E-Procurement: A source for cost

reduction
Sourcing is defined as the process of identifying suppliers that
could provide needed products or services for the acquiring
organization.
sourcing is a pre purchase activity (identify suppliers) and purchase
E-Procurement and sourcing both are part of procurement
Purchasing refers to actual buying of materials and those activities
Enterprise Resource Planning associated with the buying process. Electronic purchasing
addresses only part of the problem and represents only the tip of the
iceberg.
Procurement on the other hand has a broader meaning and
includes purchasing, transportation, warehousing and inbound
receiving.
Procurement is a closed-loop process that begins with the
requisition and ends with payment

Procurement Process: Why automate?

A Traditional purchasing process flow Multiple Departments
•Engineering
•Marketing
•Sales
•Support

Approval Hierarchy
•Managers
•Approvers
•Etc. Purchasing Department
•H/W Purchaser
•Facilities Purchaser
•Etc.
Suppliers
•Contract
•Non-Contract
•Specialized
•Etc. Logistics
•Receiving
•Inventory
•Payment
•Etc.
Source: ariba.com, February 2001.

Definition E-Procurement Effect of E-Procurement

An E-Procurement application is the software that is required to
access suppliers electronically, enabling an organization to conduct Traditional/Manual Internet
procurement transactions over the Internet. Price of Materials --- 5% to 10%
and Services
reduction
Supplier Purchase and
7.3 days 2 days
Fulfillment Cycles
USD107 per order USD30 per order
Supplier Administrative Costs
requisition requisition
Portal 25% to 50%
Supplier Inventory --- reduction in
inventory cost
Source: Aberdeen Group Jun 2004
Supplier

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 Benefits of E-Procurement Direct vs Indirect Materials
http://www.mysap.com/solutions/e-procurement/businessbenefits.htm Direct Materials Indirect Materials
Strategic sourcing – core business Technical sourcing – non-strategic
• Reduced purchase costs Systematic sourcing scheduled by production run Spot buy, less frequent purchase of
• Enhanced efficiency at every stage standardize products
Locus of operation: professional buyer’s desktop
• Establish adaptive, efficient, collaborative supplier relations Locus of operation: employee desktop
Driven by design specification Driven by catalog
• Monitor and regulate buying behaviors
Actual transaction function not as time Focus on transaction functions which is time
• Improve sourcing by discovering more suppliers consuming as back & forth information sharing & consuming
communication with suppliers
• Ensure deliveries on time, every time
More complex – both technical and non Less complex decision when choosing a
• Free up skilled employees technological consideration when choosing a solution provider
• Reduce training requirement solution provider. Must provide benefits to all
members of supply chain
• Permit flexible access time, anywhere Collaboration, integration & visibility among Many suppliers
• Manage contracts qualified suppliers are critical
Quality, security and privacy conscious Price conscious
• Perform content management functions
• Reduce maverick purchase

Indirect procurement challenges Total Cost of Indirect Procurement

• Multiple suppliers ORM – Operations Resource • Only 40% of total indirect material costs are true product costs
• By commodity type Management
• Cost of Procurement:
• By geographic area • Office products, travel
services – Coordinating approvals Cost of
• By department or functional
group MRO – Maintenance Repair – Managing quotations Cost of goods Procurement

• Low product standardization and Operations – Purchase orders

• Replacement parts,
• Off-contract, “rogue” buying – IT costs
• Excess and obsolete inventory • Cost of Inventory:
• Lack of detailed usage and cost – Carrying costs
information – Storage
• High process costs relative to
– Insurance
product costs Cost of
– Shrinkage Inventory
– Obsolescence *Source: Grainger Industrial Supply and industry studies

Operating Resource Procurement at

Business Benefits of MS Market
Microsoft: MS Market Supplier N
Supplier 2
1. Catalog Supplier 1
Buyer 2. Browser Suppliers Multisupplier Management MS Market Solution Business Benefits
Catalog
3. Find Products
Catalog Content

Catalog User-friendly catalog for world-wide Control and tracking of orders with
Interchange

4. Order items Order Form employees direct vendors

Web
Browser 5. Confirm order Availability
Integration with SAP R/3
Automate $3 billion annual
Approval Components: spending
Order Entry
Workflow 1. Windows NT server 4.0
Reduce purchase cycle from 8 to 3
6. Transmit order PO Workflow 2. Internet Information Server 3.0 days
get confirmation
3. SQL Server 6.5 Reduce employee overhead from
4. Site Server Enterprise 2.0 14 to 2 full-time employees
MS Market in Action Fulfillment 5. Microsoft Exchange Server for e-mail Average 1,000 orders per day;
• Shipping
approval
• Accounting
7. Order Completed • Etc.

