EProcurement Implementation

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Atlantic International University

Master of Business Administration

E-Procurement Implementation- An Available

Opportunity

Mohammed Rehan

AEM296BM16766ICLBA

May 2005

E-Procurement Implementation- An Available

Opportunity

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AbstractAn average organization spends almost 40 per cent of purchasing expenditure on

non-production (indirect goods) items like travel, office supplies and services.

Optimal supply chain collaboration requires streamlined, collaborative business

processes and a supporting technology infrastructure that enables

synchronization of information across the extended enterprise. As they strive for

competitive advantage, todays organizations are increasingly reliant on deeper,

more complex interactions with their business partners. While eProcurement can

deliver significant buy-side cost savings to business, a number of innovative

companies, and marketplaces, are now looking at other appropriate areas of their

business to drive forward their business performance throughout the value chain

- both supply and demand. Automating the purchase of goods and services

through implementing an eProcurement system, organizations can make

significant reductions on purchasing expenditures that boost the bottom line

though significant hard dollar savings.

This paper explains why an eProcurement implementation, as part of a total

supply management strategy, is an opportunity for organizations to strengthen

existing supplier relationships and improve processes. It shows how companies

can gain immediate and tangible returns through eProcurement.

Introduction

eProcurement - Buy the right commodity at the right time from the right people

Business Process

What is supply chain?

A supply chain is a network of facilities and distribution options that performs the

functions of procurement of materials, transformation of these materials into


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intermediate and finished products, and the distribution of these finished productsto customers.

What is eProcurement?

eProcurement is the purchase of goods or services electronically and is an

integral part of an overall strategic procurement plan in the current business

environment. The plan includes, but is not limited to strategic sourcing or supplier

rationalization, supply chain automation, and participation in one or more market-

places. The commodities purchased can be operational resources (non-

production) or production resources (raw materials).

Business Case

eProcurement offers the ability to drastically reduce transaction costs and cycle

times, thereby improving a companys bottom line. It enables the consolidation of

the procurement process across various departments and also helps suppliers in

terms of demand projections.

eProcurement frees up the buyers time to pursue strategic initiatives, like total

cost reduction and continuous improvement, and building collaborative

relationships with suppliers. It provides the means to efficiently manage these

new relationships and facilitate the synthesis of suppliers into the organizations

supply chain. This leads to ever increasing velocity in the supply chain,

translating to the companys leadership in the market.

Challenges

Defining and integrating various processes and harmonizing operations

between the organization, suppliers, and distributors


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Implementing a technology on top of existing enterprise systems that will workto bring the disparate systems and the new procurement software together to

improve operations

Solution

The focus is on streamlining of business processes along with building a digitized

product catalogs and automating the RFQ -based purchase processes while

providing integration with the ERP/SCM systems. This holds significant promise

in terms of improving supply chain efficiencies and helping companies achieve

higher levels of operational excellence. It is estimated that the cost of placing a

purchase order will plummet drastically and the increased choice and flexibility

will make for higher levels of profitability.

eProcurement - Boosting Company Bottom Lines

Increased transactional efficiency through transparent processes achieved via

greater empowerment of purchasing managers


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Figure 1: The history of B2B eCommerce

Business process

Conventional purchasing of operating resources - equipment, and software - can

account for almost 50-70% of total operating expenses of a business. Most

companies have decentralized their procurement operation across different and

multiple business units with a couple of thousand suppliers and an average of

four to five contracts per supplier. eProcurement harnesses the power of Web to

ensure profits for the companies. Employees create all requisitions electronically.


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An automated approval process transforms the requisitions to purchase orders.The approved orders are electronically routed to the suppliers who in turn ship

the goods and send the invoices back to the companies.

eProcurement - Automation of Requisition-to-pay Process

Business case

eProcurement is perhaps the most direct and effective way for an organization to

leverage the Web to reduce costs, improve productivity and boost profits. It

automates and streamlines the process by creating a Web-based, self-service

environment that pushes product selection and order initiation to the desktops of

frontline employees while maintaining corporate trading agreements, workflows

and authorization rules. The purchase department now focuses on upstream

activities such as supply source development, negotiation and vendor

management.

Consider the example of a leading electronics manufacturer in the Americas. The

challenge faced by it was to - consolidate spending on operating resources

across the organization. For instance, there were 10 (say) divisions negotiating

with 5 (say) different suppliers for the same commodity - Pens. The

consequence was that each of the divisions had to go through this humungous

process every time there was a demand for Pens and finally none of them were

able to get the best price. So what did they do? They chose eProcurement as the

new path to follow.

Benefits of eProcurement for the company

Savings from reduction in the cost of ordering non-production goods

Reduction in cycle time


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Increased customer satisfaction

Ensured streamlining of the procurement process and eliminated

administrative overheads

Cross-business entity analysis for better contracts and pricing

Other savings accrued from re-organization of procurement professionals

Having decided to tread on the eProcurement path, there bound to have some

impact on the organization as well as the supply chain. Its detailed below.

