What is e-procurement?

In this chapter we consider the benefits and risks of e-procurement together with tech­niques that can be used to assess these benefits and risks. We also consider the selection of the different types of e-procurement including the hyped business-to-business marketplaces.

The terms ‘purchasing’ and ‘procurement’ are sometimes used interchangeably, but as Kalakota and Robinson (2000) point out, ‘procurement’ generally has a broader meaning. ‘Procurement’ refers to all activities involved with obtaining items from a supplier; this includes purchasing, but also inbound logistics such as transportation, goods-in and ware­housing before the item is used. The key procurement activities and associated information flows within an organization are shown in Figure 7.1. In this chapter we focus on these activ­ities which include searching and specification of product by the end-user, purchasing by the buyer, payment by an account, and receipt and distribution of goods within a warehouse.

E-procurement should be directed at improving performance for each of the ‘five rights of purchasing’ (Baily et al., 1994), which are sourcing items:

1. at the right price
2. delivered at the right time
3. of the right quality
4. of the right quantity
5. from the right source.

Box 7.1 gives an additional perspective on e-purchasing.

E-procurement is not new; there have been many attempts to automate the process of pro­curement for the buyer using electronic procurement systems (EPS), workflow systems and links with suppliers through EDI (Chapter 3). These involved online entry, authorization and placing of orders using a combination of data entry forms, scanned documents and e-mail- based workflow. It is convenient to refer to these as ‘first-generation e-procurement’. Figure 7.2 is an example of an electronic procurement system that is available through a company intranet.

1. Understanding the procurement process

Before the advent of e-procurement, organizational purchasing processes had remained sim­ilar for decades. Table 7.1 highlights the paper-based process. It can be seen that it involves the end-user of the item selecting an item by conducting a search and then filling in a paper requisition form that is sent to a buyer in the purchasing department (often after authoriz­ation by a manager, which introduces further delay). The buyer then fills in an order form that is dispatched to the supplier. After the item is delivered, the item and a delivery note are usually reconciled with the order form and an invoice and then payment occurs. Procure­ment also includes the transport, storage and distribution of goods received within the business – this is referred to as ‘inbound logistics’. Activity 7.1 explains how the procurement process can be simplified through e-procurement.

2. Types of procurement

To understand the benefits of e-procurement, and also to highlight some of the practical considerations with introducing e-procurement, we need to briefly consider the different types of items that are obtained by procurement (what is bought?) and types of ordering (how is it bought?).

Let us start us by reviewing what is bought by businesses. A B2B company might buy every­thing from steel for manufacturing products, through equipment to help machine products, to paper clips and pens for office use. There are two broad categories of procurement: those that relate to manufacturing of products (production-related procurement) and operating or non­production-related procurement that supports the operations of the whole business and includes office supplies, furniture, information systems, MRO goods and a range of services from catering, buying travel, and professional services such as consulting and training. Raw materials for the production of goods and MRO goods are particularly important since they are critical to the operation of a business. For the B2B company, they would include manufac­turing equipment, network cables and computers to control the process.

Moving to how items are bought, businesses tend to buy by one of two methods:

• Systematic sourcing – negotiated contracts with regular suppliers, typically in long-term relationships.
• Spot sourcing – fulfilment of an immediate need, typically of a commoditized item for which it is less important to know the credibility of the supplier.

A further characteristic of corporate procurement is that often items such as stationery are pur­chased repeatedly, either for identical items (straight rebuy) or with some changes (modified rebuy). E-procurement systems can assist in purchase if they make rebuys more straightforward.

3. Participants in online procurement

In Chapter 2 we showed how different types of online intermediaries such as price compari­son sites changed the marketplace options for consumers. A similar understanding of new potential participants or actors in e-procurement is helpful. Riggins and Mitra (2007) iden­tify eight types of intermediary that need to be reviewed to understand options for changes to procurement as part of developing an e-procurement strategy: ^[1]

• Traditional manufacturers which produce physical goods that are generally sold to other corporate customers.
• Direct sales manufacturers similar to traditional manufacturers except that they bypass intermediaries and sell direct to end consumers via web or phone channels. These can include services companies, for example insurer Dell (dell.com) or airline easyJet (www.easyjet.com). Direct sales manufacturer can be a cost-effective option for com­panies procuring business services such as flight bookings for staff.
• Value-added procurement partners act as intermediaries to sell products and services to other businesses; examples include travel agents and office solutions companies.
• Online hubs are industry-specific vertical portals such as Elemica (elemica.com) that generate revenues via B2B exchanges.
• Knowledge experts who produce information goods, for example E-consultancy.com and Hitwise.com have subscription services with innovation alerts, best practice and statistics of Internet usage.
• Online information services provide unique information to end users that is either original in its development or provides a unique editorial perspective. This is similar to the Knowledge experts category. From an e-procurement perspective, as we saw in Chapter 6, SaaS services such as E2open (Figure 6.11) are available to manage the information supply chain.
• Online retailers include start-up e-businesses and more traditional multi-channel retailers. Euroffice (euroffice.co.uk) is an example of an Internet pureplay providing office goods at lower prices than traditional providers. Traditional providers in this space with a network of stores include Staples (www.staples.com).
• Portal communities seek to aggregate different online information services into an integrated customer experience, for example personalized news stories, online bill presentment and payment and community discussion features. These overlap with the online information service and knowledge experts. An example is Accounting Web (accountingweb.co.uk) which would support accountants in selecting services needed to run their business and would also support other businesses looking to select accountancy firms.

For each product sourced, an e-procurement strategy requires that alternative marketplace actors are selected who can offer reduced costs or improved services such as integration with internal systems.

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