eprocurement - pbworksmadeinchimany.pbworks.com/w/file/fetch/72913142/eprocurement... ·...

2014

Carolin Bieler ID: P620915791

[email protected] Universitat Politècnica de València

Alta Dirección y Tecnologías de la Información

Subject's Code: 31984

[Alta Dirección y Tecnologías de la Información] [Carolin Bieler]

Table of Contents

I. Introduction ........................................................................................................................................ 1

II. Theoretical Framework ....................................................................................................................... 2

1. Definitions of eProcurement ................................................................................................................. 2

2. Evolution of eProcurement ................................................................................................................... 2

3. What is eProcurement? ...................................................................................................................... 3

3.1 Requirements ............................................................................................................................... 3

3.2 Internal and External Catalogs ....................................................................................................... 4

3.3 Electronic Markets ......................................................................................................................... 5

4. Fields of Application ........................................................................................................................... 5

5. Advantages and Disadvantages of eProcurement .................................................................................. 6

5.1 Advantages .................................................................................................................................. 6

5.2 Disadvantages .............................................................................................................................. 8

6. Cost-Benefit-Analysis .......................................................................................................................... 8

7. Implementation of eProcurement and its Challenges .............................................................................. 9

III. Case Studies ................................................................................................................................... 10

1. Siemens AG “click2procure” ............................................................................................................... 10

1.1 Siemens AG – A Short Introduction ............................................................................................... 10

1.2 Siemens’ Procurement Challenges and Solution Requirements ....................................................... 11

1.3 What is “click2procure”? .............................................................................................................. 11

1.4 Structure and Functions ............................................................................................................... 12

1.5 Impact on Siemens’s Success ...................................................................................................... 13

2. Hewlett-Packard “Ariba Buyer” ........................................................................................................... 14

2.1 HP – A Short Introduction ............................................................................................................ 14

2.2 HPs’ Procurement Challenges and Solution Requirements ............................................................. 14

2.3 Solution Deployment ................................................................................................................... 14

2.4 Impact on HP’s Success .............................................................................................................. 15

3. Comparison ...................................................................................................................................... 15

IV. Conclusions ..................................................................................................................................... 16

V. Bibliography ..................................................................................................................................... 17


Figures and Tables

Figure 1: Architecture of an eProcurement System ................................................................................................. 3

Figure 2: Effects of eProcurement ........................................................................................................................... 6

Figure 3: Shift from Managing Transactions to Managing Suppliers ....................................................................... 7

Figure 4: Implementation of eProcurement ........................................................................................................... 10

Figure 5: Siemens click2procure Structure ............................................................................................................ 12

Figure 6: Service portfolio of click2procure ............................................................................................................ 12

Table 1: Process Improvements through eProcurement ......................................................................................... 8


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I. Introduction

The topic of this academic assignment is “eProcurement – Approach and Benefit Potentials” and how

eProcurement can impact and contribute to a company’s success. This study is organized into five sections

starting with this introduction. The second section is devoted to the theoretical framework of eProcurement. The

third part concentrates on two different examples of companies that implemented eProcurement, Siemens and

Hewlett-Packard, and its impact on their business. The last two sections, chapter four and five, complete this

assignment by drawing a conclusion and by listing the used bibliography.

The research strategy before writing this academic paper has been as follows. First, the sources of information

have been selected. These were basically online internet sources and bibliography of the central library of the

Polytechnic University of Valencia and of the University of Applied Sciences Esslingen. The next step was the

realization of the research, supported by the research tool Zotero. In order to get an overview of the whole topic,

sources with more general information about eProcurement have been searched first, then more specific sources

to go more into detail. The online search machines used for the research were ScienceDirect, Google Books,

Google Scholar and the PoliBuscador and WebPac, search machines of the university libraries. The search was

limited to books and articles and the search language has been English and German. Key words of the research

were “eProcurement”, “eProcurement Nutzenpotenziale”, “eProcurement Case Studies”, “Siemens click2procure”,

“HP Ariba Buyer” and further combinations resulting out of these key words. After finishing the research, all

results have been evaluated according to criteria like reliability, right level of detail or being up-to-date and then

the final academic papers and bibliographies haven been selected in order to write this academic assignment.

In today’s dynamic global business competition scenario, web based technology is no longer an afterthought,

rather it is a must. It is vital for companies to provide its customers with cost effective total solutions and lifecycle

costs for sustainable value. With the emergence of internet, and information and communication technology

applications, the companies are strained to shift their operation from traditional ways to the virtual eBusiness,

eProcurement and eSupply Chain philosophy.

eProcurement is constantly receiving attention from industries, business and government agencies. Analysts

believe that the utilization of eProcurement can lead to enormous cost savings and efficiency in procurement

processes. It can also enlarge the customer base and broaden the search for raw materials to lower businesses

production costs. Today, leading enterprises are enjoying eProcurement’s benefit potentials and are expanding

their eProcurement systems.

According to a study of the Federal Association Materials Management, Purchasing and Logistics (BME) called

BME Mood Barometer Electronic Procurement 2013, companies can reduce their process costs in decentralized

ordering processes through catalog systems by 30 %, in tendering processes by 19 % and auctions by 12 %. At

C-goods the buyers are able to save an average of 7 %, in particular by reducing maverick buying, bundling of

the product range or product assortment. With an extension of the provider circle and intensified competition,

companies can furthermore save about 7 % through tendering systems and about 15 % through auction systems

at A and B goods (BME, 2013, p.16). This shows that eProcurement can be considered as a real competitive

advantage.

Though, it has benefited the global business tremendously, the hype of eProcurement stopped and its expected

growth rate has been moving downwards. While eProcurement implies several benefits, the risks associated with

eProcurement have been holding some companies from adopting it.

The purpose of this academic paper is firstly to introduce the topic of eProcurement and to show the benefit

potentials of eProcurement in today’s businesses. Moreover, it aims to understand the whole eProcurement

process by focusing on benefits, risks, practices and strategies of eProcurement and its emerging usages in the

current business to business environment.


