E-Procurement Is Not Electronic Purchasing -
Dowling, C. Sabean, and D. Geller
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.
Technology Note covering the e-procurement is presented in two parts.
The first part covers:
The Promise of E-Procurement
2. E-Procurement Myths and Reality
3. Preparing for an E-Procurement Initiative
second part covers:
4. E-Procurement Architecture
5. Selecting an E-Procurement Partner(s)
6. Implementing E-Procurement
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.
- 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:
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:
Cost Allocation Rules
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:
- 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
& 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
Exception Handling Rules
- initiates the procurement process. The more simple and comprehensive
this process is, the more useable and less subverted the entire process
Requisitioning services include:
Catalog of standard goods, services and information
Alternative product selection assistance
handling and delivery instructions
Order consolidation and contingency
- 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:
Purchase contract management
Communication of specifications, terms and conditions
Request for Information, Request for Proposal and Proposal Analysis
- 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:
Management - establishes replenishment rules for stocked goods
as well as for supplier-held inventory such as forms and personalized
Inventory Management features include:
Maximum / Minimum and Economic Order Quantity rules
ECO cut-in for manufacturing and engineering materials
Phase-in and Phase-out rules for non-manufacturing / engineering
Stocking location identification
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
- 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
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
sends messages through e-mail
External System links connect e-procurement to trading partners.
Local e-procurement and external Marketplace
Workflow to logistics companies
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.
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.
an E-Procurement Partner(s)
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.
following guidelines should minimize risk:
quickly once scope and design are established.
proprietary technologies and protocols. Even though products are System
Marked or Patented, they should be built using non-proprietary tools.
(Not a simple task!)
consider outsourcing catalog construction and maintenance. This requires
unique skills and is a critical path item.
the need to acquire new skills and positions to make the system work.
extra points to a supplier who has worked with several of your suppliers.
an idealized model of characteristics for the solution, assign weighting
factors and map supplier solutions to the model to identify differentiating
and preference factors.
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.
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.
the business model and financial performance of suppliers and develop
confidence that the partnership will last through implementation and
a few change cycles.
the technical architecture and capabilities of the suppliers to assure
their ability to deliver, integrate, and maintain the system.
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
following guidelines will reduce deployment risk:
- Do not rely on executive sponsorship to make the program a success.
This is necessary but insufficient.
- 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.
- Identify conflicts and issues early and deal with them promptly.
- Build the technology infrastructure and performance management systems
- Build the technology systems that are least understood early to reveal
- 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.
- Design and deliver management reports before going live.
Measure performance and traffic as early as possible in the deployment
- Stress test the systems transaction and exception handling capacity
under controlled circumstances.
- Employ message oriented middle-ware between all applications.
- 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.
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.