The trend toward e-commerce

Fourteen major mining companies, including four based in Canada, have announced their intention to form an on-line global acquisition system to meet the needs of mining business. The move is expected to have a considerable impact on members of the Canadian Association of Mining Equipment and Services for Export (CAMESE).

The 14 backers (representing 60% of the market capitalization of the world mining and metals industry) will invest a total of $100 million in the on-line project; they expect to save as much as 7% of the cost of their purchases.

GeoCommerce, a Toronto-based member of CAMESE, estimates that up to 75% of the goods and services used by the mining industry can be traded electronically. Mining suppliers should not think that only simple items with fixed prices will be procured on the Net. Data, complex services, customized machinery and just about anything can be traded via a properly designed system.

Electronic commerce can also level the playing field for small and medium-sized suppliers. The advantages will go to the suppliers who are Net-savvy, not necessarily the ones with the biggest budgets.

Many people involved in mining are already buying items on-line. Such an approach offers several advantages over traditional shopping: the prices are great, the selection is good, and there is the convenience of shopping from your computer.

Most mining suppliers, however, have had no experience in the area of e-commerce. Business-to-business transactions are more advantageous than business-to-consumer transactions insofar as they can reduce the buyer’s in-house administrative costs, as well as his procurement costs.

When a business acquires a product or service, it sets in motion a chain of administration activity, including: inventory control; catalogue searches; calling for proposals or quotes; choosing a supplier; approving the purchase; issuing a purchase order; receiving the supplier’s acknowledgment; tracking the shipment; receiving and approving an invoice; and issuing payment. These in-house administrative costs can average $150 or more per procurement. Electronic purchasing reduces these costs significantly by enabling consumers to rationalize purchases — for example, by arranging large-volume, pooled purchases among multiple operations within one company or among different companies with operations in the same region.

In addition to lower costs and efficient procurement, business-to-business transactions give buyers centralized controls whereby head offices are better able to scrutinize the purchases of their various operations and even compare their corporate purchasing performance against that of other companies.

With added benefits like these, it is easy to see why buyers are keen on establishing Internet-based purchasing networks.

Forrester Research of Cambridge, Mass., estimates that, by 2004, the Internet marketplace for business-to-business trade of hard goods in Canada is expected to total $218 billion, or 11% of all trade conducted by business. This will be a ten-fold increase over the projected value of Internet business-to-business transactions this year. In the U.S., forecasters estimate that on-line business-to-business transactions will reach an incredible US$2.7 trillion by 2004.

Not surprisingly, the Canadian computing and electronics sector will lead the way with about $11.6 billion in transactions in 2000. By 2004, however, the motor vehicle sector is expected to rack up $88.3 billion, leaving computers and electronics behind with about $43.5 billion in transactions.

Unfortunately, the Forrester Report does not give us guidance with respect to mining. However, it does predict that “supply chains characterized by high degrees of fragmentation, demand shock susceptibility, and distribution intensity will look to Net marketplaces to weed out these inefficiencies.”

Procurement spending by the global mining industry totalled about US$200 billion in 1999. However, the rate at which mining companies adopt e-commerce could be greatly influenced by how rapidly the exchange system evolves. In mining, the only industry-specific electronic exchange, tailored to both buyers and sellers, has been undertaken by GeoCommerce.

— The author is the managing director of CAMESE.