Industrial Marketing Management 32 (2003) 219 – 226

Supply management and e-procurement: creating value added in the

supply chain
William D. Presutti Jr.
John F. Donahue Graduate School of Business, Duquesne University, 600 Forbes Avenue, 704 Rockwell Hall, Pittsburgh, PA 15282, USA

Abstract

The increasing emphasis on supply chain management is creating a greater focus on the supply management link in the supply chain. This
focus will become even more intense as firms continue to adopt e-procurement strategies to leverage the competitive advantages of the
Internet. Supply managers need to understand the impact of technology and gain competency in making a business case for e-procurement.
The implications are profound for the industrial marketer.
D 2002 Elsevier Science Inc. All rights reserved.

Keywords: Supply chain management; E-procurement; Economic value added

1. Introduction
‘‘Supply chain management’’ has exploded onto the
business scene as one of corporate management’s major
concerns over the past decade. The reasons are clear. Fully
70% of a firm’s sales revenues are, on average, spent on
supply chain-related activities from material purchases to the
distribution and service of finished products to the final
customer.
As the world’s economy becomes increasingly compet-
itive, sustaining competitiveness and the resulting profitab-
ility depends less on the ability to raise prices. Instead, firms
need to compete on the basis of product innovation, higher
quality, and faster response times, all of which must be
delivered, in most cases simultaneously and always at the
lowest costs attainable. Those competitive dimensions cannot
be delivered without an effectively managed supply chain.
Firms with the most competitive supply chains are and will
continue to be the big winners in contemporary business.
The supply chain ‘‘encompasses all activities associated
with the flow and transformation of goods from the raw
materials stage through to the end user, as well as associated
information flows. . . Supply Chain Management is the
integration of these activities through improved supply
chain relationships to achieve sustainable competitive
advantage’’ [1].
*
Tel.: +1-412-396-6269; fax: +1-412-396-5304.
E-mail address: presutti@duq.edu (W.D. Presutti Jr.).
The definition suggests that all of the links in the supply
chain must be strong and well integrated. However, it is
argued here that the key link, the one that sets the founda-
tion for the others, is supply management1 on the input end
of the chain [2]. It is the link in the supply chain that serves
as the boundary-spanning activity on the input end of the
business where the supplier base is built based on the
suppliers’ ability to help the firm deliver on the competitive
dimensions. It is where industrial marketers come face to
face with the demands of the buying firm’s supply chain.
The increasing emphasis on supply chain management
has sharpened top management’s focus on the valued-added
potential of supply management. A recent survey suggests
that 76% of CEOs expect supply management to contribute
to shareholder value as firms continue to move toward more
outsourcing [3]. The potential impact on competitiveness
and profitability is enormous because the average manufac-
turing firm spends about 50% of its sales revenue on the
purchases of goods and services needed to produce its final
1
This article uses the term ‘‘supply management’’ rather than
‘‘purchasing’’ to describe the input end of the supply chain. It is a more
comprehensive description encompassing the important evolution to a
strategic focus rather than the more tactical and transaction focus of
traditional purchasing. According to Dobler and Burt [2], ‘‘Supply managers
participate in new product development and are responsible for selecting
sources, managing costs, developing and nurturing supplier partnerships and
strategic alliances, and issuing long-term contracts with carefully selected
suppliers. . . At the most progressive organizations, supply managers are also
active participants in the organization’s strategic planning process.’’

0019-8501/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved.
doi:10.1016/S0019-8501(02)00265-1
220 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
product. It is at the supply end of the supply chain where
most of the expenditures on supply chain activities exist.
This increasing emphasis on supply management, rather
than on the more traditional ‘‘purchasing,’’ requires that the
professional supply manager move beyond the typical trans-
action focus of purchasing where price and availability were
the key factors to be considered in the purchase decision. The
‘‘new basics’’ of supply management require that supply
managers take a more strategic view of what they do. Those
new basics include a comprehensive understanding of target
costing, value engineering, supplier development, and elec-
tronic procurement [3]. The first three are not really new,
having existed as an implicit part of supply management for
some time. It is more accurate to say they are being redis-
covered. It is electronic procurement, the productive use of
the Internet to improve the effectiveness and efficiency of the
supply end of the supply chain, that is new.
