Drivers of e-procurement

Case Study 7.1 illustrates many of the reasons why many companies are now introducing e-procurement. The primary driver is cost reduction, in this case from an average of £60 per order to £10 per order. In many cases the cost of ordering exceeds the value of the product purchased. In another example, BT’s implementation of e-procurement enabled 95 per cent of all its goods – including desktop computing, stationery, clothing, travel and agency staff and so reduced the average purchasing transaction cost from £56 to £40 inside a year (IBF, 2008).

Kluge (1997) and Kalakota and Robinson (2000) consider procurement to be a strategic issue since, as the figures above show, significant savings can be made and these cost reduc­tions should result in greater profitability. Kluge (1997) reports on a survey of electronics companies in which there was a 19 per cent difference in profitability between the most suc­cessful and least successful companies. Of this difference, 13 per cent was due to differences in the cost of goods sold of which between 40 and 70 per cent was accounted for by differ­ences in the cost of purchased goods and services.

Direct cost reductions are achieved through efficiencies in the process, as indicated by Case Study 7.1 and Tables 7.1 and 7.2. Process efficiencies result in less staff time spent in searching and ordering products and reconciling deliveries with invoices. Savings also occur due to automated validation of pre-approved spending budgets for individuals or depart­ments, leading to fewer people processing each order, and in less time. It is also possible to reduce the cost of physical materials such as specially printed order forms and invoices that are important to the process, as is evident from Figure 7.1.

There are also indirect benefits from e-procurement; Tables 7.1 and 7.2 show how the cycle time between order and use of supplies can be reduced. In addition e-procurement may enable greater flexibility in ordering goods from different suppliers according to best value. This is particularly true for electronic B2B marketplaces (p. 400). E-procurement also tends to change the role of buyers in the purchasing department. By removing administra­tive tasks such as placing orders and reconciling deliveries and invoices with purchase orders, buyers can spend more time on value-adding activities. Such activities may include more time spent with key suppliers to improve product delivery and costs or analysis and control of purchasing behaviour.

A useful framework for evaluating the benefits of e-procurement and e-SCM has been created by Riggins and Mitra (2007, Figure 7.3). This can also be used to review strategy since it high­lights potential benefits in terms of process efficiency and effectiveness and strategic benefits to the company. Some of the main dimensions of value highlighted by the approach include:

• Planning – this shows the potential for an e-procurement system to increase the quality and dissemination of management information about e-procurement.
• Development – e-procurement systems can potentially be incorporated early in new product development to identify manufacturing costs; this can help accelerate development.
• Inbound – this is the main focus of e-procurement with efficiency gains from paperless transactions and more cost-effective sourcing possible through hubs or marketplace. A strategic benefit is vendor managed inventory (VMI) where supply chain partners will manage the replenishment of parts or items for sale as described in Case Study 6.1.
• Production – the integration of systems managing manufacture with the procurement systems used to ensure that manufacturing is not limited by poor availability of parts.
• Outbound – this is management of fulfilment of products to customers. It is not usually managed by the e-procurement system, but demand must be evaluated by linking through these systems to achieve efficient consumer response (ECR).

Turban etal. (2000) summarize the benefits of e-procurement as follows:

• Reduced purchasing cycle time and cost
• Enhanced budgetary control (achieved through rules to limit spending and improved reporting facilities)
• Elimination of administrative errors (correcting errors is traditionally a major part of a buyer’s workload)
• Increasing buyers’ productivity (enabling them to concentrate on strategic purchasing issues)
• Lowering prices through product standardization and consolidation of buys
• Improving information management (better access to prices from alternative suppliers and summaries of spending)
• Improving the payment process (this does not often occur currently since payment is not always integrated into e-procurement systems).

Of course, there are also barriers to adoption of e-procurement. CIPS (2008) identifies the following issues for suppliers which can act as barriers to e-procurement:

• Competition issues, e.g. in exchanges using collaborative purchasing
• Possible negative perception from suppliers, e.g. their margins reduced further from e-auctions
• Negotiated procurement benefits may be shared with other exchange users who may be competitors
• Creation of catalogues can be a long process and costly to suppliers
• Culture profile within organizations, e.g. resistance to change.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).