E-procurement saves BAe £10.5m

E-Procurement auctions have saved BAe Systems £10.5m since the start of 2001, the aerospace giant reported last week.

E-Procurement auctions have saved BAe Systems £10.5m since the start of 2001, the aerospace giant reported last week.

Analysts said the "impressive" statistics were a timely reminder that e-procurement can still have positive effects.

The company, formed in 1999 by a merger between British Aerospace and Marconi Electronic Systems, began piloting sourcing software from Commerce One at the end of 2000. Since then it has conducted more than 80 online auctions.

The merger of the two companies and their disparate IT systems was the main driver for changing e-business systems, said Andrew Mellors, capability development director at BAe Systems.

"There is plenty of business benefit for a merged company to look at replacing disparate systems with a single procurement system," he said. "A single user interface, which is quick and easy to use, leads to efficiency as well as cost savings."

The £10.5m saving - initially from indirect product purchasing - largely came as a result of a change in the negotiation process, said Mellors.

"The purchasing process was a matter of weeks rather than days, and we only had a small number of suppliers," he explained. "E-procurement has forced us to understand exactly what our requirements are. We also have access to far more suppliers, which has led to a dramatic reduction in process time."

Martin Atherton, an analyst at research firm Datamonitor, said the size of the savings suggest that there were inefficiencies within the previous systems.

"BAe, like many large UK companies, was probably a highly ineffective purchaser historically," he said. "For Commerce One, demonstrating success in this e-procurement implementation must have been relatively easy, due to the fact that it was highly likely that BAe was wasting a lot of cash.

"Nevertheless, the statistics are impressive and a timely reminder that e-procurement is still having positive effects and producing happy customers."

According to Mellors, cost savings have not been the only benefit of going down the e-procurement route. "We now understand more about our purchasing needs and have improved the overall efficiency of our processes," he said. "We have also improved our relationships with our suppliers, and some of these savings are starting to spread across the supply chain."

The success of the online auctions has led BAe Systems to look at a host of other e-business projects.

The company already conducts about £60,000 worth of purchasing transactions per month on the Exostar aerospace and defence public e-marketplace, and it is planning to increase this figure in the coming months.

In addition, Mellors said direct purchasing will go online by the start of 2003 and the company is also looking at e-billing and e-invoicing.

Guest editor comment: balance costs with savings

We can see from examples such as BAe that e-procurement has the potential to create considerable savings. But to save £10.5m over 16 months requires a fairly large expenditure in the first place. While this works for a business that consumes items that are required for the end product it produces, perhaps it has less relevance for service businesses.

As with all projects, you should consider the cost of implementing e-procurement against the potential cost saving - and this must be justifiable as a return on investment. Clearly, in some business sectors the return on investment can be considerable.

Owen Williams is head of IT at Knight Frank

Read more on E-commerce technology