Online sourcing

As we reach the end of the decade to what extent has online sourcing become a reality?

The Internet has become a daily commonplace or even inevitability for businesses as well as it is for our individual needs. It enables us with numbers of possibilities and the new opportunities of its use are still coming up. This essay examines the role of the Internet in international and global sourcing and gives brief description of how the role is being changed or developed over the last decade. It also describes the benefits which come from using the Internet in sourcing activities.

Yip and Dempster (2004) call the Internet as a driver of globalization. Its technological characteristics accelerate the globalization process. The Internet is decentralized network without any control so companies can use it to suit their own needs. It enables worldwide communication with no limitation by geographical distance. It is easy and low cost way to send and get information in real time from all over the world. Same authors summarise: “The Internet is highly complementary to the already trends that are forcing companies to become global, and at most a key driving force of the continued globalization of existing companies.”

While international purchasing is simple buying process between buyer and seller from different countries, global sourcing has a wider meaning which includes worldwide integration and coordination of material, processes, technologies and suppliers. (Monczka, Trent, Handfield 2005). The majority of the companies, which decided to source globally, did it because of the motivation of getting the goods and materials as cheap as possible. However, Monczka, Trent, Handfield (2005) give us several other reasons for worldwide sourcing. Companies can get access to the latest product and process technology or they can obtain goods of higher quality. Some companies just follow the practices of competitor in order to remain cost competitive.

The aims of global sourcing could be achieved easier with integration of right technology and one of it is the Internet. Lysons, Farrington (2006) use the word e-sourcing which refers to the use of the Internet in decision making process about the ways and locations from where products and services are obtained. Rapid development of information technology affects the all business activities and also in supply chain management the Internet has started to play significant role. Lancioni, Smith, Oliva (2000) argue that the Internet enables businesses to achieve the objectives of supply chain as decreasing the cost or improving communication, more quickly and effectively. According their research about the role of the Internet in supply chain management, companies use the Internet mostly for order processing, purchasing and communication with vendors. Next we closer explain the role of the Internet in sourcing activities.

Lancioni (2003) says that the usage of the Internet in business could be multidimensional. He compares years 1999 and 2001 in his research and there is an overall increase of using the Internet in various business activities. According his research the biggest increase is in purchasing nearly by 50%. Firms realised benefits as lower labour expenses as purchasing department staff is reduced, due to computerising of purchasing process. Next area of growth is transportation from 56.2% to 84.3% of asked firms in 2001. Implementing technologies for tracking shipment, placing claims or fleet management improved productivity and lowered level of stock. The usage of the Internet for customer service rose by 15%. Firms improved respond time what accelerates problem solution. There is 12% increase in the use of the Internet for maintaining relationships with suppliers. Firms use application as online catalogues, e-mails, Internet exchanges. Both parties can be in closer touch and is easier to develop strategic partnership.

Sourcing as “the process of identifying, selecting and developing supplier” (Lysons, Farrington, 2006) gives numerous opportunities to use the Internet in these activities even more if we consider sourcing in global context. In the term of identifying suppliers, the Internet represents an enormous source of information for buyer. Searching for the right suppliers has become easier and more cost effective. Barua, Ravindran and Whiston (1997) say that before the wide spread of Internet applications, supplier search using business directories, trade journal or yellow pages revealed only few results. Furthermore, much more focused group of suppliers can be made using the network databases as there is more information available on the Internet. Next, authors make statement about previous, present and future importance of the Internet. Electronic brochures of product and services with catalogues and price lists were the first applications of the Internet in business. Later, there are search agents for finding the requested product and for comparison of prices. They predicted online processing of bids for products and services to take place in the future. Now, it is obvious that this became reality in the form of online reverse auction. Van Weele (2005) defines it as an auction where price is set by buyer and suppliers need to meet it.