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II. Theoretical Framework

1. Definitions of eProcurement

First of all it is important to distinguish between the terms procurement and purchasing. These terms have been

quite often mixed with each other or used interchangeably. However, they differ significantly in their scope.

Purchasing refers to buying materials and all activities associated with the buying process like request, approval

or creation of a purchase order record. Purchasing addresses only one relatively minor aspect of the procurement

problems faced by companies. Procurement on the other hand, is broadly defined to include a company’s

requisitioning, purchasing, transportation, warehousing, and in-bound receiving processes. This also includes

activities such as market research and vendor evaluation and negotiation of contracts (Parida et al, n.y., p. 1).

This reveals that purchasing can be considered as a part of the whole procurement process and that the term

procurement implies not only ordering new material but also the whole logistics management involved.

Based on the consumption purposes of the acquired goods and services, procurement activities are often split

into two categories. The first category is direct, production-related procurement and the second category is

indirect, non-production-related procurement. Direct procurement addresses all components and raw materials

that are used in the manufacturing process of a finished product, such as sheet metal, semiconductors, and

petrochemicals, whereas indirect procurement relates to products and services for maintenance, repair and

operations (MRO) and focuses on products and services that are neither part of the end product nor resold

directly (Lamming, 1995, p. 15).

After making clear what the term procurement means and in order to gain an insight into the extensive theme of

eProcurement this academic paper is talking about, it is advantageous to introduce the topic by quoting some

different definitions of eProcurement. According to L. Carabello (2001, p.82), eProcurement is “A technology

designed to facilitate the acquisition of goods by commercial or government organization over internet.” This short

definition emphasizes on the benefit of eProcurement that is facilitating the acquisition process with the help of

technology. The aspect of technology is considered more deeply in the definition of Bailey: “EProcurement is the

business-to-business or business-to-consumer or business-to-government purchase and sale of supplies, work,

and services through the Internet as well as other information and networking systems, such as electronic data

interchange and enterprise resource planning” (Baily, 2008, p. 394).

A more detailed definition including the different stages of the process is given by A. C. Dahlstrom (2007, p. 27).

She describes eProcurement as follows: “EProcurement is the term used to describe the use of electronic

methods, typically over the Internet to conduct transactions in a Business to Business environment. The process

of eProcurement covers every stage of purchasing, from the identification of a requirement, through the bidding

process, to the payment and potentially the contract and supplier management.”

Taking all three definitions into account, eProcurement can be described as an electronic process, using internet

or information and networking systems to procure goods. It is mostly used in business-to-business relations

providing benefits for both parties, buyers and suppliers.

2. Evolution of eProcurement

As a major part of supply chain management, supply chains in procurement are traditionally supported by

information technology (Leenders and Fearon, 1997, p. 10). With the implementation of ERP or MRP systems in

the 1980s, electronic data interchange connections with suppliers were established. This widespread adoption of

enterprise-resource planning systems provided a fertile platform for eProcurement growth. For example, close

partnerships have been forged with direct material suppliers through the automation of delivery schedules by

linking a company’s materials management system with the suppliers’ systems. The ability to use ERP systems

to capture data on companywide spending related to suppliers allowed companies to segment their supplier base

and separate strategic sourcing form tactical supply (Johnson and Klassen, 2005, p. 7).


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During the eBoom of the 1990s, academics, consultants, executives and investors alike claimed that

eProcurement and its increasingly central role in supply-chain management would revolutionize how future

business-to-business practices would take place (Johnson and Klassen, 2005, p. 7). Since this time, companies

have also been redesigning their relationships with business partners for indirect procurement. Traditionally, ERP

systems have been applied to products with high transaction volumes and direct implications for value-adding

processes. As a consequence, still paper-prone and labor-intensive processes for indirect procurement can be

found which harbor large inefficiencies. The diffusion of eProcurement systems in the late 1990s has created the

potential for reorganizing the MRO supply chains. Compared to ERP, these systems were considerably less

expensive and more flexible due to increased standardization on a technical level. More or less all studies on

eProcurement report large efficiencies regarding process and procurement costs. The main idea of eProcurement

is to include the end-user, the requester, in the procurement process via an electronic multi-vendor catalog and to

close the process gaps, for example re-entry of data, in the supply chain for indirect goods (Neef, 2001, pp. 26-

29). A third phase of development in eProcurement has been observable with the integration of electronic

markets in the supply chain since the end of the 1990s (Poirier and Bauer, 2000, p. 38). These eMarkets evolved

alongside the early system vendors like Ariba, Commerce One or SAP and support the outsourcing of operational

procurement functions, offering tools for auctions and requests for quotations. However, the following evolution of

eMarkets has led to a substantial consolidation and many now focus on outsourced solutions for catalogs and

auctions. To summarize, these three development stages form the basis for the term eProcurement in this paper.

3. What is eProcurement?

3.1 Requirements

There are quite different, but always complex requirements for the use of electronic procurement. Whether in an

Application Service Provider (ASP) mode or as in-house solution, the necessary hardware and software does not

only have to handle the procurement processes but also internal and external networking. This is done by means

of connection to existing interfaces or to ones that have to be created, as well as by using the same data

exchange formats like XML, EDI, EDIFACT or BMEcat. Important elements of eProcurement are respectively the

ERP software of the buyer and the supplier such as SAP, Baan, J.D. Edwards, Oracle or PeopleSoft which

automate and manage commercial processes such as purchase orders and payments.

Then the eProcurement system, this means the software and database of the buyer itself in which the ordering

processes are handled through catalogs or market places are necessary. In addition, technical web components

such as Internet Transaction Servers (ITS), Web Server (Application Gate, Webgate) and SAP Business

Connector are necessary. Thus, eProcurement system architectures might look like the example of SAP

Enterprise Buyer Professional (EBP) in figure 1.

Figure 1: Architecture of an eProcurement System

Source: IT Research (2003, p. 12)


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Other aspects which had previously received little attention but that are immensely important elements are the

issues of security and project and change management. Especially the latter factors, associated with the area of

soft skills, are not to be underestimated because the best software is only as good as the willingness and the

skills of employees to use the system. Furthermore, an electronic procurement system does not help when you

forget to integrate important suppliers into the project work. Without a functioning change management the most

amazing software will be useless. The projects that don’t have the human factor in mind are supposed to fail (IT

Research, 2003, pp. 12f).

