e-procurement is often called ‘the low hanging fruit’ of e-business. But plucking that fruit involves some serious stretching and thorn avoidance. Brian Davis explains.
The e-procurement of indirect, non-production goods and services is often claimed to be the ‘lowest hanging fruit’ for manufacturers wanting to harness web technology. Corporations can spend over 30% of revenues on indirect goods and services, according to PriceWaterhouseCoopers (PWC), so the gains are certainly there to be had. But although it’s only the start of building a full e-enabled operation, it is by no means simple, as early adopters like the TI Group, BP, Corus, BMW and Rolls-Royce attest.
Indirect goods are not considered ‘sexy’, but a 10% reduction in purchase costs could result in 50% increase in profit margins for some businesses. Indirects range from office supplies, IT software and consumables, through to products for maintenance repair and operations (MRO). Analyst AMR estimates that manufacturers spend about $8 billion annually on indirect expenditure, compared to $20 billion in energy companies. This explains BP’s express aim to procure 95% of cataloguable items via the Internet by the end of 2001, as a key initiative.
Indirects are traditionally purchased by fax or telephone by users armed with paper catalogues. These are high-volume/low value purchases, and there is often little compliance with an organisation’s central systems. What’s more, leveraged contracts are difficult to implement across multi-site, global organisations. e-procurement promises to increase compliance from 30% in most organisations to 90% or more. It also offers leverage for improved negotiation of discounts and terms.
However, implementation of e-procurement is not simply a technological issue: it means addressing an organisation’s business processes. PWC consultant Dirk Claessens maintains, “e-procurement means integrating the process and technology at both global and local organisational levels, with encouragement of supplier adoption to build catalogue content on-line.”
Actually though, the biggest threat to e-procurement is continued use of telephones. Chevron’s president of e-commerce David Clementz suggested, half jokingly, “Maybe we’ll have to get rid of the fax and phones to get full e-business.” But users must be able to order what they need easily from the system, or they will abandon it. Microsoft did it properly: the company claims it has 99% use of its in-house procurement system for MRO items.
PWC believes there are six key factors that influence an implementation strategy: the rate of supplier adoption and on-line catalogue creation, the rate of user adoption, culture and change adaptation, business constraints, country-specific issues and technical integration.
Claessens suggests an organisation needs to estimate its indirect spend, judging the split between hard goods and services (cataloguable items) and those that are not. An e-procurement strategy needs to be handled in a carefully staged manner. “Don’t expect to get it all right at once,” he says. Supplier adoption must be well executed, and legacy system integration can be costly and complicated. For example, catalogue management and support can be an expensive hidden cost at two-to-five dollars per line item change.
So how do you do it? A major change programme is necessary. This demands careful communication throughout the group, and training for purchasers, suppliers and the procurement team. New processes and rules need to be created. Suppliers must also agree to provide and maintain electronic feeds to a master catalogue. Ownership of catalogue management can lie with the vendor, the buyer or a third party.
Claessens considers the key elements for effective e-procurement are: central control of contracts, regular catalogue and price updates, explicit business rules, increased use of alliance suppliers, reduction/elimination of user choice of vendor, and potential overturning of long-established local supply agreements. There must also be a switch from traditional communications to PC-based ordering, greater IT literacy for users, increased rigour in the authorisation process, and greater visibility of individual and unit spending patterns.
Numerous software application vendors have developed solutions for e-procurement, including Commerce One, Ariba, Oracle and an ever growing selection from the ERP vendors. The choice of system will depend on an organisation’s technical infrastructure, its approach to catalogue management and requirements for multiple language or multi-currency facilities: there is a large variety of licensing and pricing models. Some companies favour outsourcing the procurement function to a third party that manages the electronic catalogues and the supplier relationship on behalf of multiple buyers.
Certainly, most Global 500 organisations are initiating e-procurement programmes, as they have the greatest potential for ROI (return on investment), based on a massive volume of indirect spend. However, Claessens points out, “For small and medium sized businesses, the cost of acquisition and maintenance of such systems will remain a barrier until there is general availability of managed catalogues and associated outsourced procurement services.”
