Using the Internet to make your supply chain more efficient is a
possibility - but keep it simple, writes Liz Warren
Great claims have been made for e-procurement technologies, with
suppliers and analysts saying e-purchasing can cut bills by up to
20%. But early adopters of e-procurement have often been
disappointed by the returns they have seen and the difficulty of
rolling out e-procurement solutions. Yet there are real - if
somewhat less ambitious - benefits to be gained from using the
Internet to tackle supply chain issues.
According to Alf Noto, who is now chief operating officer of
e-procurement solutions provider TomorrowFirst, there are four
areas where companies might see a return from investing in
e-procurement solutions. The first is the cost of the transaction
itself. Suppliers and analysts have heavily promoted the ability of
e-business solutions to cut transaction costs by up to 80% - but
few companies have been able to realise this goal. According to
Noto, this is because the return on investment calculation is based
on faulty reasoning.
"Most of the transaction cost is made up of bits of time from lots
of people," he says. "You probably can't get rid of those people,
because they're doing other jobs. You might be able to make some
job cuts in areas such as accounts payable, but in most businesses
it will be a small number of low-paid people. Re-engineering the
business to put together a few per cent of time from each member of
staff is probably too complex or expensive to do." As a result,
says Noto, he has seen the greatest disappointment in e-procurement
in projects that were based on savings in transaction costs.
Similarly, it is hard to realise the second type of benefit, which
centres on the increased productivity and profitability companies
might expect from freeing staff and other resources currently tied
up in procurement activities. Noto says you're more likely to
benefit from shorter cycle times - from initial requisition to firm
purchase order - than to see an impact on the bottom line through
staff having a little more time to dedicate to activities which add
greater value.
The third area - and the one which offers the greatest
opportunities for genuine return on investment, according to Noto -
is increased compliance: the ability of e-procurement solutions to
encourage staff to make use of the good deals which have already
been negotiated by the company's professional purchasing team. On
average just one-third of the goods and services used in a company
will be acquired using these preferred deals; the remainder will be
acquired through "maverick buying" at a price typically 20% higher
than the preferred deal. Increasing compliance to the 80% level to
which Noto says any company should realistically aspire could
deliver a 10% saving to the bottom line.
Oracle has developed a tool called I-Save which aims to help
companies to understand exactly what impact improved compliance
might have on the bottom line. I-Save is based on research by
Bristol Business School into the actual experiences of 700
companies when applying professional purchasing skills to 81
different commodity groups. The results show that savings can range
between 2% and 20% according to the commodity. Oracle is now
working on a similar research-based tool to determine the process
or transaction savings which companies can expect from implementing
procurement best practice.
E-procurement solutions can encourage increased compliance in
several ways: by controlling which products and catalogues staff
have access to on their desktops; by making it much easier for
staff to use preferred deals rather than source items themselves;
and by providing management information which can be used to
identify problem areas and to devise strategies for changing
employees' behaviour.
Furthermore, if companies can improve compliance - and can
demonstrate to suppliers that they have done so - they will be able
to make better use of their leverage when negotiating deals. That
is because suppliers will be confident they really will get 80% of
the company's spend in that area, rather than the 35% they usually
expect when setting their prices.
It is e-sourcing which provides Noto's fourth area where
e-procurement solutions can make an impact, by allowing
professional buyers within a company to become more effective. This
has been the route followed by the Royal Bank of Scotland, which is
using the infrastructure provided by e-sourcing supplier
FreeMarkets to run reverse auctions where suppliers are asked to
bid online for contracts.
"There is some scepticism in UK boardrooms about the e-procurement
arena, because some of the benefits are more qualitative than
quantitative," points out Ed Smith, director of group purchasing
operations at the bank. "With e-sourcing, it's straightforward,
because you are either making savings or not. We did calculations
looking at how much we would save using reverse auctions compared
to traditional procurement methods and tools and felt that, in
certain instances, we could get twice the cost savings we would
have got otherwise."
The project was sold to the board on the basis that it would pay
for itself over 12 months, but according to Smith, it has started
showing a profit within just a few months. This is partly thanks to
the relatively low start-up costs involved in using a third-party
Internet-based service like FreeMarkets, as opposed to a
software-based auction solution; and partly a result of the savings
the bank has been able to achieve when awarding contracts. "We have
a 12-month contract to transact $10m of business through
FreeMarkets and we have seen price savings ranging between 6% and
40%, depending on the commodity," says Smith.