3.2 Internal and External Catalogs

The catalog is the central place where the information about available products or services is managed. A catalog

should contain all relevant product information for the customer and the supplier, such as product category,

supplier or manufacturer, product short name, order intervals and scaled prices, product numbers, units, or

images of the product. The task of the catalog system is the organization of complex contents of different origin:

product descriptions, hierarchically graded parts lists, lists of specifications, etc. The decisive factor in this content

is the direct exchange of catalog information between supplier and purchase department. For this purpose, the

data of the supplier catalogs must be integrated directly into the IT systems of the buyer and may be connected to

his own classifications. This is an essential precondition for a seamless interlocking of the supplier and customer

system. Online catalogs get approvals or process the bureaucratic paperwork. They resemble in many aspects

already complete purchasing systems. However, the highest trump technology can play is the automation of

administrative costs. This is especially in the field of the management-intensive C article procurement important.

Looking at the entire procurement of A, B and C goods, the total value of the MRO materials being purchased is

usually relatively low. However, C articles make about 75 to 90 % of all materials being procured in a company.

Using online catalogs, this costly and time-consuming process can be represented electronically. Compared with

the traditional offline ordering process, essential processes are automated, shortened and thus less expensive.

These include for example comparisons of goods receipt data and invoice data, simplified authorization

procedures as well as a centralized selection of purchasable items. Electronically based procurement via catalogs

is based on different conditions that need different kinds of catalogs.

The first kind of catalog that will be explained more detailed is called internal catalog or also known as buy-side

solution. This means that data of the supplier or own material master data is integrated from the purchasing

department in a catalog. Target of an internal catalog is to have maximum control over the purchasing process

and to monitor the conditions with suppliers. The catalog is usually located on the servers of the purchasing

department that also takes over the care of the catalog data. This includes prices that cannot be changed from

suppliers as well as the design of the catalog. Moreover, products can be listed with the company's own names

and numbers, there are no changes of names or introductions of new abbreviations. One big advantage is that

referring to the identification of products, the purchasing department doesn’t have to remodel the entire

purchasing process but can adopt existing article data from other systems such as their ERP system.

Additionally, the payment process can be handled based on the company's existing data. The disadvantages of

such a system are obvious. The data maintenance for the purchasing company is very expensive. Furthermore,

suppliers don’t have an own access and they also have to deliver their data in a form suitable for catalog

management, this means in a standard form. This in turn is determined by the purchasing department which goes

hand in hand with constraints on the supplier side which also limits their number. Moreover, all this is very time-

consuming and costly because for the content management not only personnel have to be recruited but they also

have to provide own hardware and software. In addition, no real-time information about delivery times or

availability of products is available.

Another kind of catalog is a sell-side solution called external catalog. In this case the supplier itself establishes

electronic catalogs and makes these available to its customers. The purchasing process with selected suppliers

will be automated. Compared to the internal catalog the data is easier to adjust, they are always up to date and


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the access via web browser via internet or extranet happens in real time. The advantages for a purchasing

company are mainly on the cost side because the catalog management is part of the suppliers’ task. Likewise no

own hardware and software have to be provided. For standard items like C articles, a standard catalog can be

limited to the individual view of each company. From the perspective of the buyer, external catalogs bring also

some disadvantages. These include, for example, that the data sovereignty lies at the side of the supplier, as well

as there is a general lack of customer-specific information. In addition, the purchasing organization is dependent

on the internet as well as from the structure and functions like the search machine of the supplier catalog.

Likewise, a negative issue is the safety aspect, since the transactions are carried out over the insecure medium

internet. But by using cryptographic, Secure Socket Layer (SSL) or Pretty Good Privacy (PGP) encryption, secure

connections can certainly be established. In addition, the access to external catalogs is only possible for a certain

pre-defined user base (IT Research, 2003, pp. 14ff).

3.3 Electronic Markets

Electronic marketplaces are internet-based platforms that combine supply and demand. Buyers and sellers can

exchange any type of goods and services in the eMarkets. A characteristic of marketplace applications is that

multiple providers can reach several customers on one single marketplace. This is known as “many to many”

principle, whereas the catalog solutions are called “one-to-many” principles. Marketplaces can be distinguished

between horizontal and vertical forms.

On vertical marketplaces, companies - buyers and sellers - are usually linked only within their own industry. In

many cases, a connection to the backend systems of all participants is provided in order to realize efficient

processes.

Horizontal marketplaces are designed cross-industry and provide rather a wide range of services than profound

process integration. Mainly traded are little consultation-intensive MRO goods or C articles. In many cases in the

recent past, the trend was seen that portals and electronic marketplaces show a stronger overlap in a wide range

of application fields. So called service portals serve as an information and communication platform, but provide

also profound process support. Additional services built in marketplaces improve customer loyalty through a

community concept and allow trade in consulting-intensive A and B articles (IT Research, 2003, pp. 15f).

4. Fields of Application

Large companies use far more comprehensive procurement solutions than small and medium-sized enterprises

(SME). 54 % of SME, but 80 % of large companies use already for several years electronic catalog systems for

their procurement. As small and medium-sized enterprises are subjected much more than larger companies to

market conditions when they are purchasing, nonetheless they can also draw significant benefits (Groß, 2009, p.

1). Major obstacles for SME are the high investment costs for the acquisition of technology. In addition, there are

high follow-up costs for the maintenance and upkeeping of the online catalogs. For this reason, on-demand

systems, auctions and marketplaces are very interesting for SME. In this connection hardware, software and

services are provided centrally. Through a variety of users it results in synergies which are evident in the

reduction of cost and time. This provides SME with the ability to realize eProcurement cost-effectively

(Schlotmann, 2004, p. 1).

