Organizations have experienced several technology transformations in recent years, including the implementation of large-scale enterprise resource planning (ERP) systems and, more recently, the adoption of business-to-consumer e-commerce (B2C).
Following in the wake of these new enabling technologies is the business-to-business (B2B) wave, which is quickly gaining both momentum and attention. One of the technologies emerging at the forefront of this B2B wave is electronic procurement – which focuses on applying various Internet technologies to improve the processes involved in purchasing indirect materials.
It is important to clarify the distinction between direct and indirect materials. Direct materials are those that add value to the final product – such as steel used in automotive manufacturing – while indirect materials are typically related to an organization’s operation, but are not part of the end product. This includes things such as office supplies, computer equipment, and professional services.
In many organizations, the purchase of indirect materials is traditionally a paper-based process involving several individuals and/or departments. The process typically begins with the creation of a requisition for goods to be purchased. This normally requires the individual to source the goods from paper hard copies of supplier catalogs.
This requisition is then manually routed through an organization for authorization, based on spending limits and approval authorities, before a purchase order can be generated. Completed purchase orders are then faxed or mailed to suppliers, where the order is fulfilled. Once the goods are received and an invoice submitted by the supplier, payment is remitted. Reconciliation and updating of back end financial accounting systems completes the process.
In many cases, benefits could be realized by moving to an e-Procurement system. Prior to considering the implementation of such a system, however, it is important to understand these business drivers and the business benefits realized by such an implementation.
BUSINESS DRIVERS
There are three key business drivers behind the implementation of an e-Procurement system: First, e-Procurement systems can complement an organization’s strategic sourcing initiative and improve interaction with suppliers; Second, the process of generating a purchase order, which is typically costly and time consuming, can be highly automated through the use of an e-Procurement solution, resulting in a reduction of purchase order costs; Finally, e-Procurement systems allow access to information for detailed reporting and analysis, which is not readily available through a traditional paper-based process.
SUPPLIER MANAGEMENT
Organizations often forge relationships with preferred suppliers, negotiating contracts that guarantee volume discounts for the purchase of large quantities of indirect materials. To maximize these discounts, it is necessary to ensure that employees purchase from preferred suppliers. An e-Procurement system can reduce so-called “maverick buying”, which is the purchasing of materials from a convenient supplier, not necessarily a strategic one. This reduction comes about because e-Procurement controls access to suppliers through the use of online catalogues from which employees select materials. The catalogs presented through an e-Procurement system contain only products from selected suppliers with the negotiated price.
The result is a mechanism for managing suppliers and products that are available for purchase. The resulting benefit to the organization is greater compliance to strategic sourcing contracts, as well as material inventories that adhere to corporate standards (e.g. standardized computer models to facilitate IT support). In addition to enhancing sourcing compliance, most catalogs used by e-Procurement systems are accessed via an e-Marketplace, resulting in more accurate supplier catalog and pricing information. Updates to the catalog in terms of pricing and stock availability can be made online by the supplier, and made readily available to the buying organization. This can reduce delays associated with ordering based on out-of-date commodity information.
PURCHASE ORDER AUTOMATION
By far, the greatest benefits of an e-Procurement implementation can be realized in the form of automation. Purchase order automation eliminates many of the manual steps in the purchasing process, thereby reducing the associated cost of the transaction. Purchase order automation is core functionality in any e-Procurement system. Instead of manual routing of a completed purchase order to various approvers, an e-Procurement system routes the purchase order electronically – automatically determining the approval route based on rules such as organizational hierarchy, spending limits, and commodity types. An e-Procurement system provides visibility to the entire process for all involved.
Further automation occurs by interfacing with the organization’s existing systems, allowing financial and inventory information to be referenced and updated as required. Information exchange with ERP and legacy systems occurs automatically, without the need for manual data entry. The leading vendors provide a wide range of adapters to facilitate back end integration. Automation can be extended beyond the confines of the organization by also establishing electronic communication with suppliers’ ERP systems.
The benefits associated with purchase order automation are both tangible and intangible. Tangible benefits result from the time-savings realized within the purchasing department and at the purchaser level. Purchasers have more time available to focus on core tasks, as opposed to manual processing activities. The purchasing department can realize savings through attrition and redeployment to more strategic areas. The fact that purchasing employees have more time available means that more effort can be dedicated to strategic activities such as supplier contract negotiation, supplier monitoring and purchasing rule enforcement – resulting in intangible benefits for the organization.