Strategic supply management has the potential for sig-
nificant value creation for the firm. Business professionals
who have long been involved in supply management
understand its power to create value. The emergence of e-
procurement in the last few years is creating a higher profile
for supply management, boosting its visibility to top man-
agement.
The challenge to those operating on the supply end of the
supply chain is to make a convincing business case for what
they do. Although CEOs expect supply management to
contribute to shareholder value, effective supply managers
need to get comfortable with the language of top manage-
ment to communicate how that value is created. The move
to e-procurement provides a unique opportunity for supply
managers for two reasons. First, the application of tech-
nology to boost competitiveness and profitability is on the
agenda of any forward-thinking CEO. Second, the applica-
tion of technology to supply management, where firms
spend most operating dollars, is focusing more top-manage-
ment attention on that issue. A recent study by Deloitte
Consulting of 200 global firms indicates that 30% have
begun implementing at least a basic e-procurement solution
whereas 61% are either planning or are considering an
implementation [4].
Fig. 1. The purchasing process. Adapted from A.J. Van Weele, Purchasing Management 1994.
Making a business case for e-procurement requires that
the supply manager understand the concept of economic
value added (EVA), considered a comprehensive financial
measure of value creation. In addition to using EVA to
convince top management of the efficacy of an e-procure-
ment strategy, the supply manager can make an important
contribution to a missing ingredient in the overall supply
chain management movement—a method to measure total
economic value across the supply chain [3].
This article begins with an overview of the purchasing
process. A definition of e-procurement is offered and its role
in the purchasing process explained. Several approaches to
e-procurement are included and the benefits of an e-pro-
curement strategy identified. The discussion then turns to
how e-procurement can have a positive effect on EVA. The
article ends with a discussion of the implications for
industrial marketers.
As traditional purchasing evolves to the more compre-
hensive supply management, it is important that the industrial
marketer—suppliers and potential suppliers of industrial
buyers—understand the new demands on supply manage-
ment. Those suppliers who can help the supply manager
make a business case for e-procurement, one of the new
basics of supply management, will be those who solidify their
positions as part of a firm’s valued supplier base.
2. The purchasing process
Fig. 1 provides an overview of a typical purchasing
process. It begins with the need to define buying require-
ments based on the demands of the firm’s final customer. At
this stage, specifications are developed. Early involvement
by supply professionals (EPI) and suppliers (ESI) is present,
as well as inputs of a cross-functional buying team that may
include, in addition to supply and engineering, representa-
tives from operations and marketing.
Once the specifications have been developed, a buying
team led by the supply manager will prequalify suppliers,
generate requests for proposals, evaluate the proposals, and
select a supplier based on established selection criteria.
 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
Contract negotiations result in the terms and conditions of a
formal contract. Ordering routines and transaction-process-
ing guidelines are established for all purchases that take
place under the umbrella of the negotiated contract.
Closing the loop is a supplier evaluation system that
assesses supplier performance that provides information to
be used as the basis for rating the supplier (e.g., excellent,
good, fair, unacceptable). This step in the process is critical
for assuring that an effective supplier base is in place, a key
contributor to the firm’s competitive position.
Much is involved in each step of the purchasing process
to assure that effective supply management applies such
important concepts as value engineering at the specification
development stage, formal supplier selection approaches,
effective negotiation strategies, or specific programs that
exist for evaluating supplier performance. Those subjects
are well covered in the purchasing and supply management
literature and are beyond the scope of this article. The focus
here is on the role of e-procurement in the purchasing
process and its contribution to value creation.
2.1. E-procurement
Simply stated, e-procurement is a technology solution that
facilitates corporate buying using the Internet. It has the
power to transform the purchasing process because it per-
vades all of the steps identified. Here e-procurement is
broadly defined to include e-design at the specification
development stage of the purchasing process, ending with
the supply manager’s efforts to evaluate and rate supplier
performance.
