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Figure 1.
Progression of Information Technology Figure 2.
Traditional Purchasing Process Figure 3.
Modern E-Procurement Process Business
Case for E-procurement Figure 4.
Purchasing using the Internet Who pays to establish the e-procurement system ? Figure 5.
E-procurement System – Roles of Buyers & Suppliers What are the benefits of e-procurement ? Figure 6.
E-procurement product & concept growth What is the E-procurement Trend ? What is the E-procurement return on investment ? Where are the cost reductions ? How to eliminate off-contract “maverick” purchasing
? Figure 7.
Cost Justification to Manage Maverick Buying What organisations should consider e-procurement
solutions ? Two key
e-procurement challenges 1. Promoting the e-procurement value proposition to
suppliers 2. Catalogue content management Figure 8.
Catalogue Sales Trends |
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Executive SummaryInternet based e-procurement has advanced at a rapid pace to automate and modernise expensive, labour intensive, error prone, manual purchasing processes. Many large companies in the USA have fully integrated internet based e-procurement into their purchasing departments and have reaped significant gains with return on investment ranging between 200% and 400%. Two main factors have encouraged companies to adopt internet based e-procurement systems. Firstly, B2B transactions conducted over the internet dwarf B2C transactions 10 to 20 times more and are expected to be $6.8 Trillion in the USA by 2004. The second factor is that re-engineering purchasing processes offers superior and more reliable benefits than re-engineering sales processes as savings go directly to the bottom line. Maverick off-contract purchasing of non-production goods & services (MRO) has been a major issue for large businesses and can now be contained and successfully managed using internet e-procurement systems. MRO has been one of the last operational areas to be automated and offers extensive savings for the business that would otherwise be lost. Traditionally, internet e-procurement has been focused on medium to large businesses that have large volumes of transactions and the resources to invest in automation. However, there are now e-procurement providers providing low cost solutions to target small suppliers enabling them access to the internet e-marketplaces and subsequent gains. A key to success is to “start small and scale fast”, thus ensuring the business does not take on more than it can handle. For purchasing companies that intend to move forward with internet e-procurement systems there are two critical challenges to overcome. Firstly, they must promote the value proposition to their suppliers to gain buy-in. And secondly, ensure that suppliers maintain the quality and accuracy of their e-catalogues. Both challenges are critical to achieving successful e-procurement implementations and ongoing success. The business case for e-procurement development is compelling with substantial evidence of reductions in purchasing costs, more control over spending and authorisation, inventory management, reductions in requisition cycle times and strengthened relationships through collaboration with key suppliers. IntroductionThe aim of report is to identify key high-level issues for companies to consider when deciding whether to automate or upgrade their existing purchasing processes to an internet based e-procurement solution and whether e-procurement is a sound business decision. Information technology and e-procurement have been evolving at a rapid pace over the past two decades and many businesses have not kept up developments. We examine factors to determine the validity of the e-procurement business case for organisations wanting to leverage value from the internet based e-procurement systems. The information gathered for this report is largely American based focusing on the manufacturing sector due to the fact that the majority of e-procurement innovations began at this point. Information TechnologyManufacturing companies globally are continually looking for ways to improve their ‘bottom line’. Figure 1 shows the exploitation of productivity / operations improvements through plant automation and enterprise resource planning (ERP) in the early 1980’s – 1990’s and beyond.
Traditional Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) systems were primarily focused on the acquisition and management of production materials. Enterprise Resource Planning (ERP) systems were designed mainly for the purchasing division and generally required a significant amount of user training. However, these systems do not support comparison buying practices, parts substitution or supplier consolidation. In comparison, internet based e-procurement solutions are based on an open Internet Protocol (IP) technology, incorporating simple and easy user interfaces requiring little user training. Furthermore, these systems can be easily distributed to multiple desktops via the corporate intranet or extranet. Internet based e-procurement refines the purchasing process transferring order generation to the requisitioner level whilst supporting the authorisation structures and business rules of the procurement department see figure 3. “A mere two years
ago, eprocurement services did not exist,” said Nelly Zaharinov, senior
analyst for IDC's Supply Chain Services program. “Since then, however, the argument in favor of eprocurement has
become compelling.” Operational savings have been achieved by automating and streamlining the traditionally complex, error prone purchasing process most companies persisted with as shown in figure 2 below.
