eProcurement 1

1
eProcurement

• October 16, 2001
• Jae Kyu Lee
• (jklee_at_kgsm.kaist.ac.kr)
• Graduate School of Management
• Korea Advanced Institute of Science and Technology

2
Table of Contents

• Benefits, and Components Status of eProcurement
• Business Models of e-Procurements
• Model 1 Cost Saving through Exchanges
• Model 2 Direct Connection of Supply Chain
• Model 3 Desktop Purchase
• Model 4 Eliminate Procurement Department
• Model 5 Procurement of Human Capital
• Factors, Status and Strategies of eProcurement
• Chevron Case
• CSF of eProcurement
• eProcurement Integration Policy
• Vendor Selection Criteria and eProcurement
  Solutions
• ERP in eProcurement SAP B2B Procurement 2.0
• Key Trends and Concluding Remarks

3
Benefits of eProcurementhttp//www.mysap.com/solu
tions/e-procurement/businessbenefits.htm

• Reduced purchase costs
• Enhanced efficiency at every stage
• Establish adaptive, efficient, collaborative
  supplier relations
• Monitor and regulate buying behaviors
• Improve sourcing by discovering more suppliers
• Ensure deliveries on time, every time
• Free up skilled employees
• Reduce training requirement
• Permit flexible access time, anywhere
• Manage contracts
• Perform content management functions
• Reduce maverick purchase

4
e-Procurement Direct vs Indirect Materials
5
Alternative eProcurement Markets

• Public Exchanges
• Sellers Direct Markets
• Private Exchanges
• Comparison Portals
• Direct Connection of Supply Chain
• Internalized e-Catalogs

6
Components of eProcurement

• What is eProcurement Process?
• Requirement Search Select (Negotiation)
  Order Reception Payment After service
  Disposal
• Reengineering using B2B Platform
• Tight integration of internal and external
  systems unavoidable
• Components of eProcurement
• Content management
• Requisitioning
• Approval routing
• Order management
• Decision support

7
Transformation of Corporate Purchasing

• Front-End e-Procurement
• E-Catalogs
• Content Management
• RFQs
• Approval Routing
• Order Management
• Data Management
• ASP - Ariba,
• Commerce One,
• Oracle, Cisco, Clarus,

• Back-End ERP systems
• A/C receivable and payable
• Inventory Management
• Material Management
• Order and Sales Management
• Sales Planning
• Providers Oracle, SAP, JDE

8
Business Models of eProcurment

• Model 1 Cost Saving Through Exchanges
• Model 2 Eliminate Procurement Department
• Model 3 Desk-top Purchasing
• Model 4Direction Connection of Supply Chain
• Model 5 Procurement of Human Capital
• Any other models?

9
Model 1 Cost Saving Through Exchanges

• Raytheon Company Case
• 20 billion defense contractor
• 40,000 suppliers
• 200 million of its purchase through two
  procurement site (exchanges)
• FreeMarkets Auction
• Exostar Buy, sell, collaborate
• Saved 5-15 on each online purchase

10
Evolution from Private to Public Exchanges (vice
versa)

• GE TPN Post Reverse Auction Market
• Start as a private exchange
• Evolved to a public exchange
• GE Information Services
• EDI solution provider
• GE Global eXchane Service (GXS)
• Evolution of GEIS
• Solutions EAI, EDI, XML, Exchange
• GE GXS manages GE TPN Post too
• GXS has 100,000 trading partners
• 1 billion annual transactions
• 1 trillion in goods and services
• Issue Procurement vs. eMarketplace Ownership

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GE TPN(Trading Process Network)

• Private Reverse Auction
• Reengineer purchase process
• Purchase on the Internet
• 10B(97.10) 50B(2000)
• 60 of crews relocated , 30 reduced
• 520 reduced price
• Bidding cycle time reduced
• New vendors found
• Open TPN to other buyers

Mfr
Distruibutor
Business Buyer
Dell for Bids
VAR

• Procurement Process Reengineering
• Cultivate New Suppliers

12
Scope of Services at GE GXS
13
Model 2 Direct Connection of Supply Chain

• Eastman Chemical Case
• Barnes Noble SupplyWorks MRO
• 1,000 Stores
• MRO purchase Not books and retail items
• Connect five suppliers
• Plan to connect another 20 30 vendors eventually
• What is the architecture of Connection?

