e-Procurement

thats Intelligent Buying

Dr. Ashis K. Pani

Enterprise Landscape

Electronic Transactions
Transaction conducted electronically
between business over the networks

Internet
Extranets
Intranets
Private networks (e.g., EDI)

Automated trading improves the process

Internet Network Architecture

Network Service Providers (NSPs) run the back bone
Internet Service Provider (ISPs) provide the delivery
subnetworks
ISP

ISP

ISP

ISP
NSP

NSP

ISP

ISP
NSP

NSP
ISP

ISP
ISP

ISP
5

Backbone

The Intranet
Servers

ERP

Clients
Legacy
systems
Public/External
Internet Users

Intranet

E-mail
servers

Web
servers

Firewalls
Databases

The Extranet
Extranet
Suppliers

Intranet
VPN

Distributors

VPN

Firewall

Tunneling Internet
Intranet

VPN

Customers

Firewall

Summary : Internet, Intranet, and Extranet

Network
Type

Typical
Users

Type of
Access

Internet

Any individual
with dial-up
access or LAN

Unlimited,
public; no
restrictions

Intranet

Authorized
employees
ONLY

Private and
restricted

Extranet

Authorized
groups from
collaborating
companies

Private and
outside
authorized
partners

Information
General, public
and advertisement

Specific, corporate
and proprietary
Shared in
authorized
collaborating group
7

What is e-Commerce?
e-Commerce is buying and
selling of information,
products and services over
computer communication
networks, mainly Internet

Buyer Benefits of e-Commerce

Convenience
Easy and private
Greater product access/selection
Access to comparative information
Interactive and immediate

Seller Benefits of e-Commerce

Relationship building
Reduced costs
Increased speed and efficiency
Flexibility
Global access, global reach

e-Commerce Domains
Targeted to
consumers

Targeted to
businesses

Initiated by
businesses

B2C

B2B

Initiated by
consumers

C2C

C2B

Relative Sizes of
e-Commerce Categories

B2B
B2C

U-Commerce:
Anywhere, Anytime, Any Way

What is e-Business?
Integration of IT and Business Process
IT support model
Business Process

IT

Business Process/IT

IT spending
1995
Separate
2000
Integrated

1 10%

10 40%

e-Business
e-Business is the integration of IT and particularly the

Internet into business processes to change organizations and

create new ones.

Business Partners
Suppliers, Distributors

Production Distribution

Enterprise Resource Planing

Knowledge Tone
Applications

Enterprise
Applications
Integration

Customer Relationship Management

Customer
Marketing
Sales
Service

Selling
SellingChain
ChainManagement
Management
Customers,Resellers
Customers,
Resellers
Customers,Resellers

Stakeholders
Stakeholders

Logistics

Finance/Accounting/Auditing
Management Control

Administrative Control
HRMS/ORMS/Purchasing

Employees
Employees

Supply
SupplyChain
ChainManagement
Management

e-Business and ERP

An e-volving Relationship

ERP evolution
1960: Materials Requirement Planning (MRP)
1980: Manufacturing Resource Planning (MRP II)
1990: Enterprise Resource Planning (ERP)
2001: Enterprise Resource Planning (ERP II)

ERP focuses on Internal Enterprise

Data, Information and Knowledge
ERP

Finances

HR

Manufacturing

Knowledge
Management

Sales &
Marketing

Logistics

e-Business Focuses on Communication

with External Stakeholders
Internet
ERP

Customers

Suppliers

Finances

HR

Manufacturing

Knowledge
Management

Shareholders
Sales &
Marketing

Advisors

Researchers
and Developers

Outsourcing
Logistics

Distributors
Business Partners

1990-1998: Implement ERP or you will be

dead.
1999-2000: ERP is irrelevant, ERP is dead.
2001: ERP-II will revive the ERP movement,
Long live ERP-II
Today, ERP is no longer a tool that will provide
competitive advantage. It is must have

-BI+ CRM+SCM+ERPommerce+Cusiness= e-Be

New Thinking Is Required

The e-business Cycle A Proven Approach

Simple Supply Chain Component

Raw Material
Supplier
Supplier

Manufacturer

B2B lace
etp
ark

Manufacturer

B2B lace
etp
ark

Distributor

Distributor

Retailer

B2B lace
etp
ark

Customer

Simple Supply Chain Component

Retailer places
order with Distributor

Distributor
Retailer must
hold safety stock
Amount of safety
stock required
depends on
variability in
replenishment
process

Physical Flow

Information Flow

Retailer

IT Improvements
Electronic Data
Interchange (EDI)

Distributor

Point of Sale
(POS)