Improved operations efficiency is gained through dis-intermediation of obsolete processes and slack resources within the traditional purchasing process. These resources can then be re-assigned to add value elsewhere within the organisation or increase customer service. Companies are now looking to business-to-business (B2B) e-procurement as the next opportunity for information productivity gains and cost savings as seen in the more simplified automated e-procurement model in figure 3 below.
“TRADITIONAL PRODUCT DATA MANAGEMENT (PDM) is not enough in a competitive eBusiness environment, where manufacturers are required to deliver new products faster, cheaper, and with excellent support after delivery. Customers and suppliers must be involved in a collaborative effort. Systems without processes to coordinate product data for outsourcing design, manufacturing, and maintenance are destined for failure. To be successful, systems require additional applications to manage the delivery of product data across the global supply chain.” – AMR Research Business Case for E-procurementWhat is e-procurement ?E-procurement is the automation of the buying and selling process providing an efficient and effective way for organisations to obtain goods and services to ensure supply of purchased items is delivered in full, on time and to specification. E-procurement provides organisations with the ability to purchase all it needs from an electronic ‘one stop shop’ using internet based software technology displaying suppliers digital product catalogues for buyers to compare prices, quantities and delivery in real-time (refer figure 4. below). There are two main types of purchases organisations make, direct procurement - purchase of goods for manufacture (components) and indirect procurement - purchases for (MRO) maintenance repair and operations (pens to computers).
A typical e-procurement web-site allows authorised users access to search for buyers or sellers of goods and services who present current prices or request bids. Discounts or special offers are given immediately for volume purchases made by qualifying customers. E-procurement allows users remote access via the web 24hrs, 7days per week to accurate inventory information that ultimately improves customer relationships, reduces purchasing overheads, streamlines inventory management and improves manufacturing cycles. Who pays to establish the e-procurement system ?Generally, e-procurement system establishment costs are paid by large organisations, or groups of similar purchasing organisations wanting to obtain discounts from suppliers through leveraged purchasing (using their bulk buying power). Alternatively, supplier companies or independent third parties band together to establish their own e-procurement systems to attract buyers and share the costs. Figure 5 below, shows the roles and how suppliers manage their electronic catalogue content & accuracy which contains photographs, negotiated prices, bulk discounts, product specifications, inventory levels and estimated delivery dates into the system. Buying company staff are given authorisation to access the system and purchase products ranging from pens to computer systems dependent upon the companies involved and their purchasing needs.
Electronic requisition orders are created by the system and electronically approved. Orders are then sent through to the supplier, payment is made and delivery can be tracked in real time on most e-procurement systems. The entire transaction is completed via the internet which is available to buyers 24 hours, 7 days per week. What are the benefits of e-procurement ?Utilising e-procurement internet based systems allows organisations more control over spending, authorisation, transaction processing, inventory management, administration, maverick purchasing (purchases from non-contract suppliers for MRO) and reduces requisition / order fulfilment cycle times. Consequently, e-procurement eliminates many paper-based procedures and labour-intensive processes which are prone to error and inaccuracy. Additional benefits for companies include; · 20% reduction in purchasing costs · consolidation of suppliers and larger discounts · supplier management on-line · integration of ERP / EDI systems · increased purchasing accuracy and management information · choice of report formats including EDI, HTML, XML, e-mail or fax · increased forecasting accuracy Price Waterhouse Coopers consulting state that e-procurement has undergone various stages of product and concept growth over time from a simple requisition tool to an integral part of the modern purchasing system. Company benefits internally and externally are listed in figure 6.
