chp10 e procurement
DESCRIPTION
e-business, E-ProcurementTRANSCRIPT
Chapter TenChapter TenDemystifying e-Procurement: Buy-Side, Sell-Side, Net Markets, and Trading Exchanges
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IntroductionIntroduction
More than 5-10% revenues spent on non-production goods annually
– Office equipment, supplies, software, computers– Top 2000 U.S. corporations = $500 billion annually
Purchase detail for negotiating better supplier contracts not available
– Most POs worth less than $500– Large percentage of that is off contract, outside preferred
channels
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IntroductionIntroduction
B2B transactions comprise significant market– Several trillion dollars– Big Three automakers do $500 billion/yr worth
transactions related to buying and selling car components– Non-discretionary spending, required for business– Both buyers and seller see importance of an efficient
marketplace, to streamline processes and reduce costs
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IntroductionIntroductionProcurement not just support function; a valuable weapon
– Lower procurement costs, reduce order-cycle times and ensure smooth delivery of materials
B2B strategies now a top mgmt focus– Not so much a technological revolution as a business revolution
enabled by technology– Driven by CEO or CFO, reflecting management’s awareness of
key challenges facing corporate procurement functions• Reducing order-processing cost and cycle times• Providing enterprise-wide access to corporate procurement
capabilities• Empowering desktop requisitioning through employee self-
service• Achieving procurement s/w integration with back office
systems• Elevating procurement function to strategic importance within
organization– Dollar-for-dollar bottomline impact of e-procurement is startling
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IntroductionIntroduction
B2B strategies now a top mgmt focus– Driven by CEO or CFO, reflecting management’s
awareness of key challenges facing corporate procurement functions
• Reducing order-processing cost and cycle times• Providing enterprise-wide access to corporate
procurement capabilities• Empowering desktop requisitioning through employee
self-service• Achieving procurement s/w integration with back office
systems• Elevating procurement function to strategic importance
within organization– Dollar-for-dollar bottomline impact of e-procurement is
startling
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Evolution of e-Procurement ModelsEvolution of e-Procurement Models
IndustryConsortiums
IndustryConsortiums
Third-GenTrading
Xchanges
Third-GenTrading
Xchanges
Second-GenTrading
Xchanges
Second-GenTrading
Xchanges
First-GenTrading
Xchanges
First-GenTrading
Xchanges
CorporateProcurement
Portals
CorporateProcurement
Portals
B2ERequisition
Apps
B2ERequisition
Apps
EDIEDI
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Pre-Internet Era: EDI NetworksPre-Internet Era: EDI Networks
Private and limited to large businesses – Linked with major suppliers– Require large capital outlays
Automate procurement process; support automatic inventory replenishment; and tighten the relationship between buyers and primary suppliers
Perform best in strategic partnerships, specialized relationships, and rigid performance contracts
– Don’t do well in open sourcing and flexible supply chain world
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B2E: Purchasing and Requisitioning AppsB2E: Purchasing and Requisitioning Apps
Next gen procurement apps taking hold in corporations– Purchase of goods and services the single largest cost item– For $1 earned on sale of product, $0.50-$0.60 spent on
goods and services– Inefficient procurement practices wasting billions of dollars
Desktop requisitioning enables employees to purchase products and services online
– Hook up corporate intranet to suppliers’ Web-based commerce sites to eliminate paper-intense and costly purchasing process of traditional business
Consolidating purchasing process with few key suppliers capable of providing volume discounts can generate tremendous cost savings
– Ford
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Corporate Procurement PortalsCorporate Procurement Portals
For buying both prodn and non-prodn related goods
Procurement portals do more than basic purchasing
– Purchasing: the buying of materials and all activities related to the buying process
– Procurement: includes requisitioning, purchasing, transportation, warehousing and in-bound receiving processes
Early strategies reengineered, even dismantled hierarchical structures
Recent strategies restructure entire order-to-delivery process
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Trading Exchanges – First GenTrading Exchanges – First Gen
Communities, Store Fronts, & RFP/RFQ Facilitators
Information and content hubs– Content communities attracting purchasing professionals– Revenue: Advertisement, Subscription– VerticalNet
RFP and RFQ facilitator exchanges– Centralized online marketplace with preapproved group of
suppliers– Fixed-price, sealed bids– Revenue: subscription fees, fees for bids to be read,
transaction fees for bids submitted and/or successfully chosen
– WellBid in the energy sector
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Trading Exchanges – Second GenTrading Exchanges – Second Gen
Virtual Distributors and Auction Hubs
First gen trading hubs: “an inch deep and a mile wide”
Transaction necessary for success
Revenue: from every transaction within the exchange
Virtual Distributors– One-stop shopping for buyers and sellers– Product information from multiple catalogs, multiple suppliers
and manufacturers into a megacatalog– Do not carry inventory or distribute products; assist buyers in
arranging for 3rd party carriers to transport other goods– Streamline sourcing of direct goods by issuing a single PO
and then parsing the order to each relevant supplier– SciQuest in life-sciences industry
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Trading Exchanges – Second GenTrading Exchanges – Second Gen
Auction Hubs– Sales channel for spot buying unique items; used
equipment, surplus inventory, perishable goods– Similar to stock market– Buyers and sellers meet anonymously to agree on
prices on commodities– Driven by either sellers (AdAuction.com) or buyers
(FreeMarkets.com)– Forward auctions allow several buyers to bid for
products/services from an individual seller– Reverse auctions allow several prequalified sellers
