purchasing, suppliers, e-commerce, internet

Suppliers to industry and commerce face a new world in which their customers can tap sources far and wide in the search for the best and cheapest answer, from small components to commodities and huge machines. Buying over the Net already saves leading-edge companies hundreds of millions of dollars in annual costs. Indeed, the long-established function of purchasing is a dying trade. Like many bastions of the old management, it is crumbling before the onslaught of the new

In the process, whole industries are being reshaped. As the purchasing revolution develops via the Internet, companies will no longer need expert purchasers with deep knowledge of markets. Instead, a few clicks on the mouse will establish where they can find the supply and what is the best available combination of price and availability. The purchaser's deadly skills at negotiation are useless in this context - not that they were ever as marvellous as companies supposed.

When one mighty retailer took over a smaller, privately-owned chain, it was startled to discover that the far smaller business had won consistently lower prices. So much for economies of buying scale. The same thing happened when Compaq's chairman, Ben Rosen, sent an undercover two-man team to the Comdex trade fair to check the cost of building a cheap, entry-level PC. The pair, posing as tiny start-up entrepreneurs, got better quotes than the great Compaq.

All the hit and miss of purchasing, however, disappears when you have complete transparency. The slogan of the John Lewis store chain, 'Never Knowingly Undersold', gets reversed: 'Never Knowingly Overcharged' becomes standard operating procedure. But cost is not the only path to profit. There is another powerful alternative to traditional purchasing: the supplier partnership. The principle is as old as W. Edward Deming's famous 14 quality points: No 4 is 'End the Practice of Awarding Business on Price Tag Alone'.

Instead, Deming advised that you should seek a supplier who provides perfect quality with totally reliable just-on-time delivery. That may well produce lower costs, even at a higher price, but 'price has no meaning without a measure of the quality being purchased'. Perfection is not, of course, given to man or manager. But today suppliers routinely get brilliantly near to Deming's ideal, thanks to the quality revolution which he did so much to inspire. It is not enough. You want suppliers who are intimately involved in every aspect of specification and production and who can thus make a contribution that goes far beyond taking orders - in both senses of the phrase.

The traditional relationship between supplier and customer was at arm's length. The customer gave orders to the supplier and ordered him about, squeezing him on price, castigating him for failures of quality or delivery, threatening to take the business elsewhere, and playing one supplier off against another. The supplier responded by appeasement, which concealed resentment and all manner of secret ways of trying to defend margins against the supplier's pressure.

Take for example, the pitfall of 'cost-plus'. As Deming described it to Mary Walton, this ruse means that 'a supplier offers a bid so low that he is almost certain to get the business. Midway into production the customer discovers that certain changes must be made. The supplier obliges, while boosting the price of the items. It is too late for the customer to make other arrangements'. In Deming's own words, 'With a single supplier and a long-term relationship of trust, such pillage does not occur'.

In most cases, the warring parties in the traditional relationship, where several suppliers were all mistrusted and kept to short-term contracts, each achieved worse results than were available to them jointly. Deming's philosophy still stands: but the Information Revolution has made its implementation much easier. By linking the computers, each side can have full information about the other's requirements and costs in real time. Price issues become transparent, and the two business systems become as one.

At the extreme, supplier partnership creates the 'virtual company', which controls but does not produce what it sells. This is no fantasy. Companies like Sun Microsystems rely on outsiders for everything from whole assemblies to delivery. Their proprietary edge rests on design, management and marketing. Virtual and near-virtual companies like Dell Computer take their outsiders deep inside. They will only be expelled if technological change or inadequate performance force the 'virtual' customer's hand.

VIRTUALITY PAYS
The evidence for both Dell and Sun is that virtuality pays. Since 1994, Dell has sextupled sales to $18.2 billion. Net income, negative in 1994 by $250 million, has neared $1.5 billion. That puts Dell right at the top of the fabulous micro-electronic league. Sun, with $9.8 billion of sales, has doubled its return to investors every two years since 1988. Conservatives may protest that what prevails in Silicon Valley has no relevance outside. They are wrong - just as wrong as Western car-makers who argued that Toyota's production methods had no application outside Japan.

The Toyota methodology, naturally, became the norm, but only after market shares worth billions had been foolishly given away by the West. The same suicidal tendency is operating now. Managements are slow to move to cyberspace purchasing, despite the evidence of booming trade. Total business-to-business purchasing is already over $100 billion, and is expected to reach the trillions by 2003. The industrial world is splitting into those who intermediate, those who deal with the intermediaries and those who do neither.