PURCHASING REPORTING AND ANALYSIS
The very fact that the purchasing process is automated means that data about the purchasing process is available. At each stage of the automated purchasing process, data pertaining to the purchaser, product, supplier and approver is collected. When this data is aggregated over time, it can be presented in the form of reports. The types of reports that can be generated are virtually limitless, but popular ones include: The amount of purchases by department, purchases to a certain supplier, and the number of non-catalog orders.
Purchasing reports are important to an organization for many reasons. They assist in negotiating with suppliers because total spending on a product category is known. They aid in the enforcement of purchasing rules, and help control spending by identifying departments and users purchasing outside of the norm. The more information that is available about any process within an organization, the better the organization’s ability to control, refine and approve the process.
PRE-IMPLEMENTATION REQUIREMENTS AND CONSIDERATIONS
e-Procurement systems cannot be implemented without performing a pre-implementation assessment. According to the Deloitte Research study, “Leveraging the e-Business Marketplace: Business-to-Business e-Procurement Trends, Opportunities, and Challenges,” there are seven steps that an organization should take to help ensure success in their e-Procurement implementation.
1) Ensure e-Procurement is viewed as a critical business strategy for competitiveness. Express the potential return on investment from implementing e-Business and make it a priority with respect to other technology initiatives.
2) Require that your e-Business strategy include buying and vendor partnerships.
When planning for the implementation, be sure to include the impact on suppliers, and include a strategy for integrating them with the e-Procurement system.
3) Examine the leverage points in your business for creating value using e-Procurement. Conduct due diligence to understand all purchasing process touch points across the organization and identify the value to be realized after implementation at each touch point.
4) Ensure that your e-Procurement initiative is coupled with a strategic sourcing program.
e-Procurement systems provide a mechanism to direct spending to those suppliers with whom preferred pricing contracts have been negotiated.
5) Expect that multiple approaches will be needed for different products and services.
Few organizations employ the same purchasing rules for every product and service (commodity) category. For example, purchasing of computer equipment often requires more authorization by different approvers than the purchase of photocopier paper. These rules must be identified and built into the e-Procurement system when it is implemented.
6) Understand the tools and different approaches that are available and their impact on your business case.
Many vendors offer e-Procurement solutions. It is important to conduct an assessment to understand the requirements of an e-Procurement system and which solution best meets these requirements.
7) Consider the organizational impact of conducting business on the Web.
Education will be necessary to maximize the benefit of an e-Procurement system. Ensure that the organization is prepared for the pending implementation.
From a technology perspective, certain infrastructure must be in place before an e-Procurement system can be implemented.
E-mail is required for workflow routing.
E-mail is commonplace in today’s work environment. e-Procurement systems leverage the adoption of email and use the technology to notify approvers when a requisition is waiting for review. Some systems even allow for the review and approval of requisitions using an email interface.
A connection to the Internet is required.
e-Procurement systems automatically route purchase orders to suppliers for fulfillment. An organization implementing e-Procurement requires a connection to the Internet for this routing to occur. Status updates and catalog changes are provided to the e-Procurement system using the same connection.
Web browsers are needed on the desktop.
e-Procurement systems are built using Internet technologies. Users require a web browser on their desktop computer in order to access the system for the creation and approval of purchase requisitions.
IMPLEMENTATION CONSIDERATIONS
e-Procurement systems differ from other technologies recently implemented in many organizations. ERP systems required large, time-consuming implementations that reached across many functions within an organization but affected the day-to-day work activities of a small proportion of employees. Fortunately, the implementation of e-Procurement does not take an equivalent length of time as ERP.
The assessment, implementation and rollout of e-Procurement to a set of pilot users can be accomplished in three to four months. The subsequent system expansion and rollout across the organization can be completed in an additional two to six months. Training must be considered at each stage of the system’s rollout. In most cases, the use of a simple step by step web-based interface in the e-Procurement package will simplify training to end users. Additional competencies will need to be developed around the support and administration of the system as well.
Many organizations fear the phrase “system implementation” due to bad experiences implementing ERP. Bad experiences need not be the norm for e-Procurement implementations. By understanding the role of e-Procurement systems within an organization, properly assessing the purchasing requirements and choosing an experience implementation partner, e-Procurement systems can be implemented on time and on budget.
(The authors are practitioners in Deloitte Consulting’s e-Business practice))
