Advances in e-Procurement

What is e-Procurement? Nothing but the value-added application of Internet and e-commerce solutions to facilitate, integrate, and streamline the entire procurement process, from buyer to supplier and back. DEEPAK SHIKARPUR explains how IT-based procurement solutions can help organisations bring down costs

As professionals search for ways and means to create value propositions to increase productivity in IT usage, it is obvious that IT is not a luxury anymore. The Internet is now being considered essential infrastructure and we will soon consider power and communication as essential as land, people or machinery.

We need to spread this message about the emerging practice of using Internet and e-commerce solutions to procure and manage indirect products and services.

Need for eProcurement

The purchasing department’s fundamental business purpose is to ensure the acquisition of, payment for, and management of materials, goods and services that satisfy ongoing business requirements at lowest total cost, and in a way that is aligned with company and operational goals and objectives. Many manufacturing and trading companies spend approximately 50 to 60 percent of gross revenue annually on materials purchases.

Materials fall primarily into two major areas:

• Indirect products and services. These services are also known as non-production goods, operating resources, or MRO. Items such as valves for machinery, pencils, and contracted labour are sourced and purchased by people throughout the organisation using paper catalogues, fax machines, and the telephone. These high-volume/low-value purchases account for typically 20 to 25 percent of a company’s purchases and are largely unpredictable.
• Direct Materials. Raw materials like steel, packaging, and ingredients are typically procured using ERP software and electronic data interchange (EDI) transactions. These purchases are planned and largely predictable with the use of ERP and materials requirement planning (MRP) modules. Direct material purchases typically represent 70 to 75 percent of a company’s purchases.

Many purchasing departments spend three-fourths of their time phoning in orders and chasing down errors. This is where IT-based procurement solutions can help the organisation. e-Procurement solutions have been on the landscape only a few years

What is e-Procurement?

e-Procurement is nothing but value-added application of Internet and e-commerce solutions to facilitate, integrate, and streamline the entire procurement process, from buyer to supplier and back. However, in practical terms, e-Procurement occurs whenever a supplier and a customer utilise e-commerce technologies to facilitate their business relationship.

e-Procurement is sometimes described by software vendors as “self-service buying” for the average business consumer. This definition is fitting because it illustrates the noticeable customer service improvements that are being achieved by early adopters of Internet-based e-Procurement solutions.

Scope of e-Procurement

Many e-Procurement technologies are simply Internet-enabled variants of existing tools and techniques, such as evaluated receipt settlement and EDI. However, there are additional capabilities enabled with Internet integration, including direct access to up-to-date online catalogues, 24-hour access to supplier technical support, access to supplier inventory systems, online bidding and auctioning through trading partner networks, access to supplier websites, and Internet e-mail between trading partners. These new capabilities enable a much more flexible and extensible means of integrating supplier and buyer business processes than traditional EDI solutions, which are focused on passing standardised transaction documents between the trading partners.

Many of the existing e-Procurement packages do not include the “pay” component of the end-to-end process but rather interface to a company’s ERP system to transact that activity though a payment gateway.

Value proposition of e-Procurement

e-Procurement delivers a definite measurable value to a buying organisation in several ways. First, the best-designed e-Procurement solutions make the purchasing process easy and visible to widely dispersed buyers of goods and services. This increases compliance with corporate supply practices, which increases the total savings as well. Second, e-Procurement solutions streamline paper-intensive tasks within the procurement process, which reduces the cost and cycle time required to process a purchase order and increases productivity for both internal business consumers and purchasing professionals.

Third, captured e-Pro-curement information facilitates fact-based negotiations, automatically capturing critical pricing and supplier performance data as purchases take place. For any form of purchasing, this is a significant new capability that can tip the negotiating scale in the buyer’s favor.

To reap the full benefits of e-Procurement, a company needs to:

• Concentrate buying with fewer, preferred supply partners to maximise economies of scale;
• Utilise e-commerce solutions to facilitate information sharing between trading partners to streamline transaction processes and to monitor contract compliance and supplier performance;
• Apply advanced strategic sourcing methods, supported by central decision support systems to continuously identify and act upon value-creation opportunities with suppliers; and
• Develop a small, highly trained supply management organisation, supported by crossfunctional commodity teams, who are motivated to drive value out of supply chains, not to bid down the price of a transaction.

