E-Procurement Is Not Electronic Purchasing - Part II

  • Written By: J. Dowling
  • Published On: November 2000



E-Procurement Is Not Electronic Purchasing -
Part I
I

J. Dowling, C. Sabean, and D. Geller - November 14, 2000

Introduction

This second part of an extended note on e-procurement examines the necessary steps after a business decision to go with e-procurement has been made based on the information and criteria covered in Part I.

E-procurement is an integrated system of services and technologies that provides a seamless bridge between buying and selling businesses. The e-procurement process begins at the planning stages within the buying company and extends through to the delivery and collections services of the selling company and the receipt and payment services of the buying company. E-procurement shatters walls, enhances controls, and eliminates time delays in the requisition to receipt process.

About This Note

This Technology Note covering the e-procurement is presented in two parts. The first part covers:

1. The Promise of E-Procurement

2. E-Procurement Myths and Reality

3. Preparing for an E-Procurement Initiative

The second part covers:

4. E-Procurement Architecture

5. Selecting an E-Procurement Partner(s)

6. Implementing E-Procurement

E-Procurement Architecture

Procurement automation begins with budgeting and ends with the retirement of capital assets or consumption of raw materials. Failure (or choosing) not to include any of the following dimensions of the process de-optimizes the investment at best and opens the process for subversion at worst. Following are features found in product offerings and customer requests with examples of what each function addresses.

  1. Budgeting - is the basis for Automated Expenditure Authorization for Cost Center-based controls and accounting. When a Requisition is either initiated by an authorized individual or authorized by one, the Procurement Engine should compare the Requisition against Budget Levels and other Authorization Rules then forward it to the supplier for fulfillment.

    Budgeting services include:

    • Expense items

    • Capital items

    • Cost Allocation Rules

  2. Project Structure - is the source of Automated Expenditure Authorization project-related controls and accounting. It establishes approval and authorization routings that override or clarify normal budgeting processes. Where Project Accounting is employed, it also establishes the hierarchy of accounts that will be used to capture project costs.

    Project Structure services include:

    • Expense items

    • Capital items

    • Cost Allocation Rules

  3. Purchase Contracting - establishes commitments and agreements between suppliers and buyers. Requisitions, Receipts, and Payments leverage Purchase Contract data to set up Purchase Orders and Validate Billing. Goods Receipt and Payments post attainment of purchase commitments and consumption of sale commitments.

    Purchase Contracting deals with:

    • Quantity minimums

    • Commitment levels

    • Expiration dates

  4. Bid Management - involves a series of steps from Request for Information to Purchase and Post-Acquisition activities. These steps leading up to a Purchase Order are time consuming and highly prone to contention. Bid Management is concerned with:

    • Request for Bid posting (Open and Directed)

    • Supplier response posting

    • Standard Terms & Conditions

  5. Approval & Automated Authorization - are two distinct process steps. Approval is a statement of concurrence that no known conditions exist to prevent authorization. Authorization empowers action. A combination of automated and manual intervention steps leads to commitment of a purchase order.

    Approval services include:

    • Budget comparison rules

    • Authorization Rules

    • Approval Rules

    • Workflow

    • Escalation Rules

    • Bypass Rules

    • Exception Handling Rules

  6. Requisitioning - initiates the procurement process. The more simple and comprehensive this process is, the more useable and less subverted the entire process will be.

    Requisitioning services include:

    • Catalog of standard goods, services and information

    • Standard kits

    • Alternative product selection assistance

    • Order amendment

    • Custom routing

    • Shipping, handling and delivery instructions

    • Price variance allowance

    • Delivery variance allowance

    • Cost allocation

    • Order consolidation and contingency



  7. Purchasing - establishes procurement sources and coordinates standard product selection, supplier qualification and financial controls. There is a tendency to automate the traditional Purchasing function rather than re-defining it with an e-procurement system. E-procurement systems are designed to eliminate most of the traditional Purchasing department work and enhance the value of the rest.

    Purchasing services include:

    • Catalog management

    • Purchase contract management

    • Service contracts

    • Order release

    • Communication of specifications, terms and conditions

    • Expediting

    • Supplier interaction

    • Request for Information, Request for Proposal and Proposal Analysis

  8. Receiving - must match packages and other modes of product receipt to the Purchase Orders that authorized their delivery. Delays occur in this process when goods received cannot be matched to expected deliveries. Often this is caused by differences in product identifiers between the purchasing and sales systems.

    Receiving support services include:

    • Under-shipment and over-shipment

    • Substitute products

    • Returns

    • Recipient locator

    • Forward view of expected deliveries

  9. Inventory Management - establishes replenishment rules for stocked goods as well as for supplier-held inventory such as forms and personalized promotional materials.

