If you were to get a glimpse of my inbox during the past month, you might think I’m close friends with Jeff Bezos, CEO of Amazon.com. I get e-mails from Jeff, on behalf of Amazon, almost daily, with recommendations on what I might like to buy.
Aside from aggressively pursuing the retail market, Amazon and other e-commerce giants like eBay are shifting their thinking toward wholesale distribution in industrial markets. Historically prominent “bricks and mortar” distributors are beginning to see that it is truly only a matter of time until e-commerce companies gobble up their market share.
Think about it: a company like Amazon already has the technology, distribution network, and brand awareness to do just that. In fact, it is testing its capabilities as you read this. Just ask Home Depot and Lowe’s, which are way behind the eight ball in offering electronic distribution of their products. Why shouldn’t Amazon sell bolts, washers, and electric motors, for example? No reason at all. So that’s what it’s starting to do.
For companies that buy from distributors, it is important to recognize this shift and determine how to prepare for it. There are all kinds of potential problems. For instance, consider how Amazon today tracks buying habits and makes “recommendations” via e-mail and web displays. If you are struggling to manage costs because of “rogue buyers” in your organization (i.e., those operating outside the normal bounds of procurement), how much harder will they be to control with the Amazons of the world in their face all the time?
The good news is that the industrial market can learn from the lessons of the retail market. Here are some key points companies should be considering as they prepare for the inevitable increase in e-procurement.
1. Cultural Shift
The number of companies still faxing or e-mailing purchase orders is astonishing. Many supply-chain professionals, not to mention corporate attorneys, believe it’s the only way to purchase goods while ensuring that the company’s own terms and conditions, rather than those of the distributor, apply to the transaction. If you buy from Amazon, you’ll be signing off on its terms and conditions.
But when was the last time anyone signed and returned, let alone read, the terms and conditions of faxed or e-mailed purchase orders anyway? They don’t even hold up in court, and if you do end up there, in a dispute over whose terms and conditions should apply, only the charge-by-the-hour lawyers will win.
Certainly most companies are doing some percentage of their purchasing online, such as for office supplies, but there has to be a cultural shift to get to the point where virtually all purchasing is online, which I think will happen within five years. Like it or not, e-commerce is only going to grow. The improved efficiencies of online buying (never mind the savings in paper) are too great to ignore. What areas can you shift to online procurement now? How might you deal with your preferred terms and conditions not being part of the transaction? Such questions need to be considered.
2. Loss of Leverage
What threats might exist from more electronic buying? The main ones are product quality and consistency, after-sales service, and transportation costs. Is what you get going to be as good as it looked on the computer screen? What kind of service relationship are you going to have with the online distributor? Will you trust the transporter if you don’t have a direct relationship with it?
Think about the lost leverage that may arise. If you have ever negotiated for the purchase of goods or services with a supplier that’s larger than your organization, you probably know what I am talking about. Let’s say you’re currently buying office supplies (an industry that saw the e-commerce trend coming before all the others) from one of that market’s big three players. What would happen if Amazon or eBay bought it up? Surely you know Amazon could afford it. How would you negotiate price? How would you ensure that terms and conditions were fair and equitable? What would be the impact to your bottom line? The same applies to janitorial supplies and industrial fasteners. How might you leverage if competition diminishes?
3. Data Manipulation
Despite the popularity of enterprise resource planning software among industrial and other businesses, they are still challenged to capture the right data and present it in a meaningful fashion. Fortunately (or not?), that very capability has been a main building block of many e-commerce giants. Just look at the number of personalized e-mails you get and how websites are providing personalized purchase recommendations for you. If companies can’t capture and utilize their own spending data, they will be hard-pressed to keep these distribution giants from influencing customers to buy someone else’s products.
If your organization does have a problem with rogue purchasing, it’s going to become a bigger one. The e-distribution giants capture purchasing habits and use them to present solutions companies didn’t even know they needed. How will that affect the budget? Get on top of your spending information today to be well equipped to deal with the new world of impulse buying.
Not convinced? Let me end with this: about five years ago, several of my friends were buying from eBay, and I thought they were nuts. How could they be sure of product quality, security of their financial information, and secure product shipping? I mean, it was just too risky. Well, this year I did about 80% of my Christmas shopping online, and I loved it. Many people are going through a similar shift. And there is nothing, absolutely nothing, stopping the e-commerce giants from now entering the industrial wholesale market. Rather than wait it out, why not be prepared?
Shawn Casemore is president of Casemore & Co., a consulting firm specializing in supply-chain management.