Polish up your purchasing with e-procurement

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Polish up your purchasing with e-procurement

E-procurement is the latest e-business buzzword. What is it, where has it come from and what can it do for you? Murdoch McTaggart reports

It is debatable whether genuine and comprehensive Internet-based electronic procurement systems yet exist. What certainly do exist, however, are electronic purchasing systems where the processes of requisitioning are carried out electronically. Procurement is very much more than simply purchasing, however, and many of these further requirements have yet to be met satisfactorily and at reasonable cost.

Ian Taylor, Head of Procurement with the Halifax, believes that most firms have been convinced of the benefits and are on the brink of making choices. "One problem, however", he adds, "is the surprising number of suppliers around." According to Taylor, using best practice to select from competing suppliers is essential and this requires the different departments affected, including the IT department, to liase and co-operate fully.

The major benefit usually claimed when implementing e-procurement is reduced costs. Any such savings go straight to the bottom line and are therefore in a different category from the benefits gained through increased turnover. Analysts vary in their views as to what cost benefits or return on investment (ROI) might be gained. PA Consulting, for example, claims that a project which it designed and implemented for BP Oil yielded over 1,000% ROI in six months. Deloitte Consulting claims that typical ROIs can be greater than 300% in around two to three years.

Gartner Group, however, warns that e-procurement is at the height of the hype cycle and that there are many hidden costs which need to be properly considered. While conceding that electronic purchasing can cut costs, particularly in the area of purchasing non-production items, GartnerGroup believes that most companies using software-based procurement solutions are unlikely to achieve their projected ROI within 24 months.

Two striking characteristics of the growth of electronic business and associated global trading have been the fudging of clear demarcation lines between traditional processes extending through even to overall company activities and, secondly, the growth in the practice of partnering and forming alliances, often on a short-term ad hoc basis. e-procurement is no different and a number of models are developing, instances of which are challenging earlier ways of doing business.

New purchasing models

Some companies are setting up as supermarkets, perhaps orientated towards a particular group of customers. For example, Wstore is an Internet-only reseller directed towards providing purchasing facilities for European companies mainly in the range of up to 1,000 workstations. One area where this differs from an open-to-all e-commerce site is that the company actively partners with resellers, using legal agreements, whereby resellers continue to provide local advice and other services, leaving customers to buy online with the margin shared between Wstore and the reseller.

Wstore also provides financing and technical advice and passes leads to its reseller partners. According to Tony Price, MD of the UK branch, costs and so end-user prices can be kept down while the company will shortly be able to set up tailored pages allowing any authorised users within a company to place orders according to their budgetary authority levels and limited to items meeting agreed standard specifications so simplifying many purchasing processes. "I fully expect a boom in online purchasing in the near future", he says. Mondus, aimed principally at SMEs, uses a broking model. Potential customers can post their requirements to solicit offers. Suppliers who respond through the system are charged £1.00 for each offer made and a further percentage of between 0.5% and 5% on a successful trade.

In other cases suppliers maintain their own catalogue offerings with third party systems handling the process of joining these into what appears to be one single catalogue. In some cases such systems may be handled through links or specialised portals.

An interesting system, which is something of an amalgam of different approaches is ChemConnect, a business-to-business Internet exchange for buying and selling all types of chemicals and plastics, particularly on a worldwide spot purchase basis. Fundamentally there are two lists, product offers placed by sellers and product requests placed by buyers. Sellers can also check the product request lists and offer to supply while buyers, apart from placing their own purchase requests, can browse the offers lists and buy accordingly.

BBCN, a Houston, Texas, company developing e-procurement solutions for the auto industry and others argues that the future of e-procurement is in what it calls "trading hubs". These may be vertical, focussing on specific industries, or horizontal, focussing on specific functions or business processes. The major difference with consumer sites such as Amazon, says Robert Dowlearn, CEO of BBCN, is that B2B electronic hubs are two-way mechanisms bringing commercial benefits both to buyers and to sellers and require deep domain expertise and understanding to be set up and to work well.

Buyer beware

Many claims have been made by suppliers - supported by most analysts - that implementing electronic purchasing can cut costs significantly and improve process efficiencies. But, Andersen Consulting's Azad Ootam warns that implementing e-procurement is far from being a simple exercise and requires considerable preliminary analysis and negotiation to ensure that the business case is made and that the place of e-procurement within the business is properly understood.

The most successful e-procurement projects, he argues, are going to be those where the eProcurement function becomes totally embedded in the business process and where the system is sufficiently flexible to accommodate the rapid changes in technology which are inevitable. If negotiation of contracts is a key plank of the business process then it's essential to build this in from the start and not to become sidetracked by considering claimed savings on purchasing, for example. Understanding what is needed requires initial extensive analysis but this will be time well spent.

E-procurement - is it all hype?

  • PA Consulting says that a project that it designed and implemented for BP Oil yielded a greater than 1,000% return on investment (ROI) in six months.

  • Deloitte & Touche Consulting says that typical ROIs can be greater than 300% within two to three years.

  • Gartner Group warns that electronic procurement is at the height of the hype cycle. It says that most companies using software-based electronic procurement solutions are unlikely to achieve their projected ROI within 24 months.