The clearest indication that businesses grasp, at least
intuitively, the benefits of e-procurement is found in projec-
tions for the growth of corporate buying expected to be done
on the Internet. For example, the Boston Consulting Group
estimates that business-to-business Internet purchases will
reach $2 trillion by 2003, up from $92 billion in 1998 [4].
Although projections vary, they are generally in this range,
demonstrating the inexorable move toward technology-facili-
tated purchasing as we move deeper into the new millennium.
An argument may be made that e-procurement is not new
because many large firms have been applying technology to
the purchasing process for several decades through elec-
tronic data interchange (EDI). EDI facilitates the transfer of
transactions between two business partners by integrating
databases using a standardized format for purchase orders
and other elements in the purchasing transaction. It uses
proprietary technology called a value-added network (VAN)
to tie the buyer and seller together.
Whereas EDI was an improvement over the traditional
paper-based exchange of information by allowing the buyer
to forward important purchase-related information directly
to the supplier’s system, it is very expensive to implement,
often running into millions of dollars. Therefore, imple-
mentation cost was a significant barrier to the widespread
use of EDI as a large-scale facilitator of e-procurement. Its
221
use was limited to only the largest and most powerful firms
in the business-to-business arena. Recent developments in
Internet-based EDI that obviate the need for expensive
value-added network technology will open this oldest form
of e-procurement to more businesses [5].
3. The role of E-procurement in the purchasing process
As already noted, E-procurement, the application of
Internet technology, pervades each major component of
the purchasing process. In establishing buying requirements
through the specification development process, the concept
of e-design has emerged to help facilitate early supplier
involvement. Buyer and seller share information in real time
to build specifications that add value to the resulting
product. That communication helps to minimize design
complexities and avoids building in unnecessary costs into
the specification.
This real-time exchange of information is also crucial
because of shrinking product life cycles and the competitive
advantage that comes from reduced time-to-market. In addi-
tion, the e-design component of a comprehensive e-procure-
ment strategy helps to overcome the silo effect that comes
with design activity that is sequential. E-design facilitates
real-time collaboration among all internal members of the
firm’s cross-functional buying team, as well as with suppli-
ers, preventing the after-the-fact issues in production and
purchasing that create the inefficiencies and competitive
challenges that arise in the traditional sequential process
(for example, a product design that does not facilitate the
ease of manufacture or a design that limits the choice of
possible suppliers). A good example is Adaptec, a provider
of data transfer and communications hardware, which has
‘‘substantially reduced design-to-delivery cycle times and
saved $10 million in inventory reductions by using Web-
based collaborative design processes with key suppliers in
Hong Kong, Japan, and Taiwan’’ [6].
The use of the Internet also helps the buying firm in all
stages of the supplier selection process, from prequalifica-
tion of suppliers through the construction of a comprehens-
ive request for proposal to the selection of the final supplier.
The application of Internet technology to this step in the
purchasing process is known as e-sourcing. For example,
FreeMarkets, a pioneer in on-line sourcing through the
reverse auction process, is emerging as a leader in this area
of e-procurement.
FreeMarkets possesses expertise in many industrial sec-
tors that allows them to identify and qualify suppliers that
meet the requirements of the buying firm (FreeMarkets’
customers). In addition, FreeMarkets helps the buying
organization develop multiparameter requests for proposal
to assure that the buying company gets the lowest cost buy.
The final selection of a source of supply is the prerogative of
the buying company. That decision becomes more comfort-
able given the extensive work that had been done in the
222 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
prequalification and request for proposal development pro-
cess mediated by e-sourcing technology.
The attractiveness of this solution for the buying firm is
the enormous potential dividend that emerges when one
considers risk versus reward. An e-sourcing solution such as
the one provided by FreeMarkets costs the buying firm little.
The potential rewards that come from identifying the best
and lowest-cost supplier are significant [7].
Another, more proprietary, approach to e-sourcing is
General Electric’s (GE’s) Trading Process Network (TPN).