to bid for fulfilling an individual buyer’s need
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Trading Exchanges – Third GenTrading Exchanges – Third Gen
Collaboration hubs
Provide more than transaction functionality, help with end-to-end mgmt of supply chains
Create common platform for all participants in an industry supply chain
– Share information; conduct business transactions; collaborate on strategic and operational planning
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Trading Exchanges – Third GenTrading Exchanges – Third Gen
Provide value-added services – Increase site “stickiness”; generate multiple revenue
streams; increase competitive barriers to entry– Bidcom is a single online workplace for large contractors to
collaborate with architects, store blueprints, expedite permit process and purchase building materials
– Integrated commerce technology • Automate transaction processing, incorporate static
pricing and/or dynamic pricing– Brokering services
• Logistic and financial services– Service and support
• Customer service support, returns processing, and warranty coverage
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Industry Consortiums: Joint-Venture Industry Consortiums: Joint-Venture Procurement HubsProcurement Hubs
Larger firms responding to competitive threat posed by new startups
– Forming either buyers or suppliers consortium– Traditional industry leaders have two advantages
over startups: instant commercial activity and liquidity
Buyer consortium– Groups of large companies combining buying
power to drive down prices– Covisint
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Industry Consortiums: Joint-Venture Industry Consortiums: Joint-Venture Procurement HubsProcurement Hubs
Supplier consortium– Forming in industries with few high concentration
market players– Difference compared to buyer consortium:
sponsors get to promote and differentiate suppliers’ products
– Not new: Sabre
Major issues: governance, technology and antitrust
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Evolution of Procurement ProcessesEvolution of Procurement Processes
Reengineering procurement process key to deployment of e-procurement solution
E-procurement models all attempting to solve similar business process problems
– Fragmentation of channels– Managing by exception rather than by transaction– Controlling maverick buying by automating
requisitioning process– Integration of end-to-end process
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Reducing Channel FragmentationReducing Channel Fragmentation
Symptoms of channel fragmentation
– Maverick buying, inefficient processes, and non-strategic sourcing
Most procurement processes are paper-intensive
– Overhead: $70-300 per purchase
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Hands-Free Procurement: Managed by Hands-Free Procurement: Managed by ExceptionException
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E-Procurement: Integrating Ordering, E-Procurement: Integrating Ordering, Fulfillment and PaymentFulfillment and Payment
Search & Select Requisition
Approval &Purchase
Order Flow
Receiving TrackingPick, Pack
& Ship
Fulfillment Flow
Invoicing Payment Reporting
Payment Flow
Customer Service
Backward Integration
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Ordering: Self-Service RequisitioningOrdering: Self-Service Requisitioning
Traditional purchasing process
– Fill requisition form – Submit – Wait for approval & PO– Send PO to supplier
Many procurement guidelines and rules to follow
– Archaic given technological options today
Little help available from purchasing dept and POs can take weeks to fulfill
Self-service order work flow
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Fulfillment: Order Mgmt and Supplier Fulfillment: Order Mgmt and Supplier IntegrationIntegration
Procurement system provides seamless transition from requisition to PO, with no rekeying of orders
Fulfillment workflow steps– Order dispatch– Accounting back-office systems connectivity– Supplier connectivity– Order tracking– Receiving
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Payment: Invoice MgmtPayment: Invoice Mgmt
Companies must monitor payments and open invoices
E-procurement should support payment functionality
– Invoicing and billing– Payment– Reporting
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E-procurement Analysis and Admn AppsE-procurement Analysis and Admn Apps
Buy-side functionality alone not enough
– Increasing effectiveness and extending responsibilities of purchasing professionals also necessary
Application of spending analysis and planning across the spectrum of procurement activities a core competency of a successful procurement strategy
– Data collection– Market analysis– Supplier management decisions– Configuration of spending
controls– Continuous feedback
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Marketplace EnablersMarketplace Enablers
Ariba: Marketplace Enabler– First vendor of ORMS– Realized opportunity for automating nonprodn
procurements processes• 30% spending towards nonprodn purchase,
managed via a maze of paper-based process– Gathered customer feedback before building first
product– Transformed into a technology platform provider
• For building and powering Internet trading exchanges
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Marketplace EnablersMarketplace Enablers
Freemarkets: Auction Enabler– Runs buyer-centric auction exchange – Focused on procurement for industrial parts, raw materials,
and commodities• $4-5 trillion market
– Major opportunity• Direct materials often custom-made with no std price• Current procurement process inefficient• Current asset-disposal methods plagued by imperfect
product and pricing info– Offers service to create customer market for direct matls its
client purchases• Industrial auctions• Surplus asset auctions
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Roadmap for e-Procurement ManagersRoadmap for e-Procurement Managers
Chief procurement officers looking to deliver maximum business impact at lowest possible cost
Procurement objectives– Leverage enterprise wide buying power– Quick results at low risk– Supplier rationalization– Cost reduction by automating best practices in
strategic procurement
CPOs realizing that e-procurement applications can be powerful when applied to large number of products and services that companies buy
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Step 1: Clarify Your GoalsStep 1: Clarify Your Goals
• What is your company’s specific e-procurement goal?
