By Elizabeth Ngonzi, Arthur Andersen, New York

The hospitality industry has historically struggled under the weight of fragmented supply chains, made even more unwieldy by complex and inefficient business processes in distribution and procurement. Now that fragmentation may be put right as old economy hospitality companies turn to eBusiness startups to move procurement and distribution processes online. In short, eProcurement offers the potential for improving both ends of the equation to reduce costs, generate new revenue streams and improve audit control. 

The Internet has not only fired the first shot of this revolution, it continues to be reinvented as a way for buyers to meet suppliers, and competitors to compete or partner online in efficient and cost-effective ways. As a ubiquitous global network, the Internet makes it possible to package, distribute and consume information in digital form, breaking the economic bottle-neck imposed by the production, market exchange and distribution of goods. 

Digital marketplaces furnishing diverse products and services are breaking down trade barriers and offering access to hospitality companies of all sizes. Deutsche Bank currently estimates a $60 billion domestic and $100 billion international market for hospitality eProcurement, including furniture, fixtures and equipment (FF&E), renovation and construction, service contracts, operating supplies and food and beverage (F&B).[1] Cost savings from more efficient supply chain transactions are currently estimated to be at $3.5 billion to $4 billion in the United States alone, and $7 billion globally. Hospitality procurement of more than $20 billion domestically and $10 billion inter–nationally is forecast to be online in the next 12 to 18 months

Growth in hospitality eProcurement is clearly explosive in its potential, and our view is that hotel organizations will need to respond to this new market to remain competitive.  Nevertheless, there are major obstacles to the industry seizing the advantages of eProcurement and realizing improvements in the supply chain. This article examines marketplace models and strategies for eProcurement as part of our series in the Hospitality and Leisure Executive Report on eBusiness opportunities. 
 

The Internet and eProcurement The Internet’s ability to deliver information in a common format to a wide array of computers enables businesses to access and share information from many sources - including their customers, financial institutions and suppliers. eProcurement is a direct outgrowth of that capability. As a global network using standardized protocols and universal connectivity, the Internet opens the door for businesses to develop international marketplaces for their products and services.  Not only does the Internet facilitate the sharing of information, it simplifies the process for the end-user as well, and reduces infrastructure and transaction costs. The shared nature of the Internet distributes the infrastructure costs across large groups of potential customers,

What is the real potential for hospitality companies? eProcurement will have a positive impact on business functions and processes for those organizations that fully take advantage of these capabilities. Buyers, for example, have a growing amount of information available to identify the suppliers with whom they want to do business. eProcurement facilitates the aggregation of small purchases, thereby making the order process more efficient and cost effective. And it minimizes the need for intermediaries between the supplier and buyer. Traditional supply chain distributors, as a result, are being forced to provide value-added services to remain viable in the chain. 

The next generation 

We begin by defining eProcurement. Using digitized processes, the procurement process is engineered in concert with an all-electronic design and implementation of the infrastructure required to source, supply, manage and control services. It is one of the most important of business-to-business (B2B) functions. 

eProcurement solutions were initially launched by companies such as Ariba, Inc., which developed corporate procurement systems for global 2000 companies to give their employees access to vendors electronically. Though effective, these applications centering on “buy-side” solutions were inherently expensive and time-consuming to implement. The new generation of eProcurement is more revolutionary. Today, digital marketplaces create Internet portals to serve multiple buyers and sellers in the exchange of goods and services.  These new ventures are leveling the playing field for both buyers and suppliers, giving smaller companies and those around the world ready access, using a Web browser, to opportunities once available primarily to larger companies in North America. Large up-front investments in hardware and software are unnecessary. To draw traffic to portals, some providers - including Vertical Net, hglobe.com and hospitalitynet.org - have bundled targeted content, career services and discussion forums along with procurement services. 

Emerging marketplace models 

To participate in the development of eProcurement offerings, hospitality companies will benefit by understanding the emerging digital marketplace models. Our firm’s analysis indicates that there are currently two dominant models: 

Industry-specific marketplaces 
Organizations with domain expertise in a particular industry - or industry “vertical” in the language of the new economy - launch these exchanges. These market-places support commerce specific to an industry as they seek to aggregate buyers and sellers to reduce transaction costs. Their competitive advantage is based on a unique understanding of industry inefficiencies. Examples can be seen in Marriott International’s and Hyatt’s P-Co - a joint, independent electronic purchasing network powered by GoCo-op’s eCommerce engine - that leverages economies of scale to reduce prices on product and services. Or consider Instill Corporation, which links food service operators and food service product distributors/manufacturers. Instill bundles eProcurement services to improve control and management of foodservice purchasing, offers a consolidated purchase information service for monitoring contract compliance and capturing rebates, provides market intelligence to manufacturers, and creates an online community and marketplace for small chains and independent operators to improve their operating and financial performance.