E-procurement MarketplaceWhat is the E-procurement Trend ?Ariba Public Relations Manager Louise Runkel says, “Whatever we call the next generation of e-procurement and strategic sourcing, cost and efficiency are the intended results. In the current climate, it's easier to control costs than drive revenues,”. Market trends are important especially where new technology is concerned in the e-procurement market as the outcomes can be significant for companies. Determining the success of the new technology is the key factor not only for derived benefits, but also in terms of competitive advantage it provides participating companies. The more successful the technology the more companies will adopt the technology creating a ground swell of demand that will ultimately impact on the way companies will do business in the future. For those companies that chose to stagnate and persevere with archaic technology, history has shown that these companies do not survive. According to Forrester Research, business-to-business commerce online is growing and expected to be a $6.8 trillion market by 2004 in the USA. This market value figure shows the commitment of many companies to the new internet based e-procurement market and the derived benefits anticipated that will shape the future of the procurement business. As a result, those companies that were early adopters have reaped significant benefits over their competitors whilst they hesitate and postulate over the technology. Two key factors will fuel the shift to Internet-based procurement. Firstly, business-to-business (B2B) transactions conducted on the Internet will continue to dwarf on-line business-to-consumer (B2C) transactions. Aberdeen Group research indicates that the value of B2B transactions currently conducted on the Internet is 10 times to 20 times greater than the value of on-line B2C transactions. As discussed earlier the B2B market is in the Trillions of dollars and this gap has been forecasted to widen further as more companies increase their level of interaction with trading partners utilising the Internet. The second factor that will drive companies to adopt internet procurement relates to the relative ease of restructuring internal purchasing processes which is more reliable and provides greater benefits than trying to restructure sales processes. The main reason is that the savings that are accrued go directly to the bottom line. In contrast, the sales impact on the bottom line depends on the profit margin of the product or service. For example, a $5-million reduction in procurement costs increases profits by a corresponding amount. Thus, even a company with a healthy 10% profit margin would need to increase sales by $50 million to attain a similar boost in profits. “Efficiency and reduced cycle time is always in a company's interest”, says Jim Zuffoletti, FreeMarkets VP and General Manager of Diversified Manufacturing, “A deceptively simple thing about sourcing is that it's a series of largely un-automated processes ... yet it's probably the best lever for a company to pull in terms of enhancing their profitability.” Ericson, J. (2001). What’s Next in E-procurement. Retrieved August, 2002 from the World Wide Web: http://www.line56.com/articles/default.asp?ArticleID=2874 What is the E-procurement return on investment ?Combined savings from e-procurement cost reduction / operational efficiency see many global companies achieving ROI results between 200% to 400% on their e-procurement investments. Reducing purchasing costs by $100 per order for a company generating 10,000 purchase orders a year saves them approximately $1 million per year in processing costs. As a result, these substantial savings go directly to the bottom line. Where are the cost reductions ?Cost savings are achieved by lowering purchase prices through negotiated discounts, standardising products, reduced cycle times, reassigning resources, increased side-by-side vendor competition and consolidating purchasing. Further cost savings are realised from the automating and streamlining of the purchasing process, and the lowering of the average cost of generating a purchase order. This can go from a maximum of between $75 and $175 to as little as $10 to $15 dependent upon the organisation involved. How to eliminate off-contract “maverick” purchasing ?As processes are automated the information flows from purchasing transactions is far greater and detailed. Management can monitor purchasing activity through reports that are more accurate, complete, timely and can be customised for individual purchasing managers to track purchasing. According to estimates from Purchasing Magazine, U.S. businesses spend $1.4 trillion on non-production goods and services every year which means the area of MRO procurement presents an enormous opportunity for improvement and savings. Up till now, few organisations possessed an effective strategy for managing and controlling MRO expenditures. The lack of standard monitoring and ordering procedures for MRO purchases in companies has promoted significant off-contract or ‘maverick’ purchasing. As a result, indirect purchases (MRO) from off-contract purchases known as maverick buying have proliferated. The National Association of Purchasing Managers (NAPM) in the USA estimates that a third of indirect purchasing is noncompliant, resulting in companies typically paying a 15% to 27% premium on maverick purchases”. Maverick purchasing accounts for as much as 40% of all MRO spending (see figure 7.) at large organisations limiting their ability to effectively monitor and track MRO purchases. This in turn, diminishes the opportunities for the organisation to take advantage of negotiated prices / volume discounts with suppliers. Furthermore, maverick purchasing reduces leverage for future negotiations with those suppliers under contract. Additionally, MRO orders are mainly low value purchases but are costly to process – with processing costs exceeding the price of the items being purchased – and involves a significant portion of a procurement professional’s workload. MRO purchases has been one of the last operational areas to be effectively automated.
