e-Procurement delivers
Business-to-Business use of the Internet has been increasing steadily and is forecasted to increase at an even faster pace in the future. Global trends such as outsourcing and the extended enterprise are making the integration of inter-business processes a high priority for many organisations. Many organisations have undergone strategic sourcing transformations but have stopped after rationalising the supply base and negotiating new prices. True collaboration requires seamless communication and transaction processes that take cost out of the process rather than moving them down the supply chain.
e-Procurement transforms procurement by streamlining and automating each stage of the process, from searching for a product or service to ordering, approval, tracking and payment. Components such as on-line catalogues, intelligent purchasing agents, Intranet workflow, Extranet team-rooms and on-line auctions are making traditional communication channels, such as fax and EDI redundant.
Significant improvements have been realised from the introduction of e-Procurement. Transaction processing costs and times are reduced, freeing up purchasing professionals to perform more value-adding tasks, and the streamlining and automation reduces maverick purchasing, keeping purchase prices low.
Strategic Sourcing is the first, but not final, step in achieving collaborationProcurement is now responsible for bringing real value to the organisation by leveraging purchases and creating cost efficiencies. Strategic sourcing is a philosophy and framework that extends beyond the traditional purchasing approach by building and leveraging the extended enterprise
Figure 1. Purchasing Professionals are focusing more on Procurement Strategy
With most organisations spending at least one third of their overall budget to purchase goods and services, the estimated savings on total purchases of between 2% to 12%, representing significant business value.
The new strategic relationships and the extended enterprise rely heavily on tight integration and improved processes to realise the true benefits, and the source selection components of strategic sourcing projects must be supplemented with process and technology improvements to allow connectivity and collaboration.
Current procurement practices are often ineffective and inefficient
Paper-based procurement processes are still often the norm in many organisations. As a result of incomplete information, errors, incorrect routing and delays, these processes are time-consuming and costly. It's also difficult to get up-to-date pricing information, availability information and virtually impossible to track orders. Purchase orders can take weeks to move from requisition to approval.
In addition, because of the frustration caused by the complexity of inefficient / ineffective purchasing processes, many "Maverick" purchases are made. Unless people are able to quickly locate, order and receive what they need, goods and services will be ordered from unapproved suppliers. These purchases lower volume leverage with approved suppliers and result in higher prices. According to General Electric Information Services (GEIS) and Gartner Group, approximately 30% of maintenance, repairs and operations (MRO) procurement take place outside negotiated supplier contracts, increasing costs by between 20% and 50%.
e-Procurement deliverse-Procurement drastically cuts down on the time and cost of purchasing by 50%, procurement-process costs by 30%, and actual material costs by 20%. These are dramatic benefits, particularly when coupled with independent research that demonstrates a 5% savings in MRO purchasing costs can result in a greater than 20% increase in a company's profits.
Figure 2. e-Procurement example - ordering MRO products and services from approved suppliers
It is the simplicity of e-Procurement that delivers the benefits. The above example illustrates a part of the overall process. To order an MRO product and service, a requester would look at products on a catalogue via the organisations Intranet. The catalogue contains products / services from approved suppliers and include information such as specifications, animations, videos, guidelines for use and delivery lead-time.
Once the requester knows what they want, they fill out an on-line form which already contains their details, and sends it via Intranet workflow to their manager if the price is beyond their own spending limit. Once approved, the order is routed to supplier via the Internet, who can then send back an acknowledgement to the buying organisation via the Internet and into the accounting system.
The requester can track the delivery of the goods until it is received, and can then route the electronic invoice to trigger payment of the supplier. No paperwork, no delays and no unanswered queries.
Procurement cycle
Figure 3 - Procurement cycle
Design
Organisations are increasingly reliant on their strategic suppliers to provide value adding services rather than just products, and become more responsible for product design. This collaborative-procurement strategy and supporting Extranet is a scenario that will be seen with increasing frequency with the growth of the extended enterprise.
Select
The Internet is a powerful tool for searching for the right product at the right price, whether from approved suppliers via on-line catalogues, or from new suppliers via search engines. Buyers can quickly collect product information directly from manufacturers or consumer product analysts, determine whether the product or service meets specific needs and then find the least expensive source.
- Electronic Catalogues are sites that provide capabilities such as sales and marketing, customer support, order processing, customer feedback, and keyword search processes.
- Electronic Purchasing Agents (EPA) improve the product search and selection process by efficiently filtering vendors, then highlighting their products in an Intranet-based electronic catalogue.
Order
On locating the right product, it can be selected and placed in an order basket and an electronic purchase order is generated. e-Procurement processes can interrogate supplier's inventory management system directly, allowing enquiries into product pricing and availability to be answered immediately. Approvals are automatically routed to the appropriate manager. If it does not exceed the requester's authorized spending limit, the order is sent directly to the supplier over the Internet.
Deliver
Once the supplier receives the order, a receipt acknowledgment is sent back confirming the ship date and delivery number. The buyer can track the order status if required and is automatically updated with any changes to shipping information leading to a new level of supplier-customer working relationships never before imagined to enable Vendor Managed Inventory and efficient stock replenishment.
Payment
To date, privacy and security have been the biggest issues of electronic commerce, but the requisite technology and security standards are coming to market, such as Secure Electronic Transaction (SET) and Secure Sockets Layer (SSL).
Integration with ERP & Legacy systems
A critical success factor for an e-Procurement solution is that it must be able to link with ERP and legacy systems to avoid duplication and to ensure that a seamless connection between the main transaction processing systems of trading partners exists delivering substantial competitive advantage to the extended enterprise.
BenefitsFrees up Purchasing Professionals to focus on Strategic Sourcing
Purchasing Magazine have estimated that purchasing managers spend more than 35% of their time on routine paperwork. The inherent automation and efficiency of e-Procurement frees up purchasing departments to tackle more important, value-added issues such as strategic sourcing and supplier management. This results in impressive cost savings and quality improvements that drop to the bottom line.
Reduces Time throughout the Procurement Cycle
e-Procurement provides quicker product development times, faster access to available goods and services, easier ordering, shipment tracking, management control, and faster delivery.
Reduces Costs
e-Procurement reduces the total costs by integrating and automating each step of the process and linking to the ERP packages. It can also reduce inventory costs by improving the tracking of products and reducing safety stocks with the improved confidence.
Promotes buying at the lowest Price
Improves the ability to search and find the best source of a given product, and ensures that only products from approved suppliers are purchased.
Improved Control and Conformance
e-Procurement makes the standard process more streamlined and the customised catalogues contain only approved products, which makes it easier for buyers to adhere to corporate purchasing policies and reduces the occurrence of maverick purchasing.
Increased Sales
e-Procurement benefits sellers by increasing product visibility to prospective buyers and presenting products and services in a more compelling way.
Conclusion
Organisations will increasingly be under pressure from both their competitors and partners to improve inter-business integration, and the Internet offers an ideal platform. There are many options to consider, and your e-procurement solution should be selected to match your own business processes and the requirements of your customers or suppliers. One thing is for certain; e-procurement solutions offer an opportunity to closely integrate businesses and deliver radical performance improvement.