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October, 2003 |
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I-Tech |
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E-Procurement What is e-procurement? What are the tangible benefits? And how should an organization set about selecting and implementing a solution to fit its own needs? It is important to realize that there are many different flavors of e-procurement. There are different ways in which an organization can harness the advantages of web technology to improve its procurement operation and the technologies chosen will have a different impact on the business as a whole. I am trying to explain the four main business models that are often put under the e-procurement umbrella. What
is E-procurement? E-procurement is the electronic management of all purchasing activity, often starting with low-value, high-volume, non-strategic goods and services that support the business. Different
E-procurement Models It may be useful to begin with a brief overview of all four common e-procurement business models: Buy-side
E-procurement Buy-side e-procurement refers to one organization employing electronic systems to purchase goods from contracted suppliers and manage all processes relating to those purchases. Transactions may take place over the Internet, and web technology may be used to manage the flow of information and transactions throughout the organization and its supply chain. Buy-side e-procurement systems can be deployed throughout an organization, giving staff the ability to quickly and easily raise purchase requisitions and track their progress. The system often incorporates sophisticated workflow technology to streamline the process of authorizing the requisition as well as supplier contract management, which automates the process of transforming requisitions into orders and expediting them to the supplier. But a good buy-side e-procurement system should offer far more than just this. It should enforce the use of preferred suppliers and manage many of the financial processes stemming from the procurement process, such as the reconciliation of suppliers' invoices, commitment accounting and other process. Some companies also consider stock control to be an essential part of an e-procurement strategy, and the level of procurement-related functionality offered by different solutions varies from one to the next. Buy-side solutions offer a number of benefits to the organization, including:
Sell-side This term is typically used to describe how one supplier or distributor sells to a number of buying organizations using electronic systems and more often than not, e-commerce technology. Although this model is sometimes referred to as e-procurement, it is perhaps more correctly referred to as 'e-sales', as it offers the procurement professional no real means of controlling the buying process other than a simplified means of placing a supplier-specific purchase order. Organizations like DELL Computers have employed this type of e-commerce to great effect, using the system to automate much of the order-taking process and empowering their sales force to adopt more of an advisory role to the customer. Their sales people 'sell' and build relationships with customers, whilst their e-commerce system processes the orders. Because sell-side e-procurement is driven by the supplier, it is playing a significant part in B2B e-commerce. Many suppliers are taking advantage of the low cost of selling over the web to offer dramatically reduced prices, which in turn make the web an attractive place for business buyers to shop. As organizations seek the control and analysis benefits derived from buy-side e-procurement, it is more likely that suppliers' sell-side sites will offer ways to link into buy-side solutions, and vice-versa. 3.3.
Marketplaces and trading hubs The marketplace model brings together many different buying and selling organizations in one trading community. There are currently several thousand independent marketplaces and their number is growing by the day. The marketplace model is most useful in very specific vertical sectors, perhaps with a limited number of buyers and suppliers. The automotive industry is one example of where the marketplace model has been put to good effect, the wine industry another. There are several drawbacks, however. Marketplaces defeat the very essence of the Internet: the ability to eliminate the middleman. In effect a marketplace is a middleman. Like middlemen, the marketplace must add significant value to the supply chain for it to be worthwhile. Another limitation is that the marketplace model assumes that price is the only major factor in the decision-making process. They prevent the procurement professional from forming any meaningful relationship with their suppliers, which is often critical to the procurement process in order to be sure of supplier performance in other critical factors such as quality, delivery, response times and so on. Committing an organization to buying from only one marketplace has been likened to buying a new car that only works on certain roads. The Internet should be about widening trading horizons, not restricting them and e-procurement should be about re-enforcing links with suppliers, not replacing them. Marketplaces do have many benefits to offer but they must not be restrictive. They must be combined with intelligent buy-side e-procurement systems in order to represent a viable business model and add value to the buying process. During 2001, marketplaces were forced to prove their value - this led to a shake-up and many weaker players simply disappeared. 3.4.