What organisations should consider e-procurement
solutions ?
Clearly e-procurement is more suited to the medium to larger sized companies as well as government departments that purchase the same products continually from a select number of suppliers. However, the focus has begun to shift to providing internet procurement for smaller companies which is discussed in the next section. Companies wanting to control, simplify, streamline and automate the purchasing process from many suppliers should consider e-procurement internet based solutions. A first step would be to develop the e-procurement system for the indirect purchases of the company. MRO purchases will enable the new e-procurement system and processes to be ‘bedded-down’ with less disruption to operations before tackling the more critical and more complex direct purchases used in manufacturing products. When implementing new systems it is always advisable to, “start small and scale fast”. Purchasing.com, a US based on-line magazine for manufacturers, have provided a list from consultants of the Top 12 key issues for companies considering e-procurement as follows; 1. Do something, Do it soon. 2. Start with strategic sourcing. 3. Respect your legacy. 4. Segment the supply base, then apply e-sourcing tools appropriately. 5. Start with the easy, but don't neglect the hard. 6. Don't underestimate the sweeping internal changes that e-procurement demands. 7. Focus on delivering sustainable benefits. 8. Understand your power as a "market maker." 9. Treat critical suppliers with kid gloves. 10. Benchmark the competition. 11. Remember there are no "best practices" established in e-procurement. 12. Bear in mind that “You ain't seen nothing yet !”. Please visit this link http://www.coreharbor.com/newsletter/CH0301_article4.htm to read the detail related to the list above. Two key e-procurement challenges1. Promoting the e-procurement value proposition to suppliersMany suppliers outside the USA have taken a wait and see view towards internet e-procurement. They have opted to wait to see the outcomes before committing time, money and resources to developing their own e-procurement solutions. To break this attitude large purchasing organisations have started to educate their suppliers and show them the benefits to their organisations in an attempt to encourage them to pursue internet based e-procurement. Many suppliers do not understand what e-procurement represents form them and therefore cannot appreciate the benefits of e-procurement for their own businesses. Recent research has highlighted a ‘you go first’ approach towards e-procurement among smaller buyers and suppliers, writes Adam Jacobs of Cataloga. Their main focus has been on the outflow of capital in developing expensive solutions which have traditionally prohibited smaller companies from participating in the e-procurement marketplace. Companies that take this attitude are running the risk that they will be left behind in the race to leverage from internet based e-procurement technologies. Competitors who gain first mover advantage using internet based e-procurement will gain significant cost advantages over those that are left behind. Automated
e-procurement systems are seen by many smaller organisations as a ‘nice to
have’ business tool reserved for the larger market players. However, there
has been significant progress towards providing e-procurement systems for
smaller suppliers. One such company in the USA is ‘Do It Best Corp’ which is
using an internet based EDI solution that has lowered the entry costs and
effectively brought internet e-procurement to the masses. Their biggest
challenge in bringing on-board over 3,700 smaller suppliers to their proposed
procurement solution has been, “calling up the
supplier and saying, time to change”, says James McLauchlin (EDI) analyst
coordinator for Do It Best. However, without the mass demand from smaller
buyers to purchase on-line there is not the compelling commercial reasons for
smaller suppliers to become ‘e-procurement ready’ and be in a position to
provide e-catalogues. A key aspect is the significant change in organisational culture required when
implementing e-procurement systems which many companies under-estimate which
is the key to obtaining all the gains. 2. Catalogue content managementInternet based e-procurement automation relies heavily upon effective management and presentation of supplier product and pricing information in a virtual catalogue. The majority of solutions available support the full or partial replication or integration of data from multiple suppliers into a single, aggregated catalogue. With this content aggregation model, catalogue content can be leveraged for product searches across multiple suppliers; for comparative shopping; and / or for part substitution – all through a common user interface. The trend towards e-catalogues is increasing as shown in figure 8 below.