Generally it is possible to procure all goods and services by means of eProcurement. However, since potential

savings are not given for all goods, the following criteria must be checked before implementing eProcurement in a

company. First, the standardization and homogeneity of goods and services should be considered. This condition

is met when products are not very complex and a low need for advice is given. Furthermore, the costs of litigation

are an important criterion. Procurement processes which are connected to a high administrative effort can be

structured and optimized by the use of information and communication technologies. With regard to the

acquisition value, goods can be considered as suitable when both criteria, the procurement frequency and the


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procurement volumes, demonstrate values above average (Wannenwetsch, 2002, pp. 45f). Especially C and

MRO goods which are also referred to as indirect goods, meet the above mentioned suitability criteria. The value

of indirect materials makes only about 20 % of the total value of purchases of a company but about 80 % of the

volume. They are standard products whose prices are relatively low and hardly fluctuate. For these reasons,

procurement by eProcurement makes sense (Biwer et al, 2003, p. 8).

5. Advantages and Disadvantages of eProcurement

The benefits that can be achieved with a successful eProcurement implementation but also the weaknesses that

can be implied will be considered in this chapter. The advantages and disadvantages of internal and external

catalogs have already been discussed in chapter three. Therefore some more general aspects of eProcurement

will be considered in the following.

5.1 Advantages

eProcurement enables companies to decentralize operational procurement processes and centralize strategic

procurement processes as a result of the higher supply chain transparency provided by eProcurement systems.

Typically, a company's procurement function is subdivided into strategic and operational processes since

activities and priorities in these two areas are entirely different (Lamming, 1995, p. 55). Supplier management, the

pooling of purchase requisitions and procurement-oriented product development are tasks which are typically

assigned to strategic procurement. Prior to eProcurement, strategic procurement often had to deal with

administrative routine work as well, such as individual transactions, converting purchase requests into purchase

orders or ensuring the correct allocation of invoices received. Strategic aspects are frequently neglected in the

process, with the buyer having little influence over the choice of suppliers and the purchased products. The use of

internet technologies in procurement is aimed at realizing faster and more efficient operational procurement

processes which bypass the purchasing department and enable those people to concentrate on more strategic

tasks (Giunipero et al, 2000, p. 43; see figure 2). In eProcurement, requesters directly search for and select

products in electronic catalogs which are authorized and negotiated by strategic procurement in advance.

Figure 2: Effects of eProcurement Source: Puschmann et al, n.y., p.3

Without eProcurement, buyers frequently had to deal with individual transactions. As already mentioned, they had

to negotiate with suppliers, convert purchase requests into purchase orders, handle queries and ensure the

correct allocation of the invoices received. In the operational workload, strategic aspects were neglected and


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buyers had little influence over the choice of suppliers and the purchased products. Their negotiating power was

limited as the purchasing decision was made by the requester or the authorizer and not by the purchasing

department. The requester was at the center, with all activities emanating from him or her (see figure 3).

Figure 3: Shift from Managing Transactions to Managing Suppliers

Source: Puschmann et al, n.y., p.8

eProcurement brings important simplifications of the MRO procurement process and reduces this operational

workload for buyers by decentralizing the operational procurement process. If the procurement process is to be

faster and more convenient, the number of authorization stages must be radically reduced. With the old, paper-

based procurement process, numerous authorization stages were necessary and involved for example line and

project managers, specialists or the purchasing department. Very often these people also raised objections to a

lean authorization procedure. Since they have usually spent years performing the task of authorizing, they

consider it to be an important and meaningful part of their daily work. In the case of a lean procurement process,

invoice verification can be simplified as well, only performed at random or replaced by a credit system

(Puschmann et al, n.y., p. 8).

Further advantages and the most often quoted advantages of eProcurement are the potentials to cut costs of

purchased goods and services. eProcurement produces cost reductions, higher productivity, and increased

spend under management. Simply put, eProcurement is consistently delivering significant benefits to enterprises.

There is also improved compliance, reductions in off-contract spending, also called maverick spending,

reductions in requisition-to-order cycles and costs, and percentage of total enterprise spend under management

of procurement. Furthermore, the use of an eProcurement system can free supply management and other

personnel to focus on creating value for the enterprise. eProcurement not only reduces the cost of transactions, it

also improves process efficiency and can reduce administrative and other costs. Manual communications, this

means phone and fax, are reduced or eliminated, as are paper invoices and their associated costs. Enterprises

that implement eProcurement report that procurement, accounting, and other corporate functions are more

productive now than with traditional buying methods. eProcurement systems provide a standardized approach to

rolling out efficient processes to not only procurement but all departments involved in transaction processing and

financial record-keeping. eProcurement users have also the ability to bring more spend under management of the

procurement organization. Increasing spend under management helps ensure the enterprise achieves maximum

spending leverage in supply negotiations, it also ensures that consistent and thorough market diligence, costing

measures, and compliance methods are applied to each spend category. In contrast, that portion of enterprise

spend that is managed outside the procurement group typically results in less negotiation leverage and sub-

optimal market analysis, producing higher pricing levels and management costs. Each new dollar of spend

brought under management can yield 5 to 20 % cost savings (Aberdeen Group, 2005, pp. 6f).

The following table shows all process improvements of processes with eProcurement in comparison with the

traditional processes:


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Process Without eProcurement With eProcurement

Product Search Product search in paper catalog,

filling out order sheet by hand

Product search and order with

online product catalog

Commitment Process Paper-based verification processes

for order commitments

Online commitment process: Rules

embedded in ERP system

Data Input Manual data entry in the ERP

system Direct ERP integration

Data Transfer of Purchase Order Via telephone, e-mail or fax

Immediate online transfer

Purchase Order Status Via online eTracking

Table 1: Process Improvements through eProcurement Source: Merk et al, 2010

5.2 Disadvantages

As mentioned above, eProcurement has lot of benefits but still its expected growth rate has been revised

downwards. Recent market observations indicated that the adoption of eProcurement technology into the

business mainstream is occurring in a much slower rate than expected (Parida et al, n.y., p. 3). The perceived

risks that are holding back companies from investing in eProcurement technologies are numerous. These risks

mentioned by are (Davila et al, 2003, pp. 11-23):

Internal Business Risks: Companies are uncertain about having the appropriate resources to successfully

implement an eProcurement solution. Implementing an eProcurement solution not only requires that the system

itself successfully performs the purchasing process, but it integrates with the existing information infrastructure.

