SMEs and e-Procurement

NYTimes writes (in the US context):

Among the nation’s biggest 500 companies, the practice of connecting to suppliers via the Web and automating purchases – a process known as e-procurement – is “rising substantially,” said Andrew Bartels, an analyst with the technology consultancy Forrester Research.

Well-financed corporations are willing to invest in Internet software and technology that helps take the inefficiency out of the buying processes, Mr. Bartels said.

But for small- and medium-sized businesses facing an uncertain economy, such investments are often impossible to justify. “Between two-thirds and three-quarters of big companies are doing it,” Mr. Bartels said. “But below that level, the glass floor effect takes over.”

Unlike bigger businesses, second- and third-tier companies cannot be certain that their suppliers will have online electronic catalogs, be able to respond to electronic purchase orders or be willing to make online business proposals. Industry behemoths, on the other hand, can devote the time and money to installing such systems, while also compelling suppliers to link to such systems.

Mr. Bartels said the company that had attracted the most dollars from big businesses – and could benefit most from cracking the glass floor – is Ariba, one of the stars of the business-to-business bubble.

While procurement software can help make that happen by linking suppliers and buyers more closely, it is not yet affordable enough for most companies to risk the investment, said Frank Ruane, director of corporate purchasing and materials management for Olympic Steel, a company in Bedford Heights, Ohio that processes unfinished steel for manufacturers.

Mr. Ruane, who buys about 1.2 million tons worth of steel a year, said he used the Internet extensively to communicate with his 40 or so suppliers, as well as to buy indirect goods like office supplies. But Olympic, which has about $500 million in annual revenues, has yet to buy e-procurement software.

The Internet has, Mr. Ruane said, helped him reduce the cost of the products he buys, by both allowing him to find better prices and complete the transactions quickly.

But because software offered by the various e-procurement vendors is simply too expensive for him to put in place, he has not been able to reduce the company’s reliance on electronic data interchanges, the one-to-one electronic trading systems frequently set up between buyers and sellers.

Olympic would have to replace its three older computer systems with a new enterprise resource planning system, he said, before it could install new procurement technology. “And then there’s the costs of training people,” Mr. Ruane said. “The cost ends up being so astronomical that a $500 million dollar company with very narrow margins just wouldn’t have the cash flow to do it, or the time or staff.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.