InformationWeek: The Business Value of Technology

Ace Hardware Corp., a $13 billion, Chicago cooperative of 5,100 retailers, already operates an extranet, dubbed Acenet 2000, that lets its members procure products online. Ace is also testing online procurement of specialty products over FindMRO, operated by W.W. Grainger Inc. The site provides access to more than 5 million maintenance, repair, and operations items from 12,000 suppliers.

"FindMRO gives our retailers access to products that they can't easily find or don't normally stock, such as special tools, electrical motors, and even a very large quantity of Vaseline," says Tina Lopotko, department manager for Ace's commercial and industrial supply group. "The benefits really add up when you get access to these products at a lower transactional price and at a quick turnaround."

Lopotko declines to provide specific savings, but industry experts estimate that companies can cut procurement costs by as much as half and reduce order turnaround from weeks to days.

Electronic marketplaces, focused mainly on business-to-business transactions, are also expanding into consumer markets. H-E-B Food Stores, a $7-billion supermarket chain that owns 274 stores in Texas, Mexico, and Louisiana, has been testing procuring wholesale supplies for its baking, dairy, and packaging requirements since July on the Inc2Inc marketplace. The site will launch next week and provide access to 3,000 suppliers.

"We expect overall savings of 3% to 7% in our procurement costs, better inventory and forecast management, plus fewer people to manage buying chores," says Linda Espino, manager of manufacturing procurement at H-E-B Food Stores.

The supermarket chain spends tens of millions of dollars in procurement annually, and Espino plans to move nearly 80% of procurement online over Inc2Inc. The company considered building an extranet, which would have required a large budget and years of work, Espino says. Instead, it chose an E-marketplace because most of its suppliers don't have automated computerized systems. Now, the suppliers use a simple Web system and all the integration is handled by Inc2Inc.

E-marketplaces will reshape and complement online procurement extranets, says Daniel Garretson, senior business E-commerce analyst at Forrester Research. "Before, buyers were tied to a single supplier or a handful of suppliers over tightly controlled extranets," he says. "Now, with E-marketplaces, they can do one-stop comparison shopping across thousands of suppliers and go to the best source in real time or near real time."

There's a lot of money involved. Online procurement in the business-to-businesses market will jump from $75 billion this year to $3.17 trillion in 2004, according to an upcoming report from Gartner Group. Gartner didn't provide a specific figure for E-marketplace growth, but Volpe Brown Whelan & Co., a San Francisco investment company, estimates that E-marketplaces will account for $35 billion by 2004.

"E-marketplaces are using online procurement of commodities--both products and services--to lower prices while improving access to suppliers, and they are seeing substantial benefits," says Tom Slaight, VP of strategic sourcing services at A.T. Kearney Inc., an independent consulting arm of systems integrator EDS.

Typically, E-marketplaces and trading hubs take 1% to 15% of the value of the transaction as their fee, depending on the kind and volume of products and services being transacted. Even with that commission, buyers typically end up saving 10% to 40% on their transactions, an amount they previously would have paid to traditional distributors and brokers.

For example, customers of Chemdex Corp., an E-marketplace for chemical products, used to spend 10 hours a week ordering from 200 paper catalogs and each order used to cost $120 in processing charges. On the Chemdex Web site, processing costs $30.

A new A.T. Kearney survey of 162 leading global businesses shows that they channeled more than 3% of their overall buying over the Internet last year. Respondents say they expect to funnel 20% online this year.

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