External Business Risks: eProcurement solutions need not interact with internal information systems, but also

need to collaborate with external constituencies; mainly customers and suppliers. External constituencies need to

develop internal systems that facilitate the communication through electronic means, an issue that demands

technology investments as well as incentives for these constituencies. For eProcurement technologies to

succeed, suppliers must be accessible via the Internet and must provide sufficient catalogue choices to satisfy

the requirements of their customers. Suppliers, especially in low margin industries, may be hesitant or even

unable to meet such demands without guarantees of future revenue streams.

Technology Risks: Companies also fear the lack of a widely accepted standard and a clear understanding of

which eProcurement technologies best suit the needs of each company. The significance of this risk factor seems

to suggest the need for clear and open standards that would facilitate inter-organization eProcurement

technologies. Without widely accepted standards for coding, technical, and process specifications, eProcurement

technology adoption will be slow and fail to deliver the benefits as excepted.

eProcurement Process Risks: Another set of risks has to do with the security and control of the eProcurement

process itself. Organizations must be confident, for example, that unauthorized actions will not disrupt production

or other supply chain activities when committing to eProcurement technologies.

6. Cost-Benefit-Analysis

A cost-benefit analysis consists of three components. First, a quantitative and qualitative consideration of the

advantages and improvements will be carried out. In addition, a cost analysis should be performed. The final

result of the examination contrasts the costs and benefits and operationalizes the result, if possible by

performance indicators.

The benefit analysis of a system to support eProcurement consists of four components. The benefit analysis

should include an analysis of all relevant processes. Part of this step is the analysis of the actual processes in

procurement with regard to the dimensions of time, quality, this means reliability of the target process


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performance, and cost. It also examines the contribution to improvement that can make an eProcurement system

to these processes. The analysis of purchase conditions examines the improvements that can be expected by an

increased price transparency and by bundling volume. In addition to cost savings, this also includes other

purchasing conditions, such as availability and quality. The quantity structure is derived from the frequency of

processes and the number of employees involved and the resources used. Here, the comparison before and after

the introduction of an eProcurement system is very important. The stages of realization take into account the date

from which the functionalities of the eProcurement system will be ready and when a system can be fully utilized.

This can be considered as the analysis of a roll-out plan.

The cost analysis should include the costs for the whole implementation project and additionally an analysis of

the operating costs. The project costs include all costs that are directly related to the successful development of

an eProcurement system. These include external costs like consulting services and non-recurring costs for

hardware and software. Furthermore, internal costs and expenses are taken into account. These include mainly

staff costs for the own employees who are involved in the project. Operating costs include all costs that are

necessary to ensure a safe and reliable system operation. These are license costs, maintenance costs, and costs

for data maintenance. In addition, further training costs have to be taken into account when new employees have

to be trained with the system or when there are significantly changes by updates.

The result of the cost-benefit-analysis will give important information about potential savings, capital commitment,

the degree of capacity utilization, the payback period, the return on investment, security of supply, targets of the

project, strategic advantages and last but not least competitive advantages (Scherle et al, 2003, pp. 24f). After

considering the results of the cost-benefit analysis a company can decide whether to implement eProcurement in

its company or not.

7. Implementation of eProcurement and its Challenges

The introduction of an eProcurement system has far-reaching effects and therefore cannot be compared to the

introduction of new software. The associated impacts affect the procurement process, the organization, relations

with business partners and IT. Therefore, a careful analysis of the actual state and target state, as well as a

conscientious implementation is required to make an eProcurement project successful.

Figure 4 gives an overview of an eProcurement project. In the first step, the procurement portfolio and the

portfolio of the suppliers will be analyzed; this means appropriate products and suppliers for the procurement with

eProcurement will be determined. In addition, a process analysis will be performed to detect inefficiencies and to

allow optimization. Furthermore, the corporate IT infrastructure will be considered in more detail to determine

which modules will interact with the eProcurement system.

These analyzes are the basis of the target concept, in which the future procurement process is mapped. This

concept is subjected to a cost-benefit analysis which can possibly lead to changes in the target concept. The

target concept is the basis for the requirement specification which is used to request an offer from eProcurement

system providers. In addition, this target concept is also the starting point for organizational changes and the

scheduling of the rollout (Block, 2001, p. 146f).


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Figure 4: Implementation of eProcurement

Source: own graphic

Though much progress has been made, significant challenges to successful eProcurement implementation

remain. In the early days of eProcurement, buying enterprises and solution providers underestimated the time,

effort, and resources required to enable suppliers to transaction business electronically. Leading enterprises

typically use a combination of supplier-enablement approaches. Though tremendous progress has been made in

supplier enablement, all involved parties – end users, suppliers, and solution providers – continue to work to

make enablement as simple and cost effective as possible.

A further important factor is the user adoption, already mentioned in chapter 3.1. Individual end users and entire

business units will naturally resist any change in business processes that takes away buying power and buying

flexibility. Over the past few years, user adoption has increased at essentially the same pace as the increase in

suppliers enabled. With more products and suppliers on the eProcurement system, users have less reason to try

to circumvent the system. Still, end users report that several factors continue to hold back user adoption,

including inadequate representation of spending categories within the system, inconsistent purchase

requirements, procedures, and supply bases by site or region, and a lack of executive mandates or policies to

drive adoption and system compliance. Best practice enterprises have worked on user adoption for years, and

many supply executives at these enterprises have become leading sellers of the eProcurement system to end

users.

Moreover for many companies, securing budget or policy support for their eProcurement initiative is a challenge

that delayed or muted the benefits of eProcurement. In contrast, best practice enterprises received top

management support and a level of investment needed to gain cost savings, process efficiencies, and other

benefits of eProcurement. However, even supply executives at best practice enterprises would like to see more

investment and support of their eProcurement systems (Aberdeen Group, 2005, pp.7f).

