Going to the Source, on the Web

Companies that go online to do supply negotiations -- and not just ordering -- find savings and speedier results

I feel sorry for folks doing procurement for Big Business. On average, they spend four months mired in the muck of back-and-forth phone calls, faxes, and FedEx deliveries -- all to sift out that perfect supplier and negotiate a sweet deal. In procurement vernacular, they call this "sourcing," a task that's about as appealing, yet as necessary, as flossing your teeth. "It's a mundane, tedious process, all right, but it has to be done," says Dumond E. Lowery, director for global strategic sourcing at auto-parts maker Dana Corp. (DCN )

It's mind-boggling, then, that so many companies have yet to take this process online. Sure, lots of them do their purchasing on the Internet, saving millions by forcing employees to buy everything from computers to copier paper from approved vendors via the Web. But less than 5% of companies do the tedious, tit-for-tat negotiations of their supply deals online, says research house Stephens Inc.

And that's an area where corporations can unearth even more savings: If companies around the globe were to move their sourcing online, collectively they would save $1.7 trillion a year, estimates researcher Aberdeen Group. "It's not practical to do it any other way," says Charles A. Peters, a vice-president at electrical-parts maker Emerson Electric Co. (EMR )


  Savvy businesses such as Emerson ask suppliers for quotes via the Web. They haggle over design specs and discuss quality issues online. They sometimes even use a video feed over the Net for live chat sessions to seal the deal. Using the Web can cut the time it takes to negotiate a supply contract by as much as two-thirds, says AMR Research. That means more time to spend with suppliers that matter.

Such benefits are driving sales of the software that runs these systems. AMR estimates that e-sourcing software revenues will surge from $311 million last year to $544 million this year and hit $1.5 billion by 2004.

That doesn't mean everyone is jumping in. Semiconductor giant Texas Instruments (TXN ) plans to use the Web for about 10% of its purchasing this year. But it barely goes online at all to find new suppliers or negotiate such crucial matters as on-time delivery records and responsiveness to demand.

How can a tech innovator behave as if it were stuck in Jurassic amber? Its suppliers -- like those in many other industries -- distrust Web negotiations, making it hard for TI to move its negotiations online. "They think it will result in us switching suppliers willy-nilly," says G. Ken Newton Jr., TI's vice-president for procurement and logistics.


 But the chipmaker is considering ways to kill its dinosaurs and fully enter the Web Age, he adds. It plans to begin sourcing online while ensuring suppliers that the Web won't threaten their relationships. E-sourcing "is one more arrow in the quiver for purchasing," says Newton.

The extra ammunition already has helped Dana hit bull's eyes. Its purchasing managers used to go through elaborate negotiations in which suppliers would buddy up to Dana staffers by offering donuts. Now, buyers conduct online negotiations from their PCs -- and skip the gut bombs. In one negotiation for fasteners used in manufacturing bulldozers and golf carts, Dana whittled the time it took to choose a new vendor from the typical week to less than two days, says sourcing chief Lowery.

Through cyberspace, the buyer avoided a "grandiose scheme" of paperwork while hashing out such intangible terms as whether machines for the job would be housed at Dana or at the vendor's facility. That streamlining of mundane tasks makes e-sourcing worth investing in. And it sure beats flossing.

By Roger Crockett in Chicago

    Before it's here, it's on the Bloomberg Terminal.