7
E-Procurement
“E-procurement can deliver significant ‘buy-side’ cost savings to businesses, companies and marketplaces. They are now looking at other appropriate areas of their business to drive forward of performance throughout the value chain based on supply and demand
—Lusiana”
Chapter Objectives
To understand:
- Traditional vs. e-procurement
- E-procurement framework and models
- Reverse auction and its benefits
- Outsourcing e-procurement
- Open trading environment
E-procurement Model
Organizations allocate significant percentage of the purchasing budget to non-productive items like travel, office supplies and follow-ups. The optimization of supply chain cost requires streamlined, collaborative business processes and a supporting technology infrastructure that enables synchronization of information and material flow across the supply chain. Today's enterprises are increasingly reliant on their business partners for competitive advantage through cost leadership. E-procurement can reduce significant ‘procurement’ cost of the business. A number of innovative companies are now looking at procurement as an important area of their business to drive forward their business performance through this component of the value chain. Automating the purchasing (of goods and services) through implementing an e-procurement system, organizations can make significant reductions on purchasing expenditures resulting in significant increase in the bottom line.
Tata Motors Benefiting Through E-Procurement
Tata Motors is India’s largest and the fully integrated automobile company. It ranks top 6 among manufacturers of medium and heavy vehicles in the world. In late the 1990s and early 2000s, Tata Motors were facing financial losses due to cost pressures. They also lost market share to the competition. Tata Motors identified the problem in their cost structure. Materials cost amounted to 65 per cent of the entire cost in FY2000. Tata Motors decided to address their problem starting from direct materials procurement. They used e-sourcing and e-procurement to attain precision and cost cutting. Tata Motors has employed SAP and Oracle-based IT systems to support its database and transactions management. They went into outsourcing of e-procurement process to Free Markets, Tata Technologies Ltd. and Dynamic Logistics to enhance the efficiency of the supply chain. Systematic implementation of e-sourcing ensured savings to a tune of Rs 2000 mn ($50mn) in FY2001. Tata Motors embraced e-sourcing with an objective of cost reduction, smooth transactions with lower cost, transparent processes and global reach for material sourcing.
In 2001, Tata Motors employed FreeMarkets.com, a global supply management solutions company as partner in running the e-Sourcing programme. The first reverse auction under this initiative was conducted in June 2001. E-procurement in the company revolved around reverse auctions for on-line negotiation of prices for a variety of products and services procured by the company. Tata Motors extended the technique to the procurement of maintenance, annual contracts, tool engineering, administration, canteen purchases, medicines and hotel bookings. They extended the newfound success of e-sourcing to tier-II sourcing, etc. Using e-procurement, Tata Motors covered around Rs 18,500 mn ($370 mn) of spend from 2002 to 2004. They have covered 25 per cent of direct material purchasing and 55 per cent of indirect material purchasing through e-procurement in that period. E-procurement has reduced purchasing cycle time, enhanced flow of information, consolidated supplier base, reduced procurement overheads and rationalized supply conditions, quality norms and made provision for multiple locations procurement possible.
Tata Motors suppliers were also happy with the e-procurement technique since it allowed them to reduce their marketing cost, getting assured contracts, fair and transparent transactions and clarity of supply conditions. The e-procurement project brought discipline and rigour to the sourcing process and resulted in the creation of a cost-competitive and cost-conscious supply base. The benefits accrued are reduced procurement time, reduced procurement cost, realized better value for money spent, standardized the procurement process and allowed equal opportunity to all vendors.
INTRODUCTION
Procurement is a critical function in the supply chain. The procurement function includes vendor development, material ordering, issuing purchase orders, preparing procurement schedules, follow up with vendors and releasing payment. As the size of the business firm increases, the number of transactions goes up and so is the cost of transaction along with the time taken to complete the purchase order. The transaction-related cost is hidden and never taken into consideration in traditional costing methods. In the traditional procurement, (Exhibit 7.1) the time required for processing an order varies from 15–45 days. In the competitive business environment, organizations are in lookout for cost and time reductions. E-procurement, which is done for the standard products (procured in volumes) helps in reducing time and the cost of transaction. The buying process is completed within one/two hours in reverse auction method. E-procurement process is paperless resulting into tremendous time and cost saving. However, the buying organization has to develop suppliers for calling for on-line offer submission and negotiation process. E-procurement process is done with the help of specialized software solution. E-procurement services are provided by service providers or large organizations have their own software to perform e-procurement process. Indian firms like Carrier Aircon, Telco, Blue Star, Hindustan Motors and Wipro are outsourcing the e-procurement for standard items. On the other hand, L&T, Asian Paints, Marico Industries, Maruti, Grasim, LML, HDFC, Amtrex, Blue Star and Goodlass Nerolac Paints have their own software for carrying the e-procurement. With e-procurement many companies had an effective saving of 2 per cent to 22 per cent on procurement costs. Many large companies in various industry sectors are leveraging on e-procurement to increase their margins.
