E-procurement: save while you spend

Streamlining the procurement function has moved firmly into the sights of businesses out to achieve ever-greater efficiencies and savings, thanks to the mass adoption of the Internet and e-commerce.

Procurement is ideally suited to automation, and the potential is staggering. Boston-based AMR Research says US companies spent more than $US9 trillion on costs of goods sold (including labour, overhead and material costs) and more than $2.5 trillion in sales, general and administrative (SG&A) costs during 1999 alone. Just slashing the costs of such spending by nine per cent could yield $330 billion a year in savings - the combined sales of the last 100 companies on the Fortune 500 list.

Technology is the enabler for e-procurement, with e-procurement software getting better and the Internet almost begging that organisations take advantage of it. Internet-based indirect procurement lets organisations eliminate or at least massively reduce the administrative paper chase while vastly enhancing communication with suppliers and internal customers.

It is also a major step towards achieving substantive supply chain efficiencies - and that's a win/win situation for everyone involved. Analysts say procurement projects involve the same strategies as fully Web-enabled supply chains but on a much smaller, more controllable level.

It's hardly surprising then that procurement, long neglected in the quest for improved efficiencies, along with the other neglected areas of the supply chain like inventory, warehousing, order processing, delivery, and fulfilment - is taking its place as the next great economic opportunity for business.

John Blakemore, principal of Blakemore Consulting, says creative use of e-commerce in supplier-customer relationships using the latest technology will lead to significant gains in the profitability of all partners.

"Continuous improvement in the principles of process control of supply chains combined with rapid exchange of electronic data using the latest computer systems means that complex supply chains can be integrated, working capital reduced, lead-times reduced, inventory reduced and the overall efficiency and costs remarkably decreased," Blakemore says. "This leads to large reductions in marketing and supply costs as well."

With 75 per cent of the total selling price for many businesses being marketing and distribution costs, Blakemore says the new approach to re-engineering the supply chain using IT solutions truly opens Australia to a world market.

The ultimate aim is for the organisation to reduce and better manage inventory holdings, cut lead times, eliminate damage and storage, significantly reduce warehouse costs and slash the time to market for innovation of product and process improvement.

But e-procurement software can also play a potent role in eliminating or reducing duplication of sourcing effort. Research company IDC says since most direct procurement is business-unit based, while the maintenance and operational procurement is usually site-based, there is typically a lack of both information sharing and re-use of suppliers, RFIs, RFPs and contracts across the corporation.

It finds common problems across all types of procurement include:

* Duplication of efforts in sourcing, with minimal coordinated sourcing across the enterprise and no tools to take advantage of sourcing across the enterprise.

* Lack of information on "who is buying what from whom?"

* Business management not measured on spending outside preferred suppliers.

But while supply chain management and e-procurement solutions have been implemented to manage the order fulfilment process, there is not yet a single tool available for the sourcing process.

Nonetheless, what is available by way of e-procurement solutions is a very good start. Using e-procurement software organisations can conduct Web-based business-to-business transactions focused on obtaining information, creating requests that can be routed for approval, and issuing purchase orders to suppliers. The same software fulfills the request with a receipt, receives delivery notifications and order updates and provides for electronic payment. Ideally the e-procurement application will integrate readily both with internal systems and with those of suppliers via a standard interface, with the software acting as the technological translator between vendor and buyer applications.

But it gets better. E-procurement software also automates tasks, thus reducing staff time spent on purchasing. For example, a company that constantly needs fresh supplies of certain parts can use an e-procurement package to monitor inventory levels and automatically purchase new parts whenever supplies are low.

The software can also automate tedious clerical tasks like completing purchase requisitions and order forms.

And most e-procurement packages provide a range of sophisticated features for added value.

For instance a standard e-procurement package lets you define workflows to ensure the right person gets the right information at the right time. The Web-based e-procurement market also embraces apps sold in outsourced licensing models allowing suppliers to create, convert, and consolidate catalogue content and aggregate the data in a procurement portal to give buyers access to electronic data via a browser.