Here the buyer posts a request for proposal on the Internet
for access by prequalified suppliers. The suppliers download
the request and submit bids electronically. The buyer
evaluates the bids, negotiates on line, and places the order
with the lowest responsible bidder. The system also facili-
tates transaction processing by, for example, automatically
reconciling purchase orders with invoices as part of the
payment process. A solution like the TPN impacts both the
supplier selection and contract agreement components of the
purchasing process (see Ref. [5], p. 198).
Indeed, some of the earliest e-procurement solutions that
emerged about 4 years ago focused on establishing ordering
routines that reduced transaction costs associated with oper-
ating resource purchasing (typically maintenance, repair, and
operating supplies [MRO]). One of the leaders in this
component of the purchasing process was Ariba Corpora-
tion. Through its technology, the processing of MRO trans-
actions from a contract established by the buyer with selected
suppliers is completely automated from requisitioning to
payment. Authorized users are provided access to the system
from their desktop computers. Requisitions are generated
through the system, approvals are made electronically, an
electronic purchase order is created, and the order is sent
directly to the supplier. It is a ‘‘no touch’’ solution for the
supply manager.
The only purchasing department involvement is the
upfront value-added step of negotiating the master contract
with the supplier. System suppliers like Ariba are expanding
the application of their Internet solutions to include direct
material purchases, as well as indirect operating resources
purchases.
The final step in the purchasing process is supplier
evaluation and rating. This process requires extensive and
accurate performance data. In the traditional paper-based
system, it is difficult to capture and retrieve that data to
conduct an effective and efficient supplier assessment. E-
procurement solutions provide the firm with data ware-
housing capabilities on which the supply manager can
draw. Not only does an e-procurement solution help to
capture aggregate purchases by purchased product code, it
also helps to chronicle the salient details in a supplier’s
performance record including delivery and quality-level
performance.
The tremendous potential of e-procurement has stimu-
lated major enterprise resource planning (ERP) software
providers to add e-procurement capabilities to their systems.
For example, Oracle Corporation has developed its ‘‘pro-
cure-to-pay’’ solution that automates the complete procure-
ment cycle. Its features include spend analysis, strategic
sourcing, supplier collaboration, desktop requisitioning, and
electronic invoicing and payment. Oracle estimates that its
end-to-end procurement solution can save firms 10– 20% of
total purchasing costs.
Similarly, ERP provider SAP offers its mySAP E-pro-
curement solution in a partnership with Commerce One
Corporation. Through its integrated analytics feature, my
SAP E-procurement provides the buying company with
tools to identify sources of supply, compare sources, mon-
itor existing contracts, and evaluate supplier performance. It
also includes an automated requisitioning process for MRO
buying that is typical of most other e-procurement solutions
on the market. Reverse auction capabilities are included
among other features. Independent consulting estimates of
mySAP E-procurement suggest returns on investment ran-
ging from 240% to 400% [8].
4. E-procurement: a caveat
Although e-procurement technology holds significant
potential for improving the effectiveness and efficiency of
the purchasing process, a caveat is in order. For a firm to
realize the maximum value-creating benefits from an e-
procurement strategy, the purchasing process must be eval-
uated to determine if it needs to be reengineered. For
example, at the specification development stage, if a firm
has little history of cross-functional collaboration and early
supplier involvement, the collaborative potential of the e-
design component of an e-procurement strategy has little
chance to succeed. Here, there needs to be a transformation
in the corporate culture as well as a reengineering of the
specification development process.
Or, if there are redundancies in the requisition approval
process, those redundancies need to be eliminated before
applying an e-procurement solution. As some have
argued, a successful e-procurement initiative ‘‘is often
more attributable to the procurement aspects than it is
to the electronic aspects’’ [9]. The technology is an
enabler. It cannot fix a flawed process. However, it is a
powerful enabler that can generate tremendous value for
the firm in terms of higher revenue, reduced costs, and
better utilization of assets.
5. The benefits of e-procurement
The supply management and e-procurement literature is
rich with estimates of the benefits of e-procurement. The
potential is so great that e-procurement has turned the
formerly looked-down-upon traditional purchasing function
into a competitive weapon. The benefits that GE has
realized from its TPN are illustrative.
