Nothing to Lose but Overhead, Unnecessary Costs and Errors

By Ken Sloan, Principal, Tompkins Associates

If your company is not using e-Procurement, you are losing the best opportunity available today to drive savings and increase profits. On average, acquiring products and services accounts for more than 50 percent of every dollar of revenue that a business gains, including the combined costs of administrative resources and the cost of the products and services.

Sadly, relatively little emphasis has been put on procurement and purchasing processes in the past. This has hurt company bottom lines at a time when no one can afford negative impacts on profits and revenues.

Fortunately, technologies that leverage the power of the Web and Internet have created an incredible opportunity for businesses to dramatically reduce the costs of administration, products and services while revising and enforcing internal procurement policies. Your business can remain competitive and significantly increase profits by moving from traditional procurement to an e-Procurement strategy.

What is e-Procurement?

Typical procurement processes within an organization include one or more purchasing/selling departments, all of which rely on paper-based systems. Purchase orders (POs), requests for quotes (RFQs), invoices and payments are transmitted via phone, mail, fax and e-mail. Procurement departments are typically disparate across organizations and geographies, and each has its own hierarchies, processes, rules and relationships. As a result, the system is highly vulnerable to human error (lost POs, lost invoices and incorrect procurement data entry, for example), and actual and total expenditures are not visible. In other words, each organization knows what it bought, how much it cost and from whom they bought it, but the visibility is not aggregated at the corporate financial level. The result is ineffective and impossible spending management.

E-Procurement, on the other hand, links procurement organizations through a centralized, Web-based system. This eliminates paper-based transactions and enforces company-wide buying/selling compliance. E-procurement technology automatically manages negotiated contracts—ensuring that discounts and rebates are received properly—and provides centralized visibility across all organizations.

E-Procurement uses a Total Cost Management (TCM) approach to reduce errors and ultimately cut administrative costs per PO by more than 75 percent. TCM is strategic and includes every area within an organization that touches or affects spending, along with the actual processes and policies that govern these activities. The attitude is "find it, get it, keep it:"

• Find it through a comprehensive assessment of your internal operations and external business partner relationships.
• Get it through effective sourcing, negotiations and effective business partner relationships.
• Keep it by applying and enforcing electronically automated compliance rules and reporting measurements.

It is important to remember that e-Procurement is not just about buying. As the old saying goes, "It takes two to tango." E-Procurement requires a strong sense of collaboration with a goal of building stronger partnerships in which both sides prosper. It also requires a collaborative strategy across the supply chain.

Many companies treat e-Procurement like any other internal initiative, believing that if they buy the right hardware and software, set it up, conduct training and announce to their suppliers and the rest of the world that they are ready to do e-business, they will soon be reaping the benefits. Unfortunately, implementing e-Procurement tools without a strong collaborative methodology usually results in a huge investment in a technology infrastructure that current suppliers are unable or unwilling to use.

E-Procurement requires more than the latest and greatest technology. You must define business goals, plan the implementation, communicate your plan with your supply chain (or at a very minimum, with your key suppliers and/or customers), develop strategies that will incorporate your supply chain into the initiative, implement the solution, and measure the results.

An E-Procurement Strategy

Tompkins Associates has developed a unique, four-step process for developing an incremental e-Procurement deployment strategy. An e-Procurement assessment is the first step. Its objective is to obtain a perspective of spending patterns, both historic and current, along with a comprehensive understanding of business process disciplines, technology infrastructure and supply chain relationships. The results of this assessment should be compared with best practices and industry benchmarks, resulting in a gap analysis.

Using the results of the assessment and gap analysis, your organization must develop a strategic plan that incorporates business goals and objectives with costs, benefits and complexity. Historically, many organizations and e-marketplaces have failed in their attempts to implement an e-Procurement system simply because they had a one-phase plan that included an expensive product suite with a complex infrastructure. A better methodology is one that is incremental and has short-term, mid-term, and long-term goals.

This type of plan begins with a low-cost, low-risk solution such as sourcing. It then uses the proof of concept and the gains from that initial implementation to move to the next phase and pay for it, focusing on continuous improvement.

The third step in the methodology is implementation. Because procurement touches your business processes and technology and the external business partners in your supply chain, there should be planned and monitored tasks specific to internal and external communications, including the project team and supply chain partners affected by this implementation. Communication is critical to the success of an e-Procurement implementation.

The result of this oversight is implementation delays or even complete failure. Furthermore, capturing all elements of the total cost of acquisition can be a daunting task. It often requires input from multiple ERP and/or legacy systems. Integration with complementary IT systems is the single most complex task of an e-Procurement implementation and must be considered and planned in the previous stage.

Upon completion of implementation, an evaluation of the results should be compared with goals and objectives to determine the rate of success or failure. This evaluation should include internal and external compliance to the plan and quantifiable and measurable savings. The questions to be answered by the evaluation are simple.

First, did the implementation meet your expectations? Even if expectations were met, can they be exceeded? Can you bring on more users and business partners to extend the reach of products bought and sold? Conversely, if your expectations were not met, you must find the problem, fix it, and reevaluate. You need to determine whether the users are using the system the way it was intended and if the compliance rules are being met.

Reaping the Benefits of an e-Procurement Strategy

Once your e-Procurement strategy is in place, the way you do business will change. With carefully selected, customized e-Procurement technology, you can perform all of the transactions required to acquire goods and services in an online, real-time environment via the Internet. This has numerous benefits.

First, there are the incredible savings opportunities through product and services discounts. An example is the leveraging of volume purchase opportunities. With the visibility e-Procurement provides, companies realize that they are buying the same product from many different suppliers and are losing an opportunity for volume discounts.

Another benefit is increased administrative efficiencies. For example, using current procurement electronic systems, the process of negotiating contracts is shortened significantly. Paper-based systems can take weeks or months; electronic systems take hours, or at the most, a few days.

Yet another advantage of e-Procurement is reduced inventory levels. E-Procurement relies on complementary supply chain forecasting and planning applications that promote electronic collaboration with suppliers. This results in a reduction of goods, which in turn lowers inventory, storage and handling costs.

With e-Procurement, every dollar saved goes straight to the bottom line, resulting in higher profitability. And, you have nothing to lose but overhead, unnecessary costs and errors. You have everything to gain—including survival in the turbulent global marketplace and competitive advantage.

E-Procurement Strategy: Things to Consider

It makes sense to take advantage of e-Procurement practices, but how do you begin the process of selecting the right e-Procurement technology? Some things you should consider before making any technology investments are:

Business model. Is your company a buying or selling organization or both?

Solution set(s) specific to business requirements. Depending upon your business requirements and the type of business model that is required, which applications will you need?

Catalogs and content. If you are a seller, do you have an electronic catalog and, if so, who is responsible for maintenance? If you are a buyer, where will the catalogs reside and how will you access them?

Infrastructure. Regardless of what type of business model or solutions that are required, will the procurement initiative be deployed within the local environment (i.e., behind your firewall on your own hardware), or would you be better served utilizing an Application Service Provider (ASP) or an exchange?

Integration. This requisite applies to both existing backend ERP, financial and legacy systems (Enterprise Application Integration - EAI) and to the integration of the procurement messages entering your domain.

Resources. Depending upon your infrastructure, you may need to recruit individuals with strong procurement experience (i.e., the more you have behind your firewall, the more experienced resources you will need).