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 E-Procurement Business Issues Transformation of Corporate
(Purchasing Department) Purchasing
Supplier Performance Operational Efficiency

How well are my suppliers How can I streamline my

performing? procurement process? Front-End E-Procurement Back-End ERP systems
• e-Catalogs • A/C receivable and
Procurement Efficiency payable
Supplier Efficiency
• Content Management
• Inventory Management
How can I maximize my
purchasing power?
How can I align with my
strategic suppliers?
• RFQs • Material Management
• Approval Routing • Order and Sales
Buying Behavior Cost Savings
• Order Management Management
How can I identify and
eliminate rogue buying?
How can I drive my • Data Management • Sales Planning
procurement costs down?
• ASP :- Ariba, • Providers : Oracle, SAP,
Commerce One,
E-Procurement Oracle, Cisco, Clarus,

E-Procurement Chain Management

E-Procurement Application Process
E-Procurement
Order Order
ORGANIZATIONAL Requisition Analysis Complete Search and Approval
Receipt and Deliver and
BUYING Procurement and Invoice
(History, Plan, Forecast) Select Placement Schedule
Life Cycle
Multisupplier Approval Order
PRODUCT SELECTION Product Analysis catalog Workflow Management
(Quality, Price, Availability) Search Engine
MEASURE Partial
Shipping and
AND
APPROVAL WORKFLOW
Approval Analysis Functional Distribution
IMPROVE (Avg.approvers, Avg.days) Solutions Pricing and Supplier-side
Availability Order Entry Receipt and
Supplier Analysis Invoicing
SUPPLIER SELECTION (Quality, Delivery, Price,
Performance)
Complete Integrated Procurement Chain
Logistics Analysis Integrated
LOGISTICS (Delivery, Payment, Credit, Solutions Management Application
Inventory)
Interenterprise Processes Breaking Down Process Walls

E-Procurement Models
Neutral Markets
Aggregated

Aggregated
Sell Side

Buy Side

Buy Side
Sell Side

E-Procurement Models

One:Many Few:Many Many:Many Many:Few Many:One

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E-Procurement Models
• Company-centric models
– Sell-side marketplace (one-to-many)
– Buy-side marketplace (many-to-one)
• Many-to-many marketplaces—the exchange
– Buyers and sellers meet to trade
• Trading communities
• Trading exchanges
• Exchanges
Sell-Side Marketplace Architecture
Sell-Side Marketplaces: One-to-Many
(cont.)
– Value-added services
• Track status of order
• Check stock availability
• Promotions
• Customized prices
• Group accounts and central approval—for
businesses with multiple branches
• Standing orders automatically activated
“One to Many” (Seller solution)
Seller Centric:- Primary motivation is to increase revenues and
reach a wider market than the seller currently serves. Likely to be a
dominant seller in the market.
B
B
Seller
B
Solution
B
Sell-Side Marketplaces: One-to-Many
(cont.)
• Company portal attractive, easy to use
• Browse online catalogs
• Use search engines
• Payments
– Cash or check upon delivery
– Automatic payments
– Credit card
– Purchasing card
Sell-Side Marketplaces: One-to-Many
(cont.)
• Direct sales from catalogs
– Benefits
• Reduces errors during the process
• Speeds up order cycle
• Ability to customize products
• Offer different prices to different customers
– Limitations
• Channel conflicts with distribution systems
• High cost when traditional EDI used
• Large number of business partners is needed to
justify system
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 Buy Side: One-from-many,
“Many to One” (buyer solution) E-Procurement (cont.)
Buyer Centric:- Primary motivation is to reduce
procurement costs and increase efficiency of • Innovative procurement management
procurement process. – Innovative purchasing as strategic approach
to increase profit margins
S
– Web facilitation includes:
S
• Electronic tendering
• Volume purchasing
Buyer • Aggregating supplier catalogs at buyer’s site
S
Solution • Group purchasing
S • Others
S