Horizontal marketplaces 
These exchanges provide a vehicle for many types of buyers and sellers to advertise, share content, bid on products, participate in auctions and manage their supply chains. Such marketplace sites serve a wide range of disparate industries and/or provide them with access to horizontal applications. 

Unlike the original eProcurement systems, which generally provided static catalogs and limited sourcing capability, these new digital marketplaces use dynamic pricing models - primarily auctions or exchanges - which are based on demand. Additionally, some marketplaces, such as those powered by Zoho.com, can interface with companies’ enterprise resource planning (ERP) and accounting systems.

Horizontal marketplaces have multiple revenue streams, the most common of which come from advertising on sites. Many of these marketplaces also generate revenues in the form of commissions charged to sellers participating in auctions. Storefront sales to sellers can be an additional source of revenue for such marketplaces. Tradeout.com, one such example of a horizontal marketplace, categorizes its services to multiple industries by product type. Its services include the hosting of seller–driven auctions for excess inventory resale. In such auctions, sellers list their products and receive price bids from multiple buyers for individual products, thereby enabling the seller to potentially receive the highest price for their products, including any excess inventory that ordinarily would have to be written off. Vertical marketplaces have similar revenue sources, although they are able to command higher advertising fees due to the detailed information they can collect on concentrated groups of members and subscribers. Additionally, some of them also generate revenues by charging subscription fees to access their focused content and product data. 

In contrast to vertical marketplaces, horizontal marketplaces face challenges specific to their broad mission. Based on the need to appeal to diverse industries, these marketplaces must satisfy the product, service and content needs of their varied buyers and members, and may be fighting an uphill battle in doing so. Some companies have been successful using this model, but they have had to invest in expensive domain experts to develop the compelling offerings typically available in a vertical marketplace. The diversity of the industries served by horizontal marketplaces, however, can be useful in reducing risk in the event of limited penetration in a particular vertical. 

A hybrid marketplace model is beginning to emerge with the advantage of leveraging the strengths of both models. In this model several contiguous verticals are represented in a marketplace. These contiguous verticals can be grouped according to the similar products and services used by all, yet still maintain the content and other offerings unique to each. A hybrid market–place, for example, might provide an exchange for food service, hospitality and grocery industry members, such as VerticalNet’s e-hospitality.com, which could be grouped together to access food and beverage suppliers. In contrast, hospitality industry member sites might feature only FF&E items, such as beds. Buyers can benefit from hybrid models of digital marketplaces because they can potentially access more sellers and therefore have more bargaining power.

Similarly, marketplaces are expanding internationally, according to Forrester Research, despite barriers in some countries to Internet adoption, including public policies impeding imports and exports.[2] Global expansion boosts supplier access to new markets and exposes new buyers to eBusiness. Although North America will own half of all online sales in 2004, reports Forrester, eBusiness in Western Europe will grow to $1.5 trillion, followed by Latin America, which is projected to reach $82 billion in 2004. Developing countries such as Zimbabwe are not projected to have eBusiness begin to take off until after 2010. 
 

The implications of eProcurement  eProcurement clearly offers significant opportunities for hospitality industry players to improve their supply chains, and those companies that ignore the potential may suffer in the long run. During these early stages of the eProcurement revolution, relationships among buyers, sellers and competitors will be redefined. Additionally, global eBusiness will be fueled by the ability to track the movement of trade goods at any point along the supply chain. Ships transporting goods from Latin America to North America, for example, might be quickly redirected to Europe in the event that bids were greater in other locations. Such flexibility in real-time pricing would greatly minimize reliance on fixed prices.[3]

We can summarize the implications for various segments of the hospitality industry in the following points: 

Brand parents

• Established brands can leverage their relationships, experience, knowledge and purchasing power to reengineer corporate purchasing efforts for improved efficiency.  
• These players can develop (or partner with vendors and/or with competitors) private, secure, customized sites for employees to purchase products and services from approved vendors. Real-time inventory management and accounting then becomes possible. 
• The major brands can also take control of the procurement process by minimizing “maverick” purchases and monitoring adherence to approved vendor lists, ensuring their employees adhere to quality standards. 

