Even the most ambitious corporate e-procurement guru would hesitate to promise an 80 per cent cost reduction.

Yet MouCo, a four-person artisan cheese-making start-up from Colorado, pared more than four fifths off its equipment bill by using online auctions.

"We bought most of the stuff on eBay," says co-founder Robert Poland. "We spent $4,000, and we figured we saved about $18,000. We got an $8,000 cooler for $500."

It is just one of a variety of e-procurement strategies that small companies are using to cut the costs of supplies, services and capital equipment.

The smaller a company's budget, the more worthwhile it becomes to pursue any saving - so SMEs can benefit from savings that larger companies would not bother with.

And though they may not have the purchasing muscle of a global corporation, they can still run online requests for purchase and reverse auctions to cut the cost of their equipment and supplies.

Best known for consumer auctions, eBay also has a dedicated site for business-to-business transactions, selling everything from tractors to nacho machines. Business sales accounted for around 10 per cent of gross sales through eBay in 2003, totalling about $2bn, up from $1bn the year before.

Most buyers were businesses with fewer than 100 employees.

SMEs also use specialised trading systems. Bartercard is a barter-based trading exchange that handled an estimated $2bn of business from SMEs around the world last year through offline and online direct sales and auctions.

Members can exchange excess inventory for barter currency which they can then trade with other Bartercard members for business supplies or benefits for the owners and employees.

A number of specialist auction sites and marketplaces also serve SMEs. GoIndustry sells used and surplus industrial equipment, from gas pipelines to tractors, worth about €250m annually.

Savings vary, says Andrew Heath, GoIndustry's executive vice-president, but average prices are about 40 per cent of the cost of new equipment, and two-thirds of the price a second-hand dealer might charge.

GoIndustry charges higher margins, typically about 14 per cent, while eBay charges between 2 and 6 per cent. This is justified by the experience of GoIndustry's staff, says Mr Heath.

"It takes a lot of expertise to get the categorisation correct. Our staff knows how detailed the asset descriptions need to be, to make sure that the searches are accurate. If you're buying machine tools, for example, you need to be able to search by spindle width."

One customer is Digital Techniques, a 10-person company based in Mumbai, importing used machine tools from Europe into India. Owner Satish Kale buys a large proportion of his stock through GoIndustry, typically at a quarter of the price of new equipment.

The savings on offer from these sites are highly attractive for small businesses, but for large corporations they may not be worth the hassle. Corporate procurement procedures are often too rigid to take advantage.

"If a small businessman saves $5,000 buying computers online, that's their sons' college tuition for a year. For a global corporation, it's a rounding error," says Jordan Glazier, general manager of eBay Business.

Small businesses are nonetheless following the lead of their corporate cousins, and using software to host their own auctions and run their own procurement events.

Big business software vendors such as Oracle are increasingly targeting the SME market, and some have launched SME-friendly versions of their online procurement software.

Oracle, for example, claims to have more than 3,000 SMEs worldwide using its procurement solutions.

A number of specialist companies, including Digital Union, Vendigital and Procuri, allow companies to run one-off purchasing events such as reverse auctions for a relatively low initial outlay, within the means of SME customers.

FM Resources, a 20-person office supply company based in upstate New York, started using Procuri following the lead of one of its customers, photography giant Eastman Kodak.

FM Resources ran two sourcing events last year, saving about $600,000 from a total bill of $6m.

"It creates a level playing field," says Fabricio Morales, president of FM Resources. "It allows a small business like us to use large company tools."

This is a growing trend. Many SMEs encounter procurement software when their customers request them to participate in auctions, and some are starting to explore whether it will work for them, too.

These software packages allow buyers to assess bids not based solely on price, but on a range of factors such as the time for delivery, payment terms, and inventory management options.

Customers can set their own priorities and use the software to select the most suitable "best value" bid, rather than simply the cheapest.

Hosted offerings offer an easy way for an SME to explore the possibilities of e-procurement, without the hassle of installing and maintaining their own equipment.

E-procurement systems will not be suitable for every business. Existing suppliers may see new procurement methods as a bid to supplant them, or cut their margins, and may be reluctant to take part.

For an auction to work, for example, it is essential to have a reasonable number of suppliers to bid against each other.

 "When there is enough competition in the market, customers tend to find that they can save over 20 per cent," says Mark Morel, president and chief executive of Procuri.

That's a gross saving, excluding the cost of the software and other additional charges. "We looked into this and looked into all the hidden costs," says David Metcalfe, vice-president at Forrester Research. "We concluded that a 15 per cent saving was really what was likely to happen."

However, dipping a toe in the water is not the way to take advantage of those savings, he says. "A lot of companies say start with low risk items like stationery. But if it's only 1 per cent of your monthly budget, then shaving 15 per cent off that isn't going to make much impact.

"Companies should look at what their main categories of spend are, and focus on those."

With these kinds of savings available, it seems likely that more and more SMEs will take the plunge into online procurement.

© Copyright Financial Times Limited 2004

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