Impact of eProcurement on the business

Reduced costs of goods and services: eProcurement solutions made it easier

for purchasers to buy on contract; increasing buying leverage with key

suppliers

Better information for procurement management: Purchase data collected

from an integrated, internal system could now be examined to identify and

adjust sourcing policies and process flows as per need to help grow the

company aggressively Better planning: True integration of inter-company business processes

enabled collaborative planning with suppliers, thereby reducing working

capital requirements and lower required inventory levels

Higher productivity: eProcurement solutions also made it possible for

business consumers to do their own buying directly from suppliers.

Consequently, purchasing professionals now have more time to spend on

higher-value activities - building better supplier relationship, contract

management.

New capabilities for procurement process

True integration of customer and supplier processes


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Cooperative supply chain management and planning

Real-time access to supplier knowledge

Surplus material/recycling

Global trading networks

Company negotiating for its share of the suppliers savings

Supplier benefits tremendously

o Increased sales volume

o Automated order management

o Faster time to pay

o Lower inventory

o Lower service costs

Quantify/Qualify to help with negotiation

Negotiation point to be leveraged

Impact of eProcurement on the overall supply chain

Ordering: Reduced order costs, richer ordering experience, real time

substitutions, pricing based upon availability, quality and accurate

configuration

Inventory: Fewer inventory shortages, shorter replenishment times, reduced

shipment time, earlier notice of demand (demand planning/forecasting)


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Returns: Reduced paper processes, faster turn around, improved customerservice

Billing: Reduced billing/payment cycles, reduced errors, improved cash flow,

more complex pricing capability

Customer service: Better history of customer behavior

Is it all that simple as it sounds? Definitely not. There are a number of challenges

that a company faces when it opts for the eProcurement way of life. The next

section discusses some of the main challenges a company needs to surmount to

enjoy the benefits of eProcurement.

Challenges

Accelerating technological innovation has compounded the problem by creating a

proliferation of surplus and idle assets with the associated challenges of

obsolescence, waste and under-utilization. Experts have conservatively

estimated that about 10 percent of the assets on a companys balance sheet are

either surplus or idle. These issues are now in the radar for senior executives,

especially in asset-intensive industries like energy, utilities, construction,

healthcare and discrete manufacturing.

Given this backdrop, lets discuss some of the challenges that were faced by the

leading electronics company in question.

First and foremost, the company had to define the new business processes

unambiguously

Next, being a large organization there were several disparate systems that

had to be knit together - a complex functional and technical proposition


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Lastly, the buy-in of business users had to be sought to ensure that thesolution met the business objectives

The next section would throw some light on what entails an eProcurement

solution and more specifically how it was developed for the electronics

manufacturer.

Solution

The eProcurement solution is threefold: first to close all windows on procurement

control and gain compliance through easy-to-use tools like Ariba Buyer; second,

streamline and speed up the procurement process; and third, to reduce the

number of vendors and leverage the spending of the corporation, renegotiate

best pricing agreements. In other words it is a balanced deployment of

technology, re-engineering and sourcing. All three elements need to function in

tandem to make the solution work.

This process is not easy, but it is also not as intricate and complex as rocket

science. The challenge is in picking a robust and flexible tool, integrating it with

legacy systems, enabling supply base for electronic content and transactional

interactions and more importantly getting the buy-in of business users.

Some of the main issues faced by the company (per the example discussed in

this chapter)

are highlighted below.

Key issues in deploying an effective eProcurement solution

Ease of use, consistent user interface

Functionality and flexibility


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Intranet-based deployment to all clients

Approval and business modeling capabilities

Document-based workflow capabilities

Online, real-time access to key procurement information

ERP integration

Supplier integration

Unique buying organization support

Integration with legacy systems

Considerable thought was also given to the mode of communication between the

company and its suppliers. Some of them included:

Methods of exchange

EDI - application to application

Auto ID (bar codes) - item to application

Email - person to person

Extranets - person to person and application to application

XML - computer to computer and computer to person

A Robust and Scalable eProcurement Solution

Higher returns by reducing maverick spends and ensuring tighter fiscal discipline

StrategyPlanning an effective eProcurement strategy includes successful introduction of

new business processes- not just automation of existing ones. In order for

eProcurement solutions to meet their promised ROI, the company needs full

participation and total commitment in using the system.


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To create an effective eProcurement strategy, the company must:

Set supplier selection criteria

Increase IT bandwidth

Be aware of scale-up problems

Evaluate various options

Review suppliers content update strategies

Mix and match solutions

Choose compatible solutions

Once a company decides that eProcurement is a path that should be followed,

the next challenge is how to achieve its objective. One method is to buy the right

hardware and software, set it up, conduct training and announce to its suppliers

and the rest of the world that the company is e-ready. This success of the

approach rests heavily on the rest of the world and the companys current

suppliers, who also need to be willing to do e-business. However, there could be

a better approach. The first step toward implementing an

eProcurement solution is to introduce the paradigm change in process- change

the purchasing organization of the company from a buying function to a

procurement process. This new approach allows for the inclusion of the total

costs of acquisition in source selection. To ensure success in eProcurement, it is

important to ensure that the selected supplier is willing and also capable to

participate in technology innovations - this should be a prime vendor selection

criterion.