Roberts and Mackay (1998) mention that E-mails, searching tools and file transfer were the most used internet applications before. As the World Wide Web has started to play role, more and more companies set their own website to become visible in electronic world. These days, it is necessity for company to have its own webpage. It is a marketing tool and communication place. Customers, business partners and the third parities can easily get information about the company, look at lists of products or they can send their requirements via contact links.

Besides going to website of individual supplier, there are numbers of supplier’s portals (e.g. globalsources.com, purchasing.com, powersourcing.com) on the Internet where can buyer search for supplier according to required product, industry or country of supplier. Buyers are provided with product information and contact details of suppliers, some of portals offer a brief description of a company or there is a possibility to order or look to its catalogue as well as to contact supplier. Besides free accessible websites which offer lists of supplier from all over the world, there are also specialized marketplaces. Van Weele (2005) defines electronic marketplace as “a place on the Internet where actual transaction can take place between buyers and sellers”. UK national B2B centre presents on its website (unknown, 2009) various types of such markets and describes the range of services which they provide as lists of suppliers, electronic catalogues, online purchasing or online auction. General benefits of e-marketplaces include forming new trading partnerships or operating on a round-the-clock basis. An international e-market place gives opportunities which otherwise buyer would not be informed of. However, the first beliefs about e-market places and independent business exchanges were not meet as many e-market places failed. Sites were the Internet is used to target customer are the most successful (Tieman 2003, cited by Laseter).

As we talk about the software equipment there are numbers of software programmes design for businesses to manage business activities electronically and over the Internet e.g. SAP, Oracle, Ariba. These programmes have also applications for e-procurement. Nowadays, investments to information technology are inevitable for each company which want to success internationally. Schalibly (2004) says: „Company that does not have electronic data cannot even begin to think about the global sourcing.“ Also some companies refuse to cooperate with firm which do not meet their information technology requirements. Companies have recognised that and the investments to IT became the regular line item in their expenditure. Even more it is increasing every year.

As the Internet provides us with number of supplier after the initial search, they can be both efficient and inefficient suppliers on the list. Therefore it is necessary to implement strategy for selection and evaluation of supplier. One possibility is to reduce selection according buyer requirements as price of product, size of company or number of years a company operates. Once buyer has a shortlist he can starts to evaluate suppliers. Buyer’s transaction cost would increase if he wants to evaluate all suppliers (Barua, Ravindran, Whiston, 1997). Trucker and Jones (2000) emphasize other important issues with selecting a supplier. These are using the right searching engines, intelligent agents and training procurement staff to guide the Internet effectively in order to minimize the irrelevant results.

As far as developing relationships with suppliers is consider, the Internet is an important communication media. It supports these relationships as it is not costly and easy to connect. Even more, buyers have same opportunity if they deal with local or supplier from greater distance. We talk more about benefits of online communication later.

As we mentioned above the Internet is widely used application in online sourcing. The main benefits include improving communication, getting better access to information or possibility to complete the entire purchasing process over the Internet. All these benefits results in cost saving enhance efficiencies and increase profit (Lancioni, Smith, Schau, 2002). Bartezzaghi and Ronchi (2005) give these benefits of applying e-sourcing. Buyer gets product for lower purchasing price and he achieves higher level of efficiency. Number of supplier also decreases by using e-sourcing tools.

Communication over the Internet involves e-mails, website contact links and Internet exchanges. From global point of view, the possibility to communicate across the whole world and in different time zones represents the one of the main advantages which the Internet offers in global sourcing (Walters, 2007). Companies are able to contact supplier via E-mail on 24 hour basis as time zones barriers are removed. That was not possible before with using e.g. telephone lines. Sending documents and other files through the Internet became possible as now we have electronic data and electronic signature. Companies save time as sending takes few minutes while post delivery several days. There has also been improvement in customer service as customers can access company website or send requests any time. Results are in reduction of service costs and respond time (Lancioni, Smith, Oliva, 2000). Besides the advantages, there are issues as security and reliability which eliminates the potential use of the Internet. Walters (2007) conducts that as buyer and seller can contact directly via the Internet in a flexible and convenient way there is no need to us services of intermediaries. Transaction costs are reduced. One of the problems is protection of business emails with sensitive information against hackers (Roberts and Mackay, 1998).

