The Internet's rapid growth has driven many companies to add
an electronic commerce component to their operations to gain
competitive advantage. Business-to-business online procurement
has recently emerged as one of the hottest topics in the world
of commerce and technology. The growth of the Internet and commercial
web-based applications is offering ever-increasing operational
cost savings to enterprises, extending trading communities and
lowering the financial barriers to e-commerce participation.
Once the advantages of electronic commerce are recognised, there
is an upsurge in the desire to implement a full Electronic Procurement
solution - motivated largely by the significant return on investment
(ROI) that it can potentially deliver to organisations. Reducing
indirect procurement costs can immediately improve an organisation's
bottom line. Furthermore, in an increasingly competitive business
environment, companies can also re-deploy procurement and administrative
resources for more strategic purposes. This paper explores the
challenges, the solution and implementation of electronic procurement.
Increased COST, COMPETITION and CUSTOMER PRESSURES have driven
companies to review internal processes and tap into the enormous
savings potential from indirect spending.
In general, companies have not automated indirect purchases.
For most companies, the procurement process accounts for thirty-sixty
percent of overall costs and sixty-eighty percent of purchasing
transactions. Furthermore, an enterprise's requisitions do not
have an easy-to-use ordering process to buy high volume, low
cost indirect materials quickly and efficiently. Most processes
for indirect procurement are cumbersome and generate massive
paperwork in both the purchasing and finance departments.
While many companies, especially in the manufacturing industry,
have tackled direct procurement (direct goods being those, which
form part of the actual products the company is manufacturing,
e.g. steel for an automobile manufacturer), Just In Time (JIT)
and materials resource planning systems (MRP). Very few organisations
have focused their attention on indirect procurement (indirect
goods being those supporting production, such as stationery,
2. Problems with Today's Procurement
There are many problems associated with traditional manual
procurement processes. For example, using multiple channels and
processes makes both internal and external communications confusing.
Additionally, using many different types of transactions to manage
numerous suppliers (which vary in size, respective contracts
and relationships) is time consuming. Spreading information across
many systems increases the margin for error. Hence, there is
a high cost and slow turnaround associated with manual procurement
(as much as $100-$120 per purchase order).
For the procurement of indirect goods and services, companies
are facing the following challenges:
- Excessive focus of procurement resources on low-value activities.
- Disproportionate acquisition cost to product value.
- Off-contract, rogue purchasing or non-leveraged spending
across corporate organizations.
- On-going proliferation of supplier and product portfolio.
- Inadequate audit and analysis of enterprise spending and
3. Procurement Defined
Procurement is the term most commonly employed to refer to
the purchasing of goods and services for the day-to-day operation
of a business. Procurement is an essential part of any organisation's
ability to function effectively and efficiently. The term 'procurement'
is understood to refer to the purchase of indirect goods. Electronic
procurement is about taking this process online and automating
the whole procedure with the underlying aim centred on saving
Companies investing in electronic procurement solutions expect
to improve the efficiency of their buying processes. However,
the main question is, where will the savings come from? A list
of potential returns comes to mind. This ranges from reducing
cost of purchasing through increased control over fulfilment
logistics, consolidating enterprise-wide procurement through
one channel, all the way to enhanced enterprise image.
Three areas of increased efficiency account for the majority
of returns on the eProcurement investment:
- reduced cost of purchasing;
- reduced cost of goods purchased;
- Reduced inventory days.
3.1 Reduced cost of purchasing
What is the cost factor in the purchasing process? Most important,
is the value of time spent on purchasing by both the enterprise's
procurement department and the employees generating the purchase
requirement. The purchase request generator will spend time collecting
signatures from those who are authorised to approve the purchase.
The procurement department will then check that internal policies
have been followed, find a supplier, negotiate terms for the
deal, generate a purchase order, track delivery, collect invoice,
generate payment. Time saving can be achieved on most of these
Furthermore, the cost of purchasing in many enterprises today
is increased, by maverick buying by employees. This involves
some employees purchasing goods from suppliers who are not a
preferred list with whom discounts have been negotiated. E-procurement
systems are designed to consolidate all purchase orders across
an enterprise, and channel the orders to preferred suppliers.
Moreover, this act of consolidation allows these enterprises
to negotiate bigger discounts in future, with data available
on this single aggregated procurement channel with increased
volume to suppliers.
