Procurement Buying on the Internet

Advances in information technology have changed the face of the B-to-B marketing process. Electronic purchasing, often called e-procurement, has grown rapidly in recent years Virtually unknown less than a decade ago, online purchasing is standard procedure for most companies today. E-procurement gives buyers access to new suppliers, lowers purchasing costs, and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services provide customer support services, and maintain ongoing customer relationships.

Companies can do e-procurement in any of several ways. They can conduct reverse auctions, in which they put their purchasing requests online and invite suppliers to bid for the business. Or they can engage in online trading exchanges, through which companies work collectively to facilitate the trading process. For example, Exostar is an onlme trading exchange that connects buyers and sellers in the aerospace and defense industry. Its goal is to improve trading efficiency and reduce costs among industry trading partners. Initially a collaboration between five leading aerospace and defense companies-BAE Systems,

Rolls-Royce, Boeing, Lockheed Martin, and Raytheon— Exostar has now connected more than 300 procurement systems and 40,000 trading partners in 20 countries around the world.

Companies also can conduct e-procurement by setting up their own company buying sites. For example, General Electric operates a company trading site on which it posts its buying needs and invites bids, negotiates terms, and places orders. Or companies can create extranet links with key suppliers. For instance, they can create direct procurement accounts with suppliers such as Worsleys, through which company buyers can purchase equipment, materials, and supplies directly.

B-to-B marketers can help customers who wish to purchase online by creating well-designed, easy-to-use Web sites. AFor example, BtoB magazine rated the site of Sun Microsystems—a market leader in network computing hardware, software, and services—as one of its "10 great B-to-B Web sites":9

A few years ago, Sun Microsystems completely redesigned its Web site. It was most interested in finding a better way to present deep information on its thousands of complex server, storage, and software products and services while also giving the site a more humanistic view. Sun came up with a tab-driven menu design that puts an enormous amount of information within only a few clicks of customers' computers. Action-oriented menu labels—such as Evaluate, Get, Use, and Maintain— leave nothing to the imagination and make navigation a snap. Beyond product pictures and specifications, the site

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Chapter 6 j Business Markets and Business Buyer Behavior 205

provides video walk-throughs of products, along with "success stories" of how other customers have benefited from doing business with Sun.

Customers can even create personalized MySun portals. "We provide you with a customized experience," says Sun's VP-Sun Web Experience. "Maybe you've downloaded software. Based on that download, you'll see a filtered blog, training classes that are available, and a link to unreleased code you can try out. It's integrated support tailored to the type of Sun products you use." Users who still need help can take advantage of the site's interactive features to request an immediate phone call, an e-mail, or a live online chat in French, German, English, or Spanish with a Sun representative.

Business-to-business e-procurement yields many benefits. First, it shaves transaction costs and results in more efficient purchasing for both buyers and suppliers. A Web-powered purchasing program eliminates the paperwork associated with traditional requisition and ordering procedures and helps an organization keep better track of all purchases.

E-procurement reduces the time between order and delivery. Time savings are particularly dramatic for companies with many overseas suppliers. Adaptec, a leading supplier of computer storage, used an extranet to tie all of its Taiwanese chip suppliers together in a kind of virtual family. Now messages from Adaptec flow in seconds from its headquarters to its Asian partners, and Adaptec has reduced the time between the order and delivery of its chips from as long as 16 weeks to just 55 days—the same turnaround time for companies that build their own chips.

Finally, beyond the cost and time savings, e-procurement frees purchasing people to focus on more-strategic issues. For many purchasing professionals, going online means reducing drudgery and paperwork and spending more time managing inventory and working creatively with suppliers. "That is the key," says an HP purchasing executive. "You can now focus people on value-added activities. Procurement professionals can now find different sources and work with suppliers to reduce costs and to develop new products."10

The rapidly expanding use of e-procurement, however, also presents some problems. For example, at the same time that the Web makes it possible for suppliers and customers to share business data and even collaborate on product design, it can also erode decades-old customer-supplier relationships. Many buyers now use the power of the Web to pit suppliers against one another and to search out better deals, products, and turnaround times on a purchase-by-purchase basis.

E-procurement can also create potential security disasters. Although e-mail and home banking transactions can be protected through basic encryption, the secure environment that businesses need to carry out confidential interactions is sometimes still lacking. Companies are spending millions for research on defensive strategies to keep hackers at bay. Cisco Systems, for example, specifies the types of routers, firewalls, and security procedures that its partners must use to safeguard extranet connections. In fact, the company goes even further—it sends its own security engineers to examine a partner's defenses and holds the partner liable for any security breach that originates from its computers.

Author I These two nonbusiness Comment | organizational markets provide attractive opportunities for many companies. Because of their unique nature, we give them special attention here.

Institutional market

Schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care.

Institutional and Government Markets

So far, our discussion of organizational buying has focused largely on the buying behavior of business buyers. Much of this discussion also applies to the buying practices of institutional and government organizations. However, these two nonbusiness markets have additional characteristics and needs. In this final section, we address the special features of institutional and government markets.

Institutional Markets

The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Institutions differ from one another in their sponsors and in their objectives. For example, there are general hospitals that cater to all types of people. By contrast, there are hospitals that provides free specialized healthcare for children, whereas government-run military veterans hospitals located around the world provide special services to veterans.11 Each institution has different buying needs and resources.

Institutional markets can be huge. As an example, consider the massive and expanding number of U.S. prisons:12

The nation's 2 million inmates and their keepers are the ultimate captive market: a $37 billion economy bulging with opportunity. State prison systems spend more than $30 billion annually, and the federal Bureau of Prisons budgets another $5 billion. That translates into plenty of work for companies looking to break into the prison market. "Our core business touches so many things—security, medicine, education, food service, maintenance, technology—that it presents a unique opportunity for any number of vendors to do business with us," says an executive at Corrections Corporation of America, the largest private prison operator in the country.

Many institutional markets are characterized by low budgets and captive patrons. For example, hospital patients have little choice but to eat whatever food the hospital supplies. A hospital purchasing agent has to decide on the quality of food to buy for patients. Because the food is provided as a part of a total service package, the buying objective is not profit. Nor is strict cost minimization the goal—patients receiving poor-quality food will complain to others and damage the hospital's reputation. Thus, the hospital purchasing agent must search for institutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low.

Many marketers set up separate divisions to meet the special characteristics and needs of institutional buyers. For example, Kellogg's Food Away from Home business unit produces, packages, prices, and markets its broad assortment of cereals, cookies, snacks, and other products to better serve the specific food service requirements of hospitals, colleges, the military, and other institutional markets.13

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