Web sites are organized around two types of e-hubs: vertical hubs centered on industries (plastics, steel, chemicals, and paper) and functional hubs (logistics, media buying, advertising, energy management). In addition to using these Web sites, companies can do e-procurement in other ways:
Â· Direct extranet links to major suppliers: A company can set up extranet links to its major suppliers. For example, it can set up a direct e-procurement account at Dell or Office Depot, and its employees can make their purchases this way.
Â· Buying alliances: Coca-Cola, Sara Lee, Kraft, PepsiCo, Gillette, P&G, and several other companies joined forces to form a buying alliance called Transora to use their combined leverage to obtain lower prices for raw materials. Transora members also share data on less expensive ways to ship products and track inventory. Several auto companies like GM, Ford, DaimlerChrysler formed Covisint for the same reason. They believe they can save as much as $1200 per car.
With the growth of consumer online shopping, it is easy to lose sight of one of the most significant trends in e-commerce: the growth of business-to-business e-procurement. In addition to posting their own Web pages on the Internet, companies have established intranets for employees to communicate with one another, and extranets to link a companyâ€™s communications and data with regular suppliers and distributors.
Most of the products that businesses are buying electronically are MRO materials (maintenance, repair and operations) and travel and entertainment services, MRO material make up 30% of business purchases, and the transaction costs for order processing are high, which means there is a huge incentive to streamline the process.
Here are some examples: Los Angeles County purchases everything from chickens to condoms over the internet. National Semiconductor has automated almost all of the company 3,500 monthly requisitions to buy materials ranging from the sterile booties worn in its fabrication plants to state of-the-art software. GE buys not only general operating supplies, but also industrial suppliers online Now that GE Information Services (GEIS)has opened its buying site to other companies, the company is well on its way to creating a vast electronic clearing house. Hundreds of thousands of firms will exchange of firms will exchange trillions of dollars of industrial inputs with GEIS running the show.
Many brick-and-mortar companies have expanded their online presence by building their business-to-business operations and targeting small businesses, which account for 98% of all US employers. The 54% of companies that now purchase over the internet are utilizing electronic marketplaces that are popping up in several forms:
1. Catalog sites: Companies can order thousands of items through electronic catalogs distributed by e-procurement software, such as Graingerâ€™s.
2. Vertical markets: Companies buying industrial products such as plastics, steel, or chemicals, or services such as logistics or media can go to specialized Web sites (called e-hubs). For example, Plastic.com allows plastics buyers to search for the best prices from the thousands of plastic sellers.
3. â€œPure Playâ€? auction sites: These are online marketplace such as eBay and Freemarkets.com that could not have been realized without the Internet and for which no business model existed before their formation. Freemarkets.com provides online auctions for buyers and sellers of industrial parts, raw materials, commodities, and services in over 50 product categories, and has facilitated over $ 40 billion worth of commerce since 1995.
4. Spot (or exchange) markets: On spot electronic markets, prices change by the minute. ChemConnect.com is an exchange for buyers and sellers of bulk chemicals such as benzene and is a B2B success in an arena littered with failed online exchanges. First to market, it is now the biggest online exchange for chemical trading, with volume of $ 8.8 billion in 2002. Customers like Vanguard Petroleum Corp. in Houston conduct about 15% of their spot purchases and sales of natural gas liquids on ChemConnectâ€™s commodities trading site.
5. Private exchanges: Hewlett-Packard, IBM, and Wal-Mart operate private exchanges to link with specially invited groups of suppliers and partners over the Web.
6. Barter markets: In these markets, participants offer to trade goods or services.
7. Buying alliances: Several companies buying the same goods join together to form purchasing consortia and gain deeper discounts on volume purchases (Transora, Covisint).
Online business buying offers several advantages:
It shaves transaction costs for both buyers and suppliers, reduces time between order and delivery, consolidates purchasing systems, and forges more intimate relationships between partners and buyers. On the downside, it may help to erode supplier-buyer loyalty and create potential security problems. Businesses also face a technological dilemma because no single system yet dominates.