Exhibit 7.1 Traditional vs. E-procurement
| Traditional Buying Process | E-procurement Process |
|---|---|
| Paper based Floating enquiry, inviting quotations, evaluation, negotiations, purchase order, follow-ups, etc. | Paperless Online process without using paper. |
| Biased The terms and conditions are favourable to either seller or buyer depending on his strength | Non-biased Terms and conditions mutually acceptable and varies with each contract. |
| Secretive Bidder not allowed to know the competitors’ names as well as their off erings. Time-consuming Takes sometimes months together for the final placement of order. | Transparent Each of the competitors know others prices (not the names) as auction is online. |
| Time-Consuming Takes sometimes months together for the final placement of order. | Transparent Can be finished within a few hours. |
E-PROCUREMENT
It is a method of the purchase of goods or services electronically and is an integral part of an overall strategic procurement plan in the current business environment. The plan includes, but is not limited to strategic sourcing or supplier rationalization, supply chain automation, and participation in one or more marketplaces. The commodities purchased can be operational resources (non-production) or production resources (raw materials).
E-procurement is perhaps the most direct and effective way for an organization to leverage the Web to reduce costs, improve productivity and boost profits. It automates and streamlines the process by creating a Web-based, self-service environment that pushes product selection and order initiation to the computer for a buyer while maintaining corporate trading agreements, workflows and authorization rules. With adoption of e-procurement, the purchase department is relieved of time-consuming traditional procurement activities. They now focus on upstream activities such as supply source development, negotiation and vendor management.
For organizations procurement is a most critical decision-making process. Procuring goods at the right price and from the right vendor takes a long period. However, e-procurement provides an on-line platform for both buyers and suppliers to interact and reduce the cycle time of procurement. With e-sourcing the buyers analyse, purchase and identify opportunities at a better price and moreover, they have direct access to goods and services. The building blocks of e-procurement are shown in Exhibit 7.2. E-procurement helps in compression of procurement cycle. It is a transparent ordering process as the supplier can see the lowest price quoted without the vendor's name being revealed. If e-procurement is outsourced to a third party service provider, there is no possibility for dummy quotes to creep in.
E-procurement process reduces costs and increases efficiency. Thus, businesses can increase efficiencies and maximize savings on procurement. This helps them to make better use of their resources and capital. In India, procurement services and solutions segments such as Wipro's O1markets and neoIT are the leading players. At the global level, for e-procurement services FreeMarkets, Commerce One and Ariba Technologies are the most popular names.
E-procurement is done through the Internet, electronic data interchange (EDI) or enterprise resource planning (ERP). It is done in B2B and B2C business as well. E-procurement Web site brings buyers and sellers on the same platform to perform transactions. The buyers and sellers are subscribers to the site. Buyers specify the price for goods and invite the bids from the sellers. E-procurement software helps to automate buying and selling. E-procurement process reduces the procurement (transaction) cost and shortens procurement cycle.
REVERSE AUCTION (RA)
RA is a process of bidding by suppliers through the Internet using reverse auction engine (a software programme). All the bidders can participate simultaneously in the bidding process. The buyer fixes the specifications and commercial terms, and fixes purchase price below which the bidders have to quote. The bidding starts at pre-fixed start time. The bidders can see their prices quoted by others so that they can reduce the prices step by step However, buyers can see all the bids.
In the bid, no increase in price is allowed. The entire bidding process finishes within an hour or so. Normally hectic bid changes are seen just before closing time (Figure 7.1). Reverse auction gives good price reduction benefits to buyers.
