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Added Value in The Area of E-Procurement

Name: Added Value in The Area of E-Procurement
Price: 0.99 EUR
Availability: InStock
Author: Dennis Wulfert
ISBN: 978-3-640-04410-8

Term Paper, 2001

7 Pages, Grade: 1,7 (A-)

Dennis Wulfert (Author)

Excerpt

1. Introduction

2. What is electronic procurement?

3. Added value as a result of e-Procurement

4. Disadvantages in implementing e-Procurement

5. Example of successful implementation of e-Procurement

6. Conclusion

Appendices References

1. Introduction

The current situation of many companies is more than difficult. Due to the fast development of the world wide network systems in recent years and continuing trend in globalization, most businesses are confronted with nationwide and international competitors. The strong competition leads to stagnating or declining revenues, thus businesses are forced to implement new technologies to improve their processes throughout the whole organisation in order to achieve competitive advantages. One of these new technologies is the idea of electronic procurement (e-Procurement). This essay deals with the potential of added-value in the area of electronic procurement. The target is to analyze the advantages and the disadvantages of electronic purchase and to consider the necessity of implementing this process into the company.

At first, the broad definition will be given. Then, the advantages and the disadvantages of e- Procurement will be discussed. Afterwards, an example of a company working with this electronic system will be mentioned. Finally, the conclusion will summarize the main idea.

2. What is electronic procurement?

The majority of companies manage their procurement of products and services through many internal organizations and receive them from many different suppliers. These products and services are often maintenance, repair and operations goods (MRO), also known as indirect products. Though the high costs in comparison with the total cost occur during the procurement procedure, the companies often neglect the importance of effective procurement. For example, 85% of the Frankfurt Airport's expenditures go towards MRO articles.

The improvement of the system means that the customer has to completely re-engineer the ordering processes for MRO goods. For the supplier, it means updating the process i.e. for order taking, inventory tracking and reporting, delivering and finally, billing and payments.

Similar to most of the newly invented technologies, e-Procurement has not got an exact definition yet. But generally it can be said that electronic procurement is a business-to- business purchase and sale of products and services via the internet. Thereby the employees use the recently introduced system to create requisitions to electronic catalogues and purchase orders. These orders are authorized through an automated system that places them and pays for them (see appendix 1).

3. Added value as a result of e-Procurement

Considerable costs arise in almost every business in the area of the MRO articles. The costs for these articles make up on average 36% of the total costs of a business after a study carried out by the CAPS (Centre for Advanced Purchasing Studies).

E-Procurement acts here and improves the ordering, collecting and purchasing procedures. The companies which implement the e-Procurement process in their operations begin to cut spendings on MRO articles and increase their profits and add value to the company without increasing sales.

The optimization of the process forms the essential part of possible savings. Existing manual processes based on paper forms in most enterprises can usually be automated with the help of an e-Procurement application.

Thus, the costs for paper requisitions, paper catalogues and their renewal and distribution can be considerably decreased. According to the Forrester research the administrative costs amount to an average of US$ 142 at a traditional ordering process. The costs of the same process, carried out via the World Wide Web, only amount to US$ 7. The single solutions promise potential savings of at least 20% in the area of the indirect products. The realisation of numerous saving potentials during this operation stage by implementing e-Procurement solutions leads in many cases to a positive return on investment in less than a year.

Until now, many internal orders lasted for several days and sometimes weeks before the employee's request were finally met. By the direct connection with suppliers the time for ordering without the approval of superiors, can be decreased to the fraction of a second. Furthermore, orders requiring permission also take less time by using the web based workflow. This makes work for all employees of the business more effective, because the needed materials are available much faster than without the use of e-Procurement software.

By the carrying out of all the obtaining events through a single system, the procurement system can be checked faster and in more depth. Because of negotiated general agreements on delivery and price conditions with a certain number of suppliers, who are exclusively represented on the online system, it is ensured that all orders set by employees will go through that single ordering system. The obtaining events can be evaluated and an existing optimisation of potentials can easily be discovered and used. In addition, the implemented system will allow better control of employee spendings with non-contract suppliers and makes it possible for a company to track a contractor's time across various projects and departments, permitting group- or project-level tracking of the services spend.

Better control of the obtaining events leads to better planning. Then, this improved planning allows more specific agreements with the suppliers to satisfy the need for indirect goods. In a first step, the introduction of an e-Procurement system provides a consolidation of supplier relations. This leads to an improvement in the current obtaining processes. The purchasing company can buy directly from manufacturers and avoid paying intermediaries and achieve greater discounts by large scale orders. A better transparency of the market will be created through the global search for suppliers, which will lead to further advantages.

By the introduction of an e-Procurement solution the employees are able to obtain a large portion of their needs for indirect goods via the World Wide Web independently to their business. Thus, this will reduce order error rates and processing costs. The purchasing department will be relieved of routine activities and can devote more and more to the strategic formulations in the purchase.

For example, PricewaterhouseCoopers has developed an independent method for the optimisation of obtaining events: Full Value Procurement. This method ensures that all phases and components of the process of purchase are optimised. So Full Value Procurement goes beyond the optimisation of the operative processes of purchase (see appendix 2).