14
Model 3 Desktop Purchase

• KoSa develops and sells polyester-based
  intermediate products and polymers
• Headquartered in Houston and main office in
  Frankfurt 10,000 employees worldwide
• Direct access to internal e-catalog over 56,000
  products
• One-stop procurement from the desk-top
• 200 employees at six plans in Germany use the
  system
• Previous 450 suppliers only a handful remains
• 80 of orders to six selected and quality assess
  companies

15
Desktop Purchasing Cases

• Lockheed Martin
• 30-35 of purchase decisions back to end users
• Goal Make electronic catalog a standard for
  small dollar (less than 10,000) procurements
• Cisco Case
• Cisco implemented a Web buying program
• Low-end items without going through the
  traditional approval process
• Change the way of purchasing
• MS Market
• Other Cases in mySAP.com
• http//www.mysap.com/solutions/e-procurement/custo
  mersuccesses.htm

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Case Study - BP International

• Key learning similar to Lockheed Martin
• Employees place low-value orders
  themselves without needing approval
• Professional procurement staff add value by
• concentrating on the high value / high risk order
  
• negotiating the applicable purchase agreements

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Case Study - BP International

• Cost of reduction was apparent
• Cost of purchase - reduce by 5 percent, save 1.5
  million pound per year
• Eliminate 90 of the transaction-handling
  workload
• Procurement staff place only 11 of orders yet
  control 92 of company purchase
• Purchasing order process time - three days to
  few minutes
• Cut the cost of administering the order process
  by gt250,000 pound per year

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Model 4 Eliminate Procurement Department

• Avendra for Lodging Co. Case
• Hyatt Hotel and Marriott International Hotel
  eliminated purchasing department
• Joint venture with 5 lodging companies, combining
  their procurement staffs
• The joint venture, Avendra LLC, procures for
  these hotels.

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Procurement Service Provider

• WorldCrest
• Specialized in negotiating office supplies,
  furniture, gas, chemicals, etc.
• Bargain by group purchasing
• Pantellos
• Membership of 20 large energy companies
• American Electric Power, Cinergy, Consolidated
  Edison, PGE, Reliant Energy
• Pantellos supports the members the access to
  WorldCrest for indirect goods and services
• Potential in Cinergy 100 million annual
  purchase on indirect goods and services

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Model 5 Procurement of Human Capital

• ASP for Human Capital Procurement
• Centralize the hiring process
• Keep track of which suppliers are providing the
  employees
• Determine where the hiring company can get the
  most leverage in terms of cost reduction and
  service
• Offer back-end integration to financial and HR
  systems.
• ASP White Amber, CascadeWorks, Chimes,
  IQNavigator, Itiliti, Skills Village, and Vivant

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Case Human Capital Procurement

• Avis Group Holdings Case (Information Week, April
  16, 2001 http//www.informationweek.com/833/oohum
  an.htm)
• Car rental company based in New York
• Implemented Workforce Procurement and Management
  software
• Help to procure contingent works in the
  administration, finance, and insurance area
• Pre-negotiate rates and provide automated billing
  and approval ? save cost and time
• 37 year-over-year cost savings on temporary
  staffing procurement costs
• ASP White Amber
• Plan to expand to include personnel such as
  shuttlers and service technician at 400 major US
  locations.

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Case Human Resource Procurement

• Merrill Lynch Co. (Information Week, April 16,
  2001)
• Hires between 2,000 and 3,000 contingent systems
  consultants at a cost of 200 to 300 million
  annually.
• Old system requires 15 different signatures and
  reconciliation of time sheets.
• Pay process discounts nearly 98 of the time
• Saves 20-25 million per year by speeding the
  process

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Factors for eProcurement Policy

• Pricing Schemes
• Comparison of the Posted Prices in e-Catalogs
• Auctions, Reverse Auction and Tender
• Negotiations and Configurations
• Usage Level
• Online auctions 15 eBay Professional
• Online marketplaces 23

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Status of eProcurement

• Items to procure Direct vs. Indirect Materials
• 9 of total indirect procurement online
• 11 of total direct procurement online
• Online purchase experiences (April 20, 2001)
• Direct 46 Indirect 71 (61 in last Q)
• Cost Saving Effect Only 26
• 80 to look for new suppliers
• Improvement in purchasing process
• Efficient sourcing Faster transaction
  Standardize the process
• Decrease the number of suppliers Kosa Case
• Budget Spending
• Spending on e-sourcing technology 556 mil, which
  is doubled from last year
• Only 8 of potential customers are using
  e-procurement tools
• Slow coming and potential

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Effect of eProcurement
Source Aberdeen Group Jun 1999
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Strategic Focus of eProcurement

• Small Number of Items with Large Volume
• Tight Integration with back-end system
• Tight integration with partners along supply
  chain
• ? Direct connection, private exchanges
• Partnership based sourcing
• Large Number of Items with Small Volume
• Open Sourcing in the public exchanges
• Loose integration with legacy systems
• Discover new suppliers
• Which policy more urgent?
• Portfolio of strategies Contingency,
  combination, and architectural integration

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eProcurement Deployment Strategies

• Evolutionary Deployment of eProcurement
• Evolutionary start small with single set of
  commodities a particular region
• Strategic Sourcing systematic
• e-Procurement process reengineering
• Only most advanced organization adopts
• 2/3 of purchasing communities in experimental
  stage
• Priority and Contingent Policy Portfolio

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E-Procurement Implementation Profile