• These companies will gain access to rebates traditionally only available to larger companies based on aggregated demand. 
• The buying power of hotels outside North America, which have had little clout historically, should be increased. 
• Management will be able to leverage public access applications that provide access to extensive vendor networks and their products in horizontal or vertical marketplaces. 
• Moving processes online should result in labor cost savings. 

To fully leverage the benefits of end-to-end eProcurement, hospitality companies need to position procurement more strategically and demand value-added services from providers to manage the entire supply chain from requisition to payment. Customer care services - a critical component of these solutions - must be situated throughout the supply chain to enable hospitality companies to realize the full benefits. Consolidated reporting will also be important. 

Market forces are promoting marketplaces that encompass several contiguous verticals, rather than a single vertical focus of products or services. In hybrid market-place exchanges, managers of individual verticals will continue to need a great deal of domain expertise. However, they will also be able to cross-pollinate and leverage the capabilities of other market-places to benefit each one of their industries individually. This will promote eProcurement offerings that are moving toward one-stop shopping, while providing vertical-specific services.

In the medium-term we anticipate that eBusiness ecosystems will emerge as the next wave of eProcurement solutions. These interconnected worlds will allow organizations (employees, suppliers and customers) to transact via a single point for commerce and information, creating a global web of digital markets and corporate exchanges. This new wave of development will provide hospitality companies with clear benefits: 

• Competitive and dynamic pricing. 
• Ability to customize marketplaces. This will result in minimized searching costs through vendor-specific interfaces to facilitate adherence to quality standards and vendor comparison. 
• Consolidated reporting and accounting to monitor supply chain performance and improve budgeting. 
• Single point of contact for customer care. 
• Access to international distribution networks. 
• Process improvements in handling purchase orders. 
• Customized online order-flow-tracking capability that is based on a company’s internal workflow routing process. 
• Streamlined buyer and supplier commerce processes. 
• Shared network of commerce services. 
• New methods of dynamic sourcing and trade. 
• Aggregated purchasing and expanded sales channels. 
• Extended customer reach and enhanced customer service. 
• Meaningful tools to facilitate marketplace interaction. 

Conclusion 

Despite the benefits promoted by eProcurement marketplaces, the industry may be slow to adopt full-fledged solutions. The reasons for that are varied, but they include the large investments in legacy systems; bandwidth scalability and reliability issues associated with the Internet; and resistance to changing procedures and learning new systems. Deutsche Bank warns that eProcurement cost savings may not be fully realized by the industry for another reason. An increase in eProcurement marketplaces may decrease the likelihood of an industry platform standard for electronic commerce, thereby reducing the ability of suppliers and buyers to interact on multiple platforms and potentially minimizing cost savings. Privacy and security issues will also be major issues, particularly in the case of market-places developed by industry leaders. Those hospitality companies interested in such solutions will most likely be wary about exposing their key business functions to competitors. Solution providers will also have to protect against vulnerability to hackers and competitors. 

To fully realize the benefits of eBusiness in general and eProcurement in particular, hospitality organizations will need to: 

• Determine how to integrate their overall business strategy with the eBusiness ecosystem. 
• Identify and weigh the impact on the organization (traditional processes will be affected significantly). 
• How will our traditional “requisition-to-pay” process be affected?  
• Ask the following questions to determine how to best integrate eBusiness systems/solutions with existing legacy/back-office/front-office systems.  
• What systems are still necessary? 
• What skill sets do we need to acquire? 
• Ask for answers in key areas as part of evaluating whether to leverage the Application Service Provider model: 
• Does your company have a shortage in internal IT skills? 
• Are there any upfront costs to buyer (subscription fee model)? 
• Will the ASP partner assume responsibility for managing the application?  
• Will the ASP services free resources to be focused on other areas deemed more critical to your core business? 

Elizabeth Ngonzi is a Hospitality Consulting Services Manager based in Arthur Andersen’s Northeast Business Consulting practice in New York. 

Footnotes
1 Alex Brown Deutsche Bank, “Hospitality B2B Enter the Revolution,” May 2000. 
2 The Forrester Brief - Global eCommerce Approaches Hypergrowth, Forrester Research, Inc., April 18, 2000. 
3 Ibid.

© 2000 Arthur Andersen.