3.2 Reduced cost of goods purchased
The key to reduced cost of goods purchased is an increase
in buyer power. The more a company buys from the same supplier
and the longer the relationship with the supplier, the better
the buyer's bargaining position. Accordingly, the enterprise
should consolidate buying as much as possible by reducing the
number of suppliers and choosing those which bring it most overall
value (price, consistency of supplies, timeliness of delivery
The less consolidated the supply chain, the more savings a
company can achieve by improving its strategic sourcing. Greatest
savings can often be achieved in the purchase of non-production
goods, and on consolidation of the secondary supplier base. It
is in these areas that most savings should be expected when implementing
an e-procurement solution. A two- percent reduction in the cost
of goods over a total spend of $100m will immediately achieve
savings of $2m.
3.3 Reduced inventory days
Inventory costs money. The longer the inventory cycle, the
more is spent on cost of equity and inventory maintenance. The
cost of maintenance may be fixed in the short term since warehouses
need to be maintained and inventory management is still required.
Savings can be primarily achieved on interest paid on inventory
value. Simply, a reduction of days from the inventory cycle will
contribute savings of interest rates on the cost of inventory.
Highly integrated purchasing systems, such as e-procurement
systems, allow buyers to view real-time information on availability
and delivery information from suppliers.
4. Procurement Technology
Strategic sourcing and internal procurement are business issues.
As the above section indicates, procurement re-engineering is
primarily about improving business processes, not about technology.
The technology, however, is necessary to maximize the impact
of the business process reengineering. E-procurement applications
are all about enabling the optimisation of the procurement business
process. The challenges for technology are both internal and
With regards to implementation there are two models that can
be reviewed, one being a leveraged model where systems are managed
and run by a service provider. In this case the client may not
want to incur high capital, software license, hardware and services
expense. The alternative is a dedicated environment. Within the
dedicated environment, the organization elects to manage the
system in-house due to the significant customisation and systems
integration that is required
5. What is an E-procurement Solution?
The aim of an e-procurement solution is to enable those employees
within an organisation who have the necessary authorisation to
ditch manual purchase order forms, and use an automated system.
Therefore, the idea with e-procurement is to provide these employees
with an application on their computers that allows them to browse
catalogues online, fill in purchase orders and send these off
for either approval from superiors or directly to the supplier.
Therefore the key components for an effective e-procurement
solutions are as follows:
· A buyer user interface (usually browser-based interface).
· Catalogue management and interface system.
· An integrated communication infrastructure for approval.
· External link to digital marketplaces and suppliers.
5.1 Buyer User Interface
To allow employees to purchase their requirements, the e-procurement
solution has an inbuilt interface where buyers can browse catalogues,
put required goods into a shopping basket and then process the
order for further approval or direct to the supplier.
5.2 Catalogue interface systems
These systems are essential to any e-procurement system and
are used to manage supplier catalogues for access by employees.
Any purchasing system needs clear and effective presentation
of products, in order for buyers to be able to easily browse
through catalogues as well as searching for the products required.
5.3 Integrated approval system
Virtually all organisations have an approval process to ensure
that employees are authorised before sending out a purchase order
to a supplier. In this same way, every e-procurement system needs
an infrastructure in place to accommodate these business processes.
5.4 External link to digital marketplaces and suppliers
The final part of the e-procurement equation is the external
link to the sell side - such as a digital marketplace, or a supplier
to send through the final order for processing. Many ERP systems
fulfilled only the internal procurement processes, but this new
breed of e-procurement solution takes things one step further,
and links directly to trading communities and suppliers to automate
the procurement process entirely.
Internally, an e-procurement solution has three main roles:
- co-ordination of procurement across business units and locations;
- enable the deployment of procurement policies throughout
- Reduce time spent on the purchasing by non-procurement staff.
Externally the e-procurement solution should achieve:
- reduced cost of choosing a supplier, e.g. simultaneous price
- facilitation of communication with supplier;
- Enhanced logistics monitoring.
Three features of Internet technology allow these benefits:
- Extensive network reach. The Internet's geographic reach
is key to expanding trading communities. The use of private networks
implies a high cost for trading partners. The use of the public
network allows the lowering of entry costs and significant reduction
of ongoing network management costs.
- Superior presentation capabilities. Internet Protocol provides
significantly superior graphic presentation to the "green
on black" of EDI. The accessibility of product catalogues
facilitates procurement for enterprise employees (user friendly
technology), as well as reduces risk of remote buying. From the
supplier's perspective the ability to actively market the products,
transforms the direct communication link to the buyer from a
fulfilment channel to a sales channel.
- Inherent interoperability of Internet technology. Internet
technology is designed to be interoperable. Indeed, Internet
Protocol's interoperability with existing technologies requires
significant integration efforts. However, basic features of the
Internet protocol and, in particular, overlaying technologies
such as XML facilitates the development of complete interoperability.