E-procurement techniques like bidding on reverse auctions are one wherein companies will find they have everything to gain. It's a win-win situation for both the buyers and the sellers. The following are the features of e-reverse auction process that cater to the needs of global outsourcing:
Easy process Taking part in a reverse auction as a bidder does not require much efforts as required in a standard RFP (request for procurement) process. Paperwork is greatly reduced in the online setting. In RA process, the interface is easy between the buyers and the sellers.
Global reach In RA, bidders will find requests for products and services from all over the world. Companies can access new markets across the globe without having their physical offices at the locations.
Transparency Reverse auctions are set up to be very transparent. The bidders can see what others are offering. This is an excellent way for companies to actually see if they are as competitive as they need to be.
BENEFITS OF E-PROCUREMENT
With e-procurement process, the buyer benefits as a result a significant reduction in the procurement cost (Exhibit 7.3) and procurement cycle time. For example, Larsen & Toubro could procure a 1.6 lakh inch-metre piping (bulk) valued at Rs 80 mn within 22 days of receipt of final MTO to achieve the milestone date in one of the projects. The other benefits L&T got was a substantial reduction in procurement cost. This is because of reduction in skilled manpower requirement, reduced photocopying, courier and faxes of large files, reduced phone calls, etc. E-procurement process can be initiated from any place and at any time as per the convenience of the buyer and seller. The entire process is transparent and it is a common platform for all suppliers who are competing.
Exhibit 7.3 E-procurement Benefits—Case Studies
| Buyer: Carrier Aircon | Buyer: Hindustan Motors |
|---|---|
| Material—Compressor Oil | Material—Automotive Paints |
| Purchase value—Rs 120 lakh/pa | Annual purchase—Rs 12.25 Cr |
| E-Sourcing provider—Freemarkets India | E-Sourcing provider—01 markets (WIPRO) |
| Bidders—9 Large oil companies including PUCs | Participant suppliers—4 Nos |
| Results—12% saving (When oil prices go up worldwide) | Results—Rs 77.69 lakh (6.34% Savings) |
An e-procurement solution supports buyer-seller collaboration. It enables timely communication of the buying plan to the suppliers. This helps in reducing procurement cost and supply chain wastage.
There are three process cycles in procurement such as identifying, evaluating vendors and calling the suppliers for submitting bids. All these processes are simplified in an e-procurement process.
With reduction in procurement time using e-procurement process, the procurement personnel could devote more time for procurement action on complex and critical items other than the standard ones. The bill of material consisting of more standard items can derive excellent benefits on cost front by reverse auction. The organization needs to invest in the E-procurement software package, as it may not get economies of scales, which the service provider may get to serve a large customer base. It is then prudent to outsource the e-procurement to a service provider.
Reverse Auction at Blue Star…
Blue Star is India’s largest company manufacturing central air-conditioning systems and having an annual turnover of Rs 4760 mn ($100 mn) with network of offices in 29 cities and three modern manufacturing facilities. Blue Star manufactures and markets a wide range of air-conditioning and refrigeration systems and products. Their other businesses include marketing and maintenance of hi-tech electronic and industrial products such as machines, data communication products, medical and analytical instruments, and special control valves.
Using the 01markets reverse auction tool, Blue Star sought to procure galvanized steel. Blue Star wanted to optimize its costs by increasing the base of suppliers, thus creating a transparent process online and cutting cycle time drastically for the organization. Due to the nature of steel, getting every manufacturer on the same base level for bidding was a crucial activity. Due to spread of the suppliers across different geographies, coordination was another crucial activity. http://01markets.com understood the requirements through a comprehensive study. http://01markets.com ensured compliance of suppliers, standardizing supplier’s bids and products in order to create a level playing field. The bidders were called on Web on a particular day. RA continued as follows:
At 15.00 hours, the cost of the galvanized steel coils stood at Rs 9.6 mn. But as the RA continues the cost fell, to Rs 8.8 mn. In 2 hours, four manufacturers had submitted 21 bids to move the price-line past the reserve price to create a final savings of Rs 0.8 mn as detailed below:
Supply Category: Galvanized steel
Quantity: 1 lot
Mode: Reverse auction
No of suppliers: 4
Pre-auction buying price: Rs 9.6mn
Pos-auction price: Rs 8.8 mn
The reverse auction process just finished within 120 minutes
Source: 01 Markets-Wipro
CONSTRAINTS OF E-PROCUREMENT
As against the benefits, e-procurement has certain constraints, which are as follows:
- Infrastructure: In includes lack of continuous Internet facilities at the supplier's end. There is difficulty in downloading large files due to bandwidth/speed limitation. Sometimes there are problems in continuous access to e-procurement site. In few occasions, dates of auction are rescheduled once or twice.