• Is the goal a comprehensive and consolidated business solution?
– Integrated e-procurement mgmt necessary
• What are you trying to improve?
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Step 1: Clarify Your GoalsStep 1: Clarify Your Goals
Select &Search
Order Approval & Placement
Integrated e-Procurement Management Applications
{Deliver
&Invoice
Multi-SupplierCatalog Search
Approval Workflow Engine
Order Management
Complete Integrated Solutions
Partial Functional Solutions
Complete Procurement
Lifecycle
Shipping & Distribution
Pricing & Availability
Supplier-side Order Entry
Receipt & Invoicing
Order Receipt & Schedule
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Step 2: Construct a Process AuditStep 2: Construct a Process Audit
Understand current procurement process and factors affecting, impeding and interacting with it
First phase: Model workflows in current procurement– Identify bottlenecks– Create shortcuts
Second phase: What kind of buying do you want to support?
– Strategic buying• Long-term relationships
– Transactional buying• Paper pushing
– Spot buying• One-time deals
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Step 2: Construct a Process AuditStep 2: Construct a Process Audit
Second phase: What kind of buying are you trying to automate?
– Collect data to model current procurement chain– Study key areas to ensure processes are
consistent with strategic goals, meet customers’ needs and promote efficiency
– Identify critical success factors and performance indicators
– Also assess problem areas and areas of vulnerability
– Determine proper direction for the design phase
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Step 3: Create a Business Case for e-Step 3: Create a Business Case for e-ProcurementProcurement
Return on assets business case forces you to systematically analyze your business
Analysis forces to understand context– Without understanding environment cannot fix it– Can articulate hidden assumptions
Widely used technique in creating business case– ROA = (Revenues-Expenses)/Assets– Increase revenues, decrease expenses, keep asset base as
small as possible
Increasing profitability by generating revenue requires substantial investment but through e-procurement requires only a limited addl investment
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Step 3: Create a Business Case for e-Step 3: Create a Business Case for e-ProcurementProcurement
Decreasing expenses can be accomplished by identifying inefficiencies in the procurement chain
– Inventory carrying costs– Reducing captive capital makes quick profits– Cost improvements not just cutbacks; enhancements
through better coordination and communication; “premium freight” can be avoided for instance
Improving asset utilization can be accomplished by reducing working capital
– Eliminating warehouses to maximize stock availability and to minimize inventory holdings
– Eliminating excess inventory to reduce leakage or hidden inventory
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Step 4: Developing Supplier Integration Step 4: Developing Supplier Integration MatrixMatrix
Without supplier commitment, e-procurement difficult– But with ever-increasing velocity of change, few organizations
want to commit to long term relationships
Needed: Supplier Integration Matrix (SIM)– Helps determine the best type of relationships to have with
individual vendors– An organization applying only one relationship structure to all
vendors shortchanging itself
SIM classifies suppliers into– Strategic collaborative, long term, ex. MRO suppliers– Strategic cooperative, ex. computer suppliers– Nonstrategic limited, short term, ex. temp agency services– Nonstrategic commodity, short term, ex. office and book
suppliers
SIM should be reviewed periodically
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Step 5: Select an e-Procurement AppStep 5: Select an e-Procurement App
Wade through vendor hype– Will it support my procurement process?– Does it leverage my other application
investments?– Will it work seamlessly with other apps?– Is it extendable?
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Step 6: Remember Integration is EverythingStep 6: Remember Integration is Everything
Doomed to fail strategy– Gathering requirements,
then disappearing for 6 months, then launching the portal
Ideal goal – Continuously iterate towards
the target – the integration sweet spot
– Focus on all areas of ORM
Iterate development and deployment
– Do not take exclusive buy-side or sell-side viewpoint
Integration with back office systems a significant issue
Employees• Convenience• Ease of Use• Consistency
Professional Buyers• Control• Efficiency & Cost Reduction• Supplier Management
Suppliers• Cost Reduction• Clean Orders
IntegrationSweet-spot
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Step 7: Educate, Educate, EducateStep 7: Educate, Educate, Educate
How much of a change does your market require on the part of suppliers and buyers?
– The lesser the better
Opposition to e-procurement can cause major problems
– Schedule slippage, higher costs, poor morale
Senior management must listen, communicate, sell and even fire to deal with this problem
– “Soft” implementation roadblocks most reason why projects don’t succeed
– Do not underestimate the effort and costs of deployment
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