Trials and Errors

Electronic marketplaces were once poised to revolutionise the way companies bought and sold everything from paper clips to aeroplanes. Things have changed.

One company where e-procurement has delivered on its promises is Aventis, the €20.6 billion Franco-German pharmaceuticals group that is currently the target of a hostile takeover bid from smaller rival Sanofi-Synthélabo. Aventis is itself the product of a three-way merger, and following that deal in 2001 the company decided to integrate purchasing in the US and Europe. It signed up for a hosted service package from FreeMarkets, which began buying office supplies online for the pharma company soon after.

Mike Flanagan, Aventis’s Frankfurt-based head of capex, production supplies and services purchasing, says this “yielded significant savings and helped cut our suppliers from around 40 to just two.” By mid-2002, the company had saved $35m (€28m) on a total spend of $130m, and integration was in the home stretch. Aventis was ready to move its online exchange expertise in-house.

According to Mikael Arnbjerg, a Copenhagen-based analyst at IDC, the technology research firm, relinquishing control of purchasing operations to a third party has been a sticking point with many firms considering independent exchanges. But e-marketplace offerings have become more flexible, having metamorphosed over the years. This certainly has been the case at FreeMarkets. It began as a neutral marketplace, then migrated into a supply chain management tool and now is heavily focused on consulting.

Like FreeMarkets, a number of the early exchanges have extended their service to advise firms undertaking complex sourcing or procurement projects, setting up requests for quotes, contract templates and so on. In some cases, the exchanges are now software vendors, catering to clients that want to set up and manage their own private, invitation-only exchanges.

The “self-service” approach is what sold Arla, the DKr40.6 billion (€5.5 billion) Danish dairy co-operative. “We want one in-house system rather than having to log on to scores of web solutions from suppliers,” says Mette Windfeldt, head of the company’s e-procurement programme. Having gone live with an online exchange using software from IBX in December, she says 200 of Arla’s suppliers are expected to be able to join the marketplace soon.

Aventis has also taken advantage of the strategic shift. In early 2003 it switched from its hosted service contract to a new self-service package from FreeMarkets. Since then, Flanagan and his colleagues have been working on moving all of Aventis’s sourcing in the US and Europe on to one platform by the end of this year. Yet while the in-house team handles about one-third of the company’s total $6 billion annual spend, Flanagan still enlists FreeMarkets’ help for complex sourcing and purchases, such as when he needed to buy all the materials for an €11m service centre that it recently opened in Germany.

As the online exchanges evolve, companies are starting to look for technology that “not only improves the efficiency [of their buying and selling], but also their effectiveness,” says Nicolas Reinecke, a London-based partner leading the European purchasing and supply management practice at McKinsey & Company. “That’s the new frontier.” According to Reinecke, software vendors such as SAP, Manugistics and i2 are coming forward to provide tools that enable richer, more rigorous analysis of online and offline data, better vetting and management of supply-chain partners, and greater automation.

In from the Cold

“Not that the exchanges themselves aren’t important,” says Ron Kubera, senior vice president of northern Europe for Manugistics. “But what we’re seeing is that what companies want is better analysis before the fact, and after the fact.”

But will this leave the exchanges that have survived the last few years out in the cold? Not at all, insists Kubera. “The online exchanges that have survived are good,” he says. “We just won’t be hearing about a lot of new exchanges starting up the way we used to. The world has moved on and no one is going to start a new marketplace today with the same expectations that they once had.”

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