 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
Reductions in labor costs in the purchasing process are
one of the reasons that transaction costs fall so precipitously
with e-procurement. In a labor-intensive, paper-based pur-
chasing process, transaction costs can range from $70 to
$300 per purchase order. GE saw those costs drop 30%.
Other firms have experienced even greater reductions,
reaching nearly 65% (see Ref. [4], p. 26).
Material cost reductions in the range of 5% to 20% were
realized because GE’s e-procurement solution helped the
firm reach a wider supplier base and identify heretofore
unidentified and qualified sources of supply. The system
also allows the Company’s purchasing departments around
the world to share information about their best suppliers.
Other, less quantifiable, but no less important, benefits were
realized. For example, relieved from the non value-creating
effort required for transaction processing, GE’s purchasing
departments gained 6 to 8 days per month to work on more
strategic initiatives [5].
Generally, e-procurement systems enable firms to more
efficiently and accurately capture and aggregate how
much they are spending corporate-wide in various pur-
chased product areas, allowing the firm to bring what
may be significant buying power leverage to market. This
benefit contributes to the 5% to 20% material cost
reductions that GE has experienced. This same range of
cost reduction is also indicative of what other e-procure-
ment adopters are experiencing.
Perhaps most impactful is the recent research by the
Aberdeen Group that identifies the benefits that accrue to
a firm from an e-sourcing strategy. In addition to the 5 –
20% reductions in material costs, benefits include redu-
cing sourcing cycle times by 25 – 30% and time-to-market
by 10 – 15%. Cutting those cycle times has a significant
impact on the revenue generation potential for the firm
because products get to market faster, allowing the firm to
position itself to capture market share from a first-to-
market position. Overall, the Aberdeen Group estimates
that costs savings from e-sourcing could save U.S. firms
approximately $690 billion [7].
There is also an impact on a firm’s asset base.
Inventory levels can be significantly reduced. An effective
e-procurement strategy where, for example, extranets link
the systems of buyers and suppliers over the Internet,
facilitates real-time exchange of information in the buy-
er’s production schedule. The supplier can then adjust its
output to meet the changes in the buyer’s demand. Of
course, this implies that the supplier has developed
capabilities allowing that degree of flexibility. Effective
supply managers are aware that supplier development is
one of the new basics of supply management. So, the
issue of a supplier’s flexibility is generally dealt with and
resolved before the e-procurement strategy is put in place.
By some estimates, average inventory in the S&P indus-
trial companies is $500 million or about 60 days of supply
[10]. Although different from company to company, the
costs of carrying that inventory is in the 20– 40% range (see
223
Ref. [2], p. 524). Those carrying costs include the oppor-
tunity cost of capital, tax on assets, obsolescence and loss,
storage costs, and insurance costs. The effects on a firm’s
costs from reducing the inventory component of the firm’s
asset base are obvious.
Perhaps the best example is Dell Computer Corporation
where ‘‘disdaining inventory’’ and ‘‘trading inventory for
information’’ are among the firm’s fundamental operating
principles. The result has been inventory levels that have
been slashed to less than 8 days, or about 87% less than the
average S&P industrial company. As Michael Dell notes:
The link between day-to-day demand trend and the
incoming material from your suppliers is absolutely
critical to your success—so that the shorter you can
make the link the better off you are. Today, we have
access to technology that greatly facilitates that
information. . . We call this process trading inventory
for information. [11]
This linking of buyer and supplier not by inventory but
by information is what Dell calls ‘‘virtual integration.’’ The
information link is essential to any truly comprehensive e-
procurement strategy. The vehicle that facilitates virtual
integration is the Internet.
6. Making a business case for e-procurement
Making a business case for e-procurement requires that
the supply manager demonstrate the link between an e-
procurement strategy and the firm’s financial performance.
The supply chain management literature indicates that many
corporate-level executives ‘‘hold a traditional view of sup-
ply chain management and do not fully recognize its impact
on all areas of financial performance’’ and that ‘‘many
supply chain professionals do not speak the language of
finance, [thus] failing to articulate the real value of their
solutions at the corporate level (see Ref. [10], p. 33). Those
observations are even more relevant if one focuses on
supply management on the input end of the supply chain
because it is there that the bulk of the firm’s spending on
supply-chain-related activities occurs.
