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New Dimensions in EC and SCM Part 1: The Benefits of E-Procurement

Written By: Scott A. Elliff
Published On: February 14 2001

Executive Summary

Every business is a purchaser as well as a supplier, with many routinely processing hundreds of buying activities daily. Typically, purchases represent 50 to 90% of a company's cost structure -- making procurement strategy and execution a critical lever for effective supply chain operations and superior business profitability.

Electronic commerce offers exciting new possibilities for businesses to improve their performance on this important "upstream" supply chain activity, both for indirect or support items and, increasingly, for materials that are direct components of the products and services that businesses make and sell.

As in many areas of e-commerce, the wide variety of alternatives can be confusing. This article outlines some of the major recent developments in e-procurement and the important strategic and tactical choices that companies need to make in order to answer these questions and to take full advantage of new "buy" side e-commerce developments.

This part explains the Benefits of e-procurement and includes examples of major corporations that are pursuing e-procurement.

About This Article

This article will appear on this site in five parts. Each part will contain links to the preceding parts.

Part 2 will discuss the potential Efficiency Gains of e-procurement, including relationships and processes that are necessary to obtain these gains.

Part 3 will discuss how e-procurement can Broaden the Supplier Pool and the pros and cons of this approach to procurement.

Part 4 will discuss using e-procurement to Leverage Volume, including leveraging volume through outsourcing.

Part 5 will discuss how e-procurement can Improve Process as well as How to Get Started with e-procurement.

Introduction

Many e-commerce articles today focus primarily on the "sell" side of the business, highlighting how companies can better use electronic commerce to move product. Topics include how to get more consumer traffic on your Web site, how to integrate your information systems with those of your business customers, how to more effectively market business-to-business services in an Internet environment, and many others.

But every business is a purchaser as well as a supplier, with many routinely processing hundreds of buying activities daily. These include purchasing raw materials for manufacturing or finished products for resale, ordering office supplies and airline tickets, and contracting for temporary labor and consulting services. Typically, purchases represent 50 to 90% of a company's cost structure -- making procurement strategy and execution a critical lever for effective supply chain operations and superior business profitability.

Electronic commerce offers exciting new possibilities for businesses to improve their performance on this important "upstream" supply chain activity, both for indirect or support items and, increasingly, for materials that are direct components of the products and services that businesses make and sell.

But what is e-procurement? Really, it's any purchasing-related activity that involves electronic communication, the Internet, or related software to help companies achieve increased value. From point-and-click ordering using Web-based catalogs of individual suppliers, to marketplaces that bring together in one place the products or services offered by multiple suppliers, to live auctions that determine the lowest-price bidder - there is a wide range of new e-procurement methods and tools to help businesses buy goods and services better, faster, and cheaper.

As in many areas of e-commerce, the wide variety of alternatives can be confusing. What's the best strategy for our company to use? What specific benefits are we trying to achieve? What are the best e-procurement solutions and specific tools, Web-based services, and other mechanisms for meeting our particular needs? This article outlines some of the major recent developments in e-procurement and the important strategic and tactical choices that companies need to make in order to answer these questions and to take full advantage of new "buy" side e-commerce developments.

Ironically, what's most appealing to us as consumers using e-commerce to buy books or clothing or other merchandise -- surfing the Internet, accessing a wide range of choices, and making one-at-a-time purchases at posted prices -- is what businesses most want to avoid. Companies want to ensure that their processes are:

  • Reducing the time employees spend purchasing, whether it's leafing through catalogues or surfing the Web.

  • Leveraging their volume with preferred suppliers in order to get better pricing, service, and access to new technology.

  • Limiting choices to only those suppliers, materials, and services that they are confident can meet pre-approved levels of price and quality.

E-procurement is rapidly becoming an important issue. A recent survey by Deloitte Consulting found that among a cross-section of major corporations, only about 15% are satisfied with their current level of e-procurement activity. However, of those relatively few companies who have extensively adopted e-procurement solutions to date, 88% are satisfied with the results -- and are reporting returns on investment that often approach or exceed 300%.1 Not surprisingly then, Purchasing magazine reports that over 90% of purchasing professionals expect to be buying online within the next 12 months -- with a total of perhaps several trillion dollars of goods and services transacted online over the next several years.2


FOOTNOTES

1 "Leveraging the e-Business Marketplace: Business-to-Business e-Procurement Trends, Opportunities, and Challenges," Deloitte Consulting, 1999.

2 Purchasing Magazine, Annual Survey of On-line Buying, 1999.

What are you trying to achieve?

In order to get started in e-procurement, you need to establish a strategy and choose the specific tools and services to help you execute it.

Too often, articles and promotional materials on e-procurement fail to distinguish among the different types of benefits that are available. A "one size fits all" approach is not likely to be successful in this complex area. Rather, devoting the time and attention to determining the right objective for your situation - identifying what you are trying to achieve - and then finding the best methods for achieving it, are keys to success.

The potential benefits of e-procurement can be classified into four major areas:

  1. Increasing efficiency in executing purchase orders and other transactions

  2. Accessing the capabilities of a broader supply base

  3. Leveraging your volume to drive better prices and supplier value-added services

  4. Improving the effectiveness of your ongoing procurement process

The detailed benefits that are available within each area, the type of strategies and tactics that are appropriate for pursuing them, and some of the specific e-procurement players who are in place to meet these needs are discussed in this article. With this information in hand, you should be in a strong position to set the appropriate strategy, select the tools and providers, and implement e-procurement programs that can provide significant bottom-line value to your organization.

Conclusion of Part 1

E-procurement is an exciting and rapidly evolving aspect of e-commerce and supply chain management that promises to yield significant improvements for the companies who buy trillions of dollars of goods and services today. But it is not a panacea.

This is part 1 of a five part series on e-procurement. Part 2 will discuss the Efficiency Gains that can be expected from implementing e-procurement

About the Author

Scott A. Elliff is Founder and President of Capital Consulting & Management, Inc. (CCMI), offering high-quality analysis, practical advice, and fresh perspectives to help clients achieve bottom-line improvements in profitability, effectiveness, and market position.

Mr. Elliff has sixteen years experience consulting to a wide range of Fortune 500 and other companies, with particular expertise in supply chain management, including product development, forecasting, procurement, scheduling, manufacturing, transportation, logistics, inventory management, and customer service. He has written and spoken widely about these topics in a number of industry conferences and publications.

CCMI can be found on the Web at www.CCMIservices.com.

Mr. Elliff can be reached at (703) 370-2607 or by e-mail at scott_elliff@CCMIservices.com. All materials CCMI 2001.

 
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