e-business, E-Procurement

1. Chapter Ten
Demystifying
e-Procurement: Buy-
Side, Sell-Side, Net
Markets, and Trading
Exchanges

2. Introduction
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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3. Introduction
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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4. Introduction
Procurement 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
© e-Business Strategies,

5. Introduction
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
© e-Business Strategies,

6. Evolution of e-Procurement Models
Industry
Consortiums
Third-Gen
Trading
Xchanges
Second-Gen
Trading
Xchanges
First-Gen
Trading
Xchanges
Corporate
Procurement
Portals
B2E
Requisition
Apps
EDI
© e-Business Strategies,

7. Pre-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
© e-Business Strategies,

8. B2E: 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
© e-Business Strategies,

9. Corporate 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
© e-Business Strategies,

10. Trading 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
© e-Business Strategies,

11. Trading 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
© e-Business Strategies,

12. Trading 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
© e-Business Strategies,

13. Trading 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
© e-Business Strategies,

14. Trading 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
© e-Business Strategies,

15. Industry Consortiums: Joint-Venture
Procurement 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
© e-Business Strategies,

16. Industry Consortiums: Joint-Venture
Procurement 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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17. Evolution 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
© e-Business Strategies,

18. Reducing 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
© e-Business Strategies,

19. Hands-Free Procurement: Managed by
Exception
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20. E-Procurement: Integrating Ordering,
Fulfillment and Payment
Order Flow
Search & Approval &
Select
Requisition Purchase
Backward
Integration
Fulfillment Flow
Customer Receiving Tracking
Pick, Pack
& Ship
Service
Payment Flow
Invoicing Payment Reporting
© e-Business Strategies,

21. Ordering: Self-Service Requisitioning
Traditional purchasing
Self-service order work flow
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
© e-Business Strategies,

22. Fulfillment: Order Mgmt and Supplier
Integration
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
© e-Business Strategies,

23. Payment: Invoice Mgmt
Companies must monitor payments and open
invoices
E-procurement should support payment
functionality
– Invoicing and billing
– Payment
– Reporting
© e-Business Strategies,

24. E-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
© e-Business Strategies,

25. Marketplace 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
© e-Business Strategies,

26. Marketplace 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
© e-Business Strategies,

27. Roadmap 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
© e-Business Strategies,

28. Step 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?
© e-Business Strategies,

29. Step 1: Clarify Your Goals
Complete Select Order Order
Deliver
Approval & Receipt &
Procurement & Placement Schedule &
{
Lifecycle Search Invoice
Multi-Supplier Approval Workflow Order Shipping &
Catalog Search Engine Management Distribution
Partial
Functional
Solutions Pricing & Supplier-side Receipt &
Availability Order Entry Invoicing
Complete
Integrated
Integrated e-Procurement
Solutions Management Applications
© e-Business Strategies,

30. Step 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
© e-Business Strategies,

31. Step 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
© e-Business Strategies,

32. Step 3: Create a Business Case for e-
Procurement
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
© e-Business Strategies,

33. Step 3: Create a Business Case for e-
Procurement
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
© e-Business Strategies,

34. Step 4: Developing Supplier Integration
Matrix
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
© e-Business Strategies,

35. Step 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?
© e-Business Strategies,

36. Step 6: Remember Integration is Everything
Doomed to fail strategy
– Gathering requirements,
then disappearing for 6
months, then launching the
portal Professional Buyers
• Control
• Efficiency & Cost Reduction
Ideal goal • Supplier Management
– Continuously iterate towards
the target – the integration
sweet spot Integration
– Focus on all areas of ORM Sweet-spot
Employees Suppliers
• Convenience
Iterate development and • Ease of Use
• Cost Reduction
• Clean Orders
deployment • Consistency
– Do not take exclusive buy-
side or sell-side viewpoint
Integration with back office
systems a significant issue
© e-Business Strategies,

37. Step 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
© e-Business Strategies,

38. E-Business
Strategies, Inc.
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