Online Procurement - Mars Incorporated

Online Procurement
Procurement is the act of obtaining goods at the best possible cost, in the correct quantity at the time they are needed. Traditionally, this is a time consuming process involving much negotiation by several sources. In recent years some companies have opted for a system of online procurement, which reduces the level of labour intensity required. One company which has followed suit is Mars Incorporated through their online purchasing auctions. Mars Incorporated was founded in Washington in 1911 when Frank and Ethel Mars began producing and selling candy. The company quickly gained popularity and developed several well known brands. Today, it is one of the largest privately owned businesses in the world. For Mars Incorporated, online purchasing has allowed them to increase supply chain management to a level which could not previously have been obtained.


Advantages and Disadvantages
Online procurement does have its advantages and disadvantages. One of its main benefits is that the use of the auction system ensures that market value is always paid for items and often one of the main reasons that a company may opt for a system of online procurement is the desire to reduce production costs. In the case of Mars, by buying things through auction this ensured that they were never likely to be overcharged for the items they were buying. For companies entering into online procurement for the first time, it can be difficult to judge the value of materials and therefore the expected value of the winning bid. Generally, the auction system should drive the cost down as it forces bidders to compete to provide materials but finding the market value can be tricky. For Mars, the difficulty in this situation was slightly lessened as they had a subsidiary already using an online system. Therefore the principal adopted by the subsidiary was simply extended throughout the whole of the group.

Unfortunately, this can also generate problems of it’s own. As the bidders are required to win orders to support their own businesses they are inclined to reduce their prices in order to beat the competition and be selected as supplier. A reduction in price can, at times, result in a reduction of quality. Mars may have experienced the effects of this - mainly due to the strategy they chose when selecting suppliers. The Mars auction process began with a Request For Quote (RFQ), which specified exactly what was required of the winning bidder. For large RFQ’s, Mars always selected the bidder guaranteeing the cheapest price. Even although large RFQ’s only contained standard materials such as sugar and cocoa, the quality of these could still be compromised if they were purchased at too low a price as the supplier would only be able to produce low quality goods. As Mars Incorporated is a company which holds its five core principals with such high regard, this could have a negative effect on its credibility. To combat this problem, Mars restricted entry to their auction process to a limited number of suppliers. The materials provided by these suppliers were known by Mars Incorporated to be of the high standard required.

Even using a system such as this, problems in the process could still occur. As Mars had deliberately limited the bidders they would accept tenders from, they were effectively cutting off a huge number of potential suppliers. In doing this they left the company more susceptible to material shortages from these preferred suppliers. To tackle this, Mars imposed a maximum number of auctions that each supplier was entitled to bid for. In doing this, Mars Incorporated effectively ensured that they would receive the high standard of product that they expected, while managing to cut material costs. Through continually using different suppliers Mars also avoided the issue of price fixing.

In terms of the man hours required to arrange the purchase and delivery of any one order, online auction systems are hugely advantageous. Traditional methods of procurement require a lot of negotiation to arrange factors such as quantity, quality and delivery date and costs. Online procurement completely removes these features from the purchasing process. Through the issue of a RFQ, Mars Incorporated specified their requirements clearly. It was then the responsibility of the bidder to meet them as necessary. This reduced the time required for the entire process considerably which in turn made the delivery time shorter. Overall, the process became far more efficient.

Although the long term benefits of online procurement are clear, it is also important to consider the time and cost involved in the initial application of such a system. Like any new software implemented into a business, costs are generated not only through integration into the existing system but also through training of staff in its use. It should also be remembered that the potential financial benefits of the online auction system will only be gained by companies which are fully competent in their system’s use. Therefore, a large set up cost must be incurred before any profit can be made.

Conclusion
Companies such as Mars Incorporated which choose to use a system of online procurement, experience both benefits and problems in relation to their decision. For many companies the most enticing factors of online procurement are the ability to gain greater control over the supply chain and to reduce the cost of materials. Nonetheless, it is important to consider the effect that this may have on the integrity of the company from the perspective of both suppliers and customers, not to mention the installation costs. These problems may in turn trigger a downturn in profit. Therefore, it can be said that for some countries online procurement certainly brings about an increased turnover, however, for many the increased risk in loss of profits is too high.

References
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1075387398

http://en.wikipedia.org/wiki/Mars,_Incorporated

http://en.wikipedia.org/wiki/E-procurement