Auctions and Reverse Auctions An auction enables a buying organization to bid for a particular commodity against other buying organizations. This is becoming increasingly favored by procurement professionals who are responsible for buying large volumes of one particular item, such as raw materials or computer equipment. I am sure most of you might have heard about the success of the auction site: www.ebay.com. There is some confusion of the definition of a 'reverse auction' as this phrase is often used to refer to two different scenarios. Both are valid business models: Internet auctions of any variety really remain in their infancy, but they will almost certainly play a major role in B2B procurement in years to come. Any organization involved in the procurement of large quantities of goods should explore the auction possibilities in their own market sector. Auctions, like marketplaces, must be combined with intelligent procurement management systems to be successful. Besides the above described e-procurement models, there are many other hybrid models in use. And in recent years, marketplaces for vertical industry markets are getting popular, for example http://www.chemconnect.com for chemical industry. Critical
E-procurement Issues Next, I am trying to outline the nature of e-procurement and its benefits. However, before embarking on an e-procurement initiative, an organization must consider some critical issues that will impact the success (or failure) of the initiative. These issues can be classified in Five broad categories: Core
Functionality An evaluation and comparison of the core functionality offered by the solutions in question will determine which solution best meets the specified requirements. 1.
Ease of use The e-procurement solution will be used by hundreds or perhaps thousands of users in the organization, across a myriad of job-positions. It feature intuitive self-help features, be easy to use and simple enough to understand with minimum training. 2.
Workflow automation Document approval process is critical in the procurement process. Requests for purchase sometimes need to be authorized by several different people depending on a multitude of variable factors. Similarly supplier invoices must be approved before payment and even goods received notes need to go through quality checking and approval before being fully accepted. These business rules and policies can also change over time. An e-procurement solution must address this approval process and should be able to cater to changes in business rules and policies. It is best if the solution allows designated users to easily make any necessary changes to the business rules and controls, without requiring programming changes from the IT department. It is also important that the user can easily see the status of an order at any time. The most common method of doing this is using 'workflow' technology. Workflow technology routes a document or data round the organization to different people and a good e-procurement solution will accommodate complex business processing rules. The approval process is vital to the success of e-procurement: it is important that the solution satisfies the requirements of the approval process. Concept testing before a full implementation is always a good idea, as it highlights any weak areas or potential pitfalls. 3.
Supplier compliance One of the main difficulties with B2B e-commerce today is that systems and strategies lack uniform standards. For a supplier to sell over the Internet to more than one large customer or e-procurement marketplace, it must maintain different catalogue standards and accept orders and dispatch invoices in different formats. For the buying organization therefore, it is essential not to restrict the company to one e-commerce standard or marketplace. Over time, standardization in B2B e-commerce will happen and organizations must be prepared to respond quickly to changes. For this reason, the e-procurement solution must enable the communication of data between all different kinds of systems, and even allow data to be received and used by non-standard-compatible parties. The Internet is about broadening business horizons, not restricting a company to doing business with a handful of compliant suppliers. Besides, not many buying organizations command sufficient buying power to bring suppliers into line. 4.
Business Intelligence and Reporting An e-commerce solution should offer more than transaction processing: a good decision-support system is essential. The organization must be able to use the information to make strategic business decisions and act on them. Some commonly asked questions are: 5.
Settlement To bring the e-commerce enabled procurement cycle full circle, from order fulfillment to settlement, companies must employ a proven cash management and payment settlement process that seamlessly integrates with their corporate e-procurement solution. This solution should provide:
Government Leadership in e-procurement The Government should undertake to provide leadership by becoming a 'leading-edge user' of e-commerce, by bringing all appropriate government services and by adopting electronic payments as the normal means of payment to its suppliers. An immediate strategy should be set to meet the goals:
The key elements of the Government's approach to e-commerce should be:
E-commerce and particularly e-procurement-the purchase and payment of goods and services-can assist the Government improve the way it does its business by reducing transaction costs, making smarter decisions, better transparency and getting better value. Focus
of the strategy The intention of the strategy should be to automate the purchasing of, and payment for, simple procurement by agencies through their approved suppliers. This strategy should set the direction against which agencies and businesses might implement electronic purchasing and payment. It provides a framework to accommodate evolution in technology and progress by agencies towards procurement of goods and services using electronic arrangements. It is intended to accommodate complex procurement in later implementation phases in accord with agency needs. Conclusion In conclusion, e-procurement offers some of the most impressive returns of all e-business solutions on the market today, with the added advantage of being quick to implement. However, in order to deliver these benefits, organizations and government agencies must approach e-procurement strategically, ensuring a true understanding of what their business hopes to gain and in which areas. (Shakya is CEO, Hitechvalley.com and can be reached at rajesh@hitechvalley.com) |
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