Anatomy of e-procurement success

E-marketplaces promise huge efficiency gains and lower costs by enabling electronic buying and selling. They give customers a way to instantly compare price and availability across multiple manufacturers and products. Sue Bushell talks to those in the forefrontThe impact of e-procurement on the entire marketplace is, in time, set to be profound, with analysts predicting e-marketplaces will kill off the traditional purchasing department by 2002.

But so far there are very few operational sites in Australia trading in any significant volume. E-procurement is still in its infancy, and companies have much to learn before they can get the most out of this exciting new concept.

For a start they need to understand no e-business procurement strategy based on a "one size fits all" mentality can hope to succeed. That was the conclusion from Deloitte Consulting's global study, Leveraging the e-business marketplace, released in January.

Conducted in Australia and New Zealand as well as leading e-business regions in North America and Europe, the study reveals companies can expect an average 300 per cent return on investment and an annual supply-side saving of close to nine per cent from e-procurement. Not bad at all considering average implementation costs run between $US2 and $4 million.

But it also finds there's a challenge to developing an overall e-procurement plan: finding ways to match the needs of the business and supply category to the most appropriate solution, while realising that not all products and services will be handled using the same approach.

"In fact, the purchasing transaction for some complex products and services may not be executed over the Internet, but rather may be supported by it through functionality, including online bids and vendor qualifications. A successful e-business procurement strategy will not be based on a ‘one size fits all' mentality, but rather on a customised category approach," the study says.

One way to strive towards such levels of customisation and flexibility may be to start your strategy groundwork off with some solid upfront research designed to identify inefficiencies in business processes.

"You have to have a good understanding of the business processes in the particular industry sector that you're operating in," says Russell Hatton, director Net marketing Australasia with CSC. "You've got to have a good feel for the supply chain business processes, and you've got to have a good feel, most importantly, for where the inefficiencies are."

Look for the "sweet spot" where the organisation can benefit from automating a process or putting it online, Hatton says, then start with a small, simple but well targeted initiative that can begin to introduce all players to the concept. In Hatton's terms a sweet spot is any point in the business process where the weaknesses are sufficient that the application of the technology will clearly make a significant difference.

"Typically it will make a difference in increasing efficiency or in potentially reducing costs or those sorts of things. There may be multiple sweet spots in these things, but identify one to start with and implement a solution for that."

In his experience automating the paper flow can not only cut costs significantly but also help to ease people into e-procurement.

Hatton says it typically takes all players operating in the e-procurement environment considerable time to get used to the new ways of doing business and there's a lot of ongoing education to be done. Starting small gives everyone time to get used to the new rules.

"Once they're on, once they're educated, once they're in the groove of operating in this new environment, then the addition of new functionality, actually involving the stakeholders in identifying what would be the next best sets of functionality to add, works very well."

Be sure from the outset that you've architected your solution so that it can rapidly expand in functionality and in scale.

Next, make sure you fully understand the business model and the value propositions for each of the players, Hatton says.

If that means competitors, as well as collaborators, may gain value from the e-procurement infrastructure, so be it. Collaboration, not competition, must be the golden rule because e-procurement only works, says Barry Keogh, the Melbourne manager for e-commerce industry association Tradegate ECA, where competing industry players collaborate on issues like methods and standards. There's relatively little to be gained, and only a very short-term benefit if any, from the use of the technology alone.

Take the Australian Automotive Network Exchange (AANX) project, set up to implement a common network infrastructure allowing Australian automotive industry players to purchase parts from suppliers.

Keogh says association members have realised that for rival car manufacturers to use different purchasing methods and messages imposes enormous costs on suppliers.

"In terms of the best practice, I think the industry is now becoming well aware that they must do these in a community-hub sort of arrangement," Keogh says. "In other words they get together, they collaborate in terms of the standards they'll use, the ways they'll go about it, the approach that they'll have. So they're not really competing in terms of data or technology, what they're doing is competing in terms of service and price."

Change management

There's little doubt establishing direct online links with suppliers not only mean shorter cycle times but also creates more efficient information flows between supplier and buyer. There are substantial benefits to be had from setting up a system that requires less administration and less paperwork.

But to work effectively and deliver on its promises, e-procurement must be driven by an overall business strategy and encompass every facet of the supply chain.

"In going down the e-business procurement path, to really maximise the effectiveness of an e-procurement solution and to make it as cost-effective and competitive as possible, it needs to be viewed along similar lines as any e-business initiative and that is as part of an overall business strategy.