This model
maximises benefits when catalogue data is standardised and enriched using a
product or parts classification taxonomy or schema – a metadata layer, which is
added to the supplier catalogue by the procurement organisation, the supplier
or third party. Effective metadata supports efficient catalogue navigation
and complex searches. A metadata layer also allows buying organisations to
analyse transaction history by product categories, bill-of-material codes,
and suppliers. Such data can then be used to support future contract
negotiations and supplier consolidation analysis. The alternative content management strategy supported by Internet procurement suppliers is Open Buying on the Internet (OBI). OBI provides requisitioners with direct access to catalogue data hosted at the Web Sites of individual suppliers. The OBI business model dramatically reduces the amount of effort required for the buying organisation to support an internet procurement system. Additionally, it eases the management burden for suppliers, allowing them to develop and maintain a single web-based catalogue for all customers. However, OBI is primarily a supplier-centric business model in which supplier organisations control catalogue management, presentation and commerce activity at their websites. Buying organisations lose a certain amount of control over the purchasing process. The OBI model forces requisitioners to navigate multiple supplier catalogues – each with a unique user interface – and does not effectively support product or price comparisons across catalogues. OBI is more suited to organisations that have complex pricing and configuration management requirements for products which is logically maintained and managed by the supplier organisation. Other e-catalogue issues facing suppliers include; · Significant cultural changes required to maximise e-procurement impact. · Combining the ordering mechanism with the payments mechanism. · Integrating the supplier’s data with other back-office or supply management systems. · Sourcing the technical expertise needed to build e-catalogues or outsourcing the task. · Overcoming the inherent security problems of online media. · Managing the updating of content to meet expectations for real-time information. · Reflecting differential pricing including volume discounts and individually negotiated terms and contracts with key customers. · Producing information in multiple formats in the absence of mature and stable international standards. · Meeting the requirements for content in multiple languages and currencies. · Producing content suitable for distribution via multiple channels without duplicating effort and costs. · Addressing the marketing issues around delivering the supplier’s brand throughout a buying organisation. ConclusionsThe internet e-procurement market is exploding delivering significant benefits and competitive advantage to those companies that have the foresight to adopt the technology and leverage value from internet based e-procurement solutions. Increased communication between the buyers and suppliers encourages long-term mutually beneficial business relationships. The e-procurement business case for larger companies has been proven given their large transaction volumes. But, the technology has been recently refined to focus on smaller supplier / buyer relationships reducing the entry costs enabling full access to the internet e-procurement marketplaces. Controlling maverick off-contract buying has historically been a significant problem without a cost effective solution until recently. Internet based e-procurement provides increased management control over the entire purchasing process enabling detailed tracking and the elimination of maverick buying. Buyers realise the extensive benefits of utilising internet based e-procurement systems but the challenge is promoting the value proposition to their suppliers to gain buy-in. For those that adopt the new e-procurement technology the challenge is to then ensure that suppliers provide continual high quality, accurate and complete catalogue information. If challenges can be overcome then there is real value to be gained from implementing internet e-procurement. The key to successful e-procurement implementations is to “start small and scale fast”. References1. Duschinskyt, P. (2000). Get sold on e-procurement.