There are softer benefits too. Smith says the e-sourcing solution
has placed greater emphasis on preparation, on working more closely
with suppliers and on following up the results of the auction and
awarding contracts more quickly. "We have to have a very
professional quotation pack, so we can go to market more quickly
and robustly and not have weeks of post-tender negotiations," he
says. He does warn that not every commodity lends itself to the
reverse auction model, but the bank is continuing to extend the
range of contracts it places through FreeMarkets.
Case study: Jefferson Smurfit looks to double compliance
rates
When packaging supplier Jefferson Smurfit Group
(JSG) asked consultancy PricewaterhouseCoopers to identify
potential e-business opportunities it quickly became clear that the
biggest
benefits would come from increasing purchasing compliance. "We
found that our compliance levels were around 40%," explains Emma
Cullen, JSG's e-procurement project manager. "We knew that our
average off-to-on-contract discount is about 10%, so if we aspired
to double our compliance rates to 80%, we would achieve a
significant return on investment."
It was also very clear that there would be little benefit from
trying to reduce transaction costs. "A lot of case studies we saw
at the time were focused on process savings, but that didn't
impress us, because we have localised processing at our 150 sites
rather than having a concentrated team where we could cut
headcount," Cullen explains. "We do think we will get some process
benefits, but they will be softer savings."
The solution, which uses Marrakech's browser-based
pay-as-you-transact catalogue service, has been live since March
but is being rolled out slowly across the company. So far it has
been applied to just two product categories - office and safety
supplies - and the first site was given plenty of time to play
around with the system and gain confidence in the various
facilities. The service is now available at sites in France, the UK
and The Netherlands, while JSG is using a scorecard reporting
system to identify where compliance is lower than expected and to
understand the reasons for maverick buying.
JSG has also used the e-procurement solution as a catalyst to
renegotiate national contracts and introduce them in those
countries where they did not previously exist. "Simply telling
suppliers we are planning to use e-procurement and looking to
increase compliance has led them to bid lower prices," says Cullen.
"We weren't actually expecting to get that until we'd been able to
demonstrate increased compliance in a year's time."
Case study: Consignia's 2% saving equals £6m
Improved
compliance is at the heart of an e-procurement solution currently
being rolled out across the various businesses which make up
Consignia, formerly the Post Office. The business case for the
solution, based on e-catalogue software from Requisite Technology,
was based primarily on reducing maverick buying and encouraging
staff to take advantage of the deals negotiated by a central
procurement team. According to Peter Stevens, Consignia's supplier
development director, the group expects e-procurement to be able to
exert a downward influence of about 2% on some £300m of the
company's annual spend.
This cautious figure was reached after studying the experience of
early adopters and taking advice from some of Consignia's IT
suppliers which had introduced e-procurement solutions themselves.
Stevens points out that Consignia does not expect to see
significant reductions in transaction costs, as it had previously
streamlined its processing through the introduction of procurement
cards - essentially, corporate credit cards - several years
ago.
The project is still in its early days and detailed return on
investment figures are not yet available. However, a pilot project
with a small number of suppliers and 250 users across four business
units has proved successful and Consignia expects to roll the
system out to the rest of the business and to a wider range of
suppliers by the end of the year. Stevens adds that Consignia is
looking at other aspects of the Requisite solution, such as
e-tendering and reverse auctions, but is taking an equally cautious
approach. "We are looking at the results other people are claiming
to get, but we can see that a lot of what they're doing isn't
appropriate to our marketplace," he says. "You have to be careful
about the numbers you see in this area."
E-procurement advice- Manage purchasing processes in a structured, planned way
- Research and undertake market analysis of suppliers
- Operate within a formally recognised purchasing strategy
- Operate within a structured process for pricing and
tendering
- Negotiate and reach purchasing agreements in a way that
maximises benefits to all partners
- Seek to maximise on-going procurement relationships in order to
develop supplier partnerships
- Develop learning mechanisms that make for a process of
continuous improvement.
Source: Oracle/I-Save