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
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.
Evaluating
Alternatives
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?
Conclusion
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" on Page 2 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.