Chapter 7 E-procurement

Learning outcomes Identify the benefits and risks of e-procurement Analyse procurement methods to evaluate cost savings Assess different options for integration of organizations’ information systems with e-procurement suppliers.

Management issues What benefits and risks are associated with e-procurement? Which method(s) of e-procurement should we adopt? What organizational and technical issues are involved in introducing e-procurement?

How important is procurement? We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent on indirect goods and services—things like office supplies and computer equipment. That half dollar represents an opportunity: By driving costs out of the purchasing process, companies can increase profits without having to sell more goods. Hildebrand (2002)

Procurement and E-procurement Procurement refers to all activities of obtaining items from a supplier, include purchasing as well as inbound logistics, warehousing, etc. E-Procurement—the E integration and management of all procurement activities including purchase request, authorization, ordering, delivery, and payment

The 5 rights of e-procurement at the right price delivered at the right time are of the right quality of the right quantity from the right source. Baily et al., 1994

Figure 7.1 Key procurement activities within an organization

Figure 7.2 Electronic procurement system Source: Tranmit plc

Mini Case 7.1 Schlumberger Read the mini case study on p. 383 and answer these questions What special about the procurement process at Schlumberger? What purchasing software do they use? What advantages does this software provide than the traditional EDI?

Activity Read the Activity 7.1 on p. 385 Answer the questions at the end

Types of Procurement What is bought? How are items bought? Production-related Non-production related How are items bought? Systematic sourcing—long term relationships Spot sourcing—fulfillment of immediate need

Online Procurement 8 types of intermediaries Tradition manufacturers Direct sales manufactures Value added procurement partners Online hubs Knowledge expert Online information services Online retailers Portal communities

Figure 7.3 E-business e-value grid Source: Riggins and Mitra (2007)

Drivers of e- Procurement Case Study 7.1 Read the case on pp. 388-389 and answer the questions on p. 389 Ref. p. 390 for a summary of benefits and berriers

Estimate e- Procurement Cost Savings = requisition No *(Cost1-Cost2) Impact of cost saving on profitability Ref. table 7.3 on p. 391 for procurement cost in different industries

Activity Using Excel to complete the Activity 7.2 on pp. 391-392

Risks and Impact of e-Procurement What are the main reasons for low adoption of e-Procurement? According to Potter(2000), Security and faith in trading partners. What are the main organizational risks? Displace employees and Maverick purchase. Activity 7.3 Complete the Activity exercise on p. 393

Risks and Impact of e-Procurement Failure to Achieve real cost reductions Technology risks New technologies and models are emerging on an on-going basis. Hard to decide which one to use.

Implementing e-Procurement Companies should consider improving business processes rather simply automate the existing process The biggest challenges are Training / Change management Supplier relationship management IS manager and procurement team must work together Different types of IS can be used for different parts of procurement cycle

Figure 7.4 Use of different information systems for different aspects of the fulfilment cycle

Figure 7.5 E-mail notification of requisition approval Source: Tranmit plc

Figure 7.6 Document management software for reconciling supplier invoice with purchase order data Source: Tranmit plc

Implementing e-Procurement Integrating with Supplier Systems There are typically 3 alternatives to look at: 1:M, M:1, and M:M. Ref. Fig. 7.7on p.398 The pros and cons are summarized in Table 7.6 on p. 399

Figure 7.7 The three main e-procurement model alternatives for buyers

Figure 7.8 Integration between e-procurement systems and catalogue data

Figure 7.9 An online catalogue of items for purchase Source: Tranmit plc

B2B Marketplace Mini Case Study Case Study Visit Alibaba.com to see what opportunities it opens to SMEs Case Study Read the case study Covisint on pp. 403 -404 Discuss the question on p. 404

Figure 7.10 Jack Ma, CEO Alibaba.com Source: FT.com

Figure 7.11 Ford supplier portal provided by Covisint Source: Covisint.com

Figure 7.12 Supplier route to government portal (www.supply2.gov.uk)

Types of Marketplace Vertical marketplace—serves the same industry Horizontal marketplace—serves multiple industries Reverse aggregation—combines the purchase power Forward aggregation—combines multiple suppliers or supply chain functions Other categories—ref. p. 406, table 7.7 Metamediaries

The Future of e-Procurement Software agent—software that can assist human by automatically gathering information from internet based on user input

NEXT CLASS Read the Econsultancy Interview on pp. 415-416 of Chapter 8 and visit the Guess.com to answer the following questions: Do you see the branding or the store when you first visit the Guess.com? How do they choose online partners?