Chapter 3. Understanding the Strategic Nature of E-Procurement

Most of us would admit that the procurement function has seldom in the past been seen as particularly strategic to an organization’s success. This is particularly true of indirect goods and services, where, in squeeze times, executives often press for cost-cutting measures, limited usually to fairly ineffectual changes—restricting first class flights or suggestions that the coffee machines be furnished with less expensive brands. Savings have usually been made through discount negotiations or bulk buying; but even these efforts are often offset by lack of choice and excess carrying costs. It is because we have been so limited in our possible actions in the past—discounting or price reductions—that we have come to view efforts to reduce indirect procurement costs as piecemeal and ultimately of little return for the effort.

Acquiring direct materials for manufacturing, of course, is a different story. Companies have long sought ways to reduce costs associated with the purchase of materials, with the maintenance and upkeep of machinery, and with the transportation and delivery of finished goods. Purchasing of goods and services has always been seen as an integral part of the supply chain, and attempts at using technology in order to eliminate bottlenecks in the past has led to the widespread use of fax machines and, at least with larger buyers, the introduction of EDI (Electronic Data Interchange) technologies.

In a broader sense, though, during the past two decades, particularly, there has been a consistent and effective focus on productivity improvement—ISO ratings, kanban, cellular manufacturing, strategic sourcing, vendor-managed inventory, JIT manufacturing—all with the view that excessive costs (aside from price and unavoidable transaction costs) stem from missed commitments, poor planning, inconsistent quality of merchandise, and general unpredictability in the relationships between buyer and seller. And, although the potential effects of e-procurement are significant, it is important to remember that driving inefficiency out of the supply chain is part of an ongoing technical and structural revolution, and that as unstoppable as it is, it is not all that revolutionary. In fact, it is probably worthwhile to point out that this “evolutionary” shift has been taking place for the past several decades, and is manifested in several important ways.

First, e-procurement systems continue the trend toward automation of the process and the replacement of human labor through information technology (IT). E-procurement systems automate the requisitioning, approval, shipping, receiving process, and payment systems, and provides for automated routing and tracking capabilities, essentially eliminating the need for human intervention other than on an exceptions-only basis.

Second, e-procurement continues to enhance the breakdown of traditional vertical silos and to shift management’s focus toward horizontal processes and the empowerment of individual employees. In the past, the purchasing process was seen as a set of separate activities and functions, controlled centrally or departmentally, often focused narrowly on silo-based incentives rather than on total cost. As part of the tortured but inevitable shift from silo to horizontal processes, e-procurement systems facilitate the viewpoint that direct procurement of materials for finished goods is all part of a single, fully-integrated process, extending from forecasting and planning through to the entire supplier network. For indirect and MRO materials, e-procurement systems allow for a far greater level of individual empowerment as preapproved and fully auditable purchasing is handed over to individual employees.

Finally, e-procurement means a giant leap forward in the long-sought-after development of the extended enterprise, where the supply chain becomes a continuous, uninterrupted process extending from buyer through selling partners. As an integrated set of processes and systems that create a seamless, electronically initiated and monitored exchange of information, goods, services, and payment between buying and selling organizations of all types, e-procurement is integral to a process that can, and should, stretch from the planning and forecasting function of the buying company all the way through to the delivery and payment functions of the selling organization, regardless of the product or service, and whether direct or indirect.

Many progressive companies have always seen procurement as part of this chain of events, of course, but despite that, have seldom organized their business horizontally as a single, multifaceted process—mostly because each step had to be completed individually by skilled humans. Unfortunately, despite our talk of horizontal processes and integrated supply chains, the fact is that e-procurement is still in its infancy, and its effectiveness, particularly for direct materials, is dependent upon integration with other systems. It is also, most importantly, dependent upon not only sharing critical inventory information with suppliers (something few companies do well today) but also on actually integrating the supplier-buyer interface. That is why individual, nonintegrated procurement packages that only provide a focused or partial solution, are so problematic. It is also why integration with a company’s back-end Enterprise Resource Planning (ERP) and Advanced Planning and Scheduling (APS) systems becomes so critical.