e-Procurement Is Not Electronic Purchasing
Written By: J. Dowling
Published On: January 29 2001
e-Procurement Is Not Electronic Purchasing - Audio Conference Transcript
When my grandmother needed heating oil, ice, produce or milk, she placed
the appropriate card in the front parlor window and when the delivery
service came by, they rang the door bell, took the order, made the delivery,
got paid and left.
the other hand when a client at a large media and entertainment company
needed a tablet of paper, she called her administrator who wrote a purchase
requisition, brought it to her for approval and sent it to the division
controller who batched it and sent it to purchasing where the MRO (Maintenance,
Repair, and Operations) buyer batched it, summarized quantities of common
items then called the supplier to place the order. The buyer then made
copies of the purchase requisitions and sent them to mail room. The supplier
boxed up the goods and delivered them to the mail room where they were
matched up against the copies of purchase requisitions, bagged and loaded
into mail bins for the journey through the walls to the mail room on the
administrator's floor. The supplier meanwhile sent an invoice which the
mailperson checked against the purchase requisition, initialed the purchase
requisition and sent it to Accounts Payable. At Accounts Payable, the
Purchase Requisitions were matched with the Purchase Order and the supplier
was paid forty-five days later.
days and $150 dollars of handling later, the Tablet of Paper arrived.
This is not a pretty picture. But it is not the entire story either. While
this person waited for her tablet, hundreds of other employees were drawing
from 'office stocks' that had been hoarded over the months and hundreds
more were stopping by The Office Superstore on the way back from lunch
and submitting Expense Reimbursement Vouchers to Accounts Payable for
the same types of materials.
grandmother had three suppliers and four items to buy and she barely had
to leave her rocking chair. How can a company connect 20,000 employees
with 10,000 suppliers and 200,000 items?
Is Where E-Procurement Comes In
The first order of business recommended by the Selection Consultant was
the number of items by standardizing on 10 pens and 5 tablet colors
the number of suppliers through consolidation
the employees with a catalog that is easy to navigate
an Order Form that is Faxed directly to the Supplier
the suppliers package items for delivery directly into the mail system
the Purchase Requisition / Purchase Order Match
reduced MRO Spend both through unit cost reduction, purchase order count
reduction and reduced (measured) time spent by all parties. Thankfully,
Requisition Volume did not increase (at least in the short run). At $85
per Requisition, there was still a lot of room for improvement. Automation
approach was to build the catalog and order forms on the corporate intranet
and duplicate the rest of the process. That yielded $65 unit cost reduction.
New goals were set to hit:
- Two day
cycle time (Requisition to Receipt of Goods)
- $25 per
than 50% reduction in 'office stocks'
- An additional
5% Cost of Materials reduction
defined the Business Level Requirements of an e-Procurement Solution.
Requirements had to be set:
- An average
of 30 seconds to locate an item on the catalog
- An average
of 1 minute to locate and Request an item that had previously been Requested
- On line
feedback to Procurement and Suppliers regarding item quality and delivery
more than 30 suppliers to consider but key choices reduced the count quickly
of the original suppliers did not have the ability to meet key requirements
with Financial Accounting Systems
to Buy to Stock and Charge at Issue to employee
that this was a while ago, but more on this in a bit.
review of the eight candidates and assessment of internal support needs
revealed tremendous differences:
- The complexity
of making multiple suppliers fulfilling a single Requisition seem transparent
to the employee ranged from simple to prohibitive.
to track workflow including activities at the suppliers facilities and
during transport of goods varied widely.
- The catalog,
the catalog and more about the catalog.
of multiple suppliers into a common view has three challenges - Supplier
Ability, Product Ability and Customer Willingness to Commit Resources.
to multiple supplier technology systems through the corporate firewall(s)
and with multiple protocols.
Item price and availability update automation.
Personalized items such as Jackets, Mugs and Note Pads.
Catalog Items such as the Corporate Holiday Season Greeting Card, telephone
directories and Sandwiches from the Delis of Choice.
on three finalists, product demonstrations and project risk analysis commenced.
Business Scenario Execution as the Proof of the Pudding as follows.
are established through focus groups with homogeneous and mixed groups
scenario is ranked and a business value ($$s) is assigned.
supplier configures its system and demonstrate it to a subset of stakeholders
are collected and added to other selection criteria
systems carry three principal sources of project risk:
- It is
a buying process for employees therefore it must be readily accepted.
- Its value
is realized over a period of time therefore it must provide good service
and it must be kept current.
- It is
network-based therefore there are hundreds of points of failure.
process led to a solution which was implemented and it appears that the
IRR will be 20% greater than expected. This is principally due to lower
Item Unit Cost but also due to a 60% reduction of 'office stocks'. The
only measured cost transfer resulted from an explosion in the number of
Requisitions causing more mail packages being handled and more detail
A/P transactions that needed to be audited.
A significantly smaller company (a midsize manufacturing firm) was challenged
to reduce its average MRO Purchase Order cost from $28 to $14 in 12 months.
Several e-procurement suppliers choked on the challenge of bringing in
a solution at such a low Total Cost of Ownership. However, a few accepted
the challenge and addressed it in unique ways. One, the ultimate winner,
provided an add-on to another supplier's system to avoid stand-alone costs.
ERP, Financial Systems, CRM and Service Desk suppliers provide such solutions.
options are available and where only a few suppliers are involved, Supplier-based
e-procurement systems offer high value for Office Supplies, Manufacturing
Shop Supplies or application-specific needs such as Electrical, Plumbing
or Service Industries such as Automotive.
We tell our customers that ERP, CRM and Field Sales Automation are not
Technology Projects, they are Business Process Projects with a technology
Network Management and Data Warehouse are Technology Projects with significant
is, at this time a 60-40% proposition with a heavy emphasis on Technology.
This is due to the maturity of the application and is constantly shifting
to more of a business project as technologies and suppliers mature.
changes force us to conduct a thorough review of candidates each time
we embark on a selection to avoid working from bad data and to avoid missing
a new player.
There are a number of articles on this TEC site that discuss various aspects
of e-procurement, including analysis of vendors and products. For this
information, go the e-Commerce channel or search using the keyword, e-procurement.
E-Procurement Is Not Electronic Purchasing - Part II.
watch the TEC newsletter for new developments in e-procurement and notices
of other audio conferences.
Jim Dowling is VP of the Alignment Consulting Practice at TechnologyEvaluation.Com,
Inc. located in Woburn, Massachusetts. TEC researches IT products and
suppliers as well as the ways companies obtain business value from IT.
TEC's consulting services remove time, risk and ultimately cost from IT
can be reached at jdowling@TechnologyEvaluation.COM.