic commerce -- namely, the enhanced
information availability as a consequence of the ubiquitous nature of the Internet, both within
and between organizations. In the following section, the implications of increased information
for market transactions are briefly discussed.

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

COMMERCE

An important consequence of the increased use of Web-based procurement and electronic

commerce 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 greater
information on governance structures.

Most economists believe that was it not for the costs of coordination, markets would generally
be more efficient mechanisms for production than hierarchies. These costs of coordination
relate to the planning, control, management, and administration of economic activity. It is
held that purchasing goods and services on the open market raises the costs of coordination
through the additional search costs in identifying appropriate suppliers, costs of specifying
and 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 in
advertising 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 of
various raw materials and other components, followed by transforming processes required to
convert them. Each step presumably adds value as the product wends its way toward its
ultimate consumer (Porter 1980). Using the value chain as their framework, Malone and
colleagues (1987) argued that the use of electronic communication links between firms could
reduce both the costs of coordinating economic transactions and the costs of coordinating
production. Coordination of both sorts consists of communicating and processing information.
Because modem information technology lowers the costs of both communication and
information processing, Malone and his colleagues hypothesized that the result of reducing
coordination costs without changing anything else should be an increase in the proportion of
economic 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 than
by producing them in-house (Malone 1987; Malone et al. 1987; Malone et al. 1989). To the
extent that the costs of communication and information processing are reduced, the cost of
the 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 information
technology are associated with a decline in average firm size and a rise in the number of
firms (Brynjolffson, Malone, Gurbaxani, and Kambil 1993). Kambil (1991) also shows that
industries investing more of their capital stock in information technology also contract out
more of the value of the goods and services they produce to external suppliers (i.e., a higher
buy/make ratio in production), with a two-year lag. From the literature, it may be expected
that greater information availability will lead firms to increase their level of outsourcing. As a
consequence, an increase in the proportion of bought-out goods and services will place an
increased strategic emphasis on the purchasing process. A key question for purchasing is
thus, to what extent will the growth in the use of Web-based procurement impact on the level
of outsourcing?

In addressing this question, some attention to prognoses for the growth of both Internet
business-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 electronic
commerce market, a reasonable example is International Data Corporation's (IDC) prediction
that 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 Yankee
Group 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. respondents
in 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 via
the Internet.

Recent research by Forrester indicated that half of the U.S. Fortune 1000 organizations were
actively 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 for
acquiring MRO items on the Internet by American Express and the Internet Purchasing
Roundtable. The Open Buying on the Internet (OBI) standard is intended to enable
interoperability between companies.

To date, electronic business-to-business commerce can be seen to have progressed through

three 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 VANs
and EDI is undoubtedly its ubiquity. This is seen as a major driver in the adoption of
electronic business-to-business commerce, largely due to the widespread accessibility of the
Internet 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 browser
software, 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 next
few years. A major factor in the increasing level of outsourcing cited by Davenport (1993) is
the increased use of information technology for process innovation cuffing across
organizational boundaries, while Lonsdale and Cox (1998) identify the benefits accruing from
outsourcing 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 to
market for new products and services. As Table I shows, PA Consulting Group's study
conducted in 1996 forecasts significant increases in MRO category outsourcing.

SUMMARY

The prognosis from many of the commentators and reports identified in the literature is that
both the use of electronic commerce and the degree of outsourcing are anticipated to
increase significantly over the next three to five years. The fundamental impact of this for
procurement may be seen in two main areas. First, electronic procurement will greatly
improve organizations' ability to manage a complex of small-value, multiple-transaction, and
high-variety purchases. Second, the adoption of Web-based systems will impact on the
nature 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, but
perhaps more important for purchasing management, we may begin to see some major
changes in the way that MRO supply relationships are managed. However, from the
literature, there is little useful empirical analysis on which to base any examination of the
impact on purchasing of the adoption of Web-based procurement systems. Consequently, a
research study was undertaken to explore this area.

RESEARCH METHODOLOGY

An exploratory study was conducted during 1998 into the level of deployment and benefits of
Web-based procurement systems for the procurement of operating resources in the United
Kingdom, continental Europe, and the United States. Participants in the study included 21
procurement executives, 13 information systems executives, and in three cases, key account
sales executives. All of the respondents had involvement in the study, development, or
implementation of Web-based procurement systems for MRO purchases, depending on the
stage 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 personal
recommendation. Confidentiality of the study data was necessary due to the commercial
sensitivity perceived by most of the respondents.