The next step is supplier rationalization - a planned approach to selectively lower

the number of suppliers with whom the company does business. Reducing the


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supplier base will help in managing the strategy and vastly improve the chancesof having a successful eProcurement implementation.

Supplier Rationalization:

The first approach involves identifying key suppliers based on their performance.

Every business has unique characteristics, and well-designed performance

metrics should reflect this; however, there are some basic items everyone needs

to measure. These include product reject rates, on-time delivery performance,

completeness of orders and paperwork accuracy. Minimum standards for

qualifying suppliers should be set, communicated and enforced.

Figure 2: Value-add a company wants from a supplier


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The second approach in supplier rationalization is commodity contracting oraggregating your spending. The organization must ask if it really adds value to

have more than one, or at most two, suppliers for things like office or janitorial

supplies. The whole MRO (maintenance, repair and operations) category could

be contracted out to a single source, if it makes sense. Some companies have

chosen this route. However, a detailed spend analysis needs to be conducted, if

outsourcing is the chosen way.

Future Trends

In research released some time back, Boston Consulting Group estimates that

U.S. B2B ecommerce will grow from $1.2 trillion this year to $4.8 trillion in

transaction value by 2004.

Heres what they have to say

B2B e-commerce is advancing quickly in terms of penetrating the total

procurement market, but at the same time, remains fairly immature in its

development, says Andy Blackburn, BCG Vice President. By 2004, online

purchasing will represent 40 percent of total purchasing, however only 11 percent

of all purchases will involve online price negotiations. For many companies,

negotiating prices online is a necessary first step toward broader and deeper

buyer-seller collaborations online.

These findings, based on survey responses from more than 260 buyers, sellers

and emarketplaces as well as in-depth interviews, show that despite a high level

of online penetration, the vast majority of transactions will be ordering and

replenishment, and not price negotiations. In the words of another BCG senior

staff, the future of B2B is very promising


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In the near term, B2B e-commerce may not be as disruptive to many traditional

buyer-supplier relationships as originally thought, says Jim Andrew, BCG Vice

President. Almost half of the companies surveyed find that offline communication

is almost always needed to complete online transactions. Suppliers will continue

to send sales staff to court buyers, and buyers will continue to demand personal

commitments from their suppliers. One emerging message is - dont sell your golf

clubs.

BCGs research shows that the size of the B2B e-commerce market is far greater

than is commonly reported, in part because it recognizes the established base of

Electronic Data Interchange (EDI) over private networks and its extensions to the

web. Complete findings from the research will be available in a report to be

released in October.

Figure 3: The expected growth of the eProcurement market in the next few years


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Conclusion

The winners in this new economy will be those companies that can effectively

leverage the Web to redesign, automate, and integrate all business operations -

from demand capture, production planning, and purchasing to delivery, customer

service, and new product development. These new e-Businesses will be built on

a dynamic supply chain or series of supply chains - collectively known as a

supply net - that can be assembled and adjusted as needed to provide rapid


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and optimal response to customer demand. Such hyper responsiveness will onlybe possible if all participants of an e-Business supply net can communicate,

analyze, and collaborate on requirements, plans, schedules, and other business

initiatives as a single, integrated, extended enterprise.

eProcurement is a panacea to most of the above issues, but its bereft with its set

of cons like implementation issues, user acceptance and so on. But a quick

sanity check will confirm and dispel all doubts that the advantages and benefits of

eProcurement will far outweigh the minimal risks involved in the implementation

of this solution.

According to the Aberdeen Group , eProcurement have been able to realize the

following benefits reduce prices paid for materials by 5% to 10%; shorten

requisition-to-fulfillment cycles by 70%-80%, lower administrative costs by 73%,

cut off-contract (maverick) buying in half; reduce inventory costs by 25% to 50%

on an average.

.

References

1. Ayers, James B. Handbook of supply chain management. Boca Raton, Fla,Alexandria, Va: St. Lucie Press. APICS; 2001


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2. Ballou, Ronald H. Business Logistics management: planning, organizing, andcontrolling the supply chain - 4th ed - New Jersey: Prentice Hall, 1999.

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13. Hartley, John Electronic data interchange: gateway to World-class supply chainmanagement - Hyderabad: University Press, 1993.

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25. Nelson, Dave; Moody, Patricia E, and Stegner, Jonathan. The purchasingmachine: how the top ten companies use best practices to manage their supplychains. New York: Free Press; 2001

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Author:

Mohammed Rehan

Master of Business AdministrationMay 2005


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