A fast track to Net buying benefits

Using the Internet to make your supply chain more efficient is a possibility - but keep it simple, writes Liz Warren

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
This was last published in June 2002

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