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 section deals with how e-procurement can lead to Process Improvement and How to Get Started.
About This Article
This article has appeared on this site in five parts. Each part contains links to the preceding parts.
Part 1 discussed the Benefits of e-procurement and included examples of major corporations that are pursuing e-procurement.
Part 2 discussed the potential Efficiency Gains of e-procurement, including relationships and processes that are necessary to obtain these gains.
Part 3 discussed how e-procurement can Broaden the Supplier Pool, including the pros and cons of this approach to procurement.
Part 4 discussed using e-procurement to Leverage Volume, including leveraging volume through outsourcing.
Objective: Process Improvement
- New e-procurement providers can help you apply a full range of strategic sourcing "best practices" through the Internet
- Most comprehensive approach, but also requires greatest discipline and management support
- Does not replace working with suppliers the old fashioned way on continuous improvement and other key aspects of relationship
Process Improvement Discussion
While outsourcing is a broad business trend today and can be used effectively for procurement, as discussed in Part 4, many companies continue to be interested in improving their own internal capabilities to strategically manage their supply base and execute programs that drive down costs and increase service and quality levels. For them, the relationships with suppliers are considered to be an important element of their overall business success, and they are reluctant to hand them over to a third party - even if doing so would help them leverage volume or otherwise reduce costs.
Historically, companies have turned extensively to management consulting firms to help them understand and apply best practices within their purchasing departments. Normally, the consulting team begins by assessing the company's situation and improvement potential, and develops a set of customized strategies and action plans. Subsequently, the consultants work jointly with purchasing staff on a set of "pilot" spending categories to execute the improvements and provide training in new techniques, which the client is expected to use on an ongoing basis without additional consulting support.
While it sounds good in theory, and has often provided a strong short-term payback, many companies are finding that institutionalizing these improved strategies and purchasing techniques is a major challenge. Achieving the benefits typically involves applying a disciplined and complex methodology that includes substantial internal data gathering and external market research, extensive use of analytical and scenario modeling tools, in-depth strategy development and planning, and disciplined execution by a staff team that is devoted exclusively to the effort - what is typically called a "strategic sourcing" program.
Since the level of effort and discipline required by strategic sourcing is often difficult to sustain once the consultants are gone, purchasing procedures sometimes revert back to traditional ways of doing business and the bottom line gains are not maintained, both reducing value to the client and undermining the reputation of the consultants.
New Approaches Emerge
New players in e-procurement have emerged to address this situation as well, offering Internet-based tools and processes that give users the ability to access and apply best practices tailored to their specific situations and that allow users to remain fully in control of their own procurement activities.
For example, B2eMarkets, Inc., offers users a Strategic eSourcing Management solution that walks online users through each step of a consulting-type procurement methodology, including gathering data, analyzing requirements, and setting strategy, as well as executing e-procurement through shopping e-marketplaces, conducting reverse auctions, and using other methods that are built into the application. Based largely on the strategic sourcing approach used by Accenture (formerly Andersen Consulting), one of the largest firms in procurement consulting and an investor in the company, the subscription-based service includes industry and commodity templates, evaluation tools, "coaching" and related on-line support.
Initial results from using this approach to e-procurement have been impressive. Across about $400 million in spending volume, B2eMarkets' customers have achieved cost reductions averaging 25%, and have achieved them in about half the time of traditional strategic sourcing processes.
Whether this approach, like the others, is right for you depends on where you are today and what you are trying to achieve. A strategic sourcing oriented program is perhaps the most comprehensive approach to e-procurement, with the greatest potential long run benefits. For many companies, however, starting with the basics of increasing efficiency, accessing a more competitive supply base, and leveraging volume, as discussed earlier, may be the appropriate first steps, with more sophisticated solutions coming later.
Any software-based solution is only effective if it is fully and correctly used, of course, and is only as good as what's programmed into it. Experience, diligence, and sound judgement are still required - especially in unique situations - and no electronic commerce system can take their place at least not yet. And even a sophisticated online solution can't replace meeting and working with suppliers the old fashioned way. These personal relationships have always been important for improving business practices, changing specifications, integrating information systems, and seeking win-win improvements in pricing, quality, and service levels - and will continue to be important in the future as well.
The Potential of E-Procurement
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.
IBM, last year's winner of Purchasing magazine's top honor, bought over $12 billion per year over the Internet in 1999 and is rapidly making electronic procurement a requirement for all its suppliers. IBM estimates that electronic-commerce related procurement process improvements will save over $200 million annually, and believes that substantial further gains can be achieved. Yes, the numbers are staggering, and the potential of e-procurement as an element of business-to-business e-commerce is dramatic. But it is important to recognize that IBM's program has been 5 years in the making and has required a virtual transformation of its entire set of traditional procedures for contracting, ordering, payment, and overall supplier management.
Going forward with e-procurement requires addressing a number of important questions about your organization and its needs, objectives, and capabilities. Some of the key questions that anyone getting started with e-procurement needs to ask follow.
Getting Started with E-Procurement: Key Questions
- What are the strengths and weaknesses of your existing procurement processes and activities?
- What specific objective(s) are you trying to achieve through e-procurement, and why?
- What categories of goods and services need the most attention and would benefit most from new e-procurement approaches?
- Can you utilize existing horizontal or vertical exchanges to meet your needs?
- How willing are you to change suppliers, including adding new ones to your supply base, in order to achieve short-term or long-term benefits?
- How important is price compared to other factors in determining which suppliers to use?
- How willing are you to outsource parts of your procurement activity?
- How important is it for you to have a proprietary solution that's unique to your company alone?
- How will you ensure that buyers in your company embrace and use new techniques?
How will you integrate new information systems requirements into your organization in a way that supports rapidly achieving e-procurement benefits?
Which type of e-procurement approach is right for you depends on the situation you face, the specific objectives you are trying to achieve, and the answers to the previous questions. E-procurement offers substantial bottom-line benefits, but don't expect a miracle overnight, and be aware of the limitations and pitfalls that can accompany dramatic changes in supply chain operations.
This concludes a Five Part series on e-procurement. See "About This Article" above for links to the preceding four parts.
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.