    Background to e-procurement

    Electronic procurement has been around for something like 30 years. Until recently, with the growth of the Web, it's been in the form of EDI and some specialised systems. Compuware, for example, implemented their electronic trading On-Trac system around nine years' ago to service their resellers and now claim to sell more product electronically each day than do Dell.

    Aware of the benefits of handling procurement electronically, major retailers such as supermarkets tended to drive the deployment of EDI systems, sometimes subsidising implementation to help overcome supplier resistance. EDI still exists in its traditional form but is increasingly being replaced with Internet-based methods drawing on techniques such as virtual private networks (VPNs) or extranets and using tools such as XML schemas. Where EDI has been of considerable benefit has been that it's encouraged the putting in place of efficient electronic processes on which other, more general, procurement mechanisms can now be built.

    Earlier systems were expensive and proprietary, although corresponding to standard EDI protocols for the transfer of information. Internet e-procurement, in contrast, has huge scalability and, subject to implementation and security details, opens up a huge global market for procurement including from completely new suppliers.

    What to look out for

  • Cost savings using e-procurement can be considerable and go straight to the bottom line. However, they're not guaranteed and badly thought-out or badly implemented systems can prove both a huge cash drain and a serious disruption to trading.

  • Most so-called e-procurement systems are actually electronic ordering or requisitioning systems. Negotiating with suppliers, agreeing contracts, discount structures, levels of service and so on are an important part of the whole procurement process and aren't yet easily available except at significant cost.

  • E-procurement won't succeed unless it's fully implemented into the organisation's business processes. This means that organisations need to carry out suitably detailed analyses of their procurement processes, consider the business case for each element and prepare proper timetables and budgets.

  • Technology is changing rapidly and e-procurement systems must be flexible both to allow new technological developments to be accommodated as necessary and to take account of changes in business processes both within the organisation and among its suppliers.

  • Businesses should use best practice mechanisms for considering what they may need and to help them choose sensibly from the rapidly increasing number of e-procurement suppliers.

    Relevant URLs

    www.bbcn.com

    www.ec3.org

    www.exchange.chemconnect.com

    www.enetgroup.co.uk

    www.iplanet.com

    www.mondus.co.uk

    www.tranmit.co.uk

    www.wstore.com

    The E-procurement Best Practice Network

    BuyIT, the independent IS purchaser-supplier forum, has set up the E-procurement Best Practice Network to enable senior managers to share their experience in e-procurement and help them realise the benefits of this global revolution.

    It is inviting senior IT managers, finance and procurement professionals from the UK's leading companies and public sector organisations to a programme of informal events to identify best practice in e-procurement and to consider the impact of e-procurement on business.

    The meetings will focus on e-procurement and the new enabling technologies, including cost minimisation, supplier relationships and standards and will look at issues arising from the centralisation of purchasing.

    If you are interested in participating, please visit our website: buyitnet.org and book your place, or contact Peter Duschinsky at IT World Consultants on 020 7828 7300 or by email: peter@itworld.demon.co.uk.

    Case study: University of Surrey, Roehampton

    The University of Surrey, Roehampton, known formerly as the Roehampton Institute, carries out a great deal of complex purchasing of pharmaceuticals, reagents and similar specialised products in addition to buying more mundane items such as stationery. In 1998 it installed a new general ledger system from Agresso. These met many of its needs but had the limitations that there was no Web interface, that the user interface was somewhat daunting and that the system accommodated only two levels of purchasing authority.

    According to Shelagh Legrave, director of finance, there was a need to allow technicians who had considerable specialist knowledge to initiate purchase orders, something which is now done very successfully using E-net Software's Esparto product, a Web-based Java application which presents a friendly interface, accessible through any browser on any system and which then interfaces with the Agresso General Ledger.

    "Basically Agresso handles the main accounting processes, auditing and control functions and necessary security while Esparto gives us the flexibility, good user interface, and wide deployment which we need", comments Legrave. In addition, Esparto handles the customisation of the master catalogue, an amalgam of supplier data, presenting it according to a wide range of purchasing authority levels which have been implemented.

    Case study, Mirror Group Newspapers

    The main problem with the procurement system used by Mirror Group Newspapers (MGN) was that it was highly paper-intensive, slow and prone to error in consequence. Ian Randall, Group Systems Accountant, explains that they were looking for the ability to get all purchasing, invoices and related documentation into electronic form and that their solution was to work with UK company Tranmit to implement a system based on Lotus Notes. MGN already used Notes extensively and had six programmers familiar with the product while Tranmit brought in their experience to develop a customisable system based on their existing Sprintlink product and linking in to MGN Sun Accounts ledgers.

    All requisitions are now raised electronically as required and passed through the system for authorisation with appropriate procedures in place to handle urgent purchases at the unsociable hours typical of a busy newspaper. Invoices are also raised electronically while incoming invoices are brought into the system through document imaging processes. At present everything other than specialist items of newsprint and ink are handled through the system and Randall expects those to come in and a move to receiving electronic invoices to come about in due course.

    "The biggest benefit is in getting everything where you want it", he says, "a welcome contrast to earlier when you never knew where things were or what stage of the purchasing process they had reached. So far it's delivered everything we wanted and more."


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    This was first published in April 2000

     

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