Claessens has been advising on the BuyforMetals initiative by four leading European steel buyers: Corus (ex British Steel), Thyssen-Krupp, France’s Usinor and Belgium’s Arbed. This conglomerate is setting up a major e-procurement platform based on software and services vendors i2 and Ariba for launch in May. The first stage will address 32 suppliers and their catalogues. 16 will be catalogue-driven and the rest by RFI (request for information) and RFQ (request for quotation) using on-line reverse auctions. Each catalogue will contain about 5,000 items, mostly for MRO – including ball bearings, electrodes and IT equipment – but a couple are for direct purchases of ferro-alloys and scrap metal.
The i2/Ariba platform was selected because of the need to integrate with existing supply chain management solutions. It won’t come cheap: Claessens says an organisation should kick off the initial phase with the aim of handling a few hundred million dollars of indirect purchases (that counts out SMEs!). BuyforMetals is aiming to handle buying power of $7–8 billion annually. Claessens estimates the initial investment at $5 million for software and a similar sum for system integration during the first phase.
A key success factor is creating sufficient liquidity of transactions on the procurement exchange, and gaining success in supplier adoption. To achieve these, today’s e-markets are forming around vertical industries or horizontal communities. Vertical marketplaces include Covisint in the auto-industry, TradeRanger.com in the oil industry, eSteel and Plasticsnet. Over $438 billion of the $1.7 trillion anticipated in B2B on-line transactions is forecast to go through e-markets, claims PWC.
But what does this mean for individual organizations? Claessens maintains that companies need a good IT infrastructure with a wide area network (WAN) in place. “Good networking is essential, as procurement professionals will want access throughout the organisation.” Creation of a special team to drive the e-procurement initiative is also paramount. The BuyforMetals team has 30 people: generally, the team needs to include staff who understand the process in detail, IT literate people to build the platform and configure it, and change management experts to help re-engineer the company.
Beyond this, cultural change must be driven throughout the organisation. “You need to convince users of the benefits. e-procurement is not about sacking procurement people but adding value to their daily jobs,” remarks Claessens. Stakeholders must be clearly identified and briefed on a regular basis, with workshops to describe the impact daily (on-line or face-to-face).
As for justification, there are several measurable benefits. As all contractual agreements can be embedded in the system, compliance will increase significantly: e-procurement big boy Ariba reckons that companies can save 5-8% by buying electronically, as well as rationalising their supply base. Process savings range from 50 to 80% through automation of workflow processes, and maverick buying can almost be eliminated, as contract compliance rises from 30 to about 90%.
Looking forward, as the supplier base becomes acclimatised to the new way of buying, e-procurement will cascade through the business world. Organisations will expand their supply bases significantly, and the number of material categories on on-line databases will mushroom.
BMW Action Plan
Auto industry giant BMW is implementing an Ariba e-procurement solution in partnership with global consultancy KPMG, for purchase of indirects that include MROs, services, construction and production facilities (but not car parts). It aims to reduce the time spent on purchasing small value orders by 60—70%, from 60 to 20 minutes, from identifying the need for a product or service to arranging automatic payment.
The firm has produced a nine-point check list of work packages for e-procurement implementation, combining internal process with Ariba Live methodology.
Analysis of internal and external processes involving suppliers.
Examination of the technical aspects, to ensure the e-procurement installation will integrate with the internal IT infrastructure.
Data modeling, with customisation of the Ariba solution so its data model matches BMW’s existing MRO operations.
Catalogue management, starting with three suppliers producing on-line catalogues of office materials, electrical spare parts and hand tools. This will be expanded to 10 suppliers in the next phase.
User interface customisation: e.g. inserting the BMW logo on some front ends.
Business rules development: e.g. developing a common workflow approval system.
Reporting standardisation, for management information and analysis purposes.
Change management and communications, to keep associates updated about e-procurement changes and impact on their daily work.
e-conference room pilot. During this phase software solutions are all run on one server, so changes can be tracked on a master server and frozen at certain stages.
Author: Brian Davis