E-procurement realises rapid ROI

Purchases typically account for between 50% and 90% of a company`s cost structure, so any new business model that can realise a return on investment of several hundred percent has to be worth considering. In the extended enterprise e-procurement is such a process.

Most companies can effect major cost savings by decreasing direct material costs by just a small percentage.

Paul Whalley, MD, Industrial & Financial Systems South Africa.

When it comes to purchasing, every company wants to reduce supplier sourcing time, lower the cost of administrating purchases, and cut cycle times. At the same time they want to effect better pricing by increasing purchase volumes with a few preferred suppliers and improve quality by limiting choices to only a number of pre-qualified suppliers.

Initial e-procurement initiatives have been focused on white-collar indirect purchases such as office supplies and capital goods. But these represent a relatively small proportion of an organisation`s spend with limited cost benefits, especially as the e-marketplace model currently used has yet to prove itself from both a buyer and seller perspective.

Other areas such as project procurement and blue collar indirect material entail larger spends, but direct material purchases used in production typically account for the highest procurement costs. If these purchases can be streamlined, resulting in smaller inventories, shorter cycle times, and less administration, huge benefits can be achieved.

One area where e-procurement has been used so far to a rather limited extent is for blue-collar maintenance and service employees. By extending the use of the maintenance or enterprise asset management system to incorporate the full staff, everyone gets online with the corporate plant registers, inventories and spare parts catalogues. Thus they are able to find and request material. When combined with corporate and local supplier agreements, this can cut costs significantly.

Further, using the Internet to hook up suppliers on a transactional level, as well as in a collaborative order and supply process, the complete order process can be made much more efficient in terms of speed and cost.

Most companies can effect major cost savings by decreasing direct material costs by just a small percentage. Improving the direct material procurement process is primarily about sharing demand and supply information. By having a customer publish and transfer real-time demand through Internet channels to suppliers, this information sharing becomes reality, reducing whiplash effects.

Further, by using the Internet both as a billboard and as a transaction channel, stock management processes such as vendor-managed inventory and consignment stock management become easy and efficient. Other items of interest to procurement of direct material are RFQ procedures and reversed auctions.

As a special case, somewhere between direct and indirect material procurement is procurement for project-based production. As this type of production increases, the demand for using the Internet to facilitate RFQ procedures and logistics grows.

One process that fits nicely in a step-by-step approach to e-business and collaborative commerce is vendor-managed inventory (VMI). It is considered a low-risk, low-capital process where the supplier takes on the responsibility for the customer`s inventory in terms of certifying agreed inventory levels, service levels and quality.

The tangible benefits of VMI include a simplified supply chain where inventory levels at both supplier and customer site can be lowered and the order cycle time reduced. It should shave precious days off supplier response to changing customer demands as well as enable distribution costs to be streamlined through consolidation of deliveries to different customers.

On the customer side, administration costs are lowered and they no longer have to worry about day-to-day stock monitoring and purchasing, enabling them to focus on more value-adding strategic activities.

However, extending the enterprise goes beyond automating procurement processes. Collaboration across the supply chain is also key to greater efficiencies in planning, sub-contracting and project management.

Collaborative planning refers to companies in the value chain sharing information on demand, planning and forecasts. By a customer continuously keeping a supplier informed of likely changes in demands, the supplier is better able to plan his production. Both sides benefit from reduced inventories, lower planning cycle times, shorter lead times and higher service levels.

Similar benefits can be achieved in the supplier-sub-contractor relationship by enabling tighter collaboration by providing the contractor with information such as planned operations and shop orders.

In addition, such collaboration could also support a scenario where the external contractors, instead of returning the contracted product back to the original vendor, could instead ship the product directly to the customer or to another external supplier for additional operations in the process. Obviously there would be cost savings and efficiencies all round.

On the collaborative project management side, the Internet offers new opportunities to exchange information with other parties. By making the information stored in the internal ERP system available to the other organisation involved in a specific project, a number of benefits are achieved.

These benefits include reduced costs, improved quality, reduced time to market and, most importantly, `right` to market - the ability to not only deliver quickly but also more precisely to customer specifications.

These benefits all arise from the fact that everyone involved in the project can have access to all the necessary information on a 24-hour basis, no matter what organisation they work for, or what internal systems they are running.

When it comes to quality, collaborative project management can be used to guarantee that quality standards are adhered to, even though no single company controls the process.

It is such collaboration between suppliers, partners and customers that will help create an environment where business processes are streamlined, transcending traditional boundaries and enhancing mutual customer benefits.

This three part series is based on Industrial & Financial Systems` Guide to the Extended Enterprise, a collection of processes which the company considers suitable steps to take on the way to an extended enterprise businesses. Copies of this guide can be obtained from Warstreet Marketing on (011) 883-3003.