• Budget US2 M to 10 M
• Team Size 3 to 13 People
• Project Duration 1 to 3 years
• No. of Catalogs 3 to 30
• No. of Users 50 to 1000
• (Source Deloitte Consulting, Realizing the B2B
  Procurement Vision, 2nd Annual Study, 2001)

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e-Procurement System in Chevron

• Corporate Profile
• US 3rd largest petroleum co.
• Operating in roughly 100 countries
• Annual net gain - 3.2 billion
• Purchase budget - 9.9 billion
• Two existing ERP systems from SAP and J.D.
  Edwards

• Two-fold Solution
• E-Procurement Software from Ariba
• Web-based front end and user interface for
  catalog search, purchase order and requisition
• EDI and Catalog services from Harbinger
• Facilitate interaction with suppliers and manage
  catalog content and customer/supplier
  base

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eProcurement System Architecture for Chevron
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Critical Success Factors

• Selection of right strategy, architecture and
  solutions
• Management commitment
• Content management
• User friendly
• Seamless integration with back-end ERP
• Redesign workflow
• Manage change
• Fast implementation

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eProcurement Integration Policy

• Tight Internal Integration
• Tight integration with ERP or legacy
• Internal e-catalog
• Inter-Enterprise Integration
• Direct integration with partners ERP system
• Compliant ERP interface standard necessary
• Integration with Exchanges
• ERP-compliant eMarketplaces
• MarketSet Commerce One and SAP
• Private Exchange
• Application Server
• Communication Platform Standard XML

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Architecture of Integrating EC with ERP
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Vendor Selection Criteria

• Functions
• Technical architecture
• Cost
• Service and support
• Viability
• Vision

35
eProcurement Solutions

• Ariba
• Commerce One
• Oracle
• Saved for itself 1 bil in 2000 plan 2 bil in
  2001
• Boeing Ingersoll-Rand
• Clarus
• SAP B2B Procurement
• Commerce One SAP MarketSet
• Allows desktop purchasing through SAPs financial
  system
• Track the procurement process as life cycle
  product management, SCM, and data warehouse
• Moai Eastman Chemical adopted
• SupplyWorks Inc. Barnes Noble adopted
• GE GXS

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Business Position of ERP Provider
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Resources in E-Procurement Study
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SAP B2B Procurement 2.0 (I)http//www.mysap.com/s
olutions/e-procurement/pdf/btobfactsheet.pdf

• For ad-hoc and strategic procurement of direct
  and indirect B2B procurement of SAP R/3 users
• Support requisition-receive-pay process
• Empower Employees
• Users can check price, availability, and delivery
  time from their desktop
• Employees handle the entire procurement process
  themselves Discuss Pros and cons
• From creating a requisition, confirming receipt,
  approval of invoice for payment

39
SAP B2B Procurement 2.0 (II)

• Internet Bidding Public and private tendering
• and Reverse Auction.
• Intelligent Procurement
• Interface with SAP Business Information Warehouse
• Assess supplier performance and Analyze buyer
  habits
• Content Management
• Catalog engine and authoring tool
• Link with the third party catalog if it uses
  SAPs open catalog interface
• Direct links to mySAP.com and other Internet
  marketplaces MarketSet with Commerce One
• Buyers purchase order means sellers sales order

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SAP B2B Procurement 2.0 (III)

• B2B Procurement is independent of Material
  Management in ERP.
• Tight integration with SAPs MM
• Integration with multiple back-end systems
• Also can be deployed with non-SAP compliant ERP
  systems
• B2B Payment
• Invoke payment either to banks or vendors by
  back-end accounting system
• Via XML, EDI or any other communication methods
• Secure Date Transfer Secure Socket Layer
• Secure-HTTP Secure Electronic Transaction
• Mobile Access

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Demonstration of E-Procurement Process
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Case Study - Lockheed Martin

• Technology solution
• SAP Business-to-Business Procurement
• Integrate with the existing core SAP applications
• Key learning
• Free up procurement, finance, manufacturing,
  and logistics personnel for more value added
  activities by pushing purchasing decisions back
  to the end users for about 30-35 of the
  transactions

43
e-Procurement Key Trends

• Service companies e-Procurement of MROs
  offers them great savings whereas for
  manufacturing companies, e-procurement of
  direct material contributes their ROI.
• Most companies are taking a cautious approach.
  According to Ariba, only about 8 of
  potential customers are
  using e-procurement tools.
• Large e-procurement gain from process
  automation not from reduced purchase price
  (David Mannion, ICL).
• Deloitte Touche, AMR, Jupiter others
  predict that private marketplaces will
  dominate, with eMarketer citing 93 of all B2B
  commerce is already flowing through private
  exchanges.
• Public private e-procurement models co-exist.

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Conclusion

• eProcurement as Procurement Process Reengineering
• Selection and combination of eProcurement models
  critical
• Conformance of strategy and integration
  architecture essential
• Small MRO Exchanges
• Key Purchases Private Supply Chain
• Conformance of integration policy and solution
  selection crucial for the successful deployment