“Many to Many” segment of B2B Intensity of Organization’s

commerce Participation
Trading Community:- Primary motivation is to generate
• Information Entry and Receipt : Browser based
revenues by providing value to members of a specific market by applications which are mainly used to enter and receive
introducing new efficiencies and new ways of buying and selling information. Example: BILT using 01Markets.com

S B • Software Development and Maintenance: Organization have

an in-house software development and maintenance team.
B S Applications are developed or customized in-house.
e-Market B
Example: tatasteel.co.in
S
Exchange
B S • Network and Processing Management: Computer network
that connects all suppliers with the organization is developed
S B and managed in-house. Example: ITC’s e-Choupal
• Key to analysis: Reliability and Security V/S Cost

Value Chain Perspective Interdependency Perspective

• Two dimensions
• Networked E-Procurement (supporting reciprocal
– Functional structure, describing interconnection interdependencies)
between system participants such as buyer supplier – Example: Online Stock Information at Tata Steel
and intermediary. Buyer Supplier

– Location of value-adding process, which • Pooled information resource E-Procurement (supporting

transforms input into outputs. pooled interdependencies)
– Example: Metaljunction.com
• Airline Reservation Systems V/S Railways Buyer
MJ
Supplier1

Reservation Systems Buyer Supplier2

• Key to Analysis : E-Procurement system should • Value/supply-chain E-Procurement (supporting

sequential interdependencies)
be Located close to participants who create value. – Example: Nike
Supplier Buyer Retailer

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 Interdependency Perspective Level of Information sharing
• Two dimensions
• Role linkage (vertical or horizontal) • Intranets : Controlled access behind the initiator’s
• System support level (operational support or strategic
support). firewall and into the initiator’s intranet
• Supranet : Consortium sponsored and controlled,
interorganizational network
• Intranets, where individual companies maintain
proprietary access to a unique information product,
are better candidates for achieving significant
competitive advantage

Transaction Cost Perspective Transaction Cost Perspective

• Electronic dyad
• Electronic hierarchy
• A firm chooses this option when it does not want to commit to
• Allows firms to jointly optimize the dyadic relationship one single source and neither wants to scan entire market for
• Increase the value of total supply chain by creating a higher level every transaction.
of integration that goes beyond exchange of routine information. • Example: tatasteel.co.in
• Example: Online Stock Information at Tata Steel

Supplier 1
Buyer 1
Supplier 2

Supplier 3
Buyer 2
Supplier 4
Buyer Supplier
Buyer 3 Supplier 5

Supplier 6

Transaction Cost Perspective E-Procurement Roadmap

• e-Market
Product Characteristic Risk
• Maximizes benefits arises out of reduces search cost, faster Management
and efficient transmission of information -Complexity

• Example : metaljunction.com -Volume uncertainty

Adoption and
Implementation
Risks
-Technology uncertainty

Supplier Market E- Value

Characteristic Procurement Generated
Supplier 1 Model
-Trust Value
Buyer 1 Apportion
-Age of relationship Ownership
Supplier 1 Patterns
-Competitive intent
electronic Supplier 1 -Market variability
Buyer 2 Market Decide upon right E-
-Bargaining power Enjoy the
Supplier 1 Procurement Model
benefits
Analyze Product and
Supplier 1
Buyer 3 Supply Market
Supplier 1

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 Product Characteristics Supply Market Characteristics
• Complexity of description • Trust
– Extent to which detailed drawings or specifications are – Existing when one party has confidence in the exchange partner’s
reliability and integrity
required to describe the product
– If trust is higher than a tightly coupled E-Procurement system
– Higher the complexity, more information flow needed. will further enhance trust
Hence a tightly coupled E-Procurement model is better • Age of relationship
• Volume uncertainty – Measured as the year of association
– Assessment of fluctuations in the demand and the – e-Markets do not help in creating and sustaining longer age of
confidence placed in estimates of the demand. relationship
– Higher the uncertainty, more flexible your E-Procurement • Competitive intent
model should be. Hence e-Markets are preferred – Extent to which there are potential suppliers to ensure adequate
• Technological uncertainty competition
– Rate of changes in specifications and the probability of – e-Markets do not help if competitive intend is lower. Suppliers
future technological improvements in the product can always collude to drive prices up.
– If Suppliers are Pro – Innovation than a tightly coupled E- • Market variability
Procurement solution can be used as a buffer against – Extent of market fragmentation and rate at which price and player
uncertainty in the industry changes over time
– If market variability is high than e-Markets give better benefits

