IT & E-Commerce
| | E-Procurement: Faster, Cheaper, Slow To Take Root | By : Dan Bernard
Special Consultant
| Finding a low price for bulk materials takes some time when a company uses the usual bid-by-mail process. The prospective buyer issues a tender on paper and waits to receive response envelopes in the mail from potential suppliers. After determining which bidders meet the technical qualifications, the buyer reviews the price offers and identifies the low bidder. | A group of
petroleum
professionals
in Egypt are trying
to persuade
their country''s
government to
make new
regulations
to allow online
bidding.
| | You may be
able to auction
off mops
and brooms
on-line, but
no one should
auction off
a company’s
relationships
with its suppliers.”
| |
|
By this time, several weeks have passed since the company first decided to buy the materials, not to mention the time it took for the company''s field operation to identify the need for materials and send the request to headquarters for approval.But the Internet has allowed a real time version. With ‘online bidding,’ qualified suppliers submit their bids in real time. The buyer can identify the low bidder in a matter of minutes instead of weeks. And while the mail process allows bidders just one shot at offering a price, in online bidding the suppliers can go head-to-head.
That means the final price may be much lower than it would have been with the bid-by-mail process. Online bidding and other forms of ‘e-procurement’ have caught on in the oil and gas industry in the West. But few countries have officially sanctioned it in North Africa and the Middle East. Among the exceptions are Oman, where online bidding is used frequently, and Syria, which has approved the practice in principle after long deliberations, but has not yet staged an online auction. Now a group of petroleum professionals in Egypt are trying to persuade their country''s government to make new regulations to allow online bidding. But the switch from trusty paper documents to a seemingly abstract transaction in the electronic ether will apparently take some getting used to. A year after e-procurement advocates began lobbying, the Egyptian government is still mulling the proposal. “There are no clear laws applicable to e-business and online procurements at this time, which probably creates the problem as nobody''s really sure which way to go,” said Diedrick Bax, a Shell executive in Egypt and a leading advocate for Internet procurement. “I''m personally of the opinion that you go out and see where you find the barrier. The Egyptian environment is one where people are very much used to working within the rules.”
Faster, Cheaper
Among those leading the drive for this new method of material procurement are officials at Badr El Din Petroleum Co. (BAPETCO), a joint venture between Shell and state-owned Egyptian General Petroleum Corporation (EGPC). In fact, BAPETCO has undertaken what it believes is Egypt’s first online bid. In November 2000, the company set up an online bid demonstration for officials from state-owned EGPC. BAPETCO was seeking the best offer for triethylene glycol, a chemical used in pre-pumping treatment. First, suppliers were notified via the old-fashioned way of BAPETCO’s procurement requirement. But this time, the RFQ asked suppliers to submit their bids by logging onto the Internet, rather than by mail. BAPETCO offered technical assistance as well. “All you really need is a computer. You could even do it at an Internet café,” Bax said. Supplier representatives around the world logged on to participate. BAPETCO used a “reverse auction” process, where bidders can see other bids and then opt to go lower. Bidders can see price offers by their competitors, but not their identities. The results were impressive “The online bidding gave us almost a 17% reduction in prices,” said Hafez Khalaf, BAPETCO''s Materials General Manager. Meeting on the Internet makes it possible for suppliers in far-off locations to go head-to-head. It also allows decision makers in the buyer company to view the process simultaneously, even if located in remote offices. “It achieves cost savings and the ease of the tender evaluation time – you are doing it right on the spot for the winner,” Khalaf said. “In a normal tendering process, you have to distribute quotes among the evaluation team which evaluates them and gets back to you. With e-procurement, once you finish the tender session on-screen, you decide who the winner is, and you can place your order.”
Egyptian officials reacted with caution. EGPC asked the Shell affiliate not to hold further online auctions until government regulators and auditors had issued rules stating that the new technique should be legal. To the government, the super-fast and anonymous bidding via the Internet was reminiscent of a now-banned process, in which a prospective buyer would gather bidder representatives in a room or rooms and play them against each other, sometimes sharing information with some bidders and not others. Bax of Shell/BAPETCO said the comparison is not applicable. “With online bidding you cannot fool people. Everybody gets the same information,” Bax said. BAPETCO has asked permission to hold another online auction for materials. Advocates even organized a mock online auction for EGPC and joint venture officials in July to make them more familiar and comfortable with the technology. But a year later, it''s not clear when leading officials at the Egyptian Ministry of Petroleum and EGPC will decide on whether to allow it and under what guidelines.
At EGPC, General Manager for Procurement Mohamed Abd El Rahiem expressed confidence that top government officials would give due consideration to any innovation that could bring efficiency to the oil industry which is striving to maintain a net export and identify new reserves. “This matter is under study,” El Rahiem said. “We are willing to hear about this new method of procurement. We are looking at it, between the joint ventures, to discuss this. Then we need to set bylaws or the methods of how to put it in the latest shape to finalize this matter. And once we have legal approvals from the legal department that this electronic media will work in Egypt, we are going to finalize this matter. EGPC is interested in any step to save cost and improve our performance,” El Rahiem added. “It just takes time to discuss within EGPC and between joint venture companies. If you are going to practice any new method, how are you going to account for it and how to deal with it.” Official reluctance could stem from the fact that traditional mail bidding produces a paper trail that satisfies the necessity of this regulated industry to maintain clear accounting records. Other companies have given their support to the lobbying effort, including BG Egypt (British Gas). So have BP’s joint venture with EGPC, Gulf of Suez Petroleum Company (GUPCO), as well as the EGPC joint venture with GEOGE/formerly Deminex, Suez Oil Company (SUCO). In fact, the interest in e-procurement has seen joint venture executives forge new cooperation. The online bid that BAPETCO proposed to the Egyptian government would see bidding for supplies on behalf of both BAPETCO and SUCO. “We think there is enormous untapped buying power,” Bax said. “By combining your order you achieve much more leverage.” Pending government approval, BAPETCO hopes to use e-procurement for more than just chemicals, using the Internet to land lower prices for steel pipes, pumps or any commodity, even for services.
Not A Magic Solution
Online bidding for industrial supplies has its skeptics. Management consultants Richard Wise and David Morrison wrote in the November 2000 Harvard Business Review that this sort of e-commerce puts undue pricing pressure on suppliers. They add that companies generally should not choose suppliers with price-driven competition, but should assess suppliers as whole entities with an eye toward anticipating future business needs and building a long-term relationship. Supply Chain Management Digest in July 2000 cited Thomas Stallkamp, CEO of MSC International Inc., for his view that “the Web can alleviate clerical functions (but) it is not going to replace human intelligence for strategic sourcing and supplier relations … You may be able to auction off mops and brooms on-line, but no one should auction off a company’s relationships with its suppliers.”
BAPETCO''s Bax conceded that the technology has its limits. “It is not a blanket panacea for all your procurement problems,” Bax said. “If you have a market with three suppliers, of which one has been the best, switching to another (based only on price) may actually cost you more money” in the long run. On the other hand, the technology benefits vendors by letting them access new markets. “They can actually compete in markets that are totally nontraditional,” Bax said. “When you start talking online bidding, you find that there are no barriers. If desired, you can participate in a bid in China. Now, you might not win on the first try, but you can gather information about that market for future tries.”
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