E PROCUREMENT AT IBM “In 1999, IBM did what would seem to be a near impossible task It began doing business with 12,000 suppliers over the Internet— sending purchase orders, receiving invoices and pay.
E-PROCUREMENT AT IBM “In 1999, IBM did what would seem to be a near impossible task It began doing business with 12,000 suppliers over the Internet— sending purchase orders, receiving invoices and paying suppli- ers, all using the World Wide Web as its transaction-processing network.” Setting up 12,000 suppliers to business on the Internet was relatively easy compared to the resistance of suppliers to link to IBM via EDI (electronic data interchange) Suppliers who didn’t have large contracts with IBM balked at EDI because of the expense of special software and a VAN (value-added network) that were needed to EDI No such problem with using the Internet: Suppliers don’t need special software or a costly VAN to business with IBM The Internet’s simplicity reduces costs for IBM and its suppli- ers IBM estimated that it saved $500 million in 1999 by moving procurement to the Web, and believes that is only the tip of the iceberg Much of the savings came from eliminating intermediaries IBM uses the Web to manage multiple tiers of suppliers and as a tool to work with suppliers to improve quality and reduce costs But cost reduction was not the only reason IBM switched to Internet procurement Web-based procurement is a key part of its supplier management strategy: IBM sees great value in using the Internet to collaborate with suppliers and tap into their expertise much more rapidly than previously “The Internet will also allow IBM to collaborate with suppliers over scheduling issues If the company wants to increase production of a certain product it will be able to check with component suppliers and determine if sup- pliers can support the increase If there are schedule cutbacks, [it] will be able to notify suppliers almost instantaneously and excess inventory can be avoided.” And although supply chains are viewed as sequential, IBM doesn’t necessarily want to manage them that way Rather, it wants to use the Internet to manage multiple tiers of suppliers simultaneously An example of this is how it deals with CMs (contract manufacturers) The company sends forecasts and purchase orders to the CMs for the printed circuit boards they supply It also gives all the component manufacturers the requirements and they ship parts directly to the CM The company estimates it saved in excess of $150 million in 1999 “The savings were the difference between contract manufacturers price for components used on the boards and IBM’s price that it had negotiated with component suppliers.” Because the Internet is becoming crucial to IBM’s supplier- management strategies, IBM is trying to make it easier for suppliers to business over the Web The company has devel- oped a Web-based portal to provide a single entry point to IBM As is the case with most large companies, IBM has multiple interfaces with its suppliers, including engineering, quality, as well as purchasing, and typically suppliers have to connect to separate URLs (universal resource locators) in a company IBM’s portal provides a single point of entry for suppliers, making it easier for suppliers to business with IBM and increasing the speed of the supply chain Speed is vitally important in the elec- tronics industry due to very short product life cycles If products don’t get to the market quickly, most of the profit opportunity is lost Still another benefit envisioned by IBM will be the ability to form strategic alliances with some of its suppliers In the past, the fact that many suppliers used by IBM for its production processes were as far as 12,000 miles away made it difficult to build strate- gic alliances with them IBM believes that using the Internet will strengthen relations and enable it to develop alliances “The Internet also will play an important role in IBM’s general procurement IBM was doing EDI with core production suppliers, but not with other forms of general procurement Pur- chasers were still faxing and phoning orders, which is timely and costly.” Additional cost savings come from small volume, one-of-a-kind special purchases, because of the speed and ease of using the Internet Web-based procurement will eliminate mistakes that occur during the procurement process due to having to type or enter prices and other figures on paper documents Questions How did IBM achieve cost reductions by using the Internet for procurement? What advantage did IBM’s use of the Internet have for small suppliers? Aside from cost reduction, what major value does IBM envision for its interaction with suppliers? How does use of the Internet for procurement reduce mistakes? Indicate how using the Internet made that benefit possible How does having a Web-based portal help IBM’s suppliers?