e-Procurement Is Not Electronic Purchasing

Introduction  

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.

On 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.

Seven 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.

My 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?

This Is Where E-Procurement Comes In  

The first order of business recommended by the Selection Consultant was to simplify:

1. Reduce the number of items by standardizing on 10 pens and 5 tablet colors
   
   
2. Reduce the number of suppliers through consolidation
   
   
3. Provide the employees with a catalog that is easy to navigate
   
   
4. Provide an Order Form that is Faxed directly to the Supplier
   
   
5. Have the suppliers package items for delivery directly into the mail system
   
   
6. Eliminate the Purchase Requisition / Purchase Order Match

This alone 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 came next.

The chosen 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:

1. Two day cycle time (Requisition to Receipt of Goods)
   
   
2. $25 per Requisition
   
   
3. Greater than 50% reduction in 'office stocks'
   
   
4. An additional 5% Cost of Materials reduction

These goals defined the Business Level Requirements of an e-Procurement Solution.

Next Operational Requirements had to be set:

1. An average of 30 seconds to locate an item on the catalog
   
   
2. An average of 1 minute to locate and Request an item that had previously been Requested
   
   
3. On line feedback to Procurement and Suppliers regarding item quality and delivery service
   
   
4. Real-time authorization
   
   

There were more than 30 suppliers to consider but key choices reduced the count quickly to 8.

Note, some of the original suppliers did not have the ability to meet key requirements such as:

1. Integration with Financial Accounting Systems
   
   
2. Ability to Buy to Stock and Charge at Issue to employee

Also note that this was a while ago, but more on this in a bit.

Technical review of the eight candidates and assessment of internal support needs revealed tremendous differences:

1. The complexity of making multiple suppliers fulfilling a single Requisition seem transparent to the employee ranged from simple to prohibitive.
   
   
2. Ability to track workflow including activities at the suppliers facilities and during transport of goods varied widely.
   
   
3. The catalog, the catalog and more about the catalog.

What about the catalog?

1. Aggregation of multiple suppliers into a common view has three challenges - Supplier Ability, Product Ability and Customer Willingness to Commit Resources.
   
   
2. Connection to multiple supplier technology systems through the corporate firewall(s) and with multiple protocols.
   
   
3. Catalog Item price and availability update automation.
   
   
4. Handling Personalized items such as Jackets, Mugs and Note Pads.
   
   
5. Custom Catalog Items such as the Corporate Holiday Season Greeting Card, telephone directories and Sandwiches from the Delis of Choice.

Having settled on three finalists, product demonstrations and project risk analysis commenced.

We employ Business Scenario Execution as the Proof of the Pudding as follows.

1. Scenarios are established through focus groups with homogeneous and mixed groups of stakeholders.
   
   
2. Each scenario is ranked and a business value ($$s) is assigned.
   
   
3. Each supplier configures its system and demonstrate it to a subset of stakeholders
   
   
4. Ratings are collected and added to other selection criteria

e-Procurement systems carry three principal sources of project risk:

1. It is a buying process for employees therefore it must be readily accepted.
   
   
2. Its value is realized over a period of time therefore it must provide good service and it must be kept current.
   
   
3. It is network-based therefore there are hundreds of points of failure.

The selection 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.

Smaller Companies  

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.

ASP 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.

The Bottom Line  

We tell our customers that ERP, CRM and Field Sales Automation are not Technology Projects, they are Business Process Projects with a technology element.

Enterprise Network Management and Data Warehouse are Technology Projects with significant Business Involvement.

e-Procurement 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.

Rapid 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.

For More Information  

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.

For example: E-Procurement Is Not Electronic Purchasing - Part II.

Also watch the TEC newsletter for new developments in e-procurement and notices of other audio conferences.

About The Author  

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 related decisions.

Jim can be reached at jdowling@TechnologyEvaluation.COM.