Pratt & Whitney (dossier), an East Hartford, Conn., subsidiary of United Technologies (UTX), is using the same technology providers as GE Aircraft Engines: Burlington, Mass.-based Enigma for its illustrated parts catalog and Rockville, Md.-based SpaceWorks for order tracking and management. "It's not like anyone has a sustainable advantage," says David Brantner, Pratt's director of e-business. "We're not going to crush each other in this space using the Internet. Market share isn't going to drop because you're four months behind." So rather than e-business representing a competitive advantage, it's become the cost of remaining competitive.
Then there's the matter of overhead. GE's bold claims about cutting as much as $10 billion in selling, general and administrative expenses over the next two years seems extraordinary. To put it in perspective, IBM saved a total of $9 billion between 1993 and 1998 through an aggressive "re-engineering" program launched by Chairman and CEO Lou Gerstner when he took over at Big Blue. Some of the 36,000 jobs eliminated in 1993 were attributed to that effort.
So far, there's no evidence that e-business is dramatically changing GE's cost structure. GE's SG&A expenses were 23.6 percent of sales for the first nine months of 2000, down 0.7 percent from the same period in 1999. CIO Reiner said last November that the company was still in the early phases of some of its efforts and added: "We're now targeting $10 billion over 18 months." Last month, Welch seemed to scale back the bold claims. He told journalists that in 2001 GE would save about $1.6 billion by moving travel, accounting and other processes online, and by holding online reverse auctions, in which suppliers bid down the price of goods to win contracts. GE's communications office now calls the $10 billion figure a "total opportunity" rather than a goal tied to a specific time frame.
Reiner says moving procurement online cuts the cost of processing transactions from $50 to $100 per purchase to $5 per transaction because employees spend less time pushing paper around. But while per-transaction costs can be a measure of efficiency, they don't necessarily affect profitability. If you cut the cost of processing an order from $50 to $5, but employees do 10 times as many transactions because it's so convenient, the cost to the company is the same. (There may be savings associated with lower inventory and fewer unauthorized purchases, but those have nothing to do with transaction costs.)
GE says it has redeployed some purchasing staff, but a representative refused to say how many. The company claims that it closely tracks transaction costs but, oddly, the spokesperson says it doesn't track how much it has cut costs by redeploying staff.
Bill Eisele, an analyst with the Hurwitz Group, a consulting company, has interviewed more than 100 companies that have introduced e-procurement software and services and found few that have reduced or redeployed staff. Most simply give people new tasks, such as searching for new suppliers. That may or may not reduce costs down the road.
GE is fond of pointing to its Global eXchange Services unit, which runs reverse auctions for the company. In November, a spokesman for GE said it would buy about $6 billion worth of goods and services in 2000 through such auctions, saving an average of 13 percent, or $780 million. But this month, the company revised that figure downward, to 8 percent. These numbers don't include the cost of running the auctions, either. GXS has seven full-time staff working on auctions and employees at divisions running the auctions have to find suppliers and work with them to structure bids so they can be compared easily. Then the suppliers need to be evaluated: Just because they won the auction doesn't mean they can deliver quality goods. "There are costs involved," says GE Appliances' Joe DeAngelo. "If you were to save 12 percent in the auction, you might net 8 or 9 percent savings." A GE representative said these costs are "business confidential," but did add that they were "negligible," or less than 1 percent.
Also, much of the savings GE is boasting about comes from better purchasing practices, not e-business. For example, GE Aircraft Engines told Business Week that it reduced the types of goggles it bought from 250 to eight and saved 50 percent on the price of each. In this case, the savings came from common-sense management - and the volume discount - not from the wonders of the Internet. And since GE did some rationalization long before the Web came around, those kinds of gains will be the exception, not the rule. While GE certainly is purchasing goods for less money than it did before the auctions, the real savings attributable to the Internet aren't as extensive as it claims.
It's useful to look at other big manufacturing companies to get a sense of what the potential savings really are. IBM has been a leader in using the Web to slash costs. Through the third quarter of 2000, the company bought $27.7 billion worth of goods and services electronically. It says it saved $247 million in procurement costs, mainly by using the Web to aggregate demand for components across its product lines, and by sending technical drawings to suppliers electronically, instead of by courier.