    Inventory Management features include:

    • Maximum / Minimum and Economic Order Quantity rules

    • Associated goods relationships

    • ECO cut-in for manufacturing and engineering materials

    • Phase-in and Phase-out rules for non-manufacturing / engineering materials

    • Alternate products

    • Stocking location identification

    • Drop-ship

  10. Accounts Payable - must match receipts to purchase orders and process payments. Accounts Payable delays can bring the process to a halt when a supplier places a Credit-Hold on the account.

    Accounts Payable services include:

    • Automated invoice / receipt matching

    • Batch vouching of payments by time-period and / or payment amount

    • Automated invoice exception authorization

  11. Interfaces - provide links to other operational and planning systems. Robust interfaces assure audibility of financial and inventory systems. They also assure that notification and workflow systems keep procurement-related transaction flowing.

    Interface services include:

    • Reference links between functions allow one function to collect data from another.

    • Requisitioning copies price and delivery data from a catalog.

    • Workflow selects 'next step' from Approval and Automated Authorization.

    • Update links between functions map progress.

    • Payment posts Actual Cost to Project Control

    • Receipt posts order fulfillment to Purchasing and Accounts Payable

    • Application System links connect e-procurement to other systems.

    • Procurement obtains engineering drawings from Product Data Management

    • Workflow sends messages through e-mail

    • External System links connect e-procurement to trading partners.

    • Local e-procurement and external Marketplace

    • Workflow to logistics companies

  12. Exception Processing - is essential to the efficiency and value of an e-procurement system. The vast majority of transactions should flow through the system without human interaction. When an exception (workflow delay, budget exceeded, approval declined, shipment error, invoice error) is detected, notification must take place promptly and resolution must be automatically expedited.

  13. Analytical Processing - is essential to process improvement and supplier management. Process measures and reporting that identify the source of delays and exceptions will allow processes to be improved either by adjusting rules or through training. Reporting that focuses on product purchase patterns, product delivery, and supplier factors to support price negotiation and vendor selection.

Selecting an E-Procurement Partner(s)

The marketplace for e-procurement systems is quite broad and complex. Products range from complete application suites to highly configurable tool kits. Similarly, suppliers range from capable technologists to experienced business automation professionals. To make things more confusing, there are often multiple suppliers involved in the process, each providing product components or integration services. Finally, there is great volatility in the technology used to deploy e-procurement. Suppliers, products, and processes change rapidly making the selection process quite difficult.

The following guidelines should minimize risk:

  1. Work quickly once scope and design are established.

  2. Avoid proprietary technologies and protocols. Even though products are System Marked or Patented, they should be built using non-proprietary tools. (Not a simple task!)

  3. Seriously consider outsourcing catalog construction and maintenance. This requires unique skills and is a critical path item.

  4. Avoid the need to acquire new skills and positions to make the system work.

  5. Give extra points to a supplier who has worked with several of your suppliers.

  6. Build an idealized model of characteristics for the solution, assign weighting factors and map supplier solutions to the model to identify differentiating and preference factors.

  7. Resist the temptation to work with 'the vital few' criteria. It is the sum of small variances from dozens of characteristics that cause cost and schedule overruns.

  8. Validate all vendor claims through customer references. This is non-trivial when products and tools change dramatically from one implementation to the next. Employ knowledgeable assistance.

  9. Understand the business model and financial performance of suppliers and develop confidence that the partnership will last through implementation and a few change cycles.

  10. Understand the technical architecture and capabilities of the suppliers to assure their ability to deliver, integrate, and maintain the system.

Implementing E-Procurement

E-procurement is seven parts process engineering and three parts information technology. Even with the best-matched technology and most capable technicians, these programs can fail partially or completely during deployment. The most common causes are lack of capability and excessive need for handling exceptions.

The following guidelines will reduce deployment risk:

  1. Do not rely on executive sponsorship to make the program a success. This is necessary but insufficient.

  2. Involve lead users and as many others who will be affected by the new system early and often. Use one-on-one discussions with lead users and executives. Use focus groups where possible to communicate changes and obtain feedback.

  3. Identify conflicts and issues early and deal with them promptly.

  4. Build the technology infrastructure and performance management systems first.

  5. Build the technology systems that are least understood early to reveal issues early.

  6. Pick internal clients and external supplier for early victories. Deploy internally, to procurement professionals and 'friendly' users and suppliers first and early. Sign up the most popular
    and cooperative suppliers before taking on controversial ones.

  7. Design and deliver management reports before going live.
    Measure performance and traffic as early as possible in the deployment process.

  8. Stress test the systems transaction and exception handling capacity under controlled circumstances.

  9. Employ message oriented middle-ware between all applications.

  10. When testing, provide extra counseling and monitoring to secondary players (Receiving, Accounts Payable, Project Management, Accounting) to avoid early misuse that leads to system data corruption.

Conclusion

This note provides the information necessary for proper preparation and implementation of an e-procurement system. The benefits should provide reduced inventories, lower procurement costs, lower product costs, shorter procurement cycle-time, higher (internal) customer satisfaction, and higher value-add from procurement professionals.

 

 
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