Online purchasing revisited

E-procurement: Is it mature enough for you? Are you ready for it? Consider the benefits it might bring to your bottom line

By David Crouch

During the last five years or so, e-commerce software and its cousins, online marketplaces and e-procurement applications, promised businesses the opportunity for streamlined order processing, increased customer contact and access to new markets. For some companies, e-commerce (selling on-line) has been a valuable addition to their sales channels, but for others, the cost and organizational implications have overshadowed any benefits. (To many, particularly those with once large investments in e-biz or software companies, this may seem to be an attempt at dramatic understatement. I assure the reader that, as a fellow penny stock investor, it was only an attempt at detached professionalism.)

Electronic marketplaces, which were touted as the convergence of supplier and buyer interests in an efficient and inexpensive venue, proved to be too cumbersome for buying organizations and in direct conflict with suppliers’ interests. In the absence of successful marketplaces and without real standards for electronic communication with suppliers (certainly nothing better than EDI), is e-procurement another good idea whose time has not yet come? After the dot com bust, is there a future for these technologies or their offspring in more traditional businesses? This article answers these questions and a few others.

Back to what works

In challenging economic times, most of us take a step back from our businesses and make sure we’ve been honest with ourselves about our company’s strengths, weaknesses and growth potential. We try to see past the exuberance of the boom times and, whether our industry has hardly been affected or is reeling from a downturn, cautiously evaluate our options. Many companies begin to reign in non-critical spending, start looking to suppliers for cost savings, and analyze internal procedures for process savings. They look for opportunities to improve the bottom line without sacrificing service and quality, making new large capital purchases, or investing heavily in new sales and marketing efforts.

The costs of e-business technology, both software and services, has come down significantly over the last two years and most of the implementation mistakes have already been made. So if your organization can benefit from selling to and serving customers on-line, now is a good time to be in the market.

E-procurement and e-marketplaces

Selling on-line has become popular, but not all business models are suited to this side of e-commerce. Electronic procurement (e-procurement), on the other hand, is worth a look for most companies with a few hundred employees or more.

Two Internet purchasing models have developed over the past few years — e-marketplaces and direct e-procurement. Many confuse these terms and assume that they mean the same thing. But there are differences.

E-procurement can be defined as the automation of internal and external processes related to the purchase of goods and services. E-marketplaces, on the other hand, are aggregators of buyers and sellers in an electronic marketplace. E-marketplaces create these markets by providing software to buying organizations to offer them basic e-procurement functionality. Buyers can either use this propriety software or connect from their own e-procurement system using XML.

The benefit of e-marketplaces for buyers is that they have access to the goods and services of participating sellers in a single, integrated system. But there are drawbacks. There are limited opportunities to customize the system for a company, to fully realize the benefits of automation. The buyer has no control over which suppliers participate in the e-marketplace, which can create problems when trying to work directly with other primary suppliers. There are also service and transaction fees related to such an arrangement, which adds to the buyers’ costs.

As this form of purchasing matures, e-marketplaces will become an important source of purchasing information for most organizations, and any good e-procurement strategy should consider which e-marketplaces are or may become appropriate in the future. The key to a successful e-procurement strategy today, however, is to fully benefit from the immediate and medium term benefits of process automation, which can be dramatic. By managing their own sell and buy side applications, organizations can communicate with many buyers and sellers in the method appropriate for the relationship.

MRO e-procurement

E-procurement can generally be broken down into two types: production spending and non-production or MRO (Maintenance, Repair, and Operations) spending. Since the late ’60s, manufacturers have been squeezing more and more efficiencies out of the supply chain purchasing process. The automotive, semiconductor, and other intensely competitive industries led this drive. Production spending will benefit greatly from Internet procurement technology, but this will involve a long and costly evolutionary process, as older systems are updated or retired, and new industry standards are adopted.

MRO e-procurement, on the other hand, incorporates most non-production goods and services purchased to facilitate the normal operations of an organization. It applies to any kind of organization in any sector, and a vast array of products/services including office supplies, replacement parts, janitorial supplies, service contracts, fleet maintenance, tools, etc. Evaluation of an MRO e-procurement system in any organization should be based on its ability to provide value in two areas:

1. to increase efficiency in the buying process and reduce the internal cost per transaction; and

2. to provide purchasing and finance with the information and time to better control spending and negotiate more advantageous supplier pricing.

Of these, the first is the most significant in the short term and should be used as the main factor for determining your return on investment.

E-procurement application software streamlines the purchasing process and allows the purchasing department to reduce the steps involved in:

-    finding approved vendors and products;

-    creating requisitions;

-    getting necessary approvals;

-    placing orders with suppliers;

-    confirming the receipt of goods;

-    getting them to the requisitioner; and

-    settling accounts.

It also improves the organization’s ability to: manage buyers and approvers; manage department- level spending; manage budgets, recurring purchases, and rogue spending; generate reports that help analyze spending, improve information and control and maintain accurate information for budget guidelines and other company functions.

Documented benefits

Based on our research, most North American organizations with more than 500 employees and decentralized MRO purchasing have an internal average transaction cost of between $75 and $200. As we might expect, there is a correlation between the number of cost centres or physical locations and the cost per transaction. We have calculated this average by adding the fixed overhead costs of the purchasing department and the cost of time spent by employees in the process of finding suppliers and products, creating requisitions, the approval process, creating purchase orders, placing orders, receiving and distributing goods, and reconciling invoices and budgets.

Here are some figures collected from several studies by the Aberdeen Group:

The industry average cost per MRO transaction is US $107. Industry average cost per transaction using an MRO e-procurement system is US $35, representing a 72% savings.

• On average, 25% of MRO purchases are maverick buys resulting in purchase costs 20% over contracted prices. E-procurement adoption results in a 51% average reduction of maverick spending.
• There is an industry average of 5-10% reduction in prices paid for goods, primarily through increased contract compliance.
• The industry average MRO requisition cycle time reduction is 70-80%.
• A one time, 25-50% reduction in inventory is possible by matching stocking requirements to actual and forecast demand.
• Average inventory carrying costs are 20-45% of inventory value. As inventory is reduced, some carrying costs are eliminated.

An informal polling of Canadian manufacturers last summer revealed that less than 10% have implemented a full MRO e-procurement system and less than 20% have concrete plans to implement one in the next 12 months. Why such slow adoption of technologies and practices that can have immediate and measurable effects on the bottom line?

Several reasons can be suggested. Firstly, corporate spending on technology, particularly “e”-anything, has languished since the stock bubble burst. Secondly, most organizations recognize the potential benefits but lack a sense of urgency. MRO spending is, at best, a secondary concern for most financial officers, and the systems already in place still work. Finally, overly ambitious “new economy” companies selling the marketplace model misplaced the focus of e-procurement. Instead of working on internal procedural benefits, they tried to inject themselves into the buyer/supplier relationship to change the way companies interact. In the long term this may be successful, but short term it has hurt the image of technologies that could have practical, immediate benefits for many organizations.

If your organization could benefit from cost savings and a more efficient purchasing process, 2003 and 2004 will be good years to look into e-procurement. If the Web could improve, streamline or increase your customer interaction, it will be a good time to start building on that potential. Many software and services companies now have the body of experience and mature technologies to implement solutions quickly and effectively. If you’ve been waiting for a buyer’s market, now’s the time.

David Crouch (dcrouch@thinkgrey.com) is a senior consultant with Grey Matter Solutions.