e-Procurement
Managing the cost of buying is now realised as key to improving profitability.
E-business promises to do to procurement what self-cleaning ovens did to Mr Muscle. Automating what were once manual-based transactions will slash purchasing costs by an expected 30 percent-plus by removing inventory, paperwork and delay from their supply chains. But it will also reduce the corporate head count and free up people to concentrate on higher level activities. Or at least, the promise that it can do this has given procurement new lease of life. In fact, it’s currently being dusted off and given renewed corporate status by boardrooms the world over. In short, the e-business makeover is transforming the humble purchasing division from cost-sucking functional process into strategic tool and here’s why. The cost savings associated with e-procurement are somewhat of given. And worldwide e-commerce exchanges are expected to handle sales worth more than US$2 trillion ($4.6 trillion) by 2004.
But where e-procurement can also add extra value is through better quality of information and reporting, says Suzanne O’Leary, partner with Pricewaterhouse-Coopers (e-markets/supply chain). The jury is out on whether e-procurement can deliver on these promises. But she says early manoe uvres in the US and Australia to establish electronic market places are encouraging.
For example, an auto industry exchange was recently built in the US by Oracle with Ford, General Motors and Daimler-Chrysler. It expects to process $500 billion worth of transactions through its site. In fact, in its first week of operation Ford saved US$14 million on single tyre-based deal. Meantime, Transora, global food industry b2b market place, combines 50 of the world’s largest consumer products companies with joint purchasing power of US$500 billion. Similarly, global market place that Air New Zealand and Ansett Australia have joined is expected to handle US$45 billion.
Corporate New Zealand has been slow to embrace the web-based frontier. But it’s understood there are at least 10 e-procurement platforms currently operating locally. Ironically though, O’Leary says it’s big buyers that are pushing suppliers to work with them on e-procurement platforms. For example, Fletcher Challenge Energy has joined major corporates like Fisher & Paykel, NZ Post and Carter Holt Harvey in tendering for information on e-procurement platforms.
This follows Telecom’s decision last June to use US-based Ariba software to link the electronic catalogues of over eight suppliers, including Blue Star Office Supplies and CafŽ Express in an effort to cut costs. Similar buyer and seller online market places are being proposed by Ernst & Young. It’s also understood other major accounting and IT firms are at varying stages of completing similar types of online market places. For example, e-solutions joint venture between Telecom, Electronic Data Services (EDS) and Microsoft (to explore ASP opportunities) is offering, among other things, electronic procurement. And now that e-procurement is reality, O’Leary says, organisations are being forced to take b2b online trading seriously.
The way O’Leary sees it, companies that fail to embrace e-procurement stand to miss out on two counts. For starters, they’ll fail to maximise cost efficiencies (within the purchasing process). But more importantly, operating outside electronic trading communities means suppliers who are, can easily pick off their existing customers. O’Leary’s sees three areas where e-procurement adds value.
? Providing better information where there is (maverick buying) non-compliance to preferred supplier agreements.
? Reducing manual-based transaction costs.
? Better compliance to preferred-supplier programmes typically means better leverage within particular category.
e-Market place
A case in point – 14 of Australia’s largest companies (including AMP, Coca- Cola, Amatil and Goodman Fielder) recently established an electronic co-procurement market for buying common goods and services. But as O’Leary points out, it will be some time before the more intrinsic benefits of such an electronic market place are really known. So how should companies second-guess what benefits e-procurement might offer them? To do this, O’Leary says companies must ask themselves two fundamental questions:
? Do we want to participate in any electronic market place and how much can we save if we do?
? Do we want to participate in vertical electronic market place or establish our own platform?
“Establishing their own e-procurement platform won’t always be the right solution, especially for smaller firms. But larger organisations with existing purchasing leverage have to ask themselves, what’s the value proposition of nuzzling-up to our closest rivals?” It’s the size of the New Zealand market, says Wayne Nicholas, Clear Communications general manager (electronic commerce), that makes establishing standalone platform hard to justify. Which is why the company chose to establish its own e-procurement service in partnership with e://volution (www.evolution.co.nz) as part of its Trading Point e-business offerings.
Auckland-based e://volution is b2b horizontal market place, and best estimates suggest the portal has the potential to handle annual e-procurement worth $1 billion. E://volution was spun off as separate company in September last year after printing and stationery company Norcross Group invested $1 million in its own e-procurement project. E://volution now encompasses 40 clients including Affco, Carter Holt Harvey, Clear, Blue Star Office Supplies, DB Breweries, KPMG, NZ Post, Sky City, TransAlta, Avis, Sky TV, Ford and Southern Cross.
After successful trialing over recent months, Contact Energy decided to taken 30 percent ($2.5 million) stake in e://volution. Contact plans to use the supply chain management system to handle everyday business purchases such as stationery, printing and office supplies worth about $500,000 year. And within five to six months, Contact aims to be offering online purchasing to its 65,000 small and medium-sized business customers. The 20-plus suppliers already listed on the e://volution site include: Avenue, Empower, CafŽ Express, Deane Apparel, MasterTrade, NZ Safety, Office Products Depot, Corporate Express, Liquor King (Lion Liquor Retail), Freightways, Protector Safety, B&H Group, Fresh Flower Company, General Packaging, Crown Worldwide Movers, Norcross Printing and Trade Tools.
“Electronic procurement is emerging as b2b application capable of delivering quantifiable return-on-investments. Beyond the cost equation, e-procurement is the beginning of complete supply chain automation that encompasses logistics, shipping and inventory integration for real return,” says Nicholas. He expects new e-procurement services like e://volution to reduce the cost of doing business for both buyers and suppliers, by:
? Automating procurement and removing paper-based processes.
? Compressing procurement cycle times.
? Increasing accuracy.
? Reducing inventory levels.
? Enabling recording and reporting on key performance indicators.
? Enabling consolidated billing for multiple suppliers.
What the Clear partnership does, says e://volution director James Dale, is open up the benefits of e-commerce to Clear customers on proven robust scalable platform. “E-procurement also help companies remain competitive through cost reduction, increased profits and productivity. It also serves organisations with significant indirect purchasing requirements, also known as MRO [maintenance, repair and operational] expenses.”
Tapping into shared platform offered by an ASP (applications service provider), says Dale, means even smaller businesses can access these services. In fact, equipped with standard office PC, web browser and 56K modem, even small supplier can post their