‘‘Learning the language of finance’’ requires the supply
manager to use and understand the concept of EVA. We
now turn to a discussion of EVA and suggest how supply
managers can use it to make a business case for e-
procurement.
7. Economic value added (EVA)
EVA, recognized as a comprehensive measure of value
creation, was developed by the New York consulting firm of
Stern Stewart and Company. It ‘‘provides a more compre-
hensive measure of profitability than traditional measures
224 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
Fig. 2. The impact of supply management on economic value added (EVA). Adapted from Robert M. Monczka, PhD, presentation to the National Association
of Purchasing Management E-Procurement Conference, Scottsdale, AZ, June 2000.
because it indicates how well a firm has performed in
relation to the amount of capital employed’’ [12]. EVA is
expressed as follows:
EVA ¼ operating profit after taxes  cost of capital:
The advantage that EVA has over other measures of
financial performance is that it emphasizes and isolates
activities that help to drive value creation. Those activities
may be generally categorized as revenue, cost, and assets
(see Fig. 2). Awareness of the major EVA drivers increases
management’s appreciation of the impact of innovation, cost
reductions, technology improvements, and efforts to reduce
the capital base on value creation.
The actions that can improve profitability and value
creation are generally under the firm’s control. Better
management of operations should have a major impact on
revenue growth, cost reduction, and asset turnover. How-
ever, the cost of capital element of EVA is different. It is
largely determined by outside forces and is essentially a
given over which management has little control [13].
Therefore, it is important to realize that the key to
boosting EVA is for the firm to increase its return on capital
through increased productivity, generally, the ratio of the
value of outputs produced to the costs of inputs. Productiv-
ity can be increased three ways: (1) by increasing output
while keeping inputs constant; (2) by producing the same
level of output while reducing the costs of inputs; and 3)
ideally, by increasing output while reducing inputs, what has
come to be known as ‘‘doing more with less.’’
Whatever path is taken to increase productivity, there is
no escaping the realization of the linkage between EVA and
productivity because ‘‘the firm will find that value is being
created whenever productivity has pushed the firm’s return
on capital past the cost of capital’’ [13].
8. Enter e-procurement
The reason why supply managers need to understand
EVA as a key financial measure for making a business case
for e-procurement is because of its pervasive impact on the
value creating elements of revenue generation and cost and
asset base reduction. The overall effect of positively affect-
ing revenue while reducing input costs and the asset base is
to drive the firm’s productivity higher.
8.1. Impact on revenue
As we have already seen, one of the benefits of an e-
procurement strategy cited by the Aberdeen Group is a
reduction in time-to-market cycles by 10 –15%. E-design
and the close linkages with suppliers in Dell’s virtual
integration concept are examples of the technology-medi-
ated solutions of an e-procurement strategy that can have an
impact on those cycles and, in turn, positively impact the
revenue component of EVA.
A significant reduction in the time-to-market cycle is
important for a successful revenue-boosting product launch.
However, this advantage is not limited to new products. If a
firm can get its existing products to market faster to an
industrial customer, that ability may contribute to lower
inventory levels for the customer, positively impacting the
customer’s value creation initiatives by allowing the cus-
tomer to operate with a lower asset base. This ability to get
products to market faster may help the supplying firm boost
revenue through more market share born of the competitive
advantage that comes from reducing time-to-market.
Let’s assume that a 15% reduction in time-to-market
increases revenue by 1% for the average S&P industrial
company. One study estimates that for a manufacturer, the
impact on EVA (what the study calls economic profit)
approaches 100% [10].
8.2. Impact on costs
The impact of e-procurement on material and transac-
tions costs is dramatic, as we have seen. Material cost
reductions can range from 5% to 20% whereas transaction
costs can be reduced an even more dramatically 65%. The
effect on EVA is apparent. Those cost reductions drop
directly and totally to the bottom line, giving a significant
boost to the operating profit element of EVA.
