New Milestone in Adoption of E-Procurement

August, 2003

Since 2000, the Institute of Supply Management (ISM), in conjunction with Forrester Research, has been conducting a quarterly survey on the adoption rate of various e-procurement practices, and the most recent report shows a new milestone has been reached.

The June survey, for the first time, shows that manufacturing companies are using the Internet to purchase direct materials (i.e. those consumed in manufacturing of products) at a greater rate than they are using the Internet to purchase indirect materials (e.g. office supplies, repair parts, and services). Survey respondents spent an average of 11.7% of their total direct materials spend using the Internet in Q2 2003, up 1.7% from Q1. Indirect materials spending remained flat at 11.0%.

Why is this a big deal?
Early adopters of Internet e-procurement focused on indirect procurement as a way to gain some economies of scale with categories such as office supplies, where purchases were decentralized and ad-hoc. Significant savings could be achieved through group buys, and maverick spending could be curtailed by means of an e-procurement system. Additional savings could be achieved through reduction in cost of the purchasing transaction itself. But in manufacturing firms, indirect procurement has always been less strategic than direct procurement, where cost of material was just one factor–quality, delivery, and service are also major considerations.

Furthermore, with direct materials the procurement process is usually more complex, with quoting, configuration, specification, and scheduling as major activities in the process. The fact that e-procurement of direct material in manufacturing firms now exceeds that of indirect material indicates that the technology is becoming more commonplace and capable of being used more strategically. The hype phase of e-procurement is past, and companies are now making serious progress in adopting the technology.

So, what is keeping manufacturers from using e-procurement in even greater measure?
According to Edith Kelly-Green, spokesperson for ISM and VP/chief sourcing officer for FedEx, “Two of the main concerns keeping survey respondents from wider adoption of the Internet surround the lack of supplier enablement and integration with internal and external systems.” As these barriers are gradually overcome, expect to see e-procurement become as common as the fax machine.