4. Disadvantages in implementing e-Procurement

Besides, quite a few e-Procurement ingredients can add value to the company, the road to successful implementation and use of it may be really hard. Before introducing a new business process such as electronic purchase, which should involve all departments from management to manufacturing, the company has to be aware that this will not be just an automation of existing one.

The uniform procedure undertaken throughout the whole enterprise will affect it. The implementing process must be understood, which demands a complete knowledge of the considered company and e-Procurement. The bigger and more complex a company may be, the more difficult will it be to introduce the new procedures successfully. Insufficient assessments may lead to wastes of time and more dramatically to false investments.

The high investments towards hardware and software solutions and an insufficient amount of online orders in the beginning can lead the company to be disappointed with recently implemented e-Procurement solutions. The next step will be teaching employees how to use the new system. This of cause will lead to further costs. Once the soft- and hardware were chosen there is a risk of being depending on the supplier of the selected systems. Thus,the company is committed to the supplier and would face considerable costs if willing to change systems to a better solution. It would either be impossible or would cause enormous waists by having to re-train employees. Today already, many different standards of software solutions, which are incompatible with each other, subsist and the probability grows that the existing situation will not be solved in the near future. Fast developments in hardware and software can antiquate existing systems, which were introduced at high costs. That is why a continuous development is necessary. This will lead to continuously rising costs and may level the attractiveness of electronic purchasing with that of the traditional way.

The automated purchasing procedures may have led to a reduction of employees in the ordering/ purchasing department, so that they can try to hinder the implementation of e- Procurement in order to keep their jobs.

Suppliers will be forced to create electronic catalogues, which are first to be introduced into different market trading platforms and then can be used. Here, because of the global presence of suppliers, the problems with different languages, comparable product quality, the integration of monetary systems, the simultaneous appearing questions of laws and conditions occur. These factors should be considered extensively.

The biggest managers' concerns are over the security and the trustworthiness of trading partners. Because of many automated sequences of events the risk of the misuse of orders for personal purposes grows. Further threats in this area are caused by hackers and business' spying led by competitors. Finally it can be said that e-Procurement solutions are still in a relatively early stage of development and the long-term effects of continuous maintenance of e-Procurement couldn't be fundamentally researched yet.

5. Example of successful implementation of e-Procurement

Deutsche Bank (DB) is the largest bank in the Euro zone, with 1.400 branches in Germany, as well as 260 branches in Italy and Spain and many offices in other European countries. Over 75.000 employees serve nearly 7 million customers in 57 countries around the globe.

Internal procurement of services, hardware, software and office furniture have been handled at Deutsche Bank until now through non-Internet based system; Lotus Notes. A multimedia presentation of the articles in a catalogue with pictures and connections to virtual marketplaces or directly to the suppliers' systems was hereby impossible. Redundant data held in various supplier and procurement systems made automatic data interchange and the acquisition of indirect goods difficult. Deutsche Bank is aiming to lay the foundations for a global and future e-Procurement solution and began to cooperate with "SAP Business-to- Business Procurement Intranet" team.

The future goals are to maintain suppliers' catalogues over the Internet and input errors will be reduced by using easy-to-use web data entry screens. The catalogue management will be simplified at an enormous exte nt and content management by external service providers will be possible. A workflow process controls the approval process automatically. The buying department has now more time for strategic tasks. A specific catalogue will manage products and contracts. So the internal costs can be reduced in the areas affected by e-Procurement. Group level consolidation of procurement offers considerable potential for cost savings. In the future, at least 80% of the procurement volume will be handled via the Intranet system.

The optimal e-Procurement should be achieved through data integration with the existing R/3 procurement system. Therefore DB, using the experiences of an e-SAP team and Compaq professional services (PS), started with its first implementation of a prototype of Business-to- Business procurement with links to external suppliers' catalogues and to the mySAP.com marketplace. In just two weeks, e-SAP and Compaq PS were able to show the scenarios that Deutsche Bank wanted. The product catalogue allows multimedia presentations of the indirect products. An order was placed through an e-Procurement system and the product catalogue. The direct link to the product catalogue of an external supplier via the Internet was set up without any problems. In addition, it could be demonstrated successfully that Business-to- Business procurement systems could be connected to suppliers' systems via the mySAP.com marketplace.

6. Conclusion

There are questions by worried people concerning electronic purchase such as: Can the system be configured to meet the diverse needs of different departments, including different workflows and vendor program behaviour? Does the system manage a broad set of services categories? Does the system leverage your existing investments by integrating with e- procurement platforms for products?

In spite of this, E-Procurement should become a standard application in the enterprises within the next few years according to research institutes. Today already, enormous savings make it attractive. Thus, in the future, the strategic role of purchasing in companies will be of a considerably higher importance than today. The operative processes of purchasing will be decentralised and dealt with intelligently. On the one hand they enable the purchase department to amplify the focus on strategic processes. On the other hand, e-Procurement improves strategic processes. This applies to the strategic supplier management just as much as for the arrangement of the purchase policies concerning the e-Procurement system. This enlarged strategic role of purchasing will increase and make its contribution visible to the enterprise resulting in added value.