Yet with doubts starting to settle over the long-term viability of the B2B e-marketplace in reshaping procurement processes (Computerworld December 4, p18), the focus in many organisations will eventually shift to e-procurement's ability to achieve major internal efficiency gains, predicts Streamlink executive director and founder Martin Fisk.

From an industry perspective the confusion that was largely driven by the consultants and some of the US vendors - over this whole concept of e-marketplaces and e-exchanges being the panacea for e-procurement - is now starting to clear, Fisk said.

"I think what people are starting to realise now is that in fact exchanges are an unknown quantity, but e-procurement can deliver efficiencies and by far and away the bulk of those efficiencies are in internal processing, particularly for the larger organisation."

Fisk says that from a results perspective there are two things e-procurement software solves. First, it achieves purchasing effectiveness by encouraging people not to make purchases independently, either on an individual or a regional basis.

One Streamlink customer found that over a period of 18 months it had bought 18 mobile phones from 12 individual suppliers.

"Their effectiveness from a centralised purchasing perspective was almost zero," Fisk says. "They were paying pretty much retail prices, plus also the processing costs of 12 different invoices, then they probably had three different contracts with all the various suppliers," he said.

Another - one of the big five accounting firms - had regional based purchasing in place, and no purchasing data to tell it whether it was getting a good price or not.

"They put in our software to manage the workflow more effectively such that instead of getting papers signed off for a purchase order or purchase request, buyers would now manage all of that electronically," Fisk says. "They sold the benefits to each state by saying we'll make the way you purchase much more efficient."

After 12 months the firm was able to collect enough data to convince it that it could achieve significant cost savings by moving to national procurement. That meant developing single vendor solutions for particular areas like stationery and desktop PCs.

"They then went to national contracts and they saved on average seven and a half per cent off what they were previously spending. There were massive savings in that purchasing effectiveness area," Fisk says.

But he says the second area where e-procurement really delivers to the organisation is in purchasing efficiency.

"One of the little known facts about e-procurement is that one of its biggest impacts in terms of efficiency and cost reduction is in accounts payable," Fisk says.

Since early 1998, Internet commerce procurement applications have been largely used to process orders for indirect materials under the maintenance, repair, and operations category.

Typically, these MRO goods and services include computers, safety and cleaning equipment, and office furniture and supplies, and increasingly services like airline tickets and hotel reservations. But they are also embracing orders for materials that go into a company's finished product such as an automobile or aircraft engine, or, for the telecommunications industry, a transmission tower.

Research company IDC notes that previously, the data processing of orders for direct materials was handled by legacy applications or enterprise resource planning (ERP) software. But it says legacy and ERP applications vendors like Baan, PeopleSoft, and SAP are increasingly offering products that allow their customers to take advantage of the Internet in order to procure both direct and indirect materials.

Hewlett-Packard service portfolio manager Neil Streit led the team that redesigned the company's business processes around e-procurement technologies, eventually choosing Ariba software as a requisition front end to its SAP installation. He says apart from data processing efficiencies another benefit of e-procurement is its ability to facilitate the implementation of strategic sourcing projects.

"The main benefit you get from these applications - everybody does, really - is on really facilitating the implementation of strategic sourcing programs so you get significantly better discounts," he says.

"For instance in the US we have one office supply vendor that we use and we connect directly into that office supply vendor, through the Ariba software, and because everyone has to go through one supplier we're able to get deeper discounts."

In fact HP achieves substantial savings on all the items which have been entered into its e-procurement catalogue, with the cost of processing requisitions and purchase orders down from $125 to less than $25.

But for all the obvious benefits, Streit says e-procurement implementation carries some risks. For one thing, HP found it impossible to find a supplier that could deliver more than a 70 per cent fit to its requirements.

For another, it proved much harder getting suppliers into the system than it first appeared.

"The main risk there is the software vendors make it look nice and easy, but it's not as easy as they say," Streit says.

