e-Procurement: The Platform for Corporate Purchasing

e-PROCUREMENT: THE PLATFORM FOR CORPORATE PURCHASING

A PurchasePro Inc. White Paper

The primary objective of a business is to make a profit. Every business unit is charged with meeting these financial objectives, and for corporate purchasing organizations, this means finding ways to become more efficient and save money.

Every company, no matter its size or industry, buys goods and services. The total amount of expenditures is staggering. According to AMR Research, U.S. public companies spent an average of 63% of revenues for direct goods and services, and another 18% for indirect goods, for a total of $11.5 trillion in 1999. The math is pretty straightforward -- companies devote the bulk of their revenues to purchase other goods.

With so much money flowing through the purchasing process, it should be one of the most highly tuned corporate functions of all. While strides have been made to optimize purchasing activities, with an average of $107 spent to process a typical purchase order (PO), room remains for greater efficiencies and cost savings. Many large companies have invested significant sums implementing enterprise resource planning (ERP) packages to bolster their purchasing productivity. But many mid and smaller-sized companies are at a disadvantage. There, financial constraints seldom permit large investments in ERP or other proprietary software packages. As a result, manual or paper processes are common, and lengthy cycle times between requisition and fulfillment are the norm. Productivity and efficiency are lower than desired, and significant opportunities for cost savings go untapped.

Thankfully for purchasing organizations, there is a powerful yet affordable solution offering immediate and substantial ROI -- the e-procurement platform. This platform offers a dynamic, real-time purchasing environment that allows buyers to transact with vendors for goods and services. It streamlines and automates the purchasing process, distributes purchasing power to authorized users, standardizes buying methods, controls overall spending and leverages corporate purchasing to negotiate better deals. The result is increased productivity, greater efficiency, less maverick buying