No external forces drive companies away from true supplier partnerships and Web purchasing. The negative pressures are all internal. Managers have to make radical changes in their processes. The most resistant of these are thought processes. E-commerce demands thinking very differently about supply, suppliers, markets, information systems, value chains and everything else. All managers make minor mental changes in those areas. But only major leaps forward will seize the opportunities - and they are clearly underway.

The volume of one area of business-to-business trade, purchases over third party Web-sites, had become enormous by 1998. That year, according to Forrester Research, volume achieved by these 'infomediaries' reached $43 billion. That was a drop in several oceans compared to the torrent of trade expected by 2003, a 39-fold rise to $1.4 trillion. In February 1999, Fortune reported that infomediaries - or industry exchanges - were appearing for 'steel, paper, research chemicals, hospital suppliers, marine equipment, home equity loans, even bull semen'.

A whole new business sector has emerged to exploit and expand this market of markets. Basically, the infomediaries deal in information. The Web site's efficiency depends on the amount and accuracy of the information on the databases. If they can provide the necessary facts about suppliers, prices and availabilities, finding the right product at the right price can take minutes instead of hours. There are striking examples for cost reduction as well. Career Builder finds a million-plus people for jobs every month at a claimed cost of $900, compared to a national average of $8,000.

Since the infomediary's needs for capital and stocks are minimal, many entrepreneurs will be tempted into so vast a market. They cannot all succeed. The rich (very rich) prizes are going and will continue to go to those who are fastest with the mostest. The lesson of the informediaries applies generally in the world of e-commerce. Get in fast, get in first, and get in fully. Waiting to see and half-measures are disastrous. Don't wait for anything - including the establishment of standards.

E-COMMERCE STANDARDS
As Louise Kehoe pointed out in the Financial Times, important issues of standardisation in e-commerce had yet to be resolved as the Millennium neared: 'The 10-wheelers of electronic business-to-business commerce are getting up to speed - with suppliers and buyers of all manner of goods exchanging orders via the Internet - but nobody has defined the rules of the road'. Firms are exchanging data as they exchange goods. However, 'each industry or vertical segment is creating its own set of standards for how to exchange data, but most do not take full account of the standards created by others'.

Her fear is that 'e-business may be heading toward a pile-up of immense proportions'. An endearing and crucial habit of the Information Revolution, though, is that its problems further instead of retarding the revolutionary progress. Eager companies gather round the problem area like bees round a honey-pot, offering the solution that may create a new star, or even a super-nova. This description doesn't, though, embrace those associations of companies which from time to time, and usually over a long period of time, seek to bring the warring standards together.

As Kehoe points out, by 1999 many versions existed of XML - 'extensible mark-up language'. An order form could carry an XML 'tag' specifying price, quantity, product description, etc. It would make sense to merge all the XMLs into one fully compatible language, as Microsoft and others have proposed, on which everybody can standardise. Well before any such agreement is reached, some upstart will probably have stolen the prize - perhaps it will be Ariba Aystems.

Already Hewlett-Packard, oil company Chevron, General Motors, Cisco Systems and 'a host of other big companies' have put Ariba's software on their Intranets. You simply connect with Ariba to order 'anything from fuel oil to office notebooks'. This 'intranet marketplace' for business is a harbinger of the revolutionary future. It's a short step from the passive receipt of orders to their proactive execution. Automatic replenishment of supplies, raising automatic payment, will plainly become routine - with safeguards against over-ordering, under-fulfillment and crime built into the system.

This is the essence of the real time supply system. It's objective has ben well described by Bill Gates: 'capturing and analyzing data in real time can create an information cycle between a business, its partners and its customers that can reshape a company's entire behaviour'. The idea is to tie the company 'so closely to consumer buying patterns [that they] will drive its business processes in real time. You transcend historical data because, however skilful the analysis, it won't forecast demand accurately enough to stop under-stocking or its evil twin, over-stocking.

Nor will history tell you what customers are buying right now. If you know that, you can operate a 'just-in-time' system with your suppliers, who can supply the goods in demand when and where they are demanded. The advantage for the suppliers is that they need only make what is actually being sold: the gain for the supplier is fast response. Both sides benefit from lower costs, while the information collected by the supplier is invaluable for planning future products and production.