- Reluctance for acceptance of new system: Lack of knowledge and reluctance to use e-procurement at supplier's end will pose a major problem in utility of the system. Reluctance on the part of buyers to get feedback from suppliers and thereafter will be implemented with the help of the e-commerce team.
- Different time zones: Vendors at various time zones in reverse auction.
E-PROCUREMENT TYPES AND MODELS
There are six main types of e-procurement:2
- Web-based ERP (electronic resource planning): Creating and approving purchasing requisitions, placing purchase orders and receiving goods and services by using a software system based on the Internet.
- E-MRO (maintenance, repair and operating): Similar to Web-based ERP except that the goods and services ordered are non-product related to MRO supplies.
- E-sourcing: Identifying new suppliers for a specific category of purchasing requirements using the Internet.
- E-Tendering: Sending requests for information and prices to suppliers and receiving the responses of suppliers using the Internet.
- E-Reverse auctioning: Using the Internet to buy goods and services from a number of known or unknown suppliers.
- E-Informing: Gathering and distributing purchasing information both from and to internal and external parties using the Internet.
A variety of practices are used in e-procurement. Some common purchasing methods are as follows:
- Private trading exchanges are owned or operated by a single company in order to trade or purchase materials with the owner's suppliers and customers.
- Public trading exchanges offer a common technology platform for auctions, spot buying and catalogue ordering. They are either owned by independent investors or industry consortia.
- An on-line reverse auction is a process by which suppliers are asked to place competitively lower bids to provide materials or services.
There are two types of E-procurement models. The first one is buying application software and other one is electronic catalogue(s). The buying application software allows an organization to carry out purchasing processes and to perform a variety of procurement functions. Three basic models (Exhibit 7.4) can be broadly described as follows:
Exhibit 7.4 E-procurement Models3
| Models | Advantages | Disadvantages |
|---|---|---|
| Buyer-centric | – Tight control over the buying process – Solution to meet the buyer's specific needs – Integration of solution into buyer's financial control system – Speedier procurement – Lower transaction cost to suppliers |
– Restricted purchasing – Higher maintenance cost – costs to buyer – Issues of fresh data to suppliers – High system investments – Limited choice to suppliers |
| Seller-centric | – Lower transaction cost to buyer – Wider access to market |
–Limited support to the buyers. – Buyer have no control on data |
| Third party-managed | – Both buyers and sellers have wider access to market – Useful to volume purchasers – Solutions are cost-eff ective |
– Higher transaction cost – Solutions have huge going costs – Buyers and suppliers need to subscribe for access |
Buyer-centric e-procurement model A buying organization has its own software to manage the procurement process. The data from suppliers is fed into the system and can be used by the purchasing officers. For example, all major auto manufacturers have Web-based e-procurement models for the auto parts, components and accessories. In 2000, Ford, GM and Chrysler released a co-operative e-procurement site ‘COVISINT’ for joint procurement action to achieve huge cost reduction from suppliers based on economies of scale.
Seller-centric e-procurement model In a seller-centric procurement model, the seller is at the centre. Buyers use the supplier's system which is accessible over the Internet. The buyer can go through supplier's catalogue which is available on Web site and place orders. Examples are eBay, Yahoo, Rediff, etc.
Third party-managed e-procurement model Here the procurement software and system is provided by a third party which is a service provider. The buyer and suppliers are brought together to initiate and complete the transaction. Both the buyer and seller have to pay the fees to a third party for the procurement service provided.
These models falls under ‘closed system’ and have their pluses and minus through the perspective of buyers and sellers.