III. Case Studies

1. Siemens AG “click2procure”

1.1 Siemens AG – A Short Introduction

Siemens is a German electrical engineering and electronics giant with 460,000 employees in 220 countries and

revenues of $75 billion, making it the 21st biggest company in the world. This multinational conglomerate is one of


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the largest manufacturers in the electrical and electronics markets and a leading manufacturer of automation and

control systems, information and communication, lighting, medical, semi-conductors, power, and transportation

products and services (Laudon et al, 2009, p. 52). The company’s operations are divided into 14 business

groups. Strategic and support activities are located in corporate departments which include Finance, HR,

Technology, CIO, Global Procurement and Logistics and Strategy. Service units offer a wide range of support

activities to internal and external customers, including for example Management Consulting, Real Estate

Management, Mobility and Personnel Services and Procurement and Logistics Services.

Annually, Siemens purchases goods and services worth about €49 billion. Geographically, Europe is by far the

most important purchasing region, accounting for 63 % of all goods and services purchased worldwide. Other

important purchasing regions are Asia and North America (Müller-Lankenau et al, 2003, p. 160).

1.2 Siemens’ Procurement Challenges and Solution Requirements

Prior to Siemens’ click2procure procurement platform, each of Siemens’ business units around the globe did its

own purchasing and followed its own rules. This bloated the supply base to 5,000 separate suppliers for MRO

goods alone – about $10 billion worth of products. The decentralized purchasing system meant that Siemens

could not aggregate orders across all business units to obtain better prices, and a significant amount of maverick

purchasing occurred. Generally, maverick purchasing results in higher costs. Under the old system, 50,000

indirect purchases per month cost about $100 each to process, and there was no central review of the prices paid

for products. Siemens wanted to centralize control over global purchasing into a single unit, the SPLS. It wanted

to build a solution with the following five characteristics (Laudon et al, 2009, pp. 52f):

• Global reach – supporting procurement in over 90 countries.

• Effective catalog management – providing the ability to aggregate and manage catalogs from hundreds

of suppliers.

• Web-based search engine – providing the ability to compare prices from multiple suppliers.

• Rules-based and approval tracking – providing the ability to impose its own business rules on

purchasing based on the type of product and the ability to track the approval process.

• Integration with legacy systems – providing a software solution that would easily integrate with a diverse

range of legacy and ERP systems already in place.

Guided by these criteria, Siemens developed its procurement platform called click2procure.

1.3 What is “click2procure”?

In order to streamline and improve its procurement activities, Siemens set up the click2procure procurement

platform. Click2procure is managed by Siemens’ Procurement and Logistics Services (SPLS). SPLS manages all

of Siemens’ eProcurement activities and is globally responsible for the procurement of indirect material.

Development of the platform as it is today started at the beginning of 2001. The development process was

initiated after an internal survey showed that all of Siemens’ operational groups were supportive of a central,

company-wide buy-side platform. Previously, a range of procurement solutions had been used. However, usage

of these systems remained low while costs were high and the systems lacked a focused portfolio. Consequently,

SPLS cut costs, redefined and focused click2procure’s portfolio and introduced the “Shared Service Concept”.

Today, already 35,000 users are working with click2procure, and more than 4,000 suppliers are actively using the

platform’s functionality. These suppliers pay a subscription fee of $2,500 a year for the opportunity to sell goods

to Siemens. Platform operation costs have been cut by more than 40 % compared to 2001, the portfolio of

click2procure’s functionality is more focused and integrated and usage has increased considerably. All in all,

Siemens spent $871 million building its eProcurement system called click2procure, using technology provided by

CommerceOne and SAP. Click2procure is poised to become one of the world’s largest virtual buy-side private net

marketplaces. It provides a private, web-based platform for standardizing and automating purchasing activities.


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The system also provides sourcing, procurement, and supply chain management services to outside firms

through SPLS (Laudon et al, 2009, p. 52 and Müller-Lankenau et al, 2003, pp. 160f).

1.4 Structure and Functions

The Siemens buy-side click2procure marketplace is a web based platform to automate and standardize

procurement activities. About the buy-side marketplace all purchasing activities are carried out. It consists of a

combination of ePurchasing tools (e-payment, e-catalogs, e-sourcing and e-information), which ensure a

structured, efficient and cost-effective procurement process (see figure 5).

Figure 5: Siemens click2procure Structure Source: Laudon et al, 2009, p.53

As mentioned above, click2procure’s service portfolio consists of the three main modules information, sourcing

and ordering which includes catalogs and payment. Figure 6 gives an overview of the buy-side solution’s

functionality.

Figure 6: Service portfolio of click2procure Source: Müller-Lankenau et al, 2003, p. 161

The core of the information module is the click4suppliers system, which functions as Siemens’ purchasing

information system (PIS) and is a tool for global and interactive supplier information management. The system

contains Siemens’ global supplier database with information on about 260,000 suppliers, as well as supplier


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ratings that can be entered by Siemens’ buying professionals. So far, more than 25,000 rankings are available.

Contract management functionality gives global access to most of Siemens’ purchasing contracts. Siemens’

suppliers, including those not involved in eProcurement transactions with Siemens, should register with the

system and enter a supplier self-information (SSI) profile. The suppliers can also access their individual rankings,

including a benchmark against Siemens’ most preferred supplier in the respective segments.

The sourcing module supports electronic requests for quotations (RFQ), information (RFI) and proposals (RFP)

as well as auctioning and bidding tools and contract management functionality. Until today, Siemens carried out

about 880 auctions with a total volume of more than €2 billion. The supplier and market information stored in the

information module provides important input for the decisions made in the sourcing process. Supplier information

can be directly imported in the RFQ tool, allowing buyers to obtain supplier information when identifying and

inviting qualified suppliers for specific bidding procedures.

