Value-Chain Report: Should Your Firm Be Using E-Procurement?

Dec. 21, 2004
A look at potential financial impact, current procurement practices, and technology infrastructure will help supply an answer.

Business-to-Business (B2B) e-commerce is arguably the fastest growing economic trend today. The Gartner Group estimates that Internet-based transactions will grow to $1.3 trillion by 2003, two-thirds of which is expected to be B2B ($850-plus billion). The projected compound annual growth rate for the B2B e-commerce market from 1998 to 2003 is 90%. E-procurement is one of the largest and most visible segments of the B2B e-commerce space. Current e-procurement activity tends to be focused on the purchase of nonproduction goods and services (e.g., furniture, office or industrial supplies, computers), which is typically a significant and not efficiently managed part of corporate buying. Current annual spending on nonproduction goods and services is estimated to be $1.4 trillion. This large expenditure often is not efficiently supported by existing corporate procurement systems, leading to contract leakage and excessive purchase-order (PO) costs. E-procurement solutions use the Internet to facilitate procurement processes through the electronic connection of buyers and suppliers using a Web browser, enabling all authorized users within the buying organization to directly initiate a purchase from their desktop. Using Internet-enabled technology, companies can quickly automate processes and access critical decision-making information across continents, business units, divisions, and departments. Significant savings from implementing e-procurement solutions can be realized through cost reductions, improved data management, improved sourcing decisions, increased strategic focus of procurement professionals, and automation of workflow and approval processes. Assessing Your Readiness For E-procurement Recognizing that there are many potential benefits from implementation of e-procurement solutions, how can one assess an organization's readiness to take advantage of this new technology? One approach to evaluating the ability of a firm to capitalize on the benefits of e-procurement is to assess the following:

  • Potential financial impact
  • Current procurement practices
  • Technology infrastructure
Potential financial impact. To determine the potential financial benefit of implementation of an e-procurement solution, companies typically try to assess spending by asking:
  1. What is the total procurement spending? Total procurement spending helps to quantify the possibilities for cost reductions that could turn into additional profit. E-procurement may reduce total procurement spending by 2%-16% depending on the organization. When combined with strategic sourcing, e-procurement can provide a solution that reduces total sourcing costs by 15%-30%, according to Ernst & Young consulting partners Chris Gopal, Gene Tyndall, Wolfgang Partsch, and John Kamauff in Supercharging Supply Chains: New Ways to Increase Value Through Global Operational Excellence (1999, John Wiley and Sons).
  2. What is the nonproduction spending? Experience indicates that nonproduction spending can amount to 35% of total procurement spending in manufacturing companies and up to 80% of total procurement spending in service companies. E-procurement can reduce the cost of nonproduction goods and services by 5%-20%, directly impacting the bottom line.
Current procurement practices. To assess how well current procurement processes will leverage, and be leveraged by, implementation of an e-procurement solution, it will be helpful to evaluate the following:
  1. Does your firm have a strategic sourcing process to optimize buying relationships? Suppliers should be partners. Integration of strategic sourcing and e-procurement facilitates optimization of procurement processes.
  2. Is buying consolidated to leverage discounts? The purchasing power of the entire organization should be leveraged, rather than individual entities/business units purchasing on their own. Individual business units may not have the capabilities or tools available through e-procurement solutions.
  3. Are plans/needs shared with suppliers of nonproduction products or services? Effective communication with suppliers leads to reduced cycle time and inventory levels. E-procurement allows electronic data exchange between buyers and suppliers, which shortens the time between requisitioning, PO generation, and receipt of goods or services.
  4. Do you practice commodity buying? Commodity buying is a framework for establishing agreements to buy the majority of a particular commodity from a specific supplier. Commodity buying provides leverage to obtain improved price discounts, delivery terms, and payment terms. Electronic catalogs, part of an e-procurement solution, simplify commodity buying by helping to identify and source commodities.
  5. Are supplier performance measures in place? Most companies will benefit from analysis of supplier performance related to delivery, price, order accuracy, quality, and other criteria. However, current systems often lack the necessary reporting capability to strategically evaluate suppliers. Supplier performance can be better assessed through more accurate, timely, and useful reports generated from e-procurement solutions.
  6. Are buyer performance measures in place? The metrics that procurement managers use to evaluate buyers reveals what the procurement organization truly values. Buyers may be measured based on contract leakage/maverick buying, single-sourcing, total product costs, flexibility, daily shipments, etc. E-procurement helps provide improved reporting capabilities to help the buying organization manage buyers.
  7. How much is spent outside formal agreements? E-procurement solutions help procurement managers better control contract leakage through catalog content, work flow, and reporting. Measuring and tracking leakage can help identify savings opportunities.
  8. What is the total cost for each PO? Reducing the cost of a PO provides an immediate return on the e-procurement investment. Recent studies indicate that e-procurement solutions may reduce PO costs from as high as $175 to as low as $10 for nonproduction materials and services.
  9. Are requisition/PO/payment approval processes automated? Most companies have manual paper-based approval processes, wasting time and money while paper accumulates on desks awaiting signature. E-procurement workflow programs can automate workflow, significantly improving productivity and reducing costs.
Technology infrastructure. In evaluating the capability of the current technology infrastructure to support implementation of an e-procurement solution, companies will need to ask:
  1. Is an ERP or other suitable back-end system in place? Potential issues of interoperability and connectivity will need to be understood. ERP systems' business models, capabilities, and processes have been proven to be standardized and efficient. An appropriate foundation system, preferably an ERP, is required to support effective e-procurement capabilities.
  2. What EDI capabilities are in place? Many companies are already using EDI on the sell-side of their business because of customer requirements. E-procurement can enable all parties (buyers and suppliers) to integrate electronically. Even small suppliers can become integrated into e-procurement systems.
  3. Does your firm use procurement cards? P-cards are a simple, fast and effective solution for reducing costs; facilitating point-of-use buying; and minimizing conflicts among users, purchasing managers, and accountants. Studies have shown that P-cards drastically cut the time and cost of processing invoices and making payments. Some current users have experienced 35% to 90% reductions in purchase processing time and costs, improved procurement management and reduced cycle times by using P-cards.
If the potential benefits justify implementation of an e-procurement solution, current procurement practices are sufficiently mature to utilize and e-procurement solution effectively and an appropriate underlying technology infrastructure is in place, many of today's leading e-procurement solutions can provide significant operating benefits. Vendors such as Ariba, CommerceOne, i2, Oracle, SAP, and others offer comprehensive approaches to this exciting new technology. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.

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