Chapter Ten

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

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

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 managements
  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

5
Introduction

• B2B strategies now a top mgmt focus
• Driven by CEO or CFO, reflecting managements
  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

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
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
• Dont do well in open sourcing and flexible
  supply chain world

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

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

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

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

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
  buyers need

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

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

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

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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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

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

19
Hands-Free Procurement Managed by Exception
20
E-Procurement Integrating Ordering, Fulfillment
and Payment
Order Flow
Search Select
Requisition
Approval Purchase
Backward Integration
Fulfillment Flow
Customer Service
Receiving
Tracking
Pick, Pack Ship
Payment Flow
Invoicing
Payment
Reporting
21
Ordering Self-Service Requisitioning

• Traditional purchasing process
• Fill requisition form
• Submit
• Wait for approval PO
• Send PO to supplier
• Many procurement guidelines and rules to follow
• Archaic given technological options today
• Little help available from purchasing dept and
  POs can take weeks to fulfill

• Self-service order work flow

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

23
Payment Invoice Mgmt

• Companies must monitor payments and open invoices
• E-procurement should support payment
  functionality
• Invoicing and billing
• Payment
• Reporting

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

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

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

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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

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Step 1 Clarify Your Goals

• What is your companys specific e-procurement
  goal?
• Is the goal a comprehensive and consolidated
  business solution?
• Integrated e-procurement mgmt necessary
• What are you trying to improve?

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Step 1 Clarify Your Goals
Complete ProcurementLifecycle
Order Receipt Schedule
Order Approval Placement
Select Search
Deliver Invoice

Multi-SupplierCatalog Search
Approval Workflow Engine
Order Management
Shipping Distribution
Partial Functional Solutions
Pricing Availability
Supplier-side Order Entry
Receipt Invoicing
Complete Integrated Solutions
Integrated e-Procurement Management Applications
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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

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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

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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

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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

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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

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?

36
Step 6 Remember Integration is Everything

• Doomed to fail strategy
• Gathering requirements, then disappearing for 6
  months, then launching the portal
• Ideal goal
• Continuously iterate towards the target the
  integration sweet spot
• Focus on all areas of ORM
• Iterate development and deployment
• Do not take exclusive buy-side or sell-side
  viewpoint
• Integration with back office systems a
  significant issue

• Professional Buyers
• Control
• Efficiency Cost Reduction
• Supplier Management

Integration Sweet-spot

• Employees
• Convenience
• Ease of Use
• Consistency

• Suppliers
• Cost Reduction
• Clean Orders

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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 dont succeed
• Do not underestimate the effort and costs of
  deployment

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