In-depth, semi-structured interviews were conducted by telephone, e-mail, and face-to-face

contact with 37 individuals representing 32 organizations from industry, including national as
well 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 with
the respondents, at each stage reporting back the analysis from earlier rounds as well as
providing the opportunity to explore issues in further detail. During the three rounds, 30 of
the 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 in
five 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 development
of electronic procurement for MRO items, and the process of implementation (i.e., in-house or
outsourced, key drivers, dominant function in the process). In all of the responses, it was
noted that the study organizations had significant difficulties in terms of clear tracking and
auditing of the level and nature of MRO procurement taking place. From this, the process of
implementation and initial objectives and bafflers were identified and summarized. A brief
review was distributed to respondents inviting comment, further elaboration, and also
soliciting key issues of interest.

The second round of interviews conducted six weeks later employed a highly structured
questionnaire to guide the interviewer. Key areas investigated were system design, benefits
achieved to date, perceptions of process and functional impact, and the barriers to
implementation. Once again, a summary report was produced and circulated inviting
elaboration and clarification. At this stage, five visits were conducted to operating sites and
system 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 was
intended to provide clarification and further elaboration of the summary report, and also an
update of progress since the second round of interviews.

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

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

From the study, four main areas of benefit were identified and agreed upon by the
participants, two of which are classed as "operational" and two as "strategic." The operational
benefits relate to the ability to reduce the administrative costs of the whole procurement
process by two-thirds, and the improved audit of each transaction throughout the process.
The strategic benefits include greater influence and control over expenditure by the
procurement function (in many cases, this was seen as a step toward raising the status and
professionalism 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 administrative
cost difference between manual and electronic procurement processes. The original analysis
was then circulated to the organizations participating in round two of the Delphi study in
order 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 MRO
procurement 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 as
varied as retail banks, government departments, and international food product
manufacturers, 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 study
to obtain estimated numbers. However, Haacker (1999) states that Motorola considers every
one 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 of
MRO procurement has been developed, excluding petty cash purchases. This serves to
adjust for organizational size and variety within the sample. It must be noted that this is not a
statistically 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 administrative
issue 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, and
automotive sector organizations. The e-procurement process provides visibility of the
organization's many MRO transactions by individual budget holders, and thus offers a
considerable improvement in the audit trail.

Increased Procurement Control

The variety and variation of MRO items presented all respondents with considerable difficulty
in terms of developing specialist knowledge regarding product and service technical
characteristics, and supply market conditions. The ability to consolidate and
categorize 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 to
internal users.

In fragmented, large organizations, procurement is carried out by numerous functions, either

as local purchasing offices or outside of the purchasing line of management (i.e., with budget
holders). Furthermore, purchasers may be remote from the user, often never having contact
other than via telephone and requisition. The consolidation, transparency, and real-time
data benefits of Internet procurement enable greater coordination between the user groups
and purchasers. In addition, any centralized purchasing function was able to exert greater
control 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 seen
as 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 MRO
procurement. Typically, a supply base consisting of 5,000-plus suppliers was cited in the
larger respondent organizations. A prerequisite for many e-procurement systems is a
comprehensive supplier catalog, and thus a supply base reduction strategy was seen as a
complement to the adoption of e-procurement. Supply base reduction brings with it
considerable 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 with
each 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 authority
was 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 suppliers
once they are tied in to the supplier catalog system. The distinction was made earlier in this
report between electronic hierarchies and electronic markets. The intermediating catalog
system serves to tie customers in to the chosen supplier, and at the same time serves as a
real barrier to entry for noncatalog compliant suppliers. In particular, this may have an
excluding effect for SMEs.

Concern for the Management of Services Supply

An unresolved issue was the application of Internet systems for the more complex issue of
service provision such as facilities services (e.g., cleaning and catering). Means of real-time
measurement of service performance were regarded as necessary for such systems in order
to achieve effective supplier monitoring. Research into out-sourced service provision has
demonstrated considerable difficulty in service quality measurement. Although advances
have 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 in
this study, the issue of security was a major concern, especially in the context of electronic
payments. While data encryption advances appear to have secured electronic payment
transfer, the level of resistance expressed was considerable. The capability of any system to
provide secure data transfer was regarded as a major criterion for both existing and potential
users of e-procurement systems.

Supply Database Maintenance

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

First, it was found that all of the public-sector and local-government purchasing bodies
participating 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-sized
organizations (less than 250 employees) used supplier catalogs only. Finally, the remaining
respondents employed a mixed structure in which internal customers had access via an
intranet to the e-procurement system which provided access to both internal catalogs and
external (supplier) Web-based catalogs.

