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Maximum Adaptability

Why purchasing systems must be designed simply and with change in mind
Published in "Think!", DMR 04/2010 Online: http://www.detecon-dmr.com/en/article/maximum-adaptability_2010_1 2_16 Fabian Bechara Gwendolin Garbe External factors and influences as well as internal striving for efficiency force companies to review their business processes and organizational structures in every department, including purchasing. Quite frequently, the role of IT and its impact over the course of this change process are not given due consideration. The best possible implementation of the desired changes will not be possible unless a flexible IT landscape is in place.

Purchasers are finding changes in their situation in 2010. The days when suppliers were willing to be accommodating and lower their prices are gone. For the first time in many years, companies have been faced with price increases by their suppliers. This is in no small part due to the ongoing recovery of the economic system. Prices for raw materials, for example, have risen sharply. During the period from March 2009 to March 2010, the price per ton of steel went up by €200. This rise in prices affects the manufacturing sector in Germany most of all the automotive industry is just one example. Another negative effect for purchases outside of the European Union has been created by the weakening euro. It declined from US$1.50 in November 2009 to US$1.31 in September 2010. The conjunction of these developments is forcing chief procurement officers (CPOs) to rethink their business processes with the aim of finding new opportunities to improve efficiency and reduce process and organizational costs. As they seek to achieve these goals, purchasing departments are giving more consideration to the topics of outsourcing and centralization or to tougher price negotiations. One important aspect often forgotten in this context is the potential which lies

Published in "Think!", DMR 04/2010

hidden in the IT systems used for procurement activities. A flexible IT landscape can present significant advantages to a company. But what does that mean exactly? State-of-the-art purchasing systems are characterized by simplicity Flexible purchasing systems are characterized by their use of software which can be adapted quickly to new or changed processes. Greater reliance on standard software when selecting systems and solutions helps to achieve the goal of creating a flexible IT landscape for purchasing. These programs are capable of modeling the purchasing processes in line with a best practice approach while remaining so close to a defined standard that organizational or procedural changes can be realized more easily and at lower cost. State-of-the-art purchasing systems offer the opportunity to install new business ideas as well as improve cooperation with the neighboring units of accounting, logistics and production, thereby reducing costs. The primary characteristics of such systems are the simplicity of their implementation and the ease with which they can be integrated into the existing system landscape. Thanks to these properties, they reduce expenditures of time and money during implementation, resulting in turn in lower costs. Lower expenditures for care and maintenance of the systems is another characteristic. Company budget are frequently burdened by the costs for maintenance and updates or releases in particular. The topic of standardization plays a role in the interaction with suppliers and customers as well as in the communication within the company. So care must be taken to obtain purchasing systems which can incorporate suppliers or customers without any trouble and exploit the potential for efficiency found in the electronic interchange of data. Moreover, a flexible system landscape in purchasing can be recognized by the reduction of advanced developments and adaptations to a minimum so that the software remains manageable. The question as to whether proprietary developments are necessary should always be considered very critically because they involve higher expenditures of labor. Moreover, companies should strive to maintain a homogeneous system landscape for their purchasing activities for two reasons: first, the IT costs themselves can be reduced, and, second, there is an increase in the efficiency of employees who do not have to switch back and forth among various applications when performing their daily tasks. The figure below shows the Detecon reference model for purchasing systems. An in-depth analysis has revealed that there is a broad range of available standard software solutions and state-of-the-art products which will cover the majority of these application areas in purchasing. Before deciding on a

Published in "Think!", DMR 04/2010

solution, purchasing departments should analyze and define their specific requirements as dictated by their business processes, yet at the same time work closely with the IT experts to ensure that a new system can be integrated into the current IT landscape and adapted when changes occur in the future. The trend is clearly moving in the direction of standard products so that the benefits described above can be secured. Individualization has no place here In contrast, inflexible and inefficient purchasing systems often display a system landscape which is too tightly integrated and rigid. The various components are intermeshed to a high degree and contain many customized or adapted interfaces. Over the course of years, many companies have individualized a standard software program to such a great extent that they have left the original standard far behind and are in the meantime operating with what is virtually a proprietary development. Such systems cannot be modified without expending a lot of money, time, and effort, and they hinder the purchasing department as it strives to make its processes leaner and more cost-efficient. What is more, networking these systems within the organization also requires greater effort and leads to more work and expense, especially for maintenance. One of the main reasons for the existence of such systems lies in the history of the IT landscape. Nearly all purchasing systems have grown and developed historically.

