New
Business Methods Let You do Business at 'Web-speed'
Ford
Motor Company recently used the interact to accept bids for $55 million in
manufacturing work. General Motors has been quietly doing the stone thing for
about 18 months. Even services such as HMO plans are being bid online, What does
this mean for your company today.
The
good news: This process opens the bidding to lean, agile companies that can
identify their costs under the pressure of online Auction Fever.
The bad news: Bidding that formerly took up to six months is now done in hours or minutes, meaning companies not equipped for this warp-speed negotiation are at grave risk.
More
good news, though: As online purchasing becomes prevalent you can use online
bidding in your own purchasing function to reduce your costs!
The tool that makes doing business on the Web possible is called Activity Based Management. This accounting and management technique has received much praise for being better titan other allocation methods, especially for management decision-making. Why7 Because overhead costs such as labor, equipment, plant maintenance and facilities are attributed accurately to cross-functional processes spanning all departments and functions according to actual usage, instead of traditional formulas that paint a distorted picture of the profitability of a given product. When you are competing in the feeding frenzy of an online bidding process, this makes the difference between profit and red ink.
"This
can affect just about every business that supplies goods or services to other
businesses," said John King, president of the Indiana Roster Network, an
alliance of CPA and professional-services firms. King pointed to a survey by
Purchasing magazine showing that nearly 60% of purchasing managers intend to do
their supply sourcing online - a dramatic increase from the 25% who buy some of
their goods over the Internet today. Lower prices, new supply sources and
savings in solacing time are reasons given by the purchasing execs. For example,
Hewitt Associates saved its clients $I billion on next year's health plans by
forcing HMOs to compete online.
"The
intense pace of online bidding makes it crucial for a supplier to understand its
cost structure using Activity Based Management," said Jerry Gallagher of
the Gallagher Group in Fort Wayne, which seeks to acquire under-performing
small-cap companies and boost profits through systems
enhancements,
It's not. only automakers who are using the Web for purchasing. Already everyone
from paper to plastics to chemicals ,and even cows are being procured using
online competitive bidding,
Competitive
online bidding drives prices down, not up. In an online bidding process, several
outcomes are possible:
You
win the contract and make a profit;
Your
competitor wins the business with a more competitive offer; or,
You
win the contract and lose money because Auction Fever caused you to offer a
quote that is below your own cost.
Bloated
companies relying on outdated accounting methods are ill-prepared to compete in
this environment. On the other hand, the online auctions are a great equalizer
for small and mid-sized businesses. According to Industrial Distribution
magazine, 70% of small-business executives say they believe the Interact otters
improved opportunities for competitive bidding.
"The
key is to have a crystal-clear picture of your cost structure, so you can modify
your bids in real-time during an auction," King said. "Activity Based
Management is absolutely essential." Many businesses have recently adopted
ABM accounting to pinpoint exactly where overhead costs affect profitability.
"The
ABM accounting process allocates costs to the various activities involved in a
manufacturing or distribution process" said Perry Schroeder, a partner with
the Roster Network Member CPA firm of Baden Gage & Schroeder. Through
Activity Based Management you can identify non-value-added activities and
eliminate or modify processes and procedures to reduce the costs of those
activities. "It cuts both ways -- whether you are the buyer or the seller
in the online arena, more cost-efficient processes and procedures are necessary
to continue to be competitive in these changing environments."
With
ABM you can quote your goods and services very accurately to assure profitable
margins. ABM attributes overhead expenses to specific product-lines, rather than
traditional accounting methods that spread overhead based on arbitrary formulas.
With this information, you can constantly review and accurately manage your
costs. When you are competing in an online feeding frenzy, ABM can make the
difference between profit and loss.