Mars Inc. (Mars) is one of the world’s largest privately owned businesses and recently became aware that many companies were achieving substantial savings through the use of online procurement auctions. (Bell, P., 2003) The term 'procurement' is understood to refer to the purchase of indirect goods and electronic procurement is about taking this process online with the main aim of saving costs. (Leonard, S.R., 2001) It is now necessary to consider the advantages and disadvantages of such a system and of using auctions to fix prices.
Firstly, one of the main advantages is that of cost savings and this can be illustrated by BAE Systems who claim that since they implemented their online system, Exostar, the advantages have principally been cost savings which tend to be in the high teens. (Flynn, T., 2003) Such cost savings can be very important for companies and this appears to justify Mars’ decision as they hoped to achieve cost savings in order to allow the company to grow within highly competitive markets.
Furthermore, companies can also expect to make their business more efficient as the procurement process can be made faster. This is again a major bonus for Mars because if they are looking to remain competitive in their many markets it is extremely important for them to increase efficiency wherever possible as this will allow them to stay one step ahead of the other companies. Ford recently considered their internal processes and realised that if they were to make their business more efficient they would have to consider online procurement. This pushed them to join with Oracle to design and implement a suitable system and the company strongly believe that this is the correct path to follow as they believe that within 5 years everyone will have adopted this strategy. (Kerridge, S., 1999) It is likely that this will be more efficient for Mars as it reduces the need for the current one-on-one negotiations (Bell, P., 2003) as many people can be involved at the same time and this will clearly save time.
A further advantage of online procurement for buying and selling is that it is convenient and opens the marketplace up to a vast number of potential suppliers as it can be accessed from anywhere in the world due to the use of the internet. (Onvia, 2007) This is a particularly important point to note as Mars felt strongly that they did not want to become dependant upon a small number of suppliers as they did not want to be exposed to this risk. (Bell, P., 2003) By using online procurement Mars would be able to receive bids from suppliers who may never have been considered previously and this should assist in assuring that they do not simply rely on a couple of favoured suppliers.
However, there are also disadvantages to using online auctions to buy and sell goods or to fix prices. One of the main problems is that there tends to be a “lack of sufficient online procurement experts within the company” (Attaran, M., 2001) and so companies are forced to seek outside help. This is a particular problem within Mars because their system is extremely complex as it had to satisfy a large number of criteria such as limits of the number of suppliers and allowing suppliers to combine items to make suitable bundles. This led to a number of technical problems (Bell, P., 2003) and therefore not having any experts within the company is a major issue because when problems arise time may be wasted waiting on outside help arriving and Mars may find that they do not have sufficient control over their own system.
Furthermore, many of the advantages of online procurement can quickly turn into disadvantages if they are not managed properly. It is clearly advantageous that online auctions open the market up to a large number of potential players but this may not always be the best course of action as companies quickly realise that they are faced with the problem of choosing the most appropriate bid from a huge array of choices. By considering Exhibit 1 one can see the scale of the problem which faced Mars as within an hour they had received a number of bids from 7 different suppliers, none of which were easily comparable as all suppliers offered different bundles. (Bell, P., 2003) This therefore left Mars with a huge headache as they would have to spend a large amount of time analysing the bids to ensure that the most appropriate supplier won.
Online auctions can be advantageous in terms of fixing prices as they are unlike traditional auctions in that the ‘low bid’ wins. (Bell, P., 2003) This is clearly a benefit to buyers like Mars as they get the best possible value for money as they are able to get prices which would not have been possible had they continued with one-on-one negotiations.
However, like many previous advantages this one also has a downside as Mars stated that they did not want to squeeze suppliers too far (Bell, P., 2003) as this would go against their corporate image and would lead to poor relations. Auctions, however, by their very nature tend to encourage bidders to go to their limits in order to win the contract and so Mars would have to realise that they would have to put extra effort in to managing supplier relationships as it is likely that they would resent the strong focus on price. If additional teams are required to simply manage relationships then Mars could quickly realise that any cost savings they hoped to achieve would be lost.
In conclusion, online procurement holds a number of advantages for both buying and selling and fixing prices particularly in terms of cost savings and a more open marketplace. However, these advantages must be managed correctly in order to maximise the benefits because they can quickly turn into problems for firms as they need to spend time and effort managing supplier relationships and time may also be wasted sifting through a large number of bids in an attempt to determine the winner. In many cases there may be no clear winner due to the bundles offered and this could lead to inappropriate decisions being made.
REFERENCES
Attaran, M., “The coming of age of online procurement”, Industrial Management and Data Systems, 2001, http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=A6858097A50C8B58965C3EEB719D9194?contentType=Article&hdAction=lnkhtml&contentId=850030, accessed 12 December 2007
Bell, P., “Mars Incorporated: Online Procurement”, 2003
Flynn, T., “Doing your bidding”, Director, 2003
Kerridge, S., “Ford and Oracle to develop online procurement network”, http://software.silicon.com/webservices/0,39024657,11013775,00.htm, accessed 4 December 2007
Leonard, S.R., “Electronic Procurement”, 2001, http://213.198.108.89/ebew/e2000plen/leonard.html, accessed 14 December 2007
Onvia, “Federal Government Contracts: Electronic Data Interchange for Procurement”, 2007
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