e-procurement: moving up the agenda

Over the last couple of years, e-procurement and e-marketplaces – on-line digital trading systems – have been touted (hyped) as cornerstones of future business. In theory, manufacturing has stood to benefit among the most from the new efficiencies and cost reduction it promises. Yet the great predictions are only now showing some signs of reality, as early implementations mature. Recent research commissioned by some of the e-procurement suppliers shows e-trading finally heading for mainstream IT. A survey by Clarus claims a staggering 97% of financial directors believe that further cost savings can be made on procurement side, through improved internal efficiencies. And in separate research, hosted e-procurement provider TomorrowFirst found 60% of companies potentially looking to outsource ‘indirect’ (non production) purchasing, while 82% expect a one year payback from e-procurement. One thing for sure is that to date, companies’ main e-procurement and trading exchange emphasis has been on sourcing ‘indirect’, non production commodities. Web-based procurement of ‘direct’ production materials and manufacturing components is taking a lot longer to come about – even though it’s here that most of manufacturers’ spending occurs. Fact is, MRP and ERP systems have long been configured to serve the requisition and scheduling needs of the shop floor. Supply chain management extensions to these have also been developed. One argument goes that industry does not have either the funds or the appetite for the effort, time and cost of implementing alternatives. Nevertheless, the likelihood is that e-procurement will have to be integrated with existing ERP implementations. When it comes to direct procurement in particular, it is not enough simply to push desktop web browser software out to purchasing professionals. e-systems at this level have to be built solidly into the IT infrastructure with sophisticated web portal technology. And that’s also the case with web-based collaborative planning and design – the logical extensions of ‘e’. Unilever HPCE is one organisation embracing a broader vision of e-procurement, which will inevitably lead to full integration of ‘e’ within its IT infrastructure. HPCE is the home and personal care group within Unilever. A key part of its strategy fell into place when the firm went live earlier this year with an electronic auctioning system based on customised software from CRM (customer relationship management) IT vendor Siebel, according to Asmus Wolff, buyer at HPCE. UK-based developer Terra Nova Media designed the solution and took around three months to implement. Wolff explains that HPCE makes infrequent use of its e-auction system, which was deployed specifically for direct purchases, with peak activity coming at the end of the year when key negotiations with suppliers are undertaken. Indirect commodities are sourced using on-line exchanges like Transora – which Unilever sponsors – and e-procurement specialist Ariba. Only around 5% of HPCE’s direct procurement is handled via its auction system, but this represents a significant success as far as Wolff is concerned. It yields up to 20% in savings, he says, and although this figure is not consistent across all raw materials and packaging, they are good and worth having. Be very selective “It is not necessary to focus on the raw percentage of purchasing done using e-procurement,” says Wolff. “The key is to apply this practice to limited areas where success can be gained. A selective approach leads to success and e-auctions are just one piece of the jigsaw.” For HPCE, this jigsaw is a multi-year strategy to integrate and develop several systems, and Wolff notes the importance of a joint strategy spanning ERP and the rest – as well as training and so forth to ensure quality business processes. Another example where e-auctioning has been particularly successful is an e-market for sourcing energy supplies. Organised by a Utilyx, a recent energy auction allowed Marley Floors and Waterproofing – and its eur2.8bn Etex parent company – to obtain six figure reductions in its energy bill. The company set up a one-day auction for electricity contracts at 21 sites in the UK. Assisted by a manager from Utilyx, Marley pumped site consumption data to buyers connected to the e-market – with Etex people watching proceedings as they unfolded from the on-line trading floor at Marley’s Lenham site. All the UK’s major electricity suppliers participated, and 200 bid responses were handled during the day. While there were complications, such as including a recently acquired company in the trading, the results were good, according to Andrew Gendek, Marley’s purchasing manager. Successes or not, e-procurement system vendors are realistic about electronic trading in both direct and indirect supplies. Oracle, for instance, is claiming genuine cost savings from e-procurement, while it down-rates average reductions to 5—10%. David Tudor, Oracle’s senior principal for industry, stresses that savings up to 20% can be gained, but says a more general estimate has to be lower and backed by proper ROI (return on investment) calculations. Yet he points out that after all the hype around ERP, these systems now play a central role: this will be the case for e-procurement, he predicts. Tudor contends that it’s only been over the last six months that the real success stories have surfaced. And it was no surprise to him or the industry that indirect purchases were the early focus. Most firms have not seriously addressed cost control when it comes to purchasing indirects, he comments. And he suggests that embedding e-procurement systems and practices within an organisation involves a lot of integration work and staff training. Supply chain hubs Tudor also avers that several companies have now started establishing electronically linked supply chains, run off the back of their ERP systems, while also moving to support product lifecycle management through web hubs. So it’s all beginning to happen – but that being the case it’s worth noting there is value in getting a strategy together so that e-procurement, trading exchanges, supply chain hubs and product development hubs can be part of an integrated whole. Ariba, one of the early stars, sees cost management as still the key purpose. John Watton, UK marketing director, cites recent findings from a poll by management consultancy AT Kearney among CEOs, which revealed this remains a primary concern. Watton sees e-procurement fitting into a three-tier architecture of enterprise systems. ERP handles the base transactional functions, record keeping and management. CRM provides a top-level revenue boost. And e-procurement enables management of the bottom line. It should be viewed, he suggests, as the front line for finding the right supplier and price point, and handling contract negotiations. Like Oracle, Ariba cites savings of between five and 20%. Enforcing compliance One key area for e-procurement, according to Watton, is enforcing compliance among buyers. He points to the case of an unnamed US computer maker, which had 160 sources for toner cartridges. Using the Ariba Sourcing software, Watton claims the firm achieved 36% savings and slashed the buying cycle. Other Ariba customers, like BMW, have also achieved reduced time to order. Watton is convinced that, by 2002 e-procurement will have yielded a “good body of experience” – and with only 10% of major corporations on board, bigger uptake will follow. There’s a range of ways of doing it. TomorrowFirst claims to be the first in the UK to provide a secure, hosted e-procurement service, and Alf Noto, chief operating officer, believes there are good reasons for doing it this way, not least taking cost out of the IT. e-procurement systems need only to be linked to supply chain environments to fulfil business schedules, he says, and you get all the classic benefits of reduced maverick buying, simplified supplier transactions and the rest. As for trading exchanges themselves, it’s worth understanding the three predominant models. Public exchanges currently represent the largest proportion, although the near universal view is that their number will shrink dramatically due to lack of demand. The next category is the private exchange, set up by an ‘owner’ – typically a multi-national enterprise – that wants to automate dealings with key suppliers, partners and even customers. Then there is the exchange run by as a joint venture, like the huge Covisint in the automotive sector. These can be used for procuring anything, according Chris Philips, director of marketing at e-procurement giant and SAP partner CommerceOne. Philips says that since direct material purchasing has to be scheduled, the automated transactions of an e-market, is the way to go – buying being triggered by ERP. He points out that an e-market is ideal for many aspects of buying, like setting criteria, setting up reverse auctions, managing the bid process and handling contracts automatically. The 2002-2003 time frame will be crucial for assessing how fast maturity comes to this technology. It could be the case that e-procurement is subsumed into an integrated set of web services for business. The important thing to remember is that e-procurement, if undertaken properly and realistically, can help with cost management.