Physical Flow

Both result in
reduced safety
stock, improved
customer service
or both

Information Flow

Retailer

IT Improvements
Inventory and demand visibility
has been increased

Distributor
Information
has replaced Physical Flow Information Flow
inventory

Retailer

An e-Supply Chain in Action

Retail Stores
Package are shipped to
CVSs Warehouse

Listerine

WLs Manufacturing
and Distribution facility
in Pennsylvania

Farmers sells
Eucalyptus crop in
Australia
Processing
Company
extracts oil
Sells
Distributor
in New Jersey

Synthetic Alcohol
in Saudi Desert
Union
Carbide ships

Refined to ethanol
in Texas

Farmers grow
corn in Midwest

Supply Chain between Werner - Lambert (WL) and CVS

Auto Industrys Inventory Pipeline

Vendors
Inventories

JIT Mfg. Process

Mfg.
Process

Plt. Transit to
FG Dealers

Dealers
Inventories

e-Procurement Models

e-Procurement:

The Next Wave of Cost Reduction

Sourcing is defined as the process of identifying suppliers that could
provide needed products or services for the acquiring organization.
Purchasing refers to actual buying of materials and those activities
associated with the buying process. Electronic purchasing addresses
only part of the problem and represents only the tip of the iceberg.
Procurement on the other hand has a broader meaning and includes
purchasing, transportation, warehousing and inbound receiving.
Procurement is a closed-loop process that begins with the requisition and
ends with payment
sourcing is a pre purchase activity (identify suppliers) and purchase
and sourcing both are part of procurement

A Traditional Purchasing
Flow

Source: ariba.com, February 2001.

Process

Procurement Process: Why automate?

Multiple Departments
Engineering
Marketing
Sales
Support
Approval Hierarchy
Managers
Approvers
Purchasing Department
Etc.
H/W Purchaser
Facilities Purchaser
Etc.
Suppliers
Contract
Non-Contract
Specialized
Etc.

Logistics
Receiving
Inventory
Payment
Etc.

Deffinition e-Procurement
An e-Procurement application is the software that is required to
access suppliers electronically, enabling an organization to conduct
procurement transactions over the Internet.

Supplier

Supplier
Portal
Supplier

Supplier

Effect of eProcurement
Traditional/Manual
Price of Materials
and Services
Purchase and
Fulfillment
Cycles
Administrative
Costs
Inventory

---

Internet
5% to 10%
reduction

7.3 days

2 days

USD107 per order

requisition

USD30 per
order
requisition
25% to 50%
reduction in

---Source: Aberdeen Group Jun 2004

Benefits of eProcurement
http://www.mysap.com/solutions/e-procurement/businessbenefits.htm

Reduced purchase costs

Enhanced efficiency at every stage
Establish adaptive, efficient, collaborative supplier relations
Monitor and regulate buying behaviors
Improve sourcing by discovering more suppliers
Ensure deliveries on time, every time
Free up skilled employees
Reduce training requirement
Permit flexible access time, anywhere
Manage contracts
Perform content management functions
Reduce maverick purchase

Direct vs Indirect Materials

Direct Materials
Strategic sourcing core business

Indirect Materials
Technical sourcing non-strategic

Systematic sourcing scheduled by production Spot buy, less frequent purchase of

run
standardize products
Locus of operation: professional buyers
desktop

Locus of operation: employee desktop

Driven by design specification

Driven by catalog

Actual transaction function not as time

consuming as back & forth information
sharing & communication with suppliers

Focus on transaction functions which is

time consuming

More complex both technical and non

technological consideration when choosing a
solution provider. Must provide benefits to all
members of supply chain

Less complex decision when choosing a

solution provider

Collaboration, integration & visibility among

qualified suppliers are critical

Many suppliers

Quality, security and privacy conscious

Price conscious

Typical Indirect Procurement

Challenges

Multiple suppliers

ORM and MRO

By commodity type
By geographic area
By department or functional group

Low product standardization

Off-contract, rogue buying
Excess and obsolete inventory
Low degree of automation
Lack of detailed usage and cost information
High process costs relative to product costs

Total Cost of Indirect Procurement

Only 40% of total indirect material costs are true product costs
Cost of Procurement:

Coordinating approvals
Managing quotations
Purchase orders
IT costs

Cost of goods

Cost of
Procurement

Cost of Inventory:

Carrying costs
Storage
Insurance
Shrinkage
Obsolescence

Cost of
Inventory
*Source: Grainger Industrial Supply and industry studies

Operating Resource Procurement at

Microsoft: MS Market
Supplier N
Supplier 2

Buyer

2. Browser Suppliers

Web
Browser

4. Order items
5. Confirm order

Catalog
Order Form
Availability
Order Entry

Catalog Content
Interchange

3. Find Products

Multisupplier
Catalog

1. Catalog
Management

6. Transmit order
get confirmation

MS Market in Action
7. Order Completed

Supplier 1

Approval
Workflow
PO Workflow

Fulfillment
Shipping
Accounting
Etc.