E-procurement applications are designed to facilitate the
development of efficient procurement. Internet technology, both
the Internet protocol and the public network, plays five key
roles in developing e-procurement beyond the capabilities now
available in an EDI enabled ERP procurement solution:
- reduces the cost of deploying e-procurement solutions in
- reduces the network management costs of the procurement solution;
- enables a user friendly e-procurement application;
- increases the supplier's benefits from cooperation with buyer;
- Expands the reach of trading communities.
6. Case Studies
Ford spends an estimated $15.5 billion each year on non-production
goods and services, making it one of the largest purchasers of
such goods world-wide.
With Ford's continuing quest to cut costs, Ford utilises an e-procurement
solution, with the intention of cost cutting from the everyday
tasks such as purchasing office supplies, and filing expense
Ford has revised the purchasing process, instead of receiving
catalogues, and having employees complete purchase orders that
must be approved by management, which often takes days or weeks.
Employees now log onto an Internet system, browse manufacturers
catalogues, order from a pre-approved group of suppliers, and
obtain purchasing approval in minutes. Ford anticipates to cut
spending and transaction costs by as much as thirty percent.
Ford also uses procurement applications for processing the
more than one million travel and expense accounts that employees
submit each year. It is estimated that large corporations spend
about $36 on processing each expense report. As this example
illustrates, the focus of procurement automation is not so much
on production-related raw materials but on non-production goods.
Labinal is an automotive and aeronautics group that purchases
fifty percent to seventy percent of its indirect goods through
the use of a business to business solution from EDS. The scope
- Office supplies;
- Industrial supplies such as tools and hand equipment;
- Electrical and electronic components;
- Special industrial parts such as ball bearings and sharp
- Cleaning products;
- Security equipment.
In the field of industrial supplies, for example, the number
of suppliers, have decreased from 576 to 4. Through process automation,
the unit acquisition cost has been halved, from $150 per Purchase
Order to less than $75.
As a consequence of sourcing enhancements and process automation,
savings generated amounted to twenty-five percent of the total
indirect purchasing budget.
EDS has provided the back-end integration for Labinal. This
seamless integration has ensured that the procurement system
and legacy systems are always synchronised. E-procurement has
made requesting and ordering via a Web-based tool a more affordable
way for Labinal to conduct business. The automated process is
more efficient than the traditional manual processes.
Labinal have achieved a twenty-five percent reduction in non-production
procurement costs and halved unit acquisition costs.
7. Implementing an E-procurement Solution
The previous sections have discussed the benefits of eProcurement
and the contribution of Internet technology to realising the
e-procurement opportunity. This section lists the stages in the
development of an e-procurement implementation and analyses the
key factors for a successful implementation.
Four core stages are required in implementing eProcurement
- Business process development.
- Matching the e-procurement solution to the business processes
and IT legacy.
- Solution integration to IT legacy.
- Solution management.
7.1 Business process development
E-procurement is about making enterprise's purchasing more
efficient, i.e. it is about business processes. Realising the
full range of benefits from the e-procurement technology requires
the optimisation of the corresponding purchasing processes.
Two such processes are pivotal to the success of an e-procurement
- from an outbound perspective, the rationalisation of supply
chains usually referred to as 'strategic sourcing' and,
- From an inward perspective, the development and deployment
of procurement policies.
7.2 E-procurement / business process and IT legacy compatibility
Two key criteria dictate the choice of an e-procurement solution:
- maximum functionality and
- Minimum investment.
The criterion of 'maximum functionality' encompasses a variety
of considerations beyond the actual features of the solution.
For example: scalability, meeting long term information technology
development, minimal friction with prevailing business processes,
compatibility with technology legacy, interoperability with partner/customer
technical solutions, multi-language and multi-currency capabilities.
The criterion of 'minimum investment' means more than just
low software cost. It also involves minimal systems integration
and education, low cost of maintenance and updates, frictionless
transition from existing operations, maximum supplier buy-in,
and easy deployment over large trading communities. In order
to be able to account for all these factors, implementing e-procurement
involves an in-depth understanding of both the enterprise's operations
and information technology legacy, in addition to a comprehensive
knowledge, of the variety of e-procurement solutions available.
7.3 Solution integration
E-procurement solutions occupy a position at the centre of
the enterprise's operations. These solutions involve a variety
of internal processes, from purchasing and accounting through
to human resources and enterprise resource management. E-procurement
is also central to the enterprise's external relationships with
suppliers. Consequently, an e-procurement solution must be integrated
to the enterprise's entire information technology infrastructure.