"And on the people side the biggest issue is when you have a lot of buyers and some of these buyers like to manage the transaction. And you've taken that away from them.

"And the other issue you have with strategic sourcing is getting control within a big corporation that says you're going to have to use these people because we'll get much better discounts from them," he says. "For instance, every marketing manager in HP likes to choose his own ad agency. Now you're saying you can't do that."

Achieving substantial savings also means automating the entire, manually-controlled supply chain - and that means ultimately developing Internet technology links with every customer and supplier. But in one sense that's the easy part: unless suppliers, distributors, customers and manufacturers are prepared to open their sales forecasts, cost structures, manufacturing and inventory management processes to each others' scrutiny, real savings are unlikely. Unless re-engineering is complete efficiencies won't be achievable.

"Transformation to e-procurement must focus on balancing three key variables: people, process and technology," says Gartner analyst Robert Mack.

"Effective procurement is about process. That will never change. We will still need to develop strategies and identify timelines, risks, and business and technology requirements. We will also still need to develop evaluation criteria, solicit bids, validate vendor claims, and objectively evaluate and score choices and then negotiate. But what will change is how we look at and redefine those processes to account for the extension of the procurement organisation."

Mack says to ensure a range of relationships and requirements are supported, enterprises should evaluate e-procurement software based on functionality, technical architecture, cost, service and support, vendor viability and vision.

And it isn't easy to translate entrenched purchasing processes to software.

Also on the downside, e-procurement can be difficult to develop and integrate with outside parties. That means some organisations will always prefer to rely on hosted procurement solutions rather than deploying procurement software internally.

Companies considering in-house deployment will have to carefully analyse the integration requirements with back-office applications and outside parties' software. Adopting platform-neutral middleware and XML tools can simplify software interconnectivity and data-exchange issues.

"In e-procurement and all e-business transactions, the core of the issue is integration," says Wong Wai Kheong, vice president of Singapore-based Intranesis Communications.

"In an ideal e-procurement and e-business solution, there will be minimum (if any) human touches which can add to transaction errors and costs.

Wong says he has seen many interesting solutions capable of delivering this, including from suppliers like WebMethods, Backsoft, Netfish and Tibco, while application servers like BEA, ATG and Cold Fusion can handle some of the integration in EAI and B2B.

"My personal evaluation is that WebMethods provides the most comprehensive solution in the EAI and B2B According to IDC the procurement of the future will be knowledge-based and be able to leverage the knowledge of the enterprise. This includes specifications, contracts, products, and the like.

The company says the procurement professional will be able to easily access past RFPs and contracts, have real-time information on supplier performance and be able to collaborate with other procurement professionals within the enterprise, minimising the time and effort to source products.

Strategic sourcing programs in the future will rely heavily on supplier performance management information across the enterprise to select the best suppliers.

In many cases, today's environment requires the procurement professional to focus on managing the order-to-receipt process.

The procurement professional of the future will be focusing on the sourcing and contract.

But for now, the existing software must suffice. Gartner says the same basic criteria for selecting e-procurement applications applies as with any other software. Buyers must consider 1) Functionality: e-procurement applications must permit the aggregation of disparate sources of supplier information into a consolidated, buyer-managed view; facilitate acquisition and management of enterprise assets; enable better understanding of procurement patterns; and deliver knowledge that leads to more effective negotiations with suppliers.

2) Technical architecture: e-procurement systems must link internally to enterprise applications and externally to customer and supplier systems.

3) Cost: enterprises should consider total cost of ownership, not just acquisition costs. This includes post-acquisition costs associated with deployment from installation to when the enterprise recoups its investment.

4) Service and support: effective implementation and integration of e-procurement systems require close work with the software vendor and integration partner.

5) Financial viability: knowledge of the financial health, organisation and market position of the software vendor assists in gauging whether the vendor may be a leader or an acquisition target, or fail and exit the market.

6) Vision: enterprises must examine vendors' stated and realised development plans, align them with industry and sector trends, and include strategies appropriate to a particular market.

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