Business Benefits of MS Market

MS Market Solution
User-friendly catalog for employees

Business Benefits

world wide

Control and tracking of orders with

direct vendors

Integration with SAP R/3

Automate $3 billion annual

spending

Components: Windows NT server 4.0

Reduce purchase cycle from 8 to 3

days

Internet Information Server 3.0, SQL

Server 6.5, Site Server Enterprise 2.0,
Microsoft Exchange Server for e-mail
approval

Reduce employee overhead from

14 to 1.5 full-time employees
Average 1,000 orders per day;

e-Procurement Business Issues

(Purchasing Department)
Supplier Performance
How well are my
suppliers performing?

Procurement Efficiency
How can I maximize my
purchasing power?

Buying Behavior
How can I identify and
eliminate rogue buying?

Operational Efficiency
How can I streamline my
procurement process?

Supplier Efficiency
How can I align with my
strategic suppliers?

Cost Savings
How can I drive my
procurement costs
down?

e-Procurement
e-Procurement

Transformation of Corporate Purchasing

Front-End e-Procurement

e-Catalogs
Content Management
RFQs
Approval Routing
Order Management
Data Management
ASP :- Ariba,
Commerce One,
Oracle, Cisco, Clarus,

Back-End ERP systems

A/C receivable and
payable
Inventory Management
Material Management
Order and Sales
Management
Sales Planning
Providers : Oracle, SAP,

e-Procurement Application
Process e-Procurement

MEASURE
AND
IMPROVE

ORGANIZATIONAL
BUYING

Requisition Analysis
(History, Plan, Forecast)

PRODUCT SELECTION

Product Analysis
(Quality, Price, Availability)

APPROVAL WORKFLOW

Approval Analysis
(Avg.approvers, Avg.days)

SUPPLIER SELECTION

LOGISTICS

Supplier Analysis
(Quality, Delivery, Price,
Performance)
Logistics Analysis
(Delivery, Payment, Credit,
Inventory)

e-Procurement Models

Many:Many
Many:Few

Buy Side

Aggregated
Buy Side

One:Many Few:Many

Neutral Markets

Aggregated
Sell Side

Sell Side

B2B e-Markets

Many:One

One to Many (Seller solution)

Seller Centric:- Primary motivation is to increase
revenues and reach a wider market than the seller currently
serves. Likely to be a dominant seller in the market.

B
B

Seller
Solution

B
B
B

Sell-Side Marketplaces:
One-to-Many (cont.)
Company portal attractive, easy to use
Browse online catalogs
Use search engines
Payments

Cash or check upon delivery

Automatic payments
Credit card
Purchasing card

Sell-Side Marketplaces:
One-to-Many (cont.)
Value-added services

Track status of order

Check stock availability
Promotions
Customized prices
Group accounts and central approvalfor
businesses with multiple branches
Standing orders automatically activated

Many to One (buyer solution)

Buyer Centric:- Primary motivation is to reduce
procurement costs and increase efficiency of
procurement process.
S
S
S
S
S

Buyer
Solution

Buy Side: One-from-Many,

e-Procurement (cont.)
Innovative procurement management
Innovative purchasing as strategic approach
to increase profit margins
Aggregating supplier catalogs at buyers site
Reduce administrative processing cost per
order
Find new suppliers and vendors to provide
faster/cheaper goods and services

Many to Many segment of B2B commerce

Trading Community:- Primary motivation is to
generate revenues by providing value to members of a
specific market by introducing new efficiencies and new
ways of buying and selling
S

e-Market
Exchange

Intensity of Organizations
Participation
Information Entry and Receipt : Browser based
applications which are mainly used to enter and
receive information.
Example: BILT using 01Markets.com
Software Development and Maintenance:
Organization have an in-house software
development and maintenance team. Applications
are developed or customized in-house.
Example: Tatasteel.com
Network and Processing Management: Computer
network that connects all suppliers with the
organization is developed and managed in-house.
Example: ITCs e-Chupal
Key to analysis: Reliability and Security V/S Cost

Transaction Cost Perspective

Electronic hierarchy
Allows firms to jointly optimize the dyadic relationship
Increase the value of total supply chain by creating a higher level of integration
that goes beyond exchange of routine information.
Example: Online Stock Information at Tata steel

Buyer

Supplier

Transaction Cost Perspective

Electronic dyad
A firm chooses this option when it does not want to
commit to one single source and neither wants to scan
entire market for every transaction.
Example: tatasteel.co.in