Select an E-Procurement Model Adoption and Implementation

Classification criteria Model
Intensity of firm’s Information entry and receipt, Software
Risks
participation development and maintenance, Network and • Inherently carries more risk than ordinary information
Processing Management technology projects
Value chain Two dimensions namely functional structure, – Adoption risk: whether business partners will join the
perspective and location of value-adding process system or not
Transaction cost e-Market, e-Dyad and e-Hierarchy – Implementation risk: whether business partners will be able
economics to implement the system optimally
Interdependency Networked E-Procurement; pooled information • Subsidies such as training, software etc can be used to
Perspective resource E-Procurement; value/supply-chain E- overcome these risks
Procurement. • Key Issues:
Interdependency Resource pooling, Operational cooperation, – How to provide subsidy
perspective Operational coordination and Complementary – To Whom it should be provided
cooperation.
Level of information Intranets and supranet.
sharing

Strategic Focus of E-Procurement E-Procurement Deployment Strategies

• Small Number of Items with Large Volume
• Evolutionary Deployment of E-Procurement
– Tight Integration with back-end system
– Evolutionary: start small; with single set of commodities; a
– Tight integration with partners along supply chain:
particular region
Direct connection, private exchanges
• Strategic Sourcing: systematic
– Partnership based sourcing
E-Procurement process reengineering
• Large Number of Items with Small Volume
• Only most advanced organization adopts
– Open Sourcing in the public exchanges
• 2/3 of purchasing communities in experimental stage
– Loose integration with legacy systems
– Discover new suppliers • Priority and Contingent Policy Portfolio
• Which policy more urgent?
• Portfolio of strategies: Contingency, combination, and
architectural integration

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E-Procurement implementation profile E-Procurement System in Chevron
Corporate Profile Two-fold Solution
• Budget US$2 M to $10 M
• US 3rd largest petroleum co. • E-Procurement Software from Ariba
• Team Size 3 to 13 People
• Operating in roughly • Web-based front end and user
interface for catalog search,
• Project Duration 1 to 3 years 100 countries purchase order and requisition

• Annual net gain - $3.2 billion • EDI and Catalog services from
• No. of Catalogs 3 to 30 Harbinger
• Purchase budget - $9.9 billion
• Facilitate interaction with suppliers
• No. of Users 50 to 1000 • Two existing ERP systems
and manage catalog content and
customer/supplier base
from SAP and J.D. Edwards
(Source : Deloitte Consulting, Realizing the B2B Procurement Vision,
2nd Annual Study, 2001) (Source : Deloitte Consulting, Realizing the B2B Procurement
Vision, 2nd Annual Study, 2001)

E-Procurement System Architecture Chevron

Critical Success Factors
Intranet Extranet Supplier
• Selection of right strategy, architecture and solutions
• Management commitment
AR I BA Harbinger
Supplier • Content management
Multi
SAP
Procurement
Front-end
Vendor • User friendly
--- Electronic
Catalog • Seamless integration with back-end ERP
JDE
Chemical
Supplier • Redesign workflow
--- • Manage change
JDE EDI/EFT • Fast implementation
COPL PO / Invoice / Funds
Supplier

Firewall Firewall

E-Procurement Integration Policy Architecture of Integrating EC & ERP

• Tight Internal Integration
– Tight integration with ERP or legacy
– Internal e-catalog
• Inter-Enterprise Integration Seller
ERP-based
Catalog
…...
Web-based
Catalog
…...
– Direct integration with partner’s ERP system
– Compliant ERP interface standard necessary Web Browser Web Browser

• Integration with Exchanges Application

Server
Sales Force Supply Chain
– ERP-compliant eMarketplaces Buyer Web Server Automation Planning

– MarketSet: Commerce One and SAP

Mainframe Data Mark

ERP System ERP System

– Private Exchange
– Application Server (a) Inside-Out Approach (b) Outside-In Approach

• Communication Platform Standard: XML Figure 4. Architectures of Integrating EC with ERP

(Source: Complied from Selland [1999])

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 Conclusion
• E-Procurement as Procurement Process Reengineering
• Selection and combination of E-Procurement models critical
• Conformance of strategy and integration architecture essential
– Small MRO: Exchanges
– Key Purchases: Private Supply Chain
• Conformance of integration policy and solution selection
crucial for the successful deployment