"Any e-procurement solution must be outwardly focused," says Harry Margeridis, senior manager Manufacturing Group Deloitte Consulting, "because while there are short term benefits to be had from procuring goods online for the organisation, the real benefit comes when e-procurement can be leveraged by trading partners, suppliers and customers."

Too many organisations are trying to get into e-procurement just by putting a Web front end to their manual processes. That just won't work, Margeridis says. Success comes not from Web enabling the processes, but looking at the processes themselves.

"A key element for success in e-procurement is looking at the process aspect of it, looking at the process redesign aspect of it, and ultimately, ensuring what you're trying to do through e-procurement is not being done purely to cut costs."

E-procurement tends to be at the top of most e-business strategies because of its ability to deliver tangible bottom line benefits, but it succeeds best where it is part of a much bigger picture that puts change management and people matters firmly in the foreground.

"The organisational change aspect of it is very easily overlooked," Margeridis says. "The traditional procurement function is going to force change and it is not only going to have an impact on the process, it's also going to have an impact on the people that are forming part of that process. So for it to really be successful you need to take that into consideration."

Value-add

Unless a B2B marketplace can add value to business processes there is little point in using it. Why pay to use a marketplace to send a fax to a supplier you already deal with?

And no industry sector is quite so well positioned for adding value as banking and finance. Numbers of online trading hubs in Australia are partnering with banks to gain credibility and enhance their ability to incorporate value-added services.

For instance financial information providers like Dun & Bradstreet are helping businesses to confirm the identities and solvency of trading partners over the Internet. Similarly Commonwealth Bank announced plans earlier this year to work with the Perth-based Supply Search, which has a database of 13,000 companies, each of which pays $50 a month to be registered to trade online.

Likewise the ANZ Bank is partnering with MRO.com, to deliver a virtual marketplace for maintenance, repair, and operations (MRO) materials, linking buyers and suppliers to provide a Web enabled e-procurement service to ANZ's business customers around the world.

Having a financial institution on side adds significant value, says Steve Lloyd-Jones, business manager, MRO.com, Inc.

"If I'm a buyer in that marketplace, I know that if I send a purchase order to any supplier it will be filled because I know those suppliers have service level agreements with the ANZ.

"On the other side you find suppliers often want to be paid relatively quickly but the buyers want to stretch out the payment terms. Going through a marketplace that is operated by a financial institution allows you to reconcile those two different payment cycles.

"Furthermore if a supplier receives a purchase order from somebody they have never met, the payment will be guaranteed by the bank. That is the value-add part of it."

There's another advantage in dealing with a financial organisation that supports electronic procurement. As Pure Commerce CEO Daniel Lavecky points out, e-procurement relies for its survival on the ability of participating companies to deal with financiers who support new methods of financing. That may mean companies that process finance a lot faster than a bank.

"When you need an overdraft, you can't wait two weeks," Lavecky says. "If you need a line of credit in the next day or two to buy 1000 tonnes of steel that you bought in an online business auction, you need a financial institution that's going to support you. And there are very few financial institutions around the world that are up to that sort of level right now."

Lavecky cites three critical ingredients for successful e-procurement:

* It needs to be an integrated part of the organisation's administrative process.

E-procurement can't be run as the pet project of a single business area. The whole organisation has to accept into its culture that ordering or procurement of any sort - from internal office requirements to production line parts - be conducted this way, with a view to improving the entire organisation's business cycle. "If you can instil that into the company value system, which actually takes a long time because there's a lot of vested interest to change, then you're going to prove successful," Lavecky says.

* There needs to be other benefits than just cost savings.

For a start, it needs to improve the quality of life of those who are responsible for procurement, and that means up-skilling those who might otherwise be made redundant by new ways of doing business online.

"All those people have an understanding of the inner working of the organisation, and the intellectual property, the success of any organisation is very much based around intellect, which in the information age is the primary resource of an organisation. And if you spend a lot of time training staff, it is much cheaper to reskill than to find new staff, in the same way as its much cheaper to retain clients for ongoing sales than it is to find new clients."

* It has to be financially viable over the long term.

"It may be short-term expensive, but over the long term you've got to be able to prove that it's not just new technology for technology's sake, but it actually has a business application."

Finally, look at e-procurement but don't look at it as purely a cost-cutting measure, advises Margeridis. "Ultimately the real value in e-business is not necessarily cutting costs, it's also growth in the organisation.

"Procurement needs to focus on growth, because once you get the costs out, and you're saving 10 per cent a year or whatever, then what? Have you actually grown the company or have you purely just cut costs? Most of the successful e-business procurement solutions are ones that focus on both cost cutting and growth, with growth a key aspect."

Only then will e-procurement live up to its many seductive promises.

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