Demystifying e - Procurement Buy - Side, Sell - Side, Net Markets, and Trading Exchanges

Chapter Ten Demystifying e-Procurement: Buy-Side, Sell-Side, Net Markets, and Trading Exchanges  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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 Hands-Free Procurement: Managed by Exception E-Procurement: Integrating Ordering, Fulfillment and Payment Search & Select Requisition Approval & Purchase Order Flow Receiving Tracking Pick, Pack & Ship Fulfillment Flow Invoicing Payment Reporting Payment Flow Customer Service Backward Integration 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 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 Payment: Invoice Mgmt Companies must monitor payments and open invoices E-procurement should support payment functionality Invoicing and billing Payment Reporting 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 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 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 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 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? Step 1: Clarify Your Goals Select &Search Order Approval & Placement Integrated e-Procurement Management Applications { Deliver &Invoice Multi-SupplierCatalog Search Approval Workflow Engine Order Management Complete Integrated Solutions Partial Functional Solutions Complete ProcurementLifecycle Shipping & Distribution Pricing & Availability Supplier-side Order Entry Receipt & Invoicing Order Receipt & Schedule 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 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 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 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 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 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? 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 Employees Convenience Ease of Use Consistency Professional Buyers Control Efficiency & Cost Reduction Supplier Management Suppliers Cost Reduction Clean Orders Integration Sweet-spot 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, Inc. www.ebstrategy.com contact@ebstrategy.com 678-339-1236 x201 Fax - 678-339-9793