The digital documents used in the new supply chains are intelligent. The word is used in Cybercorp by James Martin. He pours rightful scorn on conventional purchase orders, which have to be 'laboriously filed, searched for, and sent by snail mail'. It's even less defensible when these pieces of paper have actually emerged from a computer:

'It does not make much sense to have a computer print paper documents and then have humans stuff them in envelopes, deliver them to the postal system where people sort them, put them in sacks, deliver them to plaecs, sort them again, missort some of them, until eventually they rwach a destination where they are manually keyed into another computer system with a 1% error rate'.

When computer speaks direct to computer, the supply chain can be automated. The intelligent computer at the customer end responds to production schedules and inventory records and arranges for delivery of the required goods. The equally bright computer at the supplier's establishment 'monitors the customer's needs or production schedule and supplies goods appropriate for a changing production mix, in the correct sequence, just in time'. And all this starts from turning a dumb purchase order into an intelligent one, and building on that change as simply and cogently as possible.

To achieve that end, complex and costly systems are not required. Phillip Jackson, who directs world-wide operations for De La Rue Cash Systems, stresses this: 'It is now cost-effective to stream customer delivery throughout the total enterprise by going on-line through a distribution chain in over 30 countries and a supply chain with over 300 suppliers'. The great benefits in lower inventory and improved delivery performance, leading to increased revenues and margins, can be achieved with simplicity and speed, 'in time-scales which match the critical need to achieve and maintain competitive positioning in an increasingly crowded and competitive marketplace'.

KILL OR BE KILLED
Jackson is not exaggerating when he uses that word 'critical'. Remember that in the world of the killer app it's kill or be killed. In Shikhar Ghosh's arresting statement: 'The opportunity for those companies that move first to establish electronic channels is a threat to those that do not'. He cites 'ten of Cisco's largest customers' who 'are installing new software in their own computers to tie their inventory and procurement systems to Cisco's systems'. That gives them the same kind of advantage that Johnson & Johnson acquired by linking its computers with those of Nypro, its supplier of plastic mouldings for soft contact lenses.

The purchasing linkages could force companies into the Information Revolution technology even if their managements have failed to appreciate the opportunity. The infomediaries are by no means alone in changing the rules of purchasing by opening new Websites. Large corporations are centralising purchases in a way which puts immediate pressure on suppliers. At General Electric, for example, huge savings are expected in both money and time (with the purchasing cycle halved) as suppliers bid for its business over the Web. In the affected product groups, you either trade with GE over these sites, or you don't trade.

Writing in the March-April issue of the Harvard Business Review, Ghosh was prescient about the sales and profit troubles that were to hit Compaq and force out its hero CEO, Eckhard Pfeiffer, in the spring of 1999. What if GE wanted to buy its PCs over the Net? Compared to Dell's direct selling, Ghosh observed, Compaq's business model of selling through distributors meant that its 'costs were higher, its pricing and information systems are designed for conducting business through distributors, and any move Compaq makes toward accepting orders over the Internet could threaten those distributors'.

At that time, Dell's Web sales had already reached $3 million a day: a year later they had more than doubled. Nor is Web purchasing a one-way street. The supplier gains from internal efficiencies which offset the lower prices. There is no alternative to joining the game, and not only because of the pressure of giants. As Ghosh says, 'Ultimately the risk of Internet commerce for established businesses is not from digital tornadoes but from digital termites'. That's true in the digital business itself, where relatively small distributors such as Ingram Micro and MicroAge are using the Web to muscle into the territory of their retailers, who in turn are using electronc ordering to make own-brand computers.

Ghosh describes these activities as piracy. The pirates 'are essentially eliminating layers of costs that are built into the current distribution system. He proposes four questions that answer another - should you pirate your value chain?...

• Can I realise significant margins by consolidating parts of the value chain to my customer?
• Can I create significant value for customers by reducing the number of entities they have to deal with in the value chain?
• What additional skills would I need to develop or acquire to take over the functions of others in my value chain?
• Will I be at a competitive disadvantage if someone else moves first to consolidate the value chain?

The answer to the last question is more than likely to be Yes. Value chains in the affected industries (for which, eventually, read all industries) are being remade, pirated, taken apart. The car giants like General Motors will find Internet companies like Auto-by-Tel stealing their end-markets and their margins. The giants in turn will seek greater economies by integrating their purchasing with their suppliers: the US car industry is already linked to components suppliers by one of the largest extranets. From every direction, new forces are at work to turn cyberspace into the world's dominant market. There's no hiding place from the still unfolding, gigantic consequences.