(Industry Trend or Event). Retrieved August, 2002 from the World Wide: http://www.findarticles.com/cf_0/m0COW/2000_Dec_7/68155348/p1/article.jhtml?term=e-procurement 2. PROCUREMENT Newswire Corp. (2000). U.S. Bank Creates eProcurement Card. Retrieved August, 2002 from the World Wide: http://www.findarticles.com/cf_0/m4PRN/2000_Sept_28/65529751/p1/article.jhtml?term=eprocurement 3. Klein, T. (2001). The B2B Analyst. Retrieved August, 2002 from the World Wide http://www.line56.com/research/download/b2banalyst010824.pdf 4. Business Editors. (2000) KeyCorp Cuts Costs and Eases Purchasing Decisions With New eProcurement System; Efficient System Simplifies Method for Ordering Supplies. Retrieved August, 2002 from the World Wide http://www.aberdeen.com/ab_company/researchareas/researchareas-scr.htm 5. MRO Software Inc. (2002). Conquering the Catalogue Challenge. Retrieved August, 2002 from the World Wide Web: http://www.mro.com/corporate/pdf/Catalog_Management_Whitepaper.pdf 6. Arnold, PV. (2001). Gee, Ebusiness. Retrieved August, 2002 from the World Wide Web: http://www.mrotoday.com/mro/archives/Cover%20stories/GeneralElectricON2001.htm#top 7. Martin, M. (2001). Product Lifecycle Management. Retrieved August, 2002 from the World Wide Web: http://www.techsol.com/ServiceOfferings/ServiceOffering80.cfm 8. Zapif, M. (2002). Organizations Made Significant Strides In Online Purchasing In Q2. Retrieved August, 2002 from the World Wide Web: http://www.napm.org/ISMReport/Forrester/FROB072002PR.cfm 9. Mackenzie, R. (2001) The next generation of E-procurement. Retrieved August, 2002 from the World Wide Web: http://www.coreharbor.com/newsletter/CH0301_article3.htm 10. Ericson, J. (2001). What’s Next in E-procurement. Retrieved August, 2002 from the World Wide Web: http://www.line56.com/articles/default.asp?ArticleID=2874 11. Kaneshique, T. (2002). E-procurement Rising. Retrieved August, 2002 from the World Wide Web: http://www.line56.com/articles/default.asp?NewsID=3328 12. IDC Company. (2001). The eProcurement Services Market Has Confirmed Its Value as a Standalone Services Opportunity. Retrieved August, 2002 from the World Wide Web: http://www.findarticles.com/cf_0/m4PRN/2001_May_8/74284769/p1/article.jhtml?term=eprocurement 13. Purchasing.Com. (2000). Consultants’ Top 12 E-procurement Tips. Retrieved August, 2002 from the World Wide Web: http://www.coreharbor.com/newsletter/CH0301_article4.htm 14. Core Harbor. (2001). Catalog Management. Retrieved August, 2002 from the World Wide Web: http://www.coreharbor.com/value_add/catalog_mgmt.htm 15. Core Harbor. (2001). Strategic sourcing and E-procurement. Retrieved August, 2002 from the World Wide Web: http://www.coreharbor.com/newsletter/CH0301_article2.htm 16. Morgan, J. (2002). What’s the future of EDI in Purchasing. Retrieved August, 2002 from the World Wide Web: 17. Union Digital. (2001). E-procurement. Retrieved August, 2002 from the World Wide Web: http://www.digitalunion.com/pdfs/ezmarket.pdf 18.
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Project?, by Scott Lundstrom, AMR Research, 1 July 1997. 19. AMR
Research Report on E-Commerce Applications for October 1999, by Bob Parker, AMR
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E-Procurement Report, Butler Group, August 2000. 21.
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Week, 20 November 2000. |