Published in "Think!", DMR 04/2010

Organizational changes such as mergers and acquisitions can also contribute to the evolution of a heterogeneous system landscape in procurement. But there are companies which have relied on proprietary developments right from the beginning in the hope that they would consequently be able to provide optimal support to their business processes. Speaking generally, we can say that the main priority for the business side is often the fast and trouble-free realization or implementation of process changes. They want systems which support current processes while possibly increasing efficiency or exploiting potential. A long-term IT strategy which would also promote greater efficiency in the long run is frequently deemed to be dispensable. We can use the implementation of a software solution for the procurement of special material groups as an example of this scenario. The implementation would offer relatively fast success to the business department and generate savings. However, the implementation will require a lot of work and time as well as high costs, and the software must be implemented in every local ERP system. The consequence for the company is that every future roll-out would have to be considered very carefully because of the high subsequent costs. It would have been better for the company to look around beforehand and see if there was not a standard software program which offered similar functions, but could be implemented at a central location. Better supplier management through IT The right purchasing systems can enhance the purchasing departments capability to cooperate more closely with suppliers and manage them more efficiently. The topic of transparency continues to gain significance. For example, it is more and more important for companies to have clarity regarding the volume of business done with each supplier. The strategic development and expansion of business with suppliers is not possible unless the purchasing department has these figures at hand. When it knows what the purchasing volume is, strategic procurement can make a decision about the possible removal of a supplier from the portfolio because the purchasing volume is too low. On the other hand, it may be advantageous to strengthen the bonds to an important supplier, e.g., by the conclusion of long-term contracts. A vendor who supplies materials critical for the companys operation (A items) should be given more intense scrutiny than a vendor of C materials who provides office supplies, for example. Based on these key figures, the purchasing department can also decide to pursue a two-supplier strategy, thereby avoiding dependency on any one particular vendor. A flexible purchasing system should also be in a position to integrate a new supplier without expending a lot of time and effort as well as to produce

Published in "Think!", DMR 04/2010

important key figures about the companys supplier portfolio. This is where the topic of business intelligence, for example, plays a major role. Without the help of purchasing systems, purchasing processes such as vendor-managed inventory (VMI) cannot be implemented. However, IT systems can support procurement in the classic purchasing process as well and result in cost savings. Price negotiations are one such opportunity in which a purchasing system can even prove to be more effective than a purchaser. For example, it may be possible to negotiate a lower price during an auction controlled by the system than during one conducted by a purchaser. The system can be programmed to continue to ask about a lower price right down to the very last bid, whereas a purchaser may regard the price in a vendors third or fourth bid to be reasonable and end the auction at that point. Capabilities and features of this type in a purchasing system enable the purchasing department to lower prices and reduce them long term. These scenarios can undoubtedly be modeled using proprietary or historically developed purchasing applications as well. But it must be emphasized that flexible systems in particular can result in cost savings in comparison with proprietary developments during the implementation of new business processes such as VMI because the integration and networking with the suppliers utilize a standard interface. Multiple vendors can be integrated without additional expenditures because the interface is based on a standard and need not be redefined for every single supplier. Reacting flexibly to organizational changes: centralization, outsourcing, and M&As Besides improving supplier management, the right purchasing system can promote and positively support organizational changes. When thinking about reducing costs, companies often consider the possibility of centralizing procurement activities and possibly reducing the number of employees. Plans like this have been observed frequently in the industry in recent years especially. Often locations are centralized and operative purchasing is separated from strategic purchasing. The companies are then able to reduce the size of their staffs and cut costs. But projects of this type can be carried out successfully only if purchasing systems which are flexible enough to respond to this type of change are already in place. The objective is to have all of the users at all of the locations working with the same systems so that they can access the common master data within the organization without a lot of effort and expense. Purchasing systems should also be capable of supporting a corporate merger and the subsequent fusion of the two purchasing organizations. The systems must be flexible and open enough to integrate the

Published in "Think!", DMR 04/2010

new organization quickly and cost-efficiently, including a modeling of the two sets of processes and the support along the road to a standard purchasing process as well as the integration of purchasing within the new organization. A merger can be an especially problematic situation with the consequence that two departments continue to exist and must be maintained parallel to each other because the IT systems are unable to model the new processes. Another trend which companies include in their deliberations is the idea of outsourcing the operative purchasing from the organization and handing it over to an external service provider on the basis of an outsourcing deal. In this case, manual activities are the special target of the divestiture because the desired effect is to cut personnel expenses. The service provider is tied to the company on the basis of a long-term contract and required by service level agreements to maintain a certain standard of service. A distinction can be made between two types of outsourcing: the transfer of the activities or the takeover of the employees. Prominent companies in Germany include the Deutsche Bank or Hochtief. It is especially important during outsourcing that the system landscape be flexible enough to support these process changes. In the ideal case, the interfaces to the new service provider are designed so that the internal customer or supplier does not notice that the order is being processed by an external service provider.

Published in "Think!", DMR 04/2010

Published in "Think!", DMR 04/2010

A classic example of an organizational change and its impact on the system landscape is the consolidation of a number of departments with the objective of creating a central division. There are often a number of legacy systems involved here, and the consolidation on the part of the IT results in increased labor and expense. If, for example, these systems have been tailored in detail to the specific requirements, at times without examination in the form of the calculation of a business case, the consolidation can turn out to take longer and cost more than originally planned. This dilemma could have been alleviated in advance if the two departments had based their processes and systems more closely on the standard.

Fabian Bechara Fabian Bechara is employed as Senior Consultant in the Group Supply Management. His focus is on the areas process re-engineering, cost reductions, and efficiency improvement within the supply chain. Gwendolin Garbe Gwendolin Garbe is employed as a Consultant in the Group Supply Management. She previously completed her studies in information management in Koblenz and Copenhagen. Her core competencies are in the development and realization of process and application strategies, including operative and strategic purchasing.

Published in "Think!", DMR 04/2010