Online procurement case

Mars, one of the world’s largest privately owned businesses, recently decided to take advantage of using online procurement auctions. In recent times, online auctions have emerged as one of the best opportunities to reduce costs – something which is of the utmost importance to any company which has growth ambitions. It was apparent to Mars that many other businesses had been achieving savings of roughly 5% through using online auctions, signalling that this was the way forward.

Analysing this figure of 5% in the context of Mars’ procurement costs, it equates to a significant value of savings. Growth is one of Mars’ key objectives, meaning that this opportunity was considered both necessary and worthwhile, and therefore could not have been ignored. The advantages and disadvantages of using this new procurement method is analysed in detail below.

Basically, Mars’ goal was to be able to obtain the required materials from its list of approved suppliers fairly and at a minimum cost. The method of doing so had to encompass their core principal of mutuality, i.e. shared benefits between both Mars and suppliers.

One of the attractive aspects of using online auction systems is that they can be tailor made to suit a company’s needs, meaning that ensuring guidance with company principles is perfectly possible.

Already mentioned above is the fact that savings achieved from using online auctions are particularly high. Thus, from a financial perspective, it is definitely an advantageous process. Research on the subject of online procurement enforces the belief that it is a cost cutting process, since it helps consolidate purchasing practices which in turn leads to greater discounts (Attaran, 2001). Furthermore, research has also shown that online auctions can actually achieve gross savings of up to 40% (Emiliani, 2000).

Previously, the majority of Mars’ annual direct material purchases came from a small number of highly valued suppliers. Strong supplier relationships were in place, which Mars would not want to jeopardise. Under the previous methods, it was possible that these relationships could actually have been jeopardised. This was because supplier negotiations were conducted in an arbitrary manner which meant that situations could arise whereby a valued supplier uncovered that a competitor had been awarded a contract under terms that it would have been prepared to better. Obviously, this was considered a desirable scenario.

This issue highlights one of the key advantages of using online auctions: more fairness to suppliers and more efficient and effective means of selecting a supplier. Through using online auctions, Mars can allow a selection of pre-qualified suppliers to bid for a contract, meaning each supplier is given an equally fair opportunity to win.

Furthermore, since the new process will likely require Mars to evaluate other capable suppliers that they might not otherwise have considered, Mars may actually end up formulating new strong supplier relationships which will benefit the company in the long run.
On the whole, the online auction process is very simple and efficient. Using a procurement website, Mars is able to issue a supply contract outlining requirements, which in turn reduces negotiation time between Mars and a supplier. The auction itself takes place within a certain short time period, meaning that all suppliers are forced to submit their bids quickly, again highlighting the efficiency involved.

Mars’ previous purchasing process was an extremely time consuming inefficient process. For instance, much negotiating time was dedicated to agreeing on price, one of the most time-intensive activities within the purchasing process, (Emiliani, 2000) and quantity. Both are areas where online auction mechanisms would provide an efficient means of settlement (Bell, 2005).

Similarly, the conventional procurement process tends to involve a large amount of paper processing which costs time and money. Through using online procurement, both time and money will be saved. It has even been reported that companies using online procurement have been able to reduce processing costs by a massive 85%! (www.inktec-uk.co.uk). With reduced workload, staff will also have more time to add value to the business in other ways.

In addition, since the online process significantly compresses the time involved with negotiations, the risk of changes in business conditions occurring is reduced. Such changes could potentially affect price meaning that Mars could be at a disadvantage on occasion.

Mars wanted to ensure that they did not become dependant on too small a number of suppliers. Fortunately, through the tailor made design element of online auctions, this was made possible through Mars being provided with the option to enforce a minimum number of winning bids in an auction. This highlights how flexible online procurement systems can be to meet requirements of a client company.

From all the points above, it is clear that online procurement has the potential to save a company like Mars millions of pounds. However, companies need to analyse the potential adverse impact which online auctions could have on their business, most notably on supplier relationships. These disadvantages are highlighted below.

Many believe that online auctions have a negative impact on relationships with suppliers. Firstly, reverse auctions can often force a supplier to offer products at a price closer to their break-even point, or even below it (Chin, 2002). Therefore, this supplier’s financial health is put at great risk, which could subsequently affect the long term supplier relationship.

Additionally, it is likely that relationship with suppliers will suffer anyway because of the abandonment of face-to-face negotiations in favour of the automated bidding process. More specifically, how can a company reasonably expect to build rapport and trust (i.e. any form of sound relationship) with a supplier if they do not deal with each other in person?

It is probable that with the new online process Mars will evaluate other potential candidate suppliers not dealt with before which presents a new element of risk - a new supplier may not prove to be reliable, which could have a detrimental effect on Mar’s business.

Although the long term financial benefits are clear to see, the initial adoption and implementation of online procurement systems can be very costly and problematic. Software licences along with implementation and integration costs can be extremely expensive. Likewise, online procurement software is still fairly new, and while most applications perform some functions well, none does everything well. This means companies may end up using a ‘patchwork’ of products (Emiliani, 2000) which contributes to costs and technical integration issues.

Another disadvantage is that companies choosing to use e-procurement software may encounter difficulty in gaining acceptance by employees. In other words, many staff who previously have had purchasing autonomy will perhaps not like the change of new system.

Finally, although the process is particularly efficient with regards to time involved, sometimes it is not always easy to select a winning bid within such a short time period – one of the problems which highlighted by Mars. In a situation where several bids seem equally attractive, how is a company expected to differentiate in such a short period of time?

Perhaps a solution to this problem is for companies to use a combination of online procurement and traditional processes to avoid making rash decisions, thus ensuring company success.

Conclusion

Through using internet technology, businesses are able to simplify their procurement process significantly which in turn will generate impressive savings, allowing a company to grow. Benefits of such magnitude cannot be ignored, although a company must be prepared for the potentially adverse impacts which could arise when they choose to use online auctions.


References

Attaran, M., (2001), “The Coming Age Of Online Procurement”, Industrial Management & Data Systems, Vol. 101, Number 4, pp. 177-181.
Available at
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0291010404.html

Bell, P.C., (2005), “Mars Incorporated: Online Procurement”, Richard Ivey School of Business Case Collection, January.

Chin, S., (2002), “Web Auctions On Rise But So Are Concerns – Suppliers Balk At Online Bidding Process”, EBN, June, Iss. 1318.
Available at
http://proquest.umi.com/pqdweb?index=28&did=128142651&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1197477568&clientId=46002

Emiliani, M.L., (2000), “Business-to-business Online Auctions: Key Issues For Purchasing Process Improvement”, Supply Chain Management: An International Journal, Iss. 4, pp. 176-186.
Available at
http://www.emeraldinsight.com/Insight/viewPDF.jsp?Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/1770050402.pdf

McNevin, A., (2001), “Buying Power Through E-Procurement”, Computing, March.
Available at
http://www.computingbusiness.co.uk/computing/features/2072027/buying-power-procurement

Stein, A., Hawking, P., Wyld, D.C., (2003), “The 20% Solution?: A Case Study On The Efficacy Of Reverse Auctions”, Management Research News, Vol .26, Iss. 5, pp. 1-20.
Available at
http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=6240A95A56D290CF70F57148633DA710?contentType=Article&hdAction=lnkpdf&contentId=866863&history=false


Websites

http://www.inktec-uk.co.uk/ecommerce/b2b-ecommerce.htm