Introduction
Mars Inc is one of the world’s largest privately owned businesses producing confectionary, pet food and state-of-the-art electronic payment systems. [1] In 2006 alone Mars had annual sales of $21 billion dollars. Globally Mars Inc employs 40,000 people and operates in over 100 countries. [2] Mars is still owned by the Mars family and continues to trade using five key family held values (Quality, Responsibility, Mutuality, Efficiency and Freedom). With such a large amount of different products, including the eponymous Mars and Snickers bars, Mars Inc purchases more than $4 billion direct materials annually. This has lead Mars to introduce online procurement of materials in the hope of driving down prices. Other major firms that have switched to online marketplace auctions have recorded savings of around 5%, if Mars Inc developed similar reductions they could save in excess of $200 million per year.
The Internet is now a cost effective and reliable medium for performing business transactions. Consequently companies are starting to use the Internet to procure their goods. Businesses using online procurement can offer contracts to multiple qualified suppliers simultaneously resulting in a “reverse” auction (when the lowest bid wins the auction). With suppliers competing against each other the price of the contract is driven down resulting in the purchasing firm making a saving. Mars is looking to lower the price its paying for large contracts by making its suppliers compete on the online marketplace.
Advantages and disadvantages of online procurement
The main reason for a company to switch to online procurement is to drive down the cost of contracts from suppliers. By allowing pre-qualified suppliers to compete for contracts Mars will encourage suppliers to quote their best price. This means Mars will be receiving the same quality of materials but will be purchasing them at their lowest price. Online procurement can also be used to aid Mars when they are not sure how to value a contract. By letting suppliers bid for a contract the market will essentially value the contract for them, this will result in Mars always purchasing at a fair rate and stop them getting over charged. Comparisons between suppliers can also be made easier as all bidders can be stored on a single database. This allows Mars to evaluate many different suppliers quickly to ensure the best company is chosen.
However by changing to e-purchasing Mars could very well affect the values they hold so dear. Making the supply firms reduce the price of their contracts is going to have a large affect on their profit margins. Eventually Mars may grind down the supply firms so much that they could be in danger of not making a satisfactory profit in order to secure contracts. Obviously this would affect the relationship Mars has with its suppliers, the mutual benefits Mars wants to experience with its suppliers would no longer be going two ways. If the companies Mars are purchasing from feel they are not getting paid adequately the standard of service Mars receives will drop. In addition, the time pressure for bidding companies to submit a bid lower than the one on screen could lead to errors of judgement. [5] The subsequently awarded contracts are therefore more likely to have disputes and bad faith during the life of the contract. This again would affect the family values held at Mars.
Online procurement is much faster than traditional purchasing methods. Traditional procurement methods involve a lot of man hours i.e. faxes, phone calls and paperwork to suppliers. [4] With Mars being such a large company with many divisions that all have their own purchasing situations, traditional methods of procurement were slow and costly. Switching to online procurement dramatically reduced purchasing time at Mars. Contracts with a deadline date are sent to suppliers and they have to get their bid in by this time if they want to secure the contract. Therefore, it is now easier for Mars to push contracts through the system, which will increase the efficiency of the firm.
Negotiating contracts faster may have a negative side for Mars. Online procurement only decides the price the supplier receives for the contract. Using traditional methods buyers at Mars typically spent a long time working with the suppliers to agree on the issues for a contract. For example delivery conditions, quality specifications and payment terms were all discussed. This allows for the contract to be drawn up with both parties satisfied. However these extra conditions are not discussed using online procurement. The perception of online bidding is based upon ‘lowest price’ rather than the ‘best value’ consequently Mars may not be entering into the most suitable contracts using online procurement, this could lead to problems during the life of the contract. [5]
Prior to online procurement employees at Mars buying division would have to go looking for new suppliers their selves. Using online purchasing, suppliers effectively come to them. Mars can advertise contracts on online procurement websites allowing possible new buyers to get involved. This again helps to reduce costs as Mars can evaluate contracts with a lot more companies than they could with traditional procurement thus making sure they get the best deal. Faster transaction times and reduced supplier searching times will result in employees having more time for maintaining relationships with high value suppliers. This would help Mars reinforce their family values culture.
Conclusion
Switching to online procurement will benefit Mars, as it will lower its purchasing costs due to the extra competition between suppliers. The procurement process at Mars will also become more efficient allowing for easier supplier comparisons and reducing transaction times and employee hours. There could also be some drawbacks from introducing online bidding. Mars’s family values could be affected, as Mars would be encouraging its suppliers to lower their profit margins. Client relationships could then become strained and a poorer supplier service received. Faster contract negotiating could also reduce the suitability of the contracts entered into by Mars.
References
[1] Ivey. Mars Incorporated: Online Procurement
[2] Mars Incorporated article on Wikipedia http://en.wikipedia.org/wiki/Mars,_Incorporated
[3] Mars Inc website http://www.mars.com/
[4] Online Purchasing Gains (2001)
http://www.internetnews.com/bus-news/article.php/726831
[5] Contruction Industry Council: Online Bidding
http://www.construct-it.org.uk/pages/sources/CIC_online_bidding_briefing_note.pdf
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