What is E-procurement?

What is E-procurement?

E-procurement is part of the business-to-business (B2B) commerce being E-procurement is part of the business-to-business (B2B) commerce being conducted on the Internet, in which buyers make purchases directly from suppliers through their websites, by using software packages, or through e-marketplaces, e-hubs, and trading exchanges.

The Internet can streamline and speed up the purchase order and transaction process from companies. Benefits include lower transaction costs associated with purchasing, lower prices for goods and services, reduced labor (clerical) costs, and faster ordering and delivery times.

What do companies buy over the Internet? Purchases can be classified according to two broad categories: manufacturing inputs (direct products) and operating inputs (indirect products).

Direct products are the raw materials and components that go directly into the production process of a product. Because they tend to be unique to a particular industry, they are usually purchased from industry-specific suppliers and distributors. They also tend to require specialized delivery; UPS does not typically deliver engine blocks. Indirect products do not go directly into the production of finished goods.

They are the maintenance, repair, and operation (MRO) goods and services. They tend not to be industry-specific; they include things like office supplies, computers, furniture, janitorial services, and airline tickets. As a result, they can often be purchased from vendors like Staples, and they can be delivered by services like UPS.

More companies tend to purchase indirect goods and services over the Internet than direct goods. One reason is that a company does not have to be as careful about indirect goods since they typically cost less than direct products and they do not directly affect the quality of the company’s final product. Companies that purchase direct goods over the Internet tend to do so through suppliers with whom they already have an established relationship.

Spend Analysis

Spend analysis is a relatively recent addition to the supply chain management lexicon that has evolved out of the challenges encountered in managing procurement activities, especially in far-reaching, complex global business environments. It is a formal process of collecting, cleansing, classifying, and analyzing spending data to reduce procurement costs and improve the efficiency of the procurement process.

Spend analysis attempts to assess the who, what, when, where, why, and how of a company’s expenditure process and thereby answer the questions: How much is being spent? With which suppliers? Is the promised value being realized? Spend data can come from many different sources, including supplier data and contracts, purchasing transactions, financial data, and risk data.

Whatever automated system is used, companies that have a spend analysis process in place tend to have significantly lower procurement costs, have fewer suppliers, have a more efficient supply chain in terms of speed and quality, and tend to use more advanced e-procurement systems, such as vendor-managed inventory. Spend analysis helps companies find opportunities to save money. This can be as simple as determining who is buying what within a company so that purchases can be consolidated and volume discounts can be achieved.

This might also include the use of Pareto analysis to see which few items make up the largest spending categories. It can identify suppliers in different business units or in different geographic locations that are providing better buying terms than suppliers in other parts of the business, or it can indicate if contract prices are not being adhered to. One important potential benefit is the analysis of total supply chain cost for a product that integrates spend data not only for supply purchase cost but also for transportation, tariffs, duties, inventory carrying cost, insurance, and so on.

E-marketplaces

E-marketplaces or e-hubs consolidate suppliers’ goods and services at one Internet site like a catalog. For example, e-hubs for MROs include consolidated catalogs from a wide array of suppliers that enable buyers to purchase low-value goods and services with relatively high transaction costs more cheaply and efficiently over the Internet.

E-hubs for direct goods and services are similar in that they bring together groups of suppliers at a few easy-to-use websites. E-marketplaces like Ariba provide a neutral ground on the Internet where companies can streamline supply chains and find new business partners.

An e-marketplace offers services such as online auctions where suppliers bid on order contracts, online product catalogs with multiple supplier listings that generate online purchase orders, and request-for-quote (RFQ) services, through which buyers can submit an RFQ for their needs and users can respond.

E-auctions

A process used by e-marketplaces for buyers to purchase items is the e-auction, also known as a reverse auction. In a reverse auction, a company posts contracts for items it wants to purchase that suppliers can bid on. The auction is usually open for a specified time frame, and vendors can bid as often as they want to provide the lowest purchase price. When the auction is closed, the company can compare bids based on purchase price, delivery time, and supplier reputation for quality.

Some e-marketplaces restrict participation to vendors who have been previously screened or certified for reliability and product quality. E-auctions are not only used to purchase manufacturing items but are also used to purchase services.

For example, transportation exchanges hold reverse auctions for carriers to bid on shipping contracts and for air travel. Google has over 60,000 suppliers and negotiates about 20% of its total supply spending with e-auctions, saving an estimated 18% on prices and saving time, taking only 50 minutes to complete a live auction.

Sometimes companies use reverse auctions to create price competition among the suppliers it does business with; other times companies simply go through a reverse auction only to determine the lowest price without any intention of awarding a contract. They only want to determine a baseline price to use in negotiations with their regular suppliers.

Companies that award contracts to low bidders in auctions can later discover their purchases are delivered late or not at all and are of poor quality. Suppliers are often able to see online their rank in the bidding process relative to other bidders (who are anonymous), which provides pricing information to them for the future.