E procurement at ibm

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 do 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 do EDI. No such problem with using the Internet: Suppliers don’t need
special software or a costly VAN to do 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 do 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
do 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

1. How did IBM achieve cost reductions by using the Internet for
procurement?
2. What advantage did IBM’s use of the Internet have for small suppliers?
3. Aside from cost reduction, what major value does IBM envision for its
interaction with suppliers?
4. How does use of the Internet for procurement reduce mistakes? Indicate
how using the Internet made that benefit possible.
5. How does having a Web-based portal help IBM’s suppliers?