The approach used to implement e-Procurement will also impact the savings achieved. Implementing e-Procurement requires an organisation fundamentally to rethink sourcing, supplier management, and procurement processes, thus taking advantage of strategic sourcing practices and the new information sharing and process integration options made possible by e-commerce.

Minimum requirements for an e-Procurement solution

An e-Procurement solution must support thousands of users who use the system on an infrequent basis to purchase non-production materials and service. Considering this aspect, it is recommended that every e-Procurement solution offers, at a minimum, a simple self-service user interface, complete procurement-cycle support, broad yet simple enterprise integration, sophisticated management reporting capabilities, and an uncomplicated supplier integration.

e-Procurement solutions available today

There are three types of e-Procurement solutions available today: supplier-centric, buyer-centric and trusted third-party solutions.

1. Supplier-centric solutions are created and managed by the suppliers on behalf of their community of business clients.

2. Buyer-centric solutions are typically installed and operated within the purchasing company’s infrastructure.

3. Third-party solutions, such as i2, SAP SCM and Ariba are created and operated by third-party service providers and act as a transaction processing bridge between communities of buyers and sellers.

Each type of e-Procurement solution offers a different set of advantages and disadvantages for the buying company, as discussed below.

Supplier-centric Solutions

Supplier-centric solutions are inexpensive for the buying company to implement. In many cases, the supplier will give the solution away in exchange for a long-term commitment. Today’s most common supplier solutions are secure websites to which the buying company can link to place orders with its supplier.

Conversely, supplier-centric solutions have many drawbacks that limit choice and purchasing flexibility for the corporate buyer. It is generally not recommended to use supplier-centric solutions as a long-term procurement solutions, because there are significant drawbacks for the buying organisation, including:

1. Over the long-term, supplier-centric solutions yield significant negotiating power to the supplier due to the supplier’s ownership of the ordering process

2. In supplier-centric solutions, suppliers own the ordering process and are therefore free to cross-sell and merchandise.

3. Supplier performance reporting is typically limited with supplier-centric solutions. The buyer is totally dependent on the supplier for all detailed (line-item) purchase data, and vendor price comparisons are difficult or impossible to accomplish due to different supplier catalog formats.

4. Finally, sensitive contract pricing and approval information is stored on the supplier’s server, which may concern a buying company’s internal auditors.

Buyer-centric solutions

Buyer-centric solutions offer a buying company the greatest degree of control and flexibility over internal procurement processes, but they cost the most to install and require ongoing resources to support. However, I believe that buyer-centric solutions will be the preferred solution for the majority of large public corporations.

Buyer-centric solutions are usually easy to justify for large dispersed organisations. From studies of early adopters like Telco Pune’s VCM, I find that the payback in recurring benefits often exceed two to three times the solution’s original installation cost. In some cases, the payback for buyer-centric solutions has been less than 90 days.

Buyer-centric solutions are also preferable because they are designed to work within the buying company’s existing infrastructure. All supplier catalogues are compiled into one standard format and are maintained on a buying-company-controlled server. The best buyer-centric solutions also provide extensive workflow capabilities and are integrated with corporate e-mail, ERP, and accounting systems, the combination of which enables significant cycle time reductions in PO creation, approval, and receiving. Because they are integrated into the corporate systems infrastructure, buyer-centric solutions also provide extensive management reporting capabilities such as drill-down price and performance comparisons of vendors. This reporting is important to achieve benefits from supplier leverage and development programs.

Third-Party Solutions

Third-party e-Procurement services offer buyers the option to outsource purchasing functions and applications to a third party. For an annual or per transaction fee, buyers utilise third-party Web applications to post RFQs and RFPs, organise purchases, and manage procurement information. In most cases, the third party simply provides the transaction processing capability, staying clear of long-term obligations to suppliers. In some cases, the third party also acts as a group purchasing organisation on behalf of its subscribers and resells supplier contracts.

Third-party services are often offered as a suite of specific applications that can be combined and/or tailored to provide different levels of control for the buyer. However, sensitive data is still maintained on a third party’s server, so security issues are similar to supplier solutions. By outsourcing procurement to a service provider, buyers also lose some flexibility with their supplier relationships (which can be a desired outcome in some cases).

I rarely recommend a third-party e-Procurement solution to a client who is not concerned about losing control over its long-term procurement processes. In these cases, third-party solutions are almost exclusively used for low-value operating resources such as office supplies and industrial supplies, and for items where there are many potential suppliers.

The author is executive director at Computer Society of India. He can be contacted at deepakshikarpur@yahoo.com