Although tools of online communication give advantages to salespersons they cannot replace their work. Deeter-Schmelz and Norman Kennedy (2004) argue that organization should design their website in the way to support sales representatives not to replace them. In fact, by using the Internet salesperson can get easier access to required information and by using of online sourcing tools they are free of paper work and they can concentrate on developing customer relationships. There is an example of effective communication system launched by Kia Motors (unknown 2002). The company introduced the distributor communication system in 2002 to connect subsidiaries, distributors with head office around the world through the Internet. The system enables to share information, placing orders or export document in real time. Achieved information from distributors helps KIA to establish strategy according the current market situation for the specific place. Distributors reduced their stock as they have better access to production and shipping information. Not least, trust has been built on both sides.

The Internet presents an enormous pool of information and it is simple to create own appearance on this worldwide network. This is important in global sourcing as buyers have access to broader number of suppliers. On the other hand, buyers need to pay more attention to evaluate these suppliers. It is necessary to check their real presence, look for recommendation if they are new on the market or there is not enough information about them.

The Internet allows completing the purchasing transaction online. Companies can use it from initial searching and contacting supplier through placing order to final payment of invoice. By doing so, decline of cost of transaction process can be achieved. Paper work is reduced as well as errors appear less. Notably, the whole process of ordering is done quicker. As a result of online purchasing in General Electric there has been a reduction of purchasing staff by 50%. Time period between sending order to receiving product decreased by 40% in the company (Lancioni, Smith, Oliva, 2000).

The other benefits include informing vendors of changes in orders, checking the status of order or paying invoices electronically. Companies can track and plan shipment, schedule pickups and deliveries (Lancioni, Smith, Oliva 2000). Same authors give various examples of companies about using the Internet in supply chain management. By using the Internet for shipment scheduling, General Electric can more precisely and cost effectively deliver product on time to the customer. The Internet notifies Air Products and Chemicals of most suitable terminal and plant for serving customer as the company uses the Internet in global sourcing process.

Roberts and Mackay (1998) in their article on the role of electronic commerce describe the anticipations coming from the use of the Internet. They talk about the possibilities for buyers as browsing in electronic catalogues, placing order or advancing bids. Suppliers could better organise their production and deliveries as they respond to bids. There are also the third parties which facilitate the marketplace. They offer services as supplier certification, referral, brokering and specialised directories. On the other hand, according to the research made by Deeter-Schmelz and Norman Kennedy (2004) about the usefulness of the Internet in supplier selection and relationship maintenance, statistic shows that buyers consider the Internet to be slightly important as an information source; the more useful sources are sales representatives or users of the product. In the area of selection supplier 42.6% of buyers say that the Internet does not play any important role. As far as communication and relationships with supplier are consider, the Internet is moderately or very important. Additionally, it has been more used in ongoing relationships than in initial stage of contacting supplier.

The Internet has in global sourcing process its irreplaceable role. The main role is simple search and communication between buyer and supplier which lead to cost cutting and effectiveness. The Internet became like a “meeting place” for both supplier and buyer thus their active presence and involvement on this network is inevitable if they want to succeed. However, many expectations have become reality, some still remain in stage for future developing or were simply overrated. There are also activities and situation where human approach or face to face contact can not be replaced with technology. In term of sourcing it is the building trust and long term relationships with trade partners.

Referencies

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15. unknown 2008 E-marketplaces, online auctions and exchanges <http://www.businesslink.gov.uk/bdotg/action/layer?r.s=tl&r.l1=1073861197&r.lc=en&r.l2=1073866263&topicId=1075387398> [Accessed 21.11.2009]

16. unknown, (2002)Kia Motors to launch Kia Distributor Communication System <http://www.kiamotors.com/> [Accessed 21.11.2009]