Integration into supply chain management, accounting, databases
and management information systems (MIS) is fundamental in realising
the benefits of e-procurement.
Successful e-procurement integration requires knowledge of
a multitude of programming languages, and applications, many
of which are no longer in use. A successful e-procurement integrator
needs capabilities in historic systems rather than merely an
understanding of state of the art technology.
7.4 Solution management
E-procurement solution management involves primarily two tasks:
- trading community management and
- Content management.
Trading community management begins with creating a critical
mass of buyers and suppliers who will be using interoperable
technologies. Achieving ROI on e-procurement solutions crucially
depends on the enterprise's ability to handle a large share of
its purchasing online. Successful solution management therefore
requires the proactive engagement on the technology provider's
part, in the process of convincing relevant suppliers to join
the buyer's trading community. The greater the technology vendor's
reach into the buyer's supplier base, the quicker an enterprise
will achieve return on its e-procurement investment.
Successful solution management inadvertently involves significant
content management capabilities. Content management is key to
both supplier buy-in, and buyer ease of implementation.
The third stage in implementing an e-procurement solution
involves the actual integration of the application to the enterprise's
information technology legacy. For e-procurement to provide maximum
benefit for the enterprise it must be integrated with both back
office and front office applications.
8. Industry Review
The question may be asked as to which industries are typically
suitable for the implementation of e-procurement. The target
market for e-procurement can be identified according to any of
the following criteria.
Industries with high indirect spend where the purchasing of
indirect goods and services is often manual and paper-based.
Services industries such as Utilities and Financial Services
are prime candidates. Though manufacturing clients may have a
lower percentage of indirect spending to total purchases, the
sheer volumes also make e-procurement an attractive solution
to this industry.
Clients in industries faced with high competition and cost reduction
Clients in industries where competitors have already adopted
these solutions, for example: automotive and financial services.
Government will of course benefit from the introduction of
electronic procurement due to the vast amount of indirect procurement
that takes place, typically, as this is a service industry. The
European Commission has already communicated that the aim is
to have twenty-five percent of government procurement transactions,
processed electronically by 2003.
9. Business Impact
It is easier to engage in the transactional segment and processing
speed of a new computing system than to review the softer issues,
in rolling out an electronic procurement system. However failure
to engage on this level, can result in frustration, and low effectivity
in terms of return on investment.
A successful system must be designed for casual use by untrained
employees. If users do not like the system, then the whole application
will fail. However the system must also meet the requirements
of purchasing managers, to include management controls, reporting,
and integration with existing systems.
The organisation during planning and implementation also needs
to engage in procurement chain improvement, but change often
generates opposition. These issues need to be dealt with, through
clear communication and involvement, if this cannot be done,
failure will be a part of the process.
Internal business process revolution, in turn, also requires
the capability to influence the organisation at all levels and,
most importantly, the management. Implementing an e-procurement
solution is not, in this perspective, an information technology
project. For the project to be successful, the enterprise's management
must work towards deployment throughout the company. Management
buy-in for the e-procurement effort is therefore essential to
10. European Market
The European market for Internet-based buy side online procurement
has been slow to take off relative to the US market. However,
from a small base of just under thirty implementations at year-end
1999, rapid expansion is anticipated - with the total number
of companies implementing expected to exceed 3,000 by 2004. The
first year of genuine growth in the European market is set to
take place this year. By now nearly all serious procurement software
vendors, have established a strategic presence in major European
cities, and are reporting encouraging interest and prospects
in the market.
The fragmented nature of the European market also means that
regions need to be tackled separately. Cultural and regulatory
barriers exist, meaning that a different approach needs to be
taken to serve Europe as a whole. A strong understanding of the
separate regions needs to be developed, and strategies tailored
to the conditions that exist within them.
As market forces act to increase pressure to reduce costs,
and as partners and suppliers develop online capabilities, organisations
are required to move towards engaging in developing a competence
within the e-procurement arena. The review provided here has
indicated that there are multiple facets in the adoption of this
process. Failure to consider all issues - will inevitably delay
deployment leading to disillusionment and reluctance on the part
of employees to engage in the use of these techniques.
To conclude, successful e-procurement implementation requires
a variety of capabilities from an information technology services
vendor that will be required to assist the organisation in deploying
an e-procurement system. These capabilities range from business
process understanding, through to technical proficiency and relationship
management skills. It is the combination of all capabilities
into one solution implementation composition, that is key to
excel in an e-procurement implementation.