Vendors sort out e-sourcing/supplier management issues

Despite seeming widespread agreement about the value of their products, e-sourcing vendors are having trouble staying afloat. The latest sign of this phenomenon was the recent merger of sourcing industry pioneers FreeMarkets and Ariba.

Ariba—the acquiring partner in this deal—started out as an e-procurement vendor, offering systems that automate the purchase of indirect goods such as office supplies. Buying FreeMarkets puts Ariba smack in the business of selling solutions for purchasing direct material, the items used to make other products. This end of the business—sometimes called supplier relationship management, (SRM)—is considered potentially more lucrative, partly because the savings to customers are much more substantial.

But some industry analysts still question whether Ariba—or any vendor—truly understands what it takes to solve the e-sourcing problem, which is this:

A number of e-sourcing vendors were born during the dot-com era, and those roots may have kept them from prospering earlier. Many of them—including FreeMarkets and Ariba—expended many resources building and marketing Internet-based trading exchanges instead of focusing on the nuts and bolts of e-sourcing. The idea behind trading exchanges was to attract buyers looking for the lowest-possible prices, while true e-sourcing is a supply chain management issue.

"Procurement of direct material is more than just transaction processing," says Pierre Mitchell, a VP with Boston-based AMR Research. "Vendors were too slow to realize this."

Mitchell also points out that seeing sourcing vendors go under has made manufacturers reluctant to purchase those solutions. But that may be changing as vendors show a greater understanding of sourcing and SRM.

"Direct material is a supply chain issue as much as a procurement issue," notes Jeff Hermann, CEO of SupplyWorks, which sells an e-sourcing suite for discrete manufacturers. "[It is] much more intricately linked to the flow of the factory. There's no point going around trumpeting that you got a great price on 900 parts if the other 500 parts that you need to make the automobile don't show up on time."

A similar message comes from Verticalnet, which has drastically changed its business model since the dot-com days. That transition continued in February, when Verticalnet acquired Tigris Consulting, a sourcing consultancy specializing in spend analysis. "With direct material, you need to consider the total cost of dealing with a particular supplier," says Brent Habig, former Tigris CEO and now an executive VP with Verticalnet. "It's not just the unit cost that you pay for the parts; it's the cost of any associated downtime, errors, anomalies, and rejects."

This recognition lies behind Ariba's purchase of FreeMarkets, and the recent release of three new products aimed at extending Ariba's functionality in direct material procurement. These moves show Ariba is moving in the right direction, but AMR's Mitchell says there is still plenty of room for competition in the e-sourcing/supplier relationship management space. "Direct material calls for a [vast amount] of category expertise, and there's still an opportunity for niche vendors that possess that expertise," he concludes.