In the case of material costs, one may argue that there are
revenue-boosting implications as well, so that material cost
reductions impact not only the cost element of EVA but the
revenue element as well. Assume a firm generates $20
million in sales revenue and spends $10 million through
the supply management function on purchased materials.
The firm’s operating profit margin is 10%. It adopts an e-
procurement strategy that reduces material costs 5%, at the
bottom end of the range that the literature suggests may be
 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
expected. The resulting $500,000 material cost reduction
goes directly to the firm’s bottom line.
Given that scenario, the firm would need to generate an
additional $5 million in sales revenue (a 25% increase) to
realize a $500,000 increase in profit based on a 10% operating
profit margin. This five to one ratio of sales revenue increase
to purchased material cost reduction has real implications for
the revenue component of EVA because the decrease in the
cost component has the same impact as increasing the
revenue component 25%. Although topline revenue growth
is often the major concern of corporate executives, that
growth may not always be possible in a no-growth economic
environment. Therefore, the cost component, substantially
impacted by an e-procurement strategy, may be the key to
continued value creation in that circumstance.
8.3. The impact on assets
The inventory component of a firm’s asset base is
generally significant, frequently accounting for as much as
30% of a firm’s invested capital. As we noted earlier, the
average S&P industrial company holds about $500 million
inventory, or a 60-day supply. That equates to $8 million a
day to support the company’s operations. On the other hand,
a firm like Dell Computer, which trades information for
inventory as part of its e-procurement strategy, holds less
than 8 days of inventory. For the sake of comparison, let’s
assume that Dell holds 8 days of inventory and the value of
the inventory equates to the $8 million a day for the average
S&P industrial company. Dell can support its operations
with $64 million of inventory as part of its asset base.
Not only does this reduce the asset base of EVA
significantly, all other things equal, but the impact on the
cost component of EVA is likewise affected. Given an
assumed 30% carrying cost factor, the average S&P indus-
trial company is incurring $150 million of carrying costs
versus the approximately $19 million that Dell would incur.
As in the case for material cost reductions, the cost reduc-
tions created by a reduction in the inventory component of
the asset base directly boost the firm’s profitability. In
addition, a significant amount of cash is made available
for other, more productive, purposes like investments in
needed capital equipment or to support continuous improve-
ments in the e-procurement system.
Overall, an effective e-procurement strategy impacts all
of the components of EVA. Although one would expect e-
procurement to impact the cost and asset base components,
it is clear that a comprehensive strategy could also have an
impact on EVA’s revenue component.
9. Limitations of EVA
Like any measurement tool, EVA can be manipulated by
managers to make a situation appear more favorable. For
example, the cost component can be manipulated by ter-
225
minating discretionary expenditures during an accounting
period. Employee training programs are an example. The
savings obviously improve the cost component, at least in
the short run. The revenue component may also be manip-
ulated by shipping more profitable orders before the end of
the accounting period and less profitable orders after the
end of the period, provided that customer relations are not
irreparably damaged by doing so. Or managers can manip-
ulate the asset base component by deciding not to replace
completely depreciated assets. Both actions, like the cost
reduction example, may serve to boost EVA.
It has also been observed that aggregated, results-ori-
ented financial measures such as EVA accumulated at the
end of an accounting period do not help to identify the root
causes of operational inefficiencies. Therefore, these meas-
ures offer limited useful information to people charged with
the responsibility of managing business processes [14].
A different view is taken here. The earlier discussion
indicated that a missing ingredient in supply chain manage-
ment was a method to measure total economic value across
the supply chain. EVA not only provides a comprehensive
financial measure for so doing but, given its components of
revenue generation, costs, and assets, also provides a
convenient framework in which firms may identify those
activities in each of the component areas that may be
addressed to help improve the firm’s ability to create value.
It does, in fact, provide the foundation on which business
process improvement may be justified.
10. Implications for industrial marketing
The value-creating potential of e-procurement has sig-
nificant implications for the industrial marketer. It is at the
supply or input end of the buying company’s supply chain
that the industrial marketer comes face to face with the
changing demands on the buying company’s supplier base.