OPEN TRADING ENVIRONMENT
Looking into the limitations of closed system, an open trading system is getting evolved. This allows buyers and sellers to establish systems that meet their requirements. Under an open trading model, buyers implement software that allows them to establish and maintain local internal catalogues (voluntary), but also to access e-marketplaces and supplier's stand-alone catalogues.
Suppliers have choice to log their own catalogues or use marketplaces. These arrangements benefit suppliers, who are able to make their catalogues visible to the large number of customers. The buyer can access supplier's Web site or direct to supplier in the open market.
There are two most prominent standards on open buying available on the Internet: standard and XML (extensible markup language). The open-trading architecture is based on the premise that process owners should be responsible for maintaining information associated with their business processes and procedures.
GOVERNMENT INITIATIVES
In India, the Government of Andhra Pradesh has leveraged information technology (IT) to attain a position of leadership and excellence in the information age and to transform itself into a knowledge society. The government envisioned providing good governance by establishing a committed, accountable, responsive, inspiring, nationalist, genuine administration—that is, a caring government. E-procurement is one of the vehicles that has been gainfully used in reaching the goal of caring governance by the government.
The http://www.e-procurement.gov.in (Govt. of Andhra Pradesh) e-platform provides its members with access to several trading suppliers. E-procurement auction services offer government departments easy-to-use, Web-based solutions for conducting dynamic exchanges in an on-line environment. It provides real-time bidding solutions for buyers and sellers that bring in an unprecedented level of profitability, control, and simplicity to corporate procurement and liquidation processes.
SUMMARY
In the new economy, those companies that can effectively leverage the Web to redesign, automate and integrate all business operations will remain competitive and gain success. The new e-businesses will be built on a dynamic supply chain or series of supply chains—collectively known as a ‘supply net’—that can be assembled and adjusted as needed to provide rapid and optimal response to customer demand. Responsiveness will only be possible if all participants of an e-business supply net can communicate, analyse and collaborate on requirements, plans, schedules and other business initiatives as a single, integrated, extended enterprise. E-procurement is a panacea to most of the above-mentioned issues. The advantages and benefits of E-procurement will far outweigh the minimal risks involved in the implementation of this solution.
Procurement is an important organization function in the supply chain. With E-procurement process the chances of finding a right supplier that matches the firm's requirements are more. E-procurement enables companies to reduce material costs, slash overhead and improve supplier relationships. Both government and private sector companies in India are using E-procurement to gain cost advantage. There are three basic electronic procurement models, namely, buyer-centric, seller-centric and e-marketplace. In these models, one dominant player establishes the trading rules for the system. However, these rules limit other participants’ flexibility. The above limitations can be overcome in an open-trading environment, which allow buyers and sellers to establish systems that meet their requirements.
REVIEW QUESTIONS
- Compare and contrast traditional and E-procurement processes of buying.
- Discuss the various E-procurement models prevailing in the market.
- What are the major benefits of E-procurement? Support your answer with illustrations.
- What is ‘Reverse Auction’ and how does it differ from ‘Forward Auction’?
- What are the major constraints of E-procurement process?
INTERNET EXERCISES
- The Office of Government Commerce (OGC) is an independent office of HM treasury, established to help government deliver best value from its spending. Find out from various cases how e-procurement process could deliver value from it. Visit http://www.ogc.gov.uk/case:UNC_gt;studies_eprocurement_case_studies.asp
- Online reverse auctions are an ideal way for buyers to reduce purchasing costs and streamline procurement when purchasing capital equipment, materials and services from suppliers around the world. Visit http://www.reverseauctionsblog.com/e-procurement and study various benefits of E-procurement process to both the buyer and seller.
VIDEO LINKS
- E-procurement, http://www.youtube.com/watch?v=cVtPU5qsYXM
- Improving productivity through e-procurement, http://www.supplychainbrain.com/content/videos/biotech-09/improving-the-bottom-line-through-e-procurement/
PROJECT ASSIGNMENTS
- ‘Web Tendering’ is quite common with Indian government departments and public sector units in India. Conduct a survey of these establishments and write a case report on ‘Web tendering’ process, its pros and cons, products for tendering, and terms and conditions.
- Visit online ‘B2B Hub’ in any industry sector (construction, steel, auto parts, chemicals, etc.) and write a report on its functioning, strategies for attracting memberships, transaction policies and procedures.