Accountancy Age: Small suppliers are ignoring the web at their peril

Last month British Airways said it hoped to cut hundreds of millions of pounds from its annual procurement costs following the announcement an aviation industry electronic trading exchange.

Along with five of the world’s leading airlines, BA plans to migrate a combined £32bn industry procurement budget onto a business-to-business internet site.The US big three – American Airlines, Delta Air Lines and United Airlines – along with Continental Airlines and Air France are all set to benefit from streamlining transaction costs and inventories as well as procurement budget. E-commerce experts at BA estimate that the web-based exchange will within two years slash £180m from the company’s annual £3.9bn purchasing costs.

But the move could have damaging consequences for thousands of smaller suppliers to the aviation industry. They could now face difficulty or closure as BA said it hoped to use the move to whittle down its supply chain from 14,000 to 2,000 suppliers by March 2002.

However, a BA spokesman said the shake-up would hit one off suppliers littered through the supply chain rather than established arrangements.She said: ‘We have 24 florists supplying flowers to our Heathrow office alone, and massive savings can be made if we are more systematic on-line.’

Other benefits to the partners include bringing transaction costs from £70 per transaction to £10, and bringing savings to major expense items such as fuel. The e-venture is set to go live by the end of the year, and comes within a month of rival Star Alliance, which includes Lufthansa and Singapore Airlines, announcing its own web-based exchange.

Sources close to the industry said that BA studies have shown that the Star Alliance portal will carry only a third of the goods destined for its rival site. ‘There is probably only room for one industry wide portal’, said one industry insider.’

BA procurement director Silla Maizey said the site would be open to all airlines and had the ‘critical mass’ to attract carriers and suppliers across the industry. She said: ‘The significant point is that the members of the target group provide a robust geographic spread and run across alliance groupings.’

The rush on-line by the aviation industry follows the announcement last month of a cross-gas and oil industry procurement portal that could save £37.5bn for the hard-pressed sector.Fourteen of the world’s leading petrochemical and energy companies have lent their support to a radical shake-up of traditional trading methods with the set-up of an industry specific e-procurement exchange.

BP Amoco said it believed the global project would slash as much as $37.5bn from an estimated $125bn channelled into purchasing costs by the founding partners.”We can look at making savings from 5% to 30% on our transaction costs on anything from purchasing paper clips to oil rigs in the North Sea’, said a BP Amoco spokesman.

Prime movers BP and Royal Dutch/Shell only began this January to peddle the e-commerce idea among industry colleagues. The motor industry remains the e-procurement leader with with 200,000 catalog items currently available through five participating companies on the GM TradeXchange. “The GM TradeXchange initiative demonstrates what is possible with e-business – the transformation of a company, and a complete industry convergence,” said Chris Everett, global e-business leader of PricewaterhouseCoopers.

But it’s happening in other indistries too. PwC and Ventro Life Sciences have also formed an alliance to develop and implement e-procurement solutions in the life sciences markets in Europe and the US. The alliance enables industry buyers and suppliers of R&D and laboratory materials to link electronically, irrespective of their existing technology platform.

‘The greatest demand for our services has been in the B2B space and we expect this trend to continue throughout the remainder of fiscal 2000,’ said Fergus Byrne, a global leader in PricewaterhouseCoopers Management Consulting Services practice. ‘The market is moving so quickly and e-procurement is increasingly seen as one of the fastest and easiest ways to see the benefits of e-business in action.’

GM TradeXchange went live with the automotive industry’s first internet-based business-to-business auction in December 1999. It is already the most sophisticated e-procurement market in the world. In addition to online auctions, online catalog orders totaling more than $4m have been transacted through GM TradeXchange, with 200,000 catalog items currently available from five participating companies. GM TradeXchange has also conducted a number of successful auctions totalling over $2m in revenues for General Motors and other auction participants. Most recently, GM TradeXchange completed its first bid/quote process for a large volume of rubber sealing packages resulting in $147m in contracts awarded to four suppliers, each receiving a portion of the order from General Motors and Isuzu.

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