The ordering module supports catalog-based as well as non-catalog-based purchasing. This includes support of

electronic transactions between buyers and suppliers and of end-to-end connections between procurement

respectively ERP systems of buyers and suppliers through message conversion and transaction services. The

module acts as the central hub in a many-to-one-to-many architecture. Thus, a single interface to click2procure’s

ordering module allows buyers respectively suppliers to communicate with all other trade partners connected to

the module. Catalog-based purchasing is mainly used for indirect material. SPLS offers catalog management

services, which include catalog compilation, actualization and catalog hosting. Currently, there are more than 230

catalogs with about 3 million articles available. Non-catalog-based purchasing for direct material is supported

through eNet “I”, which supports buying processes for products that cannot be standardized and are thus not

suited for catalog-based purchasing. Buyer integration is based on two different models, the application service

provisioning (ASP) approach and the OnRamp approach. For those buy-side customers who do not want to

operate their own eProcurement Software, SPLS acts as application service provider. For ASP customers,

complementary services such as invoice verification are offered. In contrast, the OnRamp approach integrates

customers’ local eProcurement systems with click2procure. Users can keep on using their local procurement

systems, message conversion and transaction is done by click2procure. The message converter operated by

click2procure enables interaction between systems that require different message formats. SPLS also manages

catalog content for all buyers and provides catalogs in formats that can be processed by the buyers’ procurement

systems. Buyers who wish to use click2procure’s ordering functionality are therefore not required to introduce

new purchasing applications. Those suppliers whose systems are going to be connected to click2procure through

automatic message exchange can obtain technical support from SPLS. Alternatively, suppliers can use a web-

interface for manual down- and upload of click2procure messages (Müller-Lankenau et al, 2003, pp.161f).

1.5 Impact on Siemens’s Success

SPLS reports a number of significant benefits from click2procure for Siemens (Laudon et al, 2009, p.55):

• 10 % reduction in prices paid for goods

• 75 % reduction in administrative costs, bringing purchase order cost down from $100 to $25

• 60 % reduction in ordering lifecycles, from over eight days down to 48 hours

• Significant reduction in accounts payable staff now that bills are paid on time

• Enhanced inventory and asset utilization

• Improved demand planning and forecasting

Siemens hopes to be able to save nearly $1 billion per year by using click2procure. Furthermore with the help of

this system, Siemens carries out auctions. Depending on the material field, cost savings between 15 to 40 %

have been realized. Total savings through auctions add up to €340 million, which is an average of about 17

percent. These relatively high savings are attributed to click2procure’s Advanced Negotiation Concept (ANC)

which has been developed based on game theoretical considerations and includes for example bonus-malus-

systems and dutch auctions (Müller-Lankenau et al, 2003, p.161). Despite these benefits, many business units at


14

Siemens have resisted joining. In some cases, favorite local suppliers are not included in the marketplace. Local

units have given up their own purchasing process and forms, and completely change their procurement business

procedures. Local units lose the ability to negotiate most favored terms, passing this activity on to central buyers

who may not understand local requirements (Laudon et al, 2009, p.55).

2. Hewlett-Packard “Ariba Buyer”

2.1 HP – A Short Introduction

Hewlett-Packard Company (HP) is an American multinational information technology corporation headquartered

in Palo Alto, California, United States. It provides hardware, software and services to consumers, small- and

medium-sized businesses and large enterprises, including customers in the government, health and education

sectors. Its operations are organized into seven segments: the Personal Systems Group, Services, the Imaging

and Printing Group, Enterprise Servers, Storage and Networking, HP Software, HP Financial Services and

Corporate Investments (Thomson Reuters, n.y.). Hewlett-Packard is a Fortune 11, global manufacturer of

technology products, with annual sales of $80 billion. HP is the largest information technology company in the

world, and has 140,000 employees in more than 170 countries. Annual spend is a staggering $60 billion. Of this

total, $13 billion is spent on indirect materials, the rest on direct materials and services (Aberdeen Group, 2005,

p.14).

2.2 HPs’ Procurement Challenges and Solution Requirements

Purchasing at HP is addressing non-compliant spend, local sourcing and strategic procurement activity, strategic

global sourcing, and other initiatives. In addition, the indirect procurement group is working across business units

and geographies to drive down the total cost of ownership by attacking spend across such horizontal

commodities as print supply chains, labor and software. In order to achieve high savings and spend reduction

objectives, the new indirect procurement system must be able to direct spend to preferred suppliers, enforce

compliance to purchasing policy and have visibility to spend globally.

There have been several milestones in HP’s eProcurement strategy. HP selected Ariba Buyer as the company’s

procurement platform, way back in 1998, very early in the evolution of eProcurement solutions. HP saw Ariba as

an early leader in spend management technology. When HP merged with Compaq, the company took another

look at available solutions and decided to stick with the Ariba platform because of its comprehensive functionality

that supported HP’s worldwide deployment, the fact that the Ariba platform already was integrated into other

critical go-forward systems within HP, and because HP’s platform was more highly developed than the

technology platform that Compaq used. HP has been a user of Ariba’s spend management solutions for several

years, and now is in the process of planning to deployment several additional Ariba strategic solutions.

More recently, purchasing at HP had to evaluate possible solutions to deploy for its go-forward platform for

strategic procurement. HP once again chose Ariba as its solution provider. HP purchasing sought global

capabilities in its solution provider, a clear technology roadmap and vision, superior functionality, and the strong

desire to partner with customers. Ariba met all these criteria, in addition to HP’s desire for a speedy

implementation, reasonable solution cost, extent of platform integration, and the presence of many existing

installations (Aberdeen Group, 2005, pp.14f).

2.3 Solution Deployment

Currently deployed are Ariba Buyer, Ariba Category Procurement, and OB10 for invoices. Ariba Spend

Management solutions shall help HP automate, integrate, and streamline their entire purchasing process from

planning to payment, resulting in significant process efficiencies and sustainable cost savings that go straight to


15

the bottom line. Ariba Spend Management consists of strategy, sourcing, procurement, visibility, managed

services, and supplier management solutions, and encompasses all categories of spend from direct goods to

MRO and services (Aberdeen Group, 2005, p.40). HP is in the process of planning deployment across all

procurement functions, this means direct and indirect services of Ariba Analysis, Ariba Category Management,

Ariba Sourcing, Ariba Contract Workbench, Ariba Compliance, and Ariba Supplier Performance Measurement