Supplier 1
Buyer 1

Buyer 2

Supplier 2
Supplier 3
Supplier 4

Buyer 3

Supplier 5
Supplier 6

Transaction Cost Perspective

e-Market
Maximizes benefits arises out of reduces search cost,
faster and efficient transmission of information
Example : metaljunction.com

Supplier 1

Buyer 1

Supplier 1
Buyer 2

electronic
Market

Supplier 1
Supplier 1

Buyer 3

Supplier 1
Supplier 1

e-Procurement Roadmap
Risk
Management

Product Characteristic
-Complexity

Adoption and
Implementation
Risks

-Volume uncertainty
-Technology uncertainty

Supplier Market
Characteristic
-Trust
-Age of relationship

e-Procurement
Model

Value
Generated

Ownership
Patterns

Value
Apportion

-Competitive intent
-Market variability
-Bargaining power

Analyze Product and

Supply Market

Decide upon right

e-Procurement Model

Enjoy the
benefits

Product Characteristics
Complexity of description
Extent to which detailed drawings or specifications are
required to describe the product
Higher the complexity, more information flow needed. Hence a tightly
coupled e-Procurement model is better

Volume uncertainty
Assessment of fluctuations in the demand and the
confidence placed in estimates of the demand.
Higher the uncertainty, more flexible your e-Procurement
model should be. Hence e-Markets are preferred

Technological uncertainty
Rate of changes in specifications and the probability of
future technological improvements in the product
If Suppliers are Pro Innovation than a tightly coupled eProcurement solution can be used as a buffer against
uncertainty

Supply Market Characteristics

Trust
Existing when one party has confidence in the exchange partners
reliability and integrity
If trust is higher than a tightly coupled e-Procurement system will further
enhance trust

Age of relationship
Measured as the year of association
e-Markets do not help in creating and sustaining longer age of
relationship

Competitive intent
Extent to which there are potential suppliers to ensure adequate
competition
e-Markets do not help if competitive intend is lower. Suppliers can always
collude to drive prices up.

Market variability
Extent of market fragmentation and rate at which price and player in the
industry changes over time
If market variability is high than e-Markets give better benefits

Adoption and Implementation

Risks
Inherently carries more risk than ordinary information
technology projects
Adoption risk: whether business partners will join the system
or not
Implementation risk: whether business partners will be able
to implement the system optimally

Subsidies such as training, software etc can be used

to overcome these risks
Key Issues:
How to provide subsidy
To Whom it should be provided

eProcurement Deployment Strategies

Evolutionary Deployment of eProcurement
Evolutionary: start small; with single set of
commodities; a particular region

Strategic Sourcing: systematic

e-Procurement process reengineering
Only most advanced organization adopts
2/3 of purchasing communities in experimental
stage

e-Procurement Implementation Profile

Budget

US$2 M to $10 M

Team Size 3 to 13 People

Project Duration 1 to 3 years
No. of Catalogs 3 to 30
No. of Users50 to 1000
(Source : Deloitte Consulting, Realizing the B2B Procurement Vision, 2nd
Annual Study, 2001)

e-Procurement System in Chevron

Corporate Profile

Two-fold Solution

US 3rd largest petroleum co.

e-Procurement Software from

Ariba

Operating in roughly
100 countries

Web-based front end and user

interface for catalog search,
purchase order and requisition

Annual net gain - $3.2 billion

EDI and Catalog services from

Harbinger

Purchase budget - $9.9

billion

Two existing ERP systems

from SAP and J.D. Edwards

Facilitate interaction with suppliers

and manage catalog content
and
customer/supplier base

eProcurement System Architecture for Chevron

Extranet

Intranet

SAP
---

ARIBA

Harbinger

Procurement
Front-end

Multi
Vendor
Electronic
Catalog

Supplier

Supplier

JDE

Supplier

Chemical

--JDE
COPL

EDI/EFT

PO / Invoice / Funds

Supplier
Firewall

Firewall

Critical Success Factors

Selection of right strategy, architecture and
solutions
Management commitment
Content management
User friendly
Seamless integration with back-end ERP
Redesign workflow
Manage change
Fast implementation

eProcurement Integration Policy

Tight Internal Integration
Tight integration with ERP or legacy
Internal e-catalog

Inter-Enterprise Integration
Direct integration with partners ERP system
Compliant ERP interface standard necessary

Integration with Exchanges

ERP-compliant eMarketplaces
MarketSet: Commerce One and SAP
Private Exchange
Application Server

Communication Platform Standard: XML

Conclusion
eProcurement as Procurement Process
Reengineering
Selection and combination of eProcurement
models critical
Conformance of strategy and integration
architecture essential
Small MRO: Exchanges
Key Purchases: Private Supply Chain

Conformance of integration policy and solution

selection crucial for the successful deployment

Thank You