At the heart of the supply database, it was considered that two elements were "strategically
important": the terms and conditions of supply, and access to communication with internal
customers. Suppliers preferred to be able to collect information relating to users of their
system, particularly expenditure profiles, as a means to develop their database marketing
capability. Customers wished to possess the same information for control and audit
purposes, but also as a means of developing retrospective volume and activity discounts with
suppliers.

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 strategic
management of such items. One of the key benefits of using Web-based systems -- their
ubiquity -- may be a countervailing force to improved professionalism in procurement without
clear controls and intervention by professional buyers. Some of the respondents involved in
this 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 or
her Web access. It was notable that this was typically the case where the development and
implementation were IT department driven.

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

"Since we will no longer need to process orders, invoices, or chase delivery either we dissolve
the function or we have to take a long, hard look at the value we add to the organization. For
me, 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 and
purchasing capabilities.

STRATEGIC IMPLICATIONS

The impact of e-procurement on purchasing strategy is believed to be a major factor in the

adoption of MRO systems. Currently, many MRO items are managed as tactical,
administrative commodities or services. As a consequence, there is considerable
sub-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 consolidation
and increased economies of purchase leverage. This, in effect, means that organizations will
be able to manage their MRO low-value items in a more strategic manner through such
actions as the establishment of single-source arrangements, consolidation and
rationalization of commodities and services, and increased buying power over the supply
base.

The use of e-procurement for the management of MRO items will provide an immense
strategic advantage to the purchasing organization. We have seen how the management of
core production purchases has developed into a strategic and critical capability (Lamming
1993). From this study, it is concluded that such benefits and methods of purchasing
management will be available for MRO goods and services due to improved information
availability. Providing buyers with accurate and comprehensive data relating to the cost,
range, and usage of MRO items enables sourcing and pricing arrangements to be conducted
under conditions of greater purchase leverage, and also delivers a concomitant increase in
purchasing's internal service level.

A procurement matrix may be employed to illustrate how re-positioning of MRO items may
benefit the purchasing function and the company as a direct consequence of the
informational advantages of e-procurement (Elliot-Shircore and Steele 1985). As illustrated in
Table 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 a
more strategic profile. Traditionally, much MRO expenditure has been viewed as dominated

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by tactical purchasing policies including devolved decisionmaking, budget-limited

procurement authority, and a complex and large supply base. One of the main early benefits
of e-procurement has been consolidation of purchased items. One respondent stated that his
organization reduced its variety of office stationery products from 235 items to 38 items within
two months of commencing its e-procurement trial. As a result, improved information
transparency makes it possible for purchasers to adopt more "strategic" procurement
approaches such as supply base reduction, lean logistics, partnership relationships, and
long-term supply contracts (Lamming 1993; Hines 1994).

CONCLUSIONS

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

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

* Electronic commerce may be conducted through a range of electronic governance

structures from electronic markets to electronic hierarchies.

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

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

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

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

Internally, the speed and cost of requisition processing have been found to be significantly
improved for two reasons. First, much MRO procurement is acquisitional and decentralized in
nature; second, the use of IT systems brings internal customer service benefits through rapid
and 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 of
much 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 adopt

e-procurement. By raising the service levels to internal customers, and by providing greatly
improved and robust information relating to the procurement process, the benefits of any
form of e-procurement system are far greater than the frequently cited process cost
reductions. 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 supply
catalog is likely to have significant benefits for profitability and the status of the purchasing
function.

In summarizing the findings of this research, Table IV contrasts e-procurement with

non-electronic procurement for the management of MRO purchasing.

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

As Holland and Lockett (1997) argued, we are likely to see mixed modes of governance
structures for MRO e-procurement emerge. The consequence of this will be to alter the
nature and contribution of MRO procurement, but not necessarily to the sole advantage of
the 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 interests
include JIT purchasing, supplier design involvement, global account management, and
electronic commerce.

(1.) The author wishes to acknowledge the support of Infobank International, and the active
involvement of the 37 participants, who for reasons of confidentiality prefer to remain
anonymous.

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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 0.0
Total 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
requirements
Behaviors 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
Principled
agreements
Detailed PPCA
In-depth
market/supply
chain analysis
Supplier
management
Behaviors Creative
Options generator
Relationship builder
Strategic negotiator
Illustrative Computers;
MRO Engineering
Categories 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)

COPYRIGHT 2000 National Association of Purchasing Management, Inc.

Copyright 2000 Gale, Cengage Learning. All rights reserved.

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