(Aberdeen Group, 2006, p.3). HP calls this initiative “Enterprise Strategic Procurement,” and the HP procurement

team expects this broad adoption of the Ariba’s solution to provide numerous opportunities for cost savings and

process efficiency improvements. Ariba solutions are now deployed for indirect procurement in 46 countries

where HP operates. Ariba Buyer is available to nearly all of HP’s 140,000 employees. Approximately 10,000

users purchase through the system each month, and approximately 50,000 HP personnel have used the system

since it was implemented. When the strategic procurement solution is implemented, there will be about 1,500

procurement professionals who use the system. HP’s indirect supply base is 45,000 suppliers, but 82% of HP’s

indirect spend is with 265 suppliers. A staggering 95% of HP’s annual indirect spend of $13 billion flows through

the Ariba eProcurement system. Various spend categories flow through the system, including software,

outsourced IT services, IT consulting, R&D supplies, marketing materials, real estate and workplace services,

and travel and meetings expenditures. From 1999 through 2003, Ariba Buyer was deployed across HP’s

worldwide sites, including premerger Compaq sites. From 2003 through 2005, HP built out additional capabilities

of the system. Full Ariba platform rollout and implementation has been done between 2006 and 2007 (Aberdeen

Group, 2005, p.15).

2.4 Impact on HP’s Success

HP’s single eProcurement platform provides the capability to achieve broad strategic objectives, including

savings, compliance, risk management, spend visibility and reporting, and systems efficiencies. HP has realized

significant quantitative benefits. Through 2005, indirect procurement has achieved over $1.8 billion total

negotiated savings and spend reduction. These results are due to its total spend management strategy, including

creation of strategic procurement capabilities, workforce expertise and implementation of a standardized

eProcurement platform. Operation expense was reduced from 0.95% of total spend in 2002 to 0.75% in fiscal

year 2005. Implementation onto a standardized platform has resulted in the retirement of over 100 legacy

systems with estimated savings of $7 million annually. Contract compliance has reached approximately 80%. HP

also gained qualitative benefits from the use of the system. The supply base was decreased significantly and

more spend was directed to preferred suppliers. The spend management solution has enabled HP procurement

professionals to address more corporate spend and focus more on strategic supply initiatives (Aberdeen Group,

2006, p.3).

The Ariba implementation of HP is staggering in its scope and breadth. HP’s approach to choosing a solution

provider that could offer broad reach to various types of suppliers, in various global locations, has paid off for HP

in a big way. HP took a long-term, strategic view of eProcurement, and has laid a strong foundation that is likely

to produce major benefits as the company moves toward implementation of the full Ariba spend management

platform (Aberdeen Group, 2005, p.16).

3. Comparison

Both companies, Siemens and HP, are market leaders in their sector and big companies in terms of their number

of employees and their worldwide operations. They are two completely different companies out of different

sectors with individual purchase processes. According to these processes, each company had their own special

requirements for the development of the eProcurement system. Nevertheless, each company was able to find the

most suitable solution for its processes.


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Siemens developed an eProcurement platform using technology provided by CommerceOne and SAP whereas

Hewlett-Packard chose the provider Ariba for its system. When choosing the right technology, the two companies

didn’t have the same approach. HP already worked with Ariba but they had the desire to extend their system after

merging with Compaq. It has already been integrated into critical go-forward systems within HP and after the

merger they decided to stay with Ariba and not to take over the technology platform that Compaq used.

Additionally, the system of HP already was more highly developed and less work was needed to develop and

introduce the new requirements. HP’s challenge was to automate, integrate, and streamline their entire

purchasing process from planning to payment. The system had to be able to direct spend to preferred suppliers,

enforce compliance to purchasing policy and have visibility to spend globally. On the other hand, Siemens used a

range of different procurement systems and they wanted to develop one single new and more efficient one. They

decided to work with CommerceOne and SAP, two already established providers. The challenge of Siemens was

that each business unit worldwide did its own purchasing what lead to extremely high costs and they wanted a

system to centralize control over the global purchasing into one single unit.

To sum it up, both companies had the aim to streamline and to improve their procurement activities because of

the worldwide located business units at Siemens that used different systems and the merger with another

company at HP. Additionally, they hoped to save costs, for example by avoiding maverick buying and aggregating

orders across all business units to negotiate better prices.

While on the side of HP no implementation problems are known, Siemens had to cope with some difficulties

concerning the end user adoption. Many business units at Siemens resisted joining the click2procure platform.

They didn’t want to give up their own purchasing processes and they furthermore feared that by passing the

negotiation process on to central buyers, these people may not understand the local requirements the local

business units have.

All in all, after a successful implementation of the new systems, both companies achieved huge sustainable cost

savings and significant process efficiencies. The click2procure platform of Siemens even turned out to be that

good that they are now selling this program to other companies and can achieve in this way further earnings.

IV. Conclusions

Already for a long time, the use of eProcurement takes an important part of the everyday business in many

purchasing departments. Catalog systems, tendering tools and electronic supplier ratings help purchase

departments to optimize their procurement processes. They now lead to measurable savings in the companies.

Uncoordinated orders from other departments, maverick buying, can be pushed back and important work

processes become more transparent. Nevertheless, it should be noted in any case that every company has its

own specific processes. This means that every company has different requirements for an eProcurement solution

and therefore each system must be tailored to the company in order to achieve the mentioned advantages.

Furthermore, there will be new approaches in the future. The extent to which Web 2.0 technologies such as wikis,

blogs or Professional (Social) Networks will influence classic tools, at the moment doesn’t play a big role in the

companies so far. However, the introduction of internal Web 2.0 Networks reached in some companies already

the purchase department and could, especially for the frequently mentioned challenge of integrating various tools,

give a decisive boost to the further strengthening of electronic procurement. Until now, Web 2.0 is, however, seen

almost exclusively from the external aspect of experience sharing, idea generation and maintaining contacts. This

is certainly a weighty aspect, but only part of the potential (BME, 2013, p. 17).

With the use of electronic procurement, the purchase departments can free themselves from the operational

ballast and focus on their key competitive issues. A large part of the companies have already successfully

followed this path, but many companies haven’t reached this goal yet. Both the solution providers and the users

are therefore still required to improve the tools and the underlying processes technically and professionally.


17

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