English as the language of business, and (4) universal access to technology and effective management practices has enabled companies in areas with low labor costs to become competitive regardless of location. Thus, many SMEs must substantially reduce costs to remain competitive, and they are finding that competing on the basis of cost alone is becoming a losing game.

Case Study: On-Line Commodity Buying

In some industries, geographic proximity is no longer an advantage. The Internet and modern transportation capabilities have combined to enable on-line businesses with low labor costs and appropriate capabilities to compete from anywhere in the world. These capabilities have eliminated two traditional advantages of local suppliers: their physical proximity and customer ignorance of comparison prices.

Large OEMs, including the Boeing Company and United Technologies Corporation (UTC), are taking advantage of these trends by turning to on-line bidding for the procurement of low-technology, pre-engineered items, such as nuts, bolts, and steel shafts, for which there are a large number of suppliers. Several companies have sprung up to conduct online auctions that pair worldwide buyers and sellers. FreeMarkets, for example, which conducts structured bidding events for industrial products, brokered more then $500 million worth of goods in 1998 and expects to handle three times as much in 1999. In a similar manner, MetalSite, conducts steel auctions; FastParts, Inc., auctions computer components; Inventory Locator Service LP auctions airplane parts; and Affiliated Networks, Inc., auctions marine supplies and boats. Although price is important, buyers may consider other factors in their final decision or may reject all bids. New suppliers are required to demonstrate appropriate capabilities prior to bidding. Unless the bids of new suppliers are substantially below those of incumbent suppliers, the jobs may go to incumbents because the buyer is more familiar with their capabilities or wants to retain a small base of the most competent suppliers.

In 1999, for example, FreeMarkets structured a daylong bidding event for UTC that included numerous lots of simple machined metal parts. Prior to the bidding, FreeMarkets analyzed a list of preapproved suppliers and selected ones acceptable to the buyer. The buyer was able to specify preferences, such as the inclusion of small and disadvantaged businesses. Each supplier was sent a package in advance detailing the parts being sought, pertinent quality requirements, and delivery dates. In this example, the bidding was conducted on a secure network. Suppliers were not informed of the names of their competitors or the prices paid for similar items in the past. They could, however, see rival bids in real time.



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement