What is E-Sourcing?
E-Sourcing in procurement is the process of using electronic tools and technology to conduct procurement activities such as sourcing, negotiations, and supplier selection. E-Sourcing tools and platforms can help streamline procurement processes, reduce costs, increase efficiency, and improve transparency and collaboration with suppliers.
E-Sourcing typically involves the use of online tools, such as e-tendering, e-auctions, and e-RFX (request for information, proposal, or quotation) to manage procurement activities. These tools can help automate and standardize procurement processes, allowing procurement professionals to more easily compare supplier offers and select the best value for the organization.
Table of Content
The term e-sourcing can be defined as the use of Webbased applications and technology for identifying, evaluating, negotiating and configuring purchases and supplier relationships that will effectively support the supply chain (Minahan et al, 2002).
E-sourcing mainly involves contract life-cycle starting from supplier research to supplier on-boarding, supplier management and evaluation of supplier performance.
E-sourcing technologies mainly involve the following:
- Automatic processing and auctioning of orders enabling speedy procurement activities at low total cost.
- Improved workflow in the procurement process with the usage of end-user self-service E-procurement applications
- Decentralised purchase of low-value items with centralised control through company-specific catalogues
- Usage of electronic-based bidding tools like eRFX (electronic-based request for quotations, etc.) and E-auctions of both conventional and Dutch type.
- Connectivity to external sources of information like databases, catalogues, portals and E-marketplaces
- Connectivity to external supply chain members via extranets that allow the sharing of real-time information
- Connectivity to internal ERP and supply chain management systems
- Connectivity to internal ERP and supply chain management systems
- Project management tracking; i.e. capturing critical activities in procurement cycle from one end to the other. For example, capturing RFI, RFP, Auction, etc. all in one.
In addition, tracking lead time, mapping workflows gives flexibility to user to capture overall project in one system. For example, Ariba, Emptoris.
Advantages of E Sourcing
E-sourcing technologies have the following advantages:
- These technologies greatly improve compliance management in major corporations.
- They simplify purchasing through online tools like supplier catalogues.
- They facilitate paperless online purchasing, which allows the selection of most appropriate suppliers and lowers the use of capital and personnel resources.
- These technologies significantly reduce procurement processing time and shorten the overall P2P cycle.
- They improve accuracy and quicken purchase transactions by automating P2P processes.
- They allow online creation and transmission of electronic documents and provide greater control and management of procurement activities.
- They offer a transparent platform and facilitate buyer-seller collaboration.
- They make information more readily accessible, which facilitates comparison and evaluation of suppliers.
- These technologies can facilitate in industry analysis.
- E-sourcing technologies require less documentation & email interaction because sharing of data happens on e-portals
- E-sourcing makes it easier to conduct audits and enhances traceability.
Pricing and Business Strategies for an E-procurement Platform
E-procurement platforms provide online markets for buyers and suppliers to interact for achieving their respective business objectives. These platforms are similar to B2C platforms like Amazon and Flipkart. In these B2C platforms, buyers and suppliers meet through the Internet platforms provided by a neutral vendor.
The vendor gets its revenue from transactions happening through the platform. The nature of revenue depends on the revenue model adopted by the vendor. For example, purchasing a book through Amazon does not charge additionally from an online customer. However, vendors like Amazon might charge a book publisher or distributor for selling their books through their e-platforms. They may also make revenue through advertisements. Similarly, E-marketplaces applicable for B2B exchanges may also involve a revenue model.
For example, a company hosting an E-procurement platform can allow buyers and suppliers to register themselves on their website free of cost. An end-user, say an automobile company looking for purchasing a standard item, can look at the catalogs of several suppliers who have registered themselves at the E-procurement platform hosted by the company.
The revenue for the company hosting an E-procurement platform would depend on actual purchase transactions and the type of revenue model adopted by it. In a B2B transaction through an E-procurement platform, both the buyers and sellers are in need of satisfying their business objectives.
The pricing and business strategy of the host of the E-procurement platform will depend on the dual nature of the customers of the platform. Depending on the nature of buyers and sellers, the pricing structure might involve cross-subsidies between these two parties.
Taking the example of eBay, a B2C marketplace, it does not charge buyers to participate in an auction. However, it charges a complex tariff from suppliers. The supplier may pay a fee when the good is put on auction and an additional fee when the auction transaction for that good is concluded.
Thus, pricing and business strategies aimed at boosting the participation of buyers by generating revenue only from suppliers. Similar objectives drive B2B exchanges when formulating pricing and business strategies.
Julien (Dimitri, 2006) provides the following insights with regard to pricing strategies that can be adopted for E-procurement through E-marketplaces:
- Tariffs must be assessed globally and efficient prices might involve some form of cross-subsidy between different types of participants.
- Lower tariffs can be envisaged for the side of the market, where members derive smaller benefits from the platform.
- Lower tariffs can be designed for the side of the market, where the participation level is sensitive to the quantum of fees charged.
- Price discrimination within sides can go higher when there is competition between platforms.
- There are two types of fees applicable for E-marketplaces – membership fees and transaction fees. Membership fees should be used as the primary source of profit, while transaction fees should be designed to maximize the volume of trade per member
- Any need for insurance for members should be financed through transaction fees and low member fees.
- The provision of free services should be used as a means for subsidizing the participation of one side.
- Specific buyers and suppliers of strategic importance can be offered free services, which could increase efficiency and improve the ability to discriminate against various sides of the market.
- Effective monitoring should ensure the prevention of misconduct by participants, and incentives should be offered to trading partners to contribute and internalize externalities.
The revenue model adopted by E-procurement platforms can also have a significant impact on its success. One major reason why Covisint failed (as given in the introductory case) was its revenue model which favored buyers with huge subscription fees for suppliers, which was not affordable for many small and medium companies. This was in addition to transaction fees which could be huge considering the total volume of transactions generated by any supplier.
Nowadays, companies are evolving from a fixed fee-based revenue model to a ‘fixed plus variable’ revenue model. In such a model, the variable component starts only when the organization starts saving up to a particular level. Therefore, this model is profitable to both the organizations involved in the transaction. Covisint anticipated that this revenue model would enable them to achieve break-even within two years thereby helping them to come out with an IPO. The huge revenues initially forecast by Covisint were supposed to be obtained by thinning the margins of suppliers through fierce competition.
Also, the ownership structure of Covisint and its auction format mostly favored the consumers of the platform forcing the suppliers into fierce price competition, leaving them with no residual value. This led to many part suppliers leaving the platform which became unprofitable.