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 addresses the Efficiency Gains of E-Procurement, including relationships and processes that are necessary to obtain these gains.
About This Article
This article will appear on this site in five parts. Each part will contain 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 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.
Objective: Efficiency Gains
- IT systems and on-line supplier catalogs can cut transaction costs
- Real savings come only when staff activities and costs are realigned
- Does not address competitiveness of current suppliers or ability to drive prices down through Web-based tools
Efficiency Gains Discussion
One of the major potential benefits of e-procurement is simply the reduction in time and costs for processing the thousands of individual requisitions and purchase orders that flow through a typical company's purchasing system. As shown in Figure 1, transaction processing activities represent about 50% of total purchasing department time today on average — time that could otherwise be spent developing and executing sourcing strategies, strategic supplier relationships, continuous improvement programs, and other clearly higher value activities.
Figure 1.
In a typical company, 75% of all invoices are for purchases of under $1,000. At an average cost of $100 to $200 or more to process the purchase order, pay the invoice, and handle all the related paperwork, this represents a tremendous overhead cost for most businesses.3 Indeed, in many cases the cost of handling the paperwork can be greater than the value of the actual items that were purchased.
In this area, e-procurement solutions are relatively well developed. Ariba, Commerce One, Oracle, and many other providers offer e-commerce applications that streamline and automate the entire workflow from issuing purchase orders, getting documents approved, paying invoices, and updating appropriate budget and financial systems. These approaches typically result in dropping the cost of fully processing transactions down to perhaps $25 per transaction — a reduction of as much as 90%.
An additional benefit of these approaches is reducing cycle times for responding to ongoing or unanticipated business needs. In many companies, the total elapsed time required to requisition even standard items is often weeks — resulting in manufacturing downtime or inefficiency while waiting for materials, or carrying higher buffer stocks of "just in case" inventories. Using e-procurement tools to streamline and speed up the process, these cycle times can typically be reduced to a matter of days or even hours.
For efficiency-related changes, the direct impact on the bottom line is often hard to measure. For example, purchasing and administrative overhead costs really only decrease if total staff levels are reduced. If all you do is cut the number of purchase orders in half and leave your staffing at the same level, then the cost to process each one simply goes up from $200 to $400.
More frequently, staff are reassigned to projects and activities that have higher potential value to the company but were previously not addressed. Determining the real business value of these efficiency-related e-procurement solutions requires asking the question "What new things are we doing now that we are freed from this administrative burden, and what is the measurable value to the organization?" Frankly, the answer is often not well known.
Footnotes
3 Capital Consulting & Management, Inc. (CCMI) ongoing client studies, 2000.
Efficiency Gains Dependencies
Finally, efficiency-related solutions rely on using supplier contracts and pricing arrangements that are already in place, whether good or bad. One of the primary ways to achieve streamlined purchasing, for example, is to have access to the catalogs and pricing of current suppliers available right at each user's desktop. Need some office supplies? Click on an icon and your order will automatically be billed to your department and shipped to your desk. Need to order raw materials for next month's plant production? You can punch in your supplier order directly from the manufacturing floor. Perhaps the supplier even has access to the production plan and current inventory levels and automatically reorders the materials for you, all at prearranged prices.
This type of deep and collaborative integration, facilitated by visibility throughout the supply chain, is not now routinely practiced, and represents an area of great growth and opportunity. With new systems appearing that will track the status of incoming materials in real time, across multiple transportation carriers, look for leading companies to use this increased supply chain visibility to enhance their use of e-procurement.
Conclusion of Part 2
Streamlining the process does little to address the other major potential sources of value from e-procurement — the ability to stimulate competition, drive better prices and services, and bring these improvements directly to the bottom line. Overall, the usefulness of efficiency-oriented e-procurement solutions depends largely on how efficient your current purchasing processes are to begin with, how good your existing supply contracts are, and how much added value is available by redeploying staff who are now working primarily on transaction processing and related administrative tasks.
This is part 2 of a five part series on e-procurement. Part 3 will discuss Broadening the Pool of Suppliers. Part 1 discussed the Benefits of 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.