Mars Incorporated - Online Procurement

Procurement between businesses and their suppliers is traditionally done manually through negotiations and bargaining. However, online procurement or e-procurement, has already been adopted by millions of companies, and is fast becoming the most common way of buying goods from a supplier thanks to the growth of the internet. Online procurement is about “taking the manual process online and automating the whole procedure with the underlying aim centred on saving money.” (http://213.198.108.89/ebew/e2000plen/leonard.html) This reasoning is illustrated in the Mars case study where it is stated that, “many major firms achieve savings of around five per cent through the use of online procurement auctions.” Although money would appear to be the main motivator for this, there are a number of further advantages and disadvantages that go along with online procurement. These will be discussed in greater detail along with an analysis of the benefits and drawbacks of using auctions to fix prices.

Obviously the main advantage to online procurement is the cost savings to be made, “Reducing indirect procurement costs can immediately improve an organisation's bottom line”. (http://213.198.108.89/ebew/e2000plen/leonard.html) For companies who are struggling to reduce costs, this would be a highly worthwhile and beneficial transition to make. Online procurement enables a company to cut out time and money spent on negotiations and contact with suppliers by enabling the whole system to be accessed online. This point is emphasised in the Mars case study where, “many different contracts and negotiations were used to address the huge number of different purchasing situations involving private businesses, brokers, governments, monopolies and cartels.” By moving this process online, these additional costs would be significantly reduced, if not abolished.

Another main advantage of using online procurement is the increase in efficiency which results from it. According to Leonard, 2001 (http://213.198.108.89/ebew/e2000plen/leonard.html) online procurement increases efficiency in three ways; reduced cost of purchasing, reduced cost of goods purchased, and reduced inventory days. This is one of the most important aims when companies move to online procurement as demonstrated in the Mars case study, “Mars’ objective was to obtain the needed materials from its list of approved suppliers fairly and at minimum cost.” Online procurement aims to achieve these goals by providing companies with “real time information as to the status of a customer's needs.” (http://en.wikipedia.org/wiki/E-procurement) This is a huge advantage to companies as it allows them to see what changes have been made and who is currently the lowest bidder, meaning they are able to select a bidder based on current up to date information.

In addition, an important advantage to a buyer-managed purchasing model is the fact that “the solutions can be highly customised to meet the buying organisation’s needs.” (http://www.usherproject.org.uk/support/hb/HBs27v2.pdf) This is important to a company like Mars who needed a highly specific and complicated model, “Mars attempted to aggregate individual small lots in a way that benefited suppliers but different suppliers had different requirements and different opportunities for efficiencies.” The fact that online procurement can be customised is hugely important for all companies involved in the process, as it means that the system can be changed and modified to suit their requirements rather than trying to adjust their buying or selling habits to incorporate a particular procurement system.

These advantages are naturally beneficial to companies when buying/selling materials, however online procurement encompasses a number of disadvantages that should also be taken into consideration. One major disadvantage for certain companies is the fact that the potential suppliers are provided with far more information than they would normally in a manual system. This could lead to serious problems for businesses, “the vendor has the power to take advantage of the customer by knowing more information about them”. (http://en.wikipedia.org/wiki/E-procurement) Companies may discover that suppliers are more tactical than usual as they have more information at their disposal and can easily undercut competitors which is illustrated in the Mars case study in Exhibit 1, where the suppliers are constantly reducing their prices to win the bidding war.

Another potential disadvantage of using online procurement is the initial investment costs involved for companies. In a buyer focused procurement model, the set up costs will be significantly higher than the costs borne by the sellers, “These solutions will require fairly high up-front investment for the buying
organisation.” (http://www.usherproject.org.uk/support/hb/HBs27v2.pdf)
Of course this investment is made with the hope of acquiring reduced maintenance costs which is illustrated by the vice president of Business Solutions at Mars who believed that using online procurement auctions would enable Mars to achieve the savings necessary to allow the company to prosper. However, further research attempts to disprove this theory, “there will be higher system maintenance costs in these solutions for the buyer”. (http://www.usherproject.org.uk/support/hb/HBs27v2.pdf) Although not evidenced in the Mars case study, the potential savings can only be calculated over time.

Using auctions to fix prices also has a number of advantages and disadvantages for companies. Reverse auctions such as those employed by Mars have an important advantage of being extremely up to date, “reverse auctions offer the ability to conduct real-time price competitions within hours.” (http://acquisition.gov/articles/feb2007_art5.htm) This enables the supply process to be far more efficient by reducing the time invested in each transaction. In addition, an advantage to a buying company like Mars is that auctions encourage increased competition among suppliers. This ensures that the buying company is paying the lowest price possible for their materials further reducing their operating costs.

However, there are various disadvantages to this process. For companies such as Mars who value their relationships with suppliers, using auctions to fix prices can mean there is “a brute force reliance on price.” This can lead to a breakdown in communication which can be detrimental to a company’s reputation and their rapport with suppliers. To combat this, Mars realised that “additional efforts” were needed to maintain their good working relationships, however only time will tell if this technique is effective.

For millions of companies, online procurement is an extremely effective and successful way to reduce the costs of purchasing materials. However, while this technique may be seen as effective to some, it still has its disadvantages which should be taken into consideration before implementation. In addition, the use of auctions to fix prices should be carefully considered prior to applying an online procurement system. Some companies may find this a highly efficient and effective method to use, however many companies who value their relationships with suppliers may be deterred by the formal system.


References

Bell, Peter C. (2003) Mars Incorporated: Online Procurement, Richard Ivey School of Business, Version (A) 9B05E004

Integrated Acquisition Environment, 2007, Spotlight on Reverse Auctions,
Available at: http://acquisition.gov/articles/feb2007_art5.htm
[accessed 7 December 2007]


Leonard, Steven R., Cheshire Henbury, 2001, Electronic Procurement,
Available at: http://213.198.108.89/ebew/e2000plen/leonard.html
[accessed 5 December 2007]


Usher Project, 2002, e-Business Advisor Handbook,
Available at: http://www.usherproject.org.uk/support/hb/HBs27v2.pdf
[accessed 5 December 2007]


Wikipedia, 2007, E-Procurement,
Available at: http://en.wikipedia.org/wiki/E-procurement
[accessed 7 December 2007]