chapter ten demystifying e-procurement: buy- side, sell-side, net markets, and trading exchanges

Chapter TenChapter TenDemystifying e-Procurement: Buy-Side, Sell-Side, Net Markets, and Trading Exchanges

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IntroductionIntroduction

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



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


IntroductionIntroductionProcurement 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



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 ModelsEvolution of e-Procurement Models

IndustryConsortiums

IndustryConsortiums

Third-GenTrading

Xchanges

Third-GenTrading

Xchanges

Second-GenTrading

Xchanges

Second-GenTrading

Xchanges

First-GenTrading

Xchanges

First-GenTrading

Xchanges

CorporateProcurement

Portals

CorporateProcurement

Portals

B2ERequisition

Apps

B2ERequisition

Apps

EDIEDI


Pre-Internet Era: EDI NetworksPre-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 AppsB2E: 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 PortalsCorporate 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 GenTrading 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 GenTrading 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 GenTrading 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 GenTrading 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 GenTrading 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 Industry Consortiums: Joint-Venture Procurement HubsProcurement 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 Industry Consortiums: Joint-Venture Procurement HubsProcurement 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 ProcessesEvolution 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 FragmentationReducing 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 Hands-Free Procurement: Managed by ExceptionException


E-Procurement: Integrating Ordering, E-Procurement: Integrating Ordering, Fulfillment and PaymentFulfillment and Payment

Search & Select Requisition

Approval &Purchase

Order Flow

Receiving TrackingPick, Pack

& Ship

Fulfillment Flow

Invoicing Payment Reporting

Payment Flow

Customer Service

Backward Integration


Ordering: Self-Service RequisitioningOrdering: 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 Fulfillment: Order Mgmt and Supplier IntegrationIntegration

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 MgmtPayment: 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 AppsE-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 EnablersMarketplace 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 EnablersMarketplace 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 ManagersRoadmap 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 GoalsStep 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 GoalsStep 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 Procurement

Lifecycle

Shipping & Distribution

Pricing & Availability

Supplier-side Order Entry

Receipt & Invoicing

Order Receipt & Schedule


Step 2: Construct a Process AuditStep 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 AuditStep 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-Step 3: Create a Business Case for e-ProcurementProcurement

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-Step 3: Create a Business Case for e-ProcurementProcurement

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 Step 4: Developing Supplier Integration MatrixMatrix

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 AppStep 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 EverythingStep 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

IntegrationSweet-spot


Step 7: Educate, Educate, EducateStep 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 E-Business Strategies, Inc.Strategies, Inc.

www.ebstrategy.comwww.ebstrategy.com

[email protected]@ebstrategy.com

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chapter ten demystifying e-procurement: buy- side, sell-side, net markets, and trading exchanges

Documents

costs ebusiness strategies

evolution of e

introductionb2b strategies

business revolution

dollar bottomline impact

strategic importance

ordercycle times

large businesses