Industrial marketers need to understand the value-creating
benefits that are driving their customer or potential customer
to aggressively exploit the advantages of the Internet in
adopting e-procurement strategies. The move away from
the transaction focus of more traditional ‘‘purchasing’’ has
profound implications for the industrial marketer.
Since more top executives are looking at supply man-
agement as a key contributor to competitive strategy, those
industrial marketers who succeed in helping the supply
manager deliver on the buying firm’s competitive strategy
through its e-procurement initiatives will become coveted
members of the buying firm’s supplier base. E-procurement
is making even more important what Theodore Leavitt
identifies as ‘‘interdependence,’’ the highest form of
buyer –supplier relationship where the supplier is not a mere
order taker but a true business partner who helps the buying
company buy [15].
There are those who believe that e-procurement strategies
will reverse the trend toward buyer –supplier relationship
226 W.D. Presutti Jr. / Industrial Marketing Management 32 (2003) 219–226
building. They point to the corrosive effect that reverse
auctions are playing, where buying firms are awarding
business on the basis of the prices received in the downward
bidding that the reverse auction precipitates. However, indus-
trial marketers need to understand that the reverse auction
approach to e-procurement has been evolving to the point
where the objective is to award business on a low-cost, not
low-price, basis.
This requires that the buying firm prepare detailed
requests for proposals covering all of the important compo-
nents of the purchase, an important early step in building
good buyer –supplier relations because it requires that the
buyer do a substantial amount of advanced planning.
Increasingly, sophisticated supply managers will be looking
at the outcome of the reverse auction as the initial step at
building a long-term relationship with a supplier [16].
Whether it is the reverse auction, buying MRO items
under a negotiated contract through an on-line catalogue,
establishing extranets with suppliers to trade inventory for
information, or the time-to-market and silo-destroying ben-
efits of e-design to facilitate early supplier involvement and
cross-functional teaming in the specification development
process, the industrial marketer will need to become com-
fortable operating in an e-procurement environment. The
momentum to adopt the Internet as an important component
of the buying firm’s supply management strategy is clearly
building. Although we may be only in the early stages of the
adoption process, the fact that nearly 82% of the world’s top
200 global corporations are expecting what they consider
full implementation of e-procurement solutions by 2003
suggests how quickly e-procurement will become a fun-
damental key to how buying companies are trying to
generate competitive leverage and value creation through
supply management [4].
11. Summary
Forward-looking top executives are anxious to leverage
the power of technology to improve the competitive position
of their firms. At the same time, they are becoming
increasingly aware of the power of effective supply man-
agement because it is at the input end of the supply chain
that 50% or more of the firm’s sales revenue is spent to help
support company operations.
It is the coming together of those two forces that has
brought e-procurement center stage as the most significant
development in supply management in recent years. The
impact of Internet technology on what has been traditionally
called the purchasing process has been pervasive, starting
with how suppliers and the internal members of the firm’s
buying team get involved with the specification devel-
opment process to the systematic collection of data to
completely and objectively evaluate supplier performance.
Given the potential that e-procurement holds for making a
significant contribution to overall corporate strategy, it is
incumbent on the supply manager to be able to make a
business case for its adoption. Supply managers need to be
comfortable speaking the language of top management by
using financial measures to make their case. Perhaps the most
comprehensive measure they can use is EVA. The EVA
components of revenue, costs, and assets may all be affected
by an e-procurement strategy. Applying EVA will also allow
the supply manager to contribute to a missing ingredient in
the overall move to more effective supply chain manage-
ment—a method to measure the value creation across the
supply chain.
Since industrial marketers interact with the buying firm’s
supply chain on the input end of the chain, the implications of
the emergence of e-procurement are clear. Increasingly, sup-
ply managers will be looking for suppliers who can help them
create value for their firms through effective e-procurement.
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William D. Presutti Jr. is Associate Professor and Associate Dean, John
F. Donahue Graduate School of Business, Duquesne University, Pittsburgh,
Pennsylvania. His research interests include logistics, supply chain man-
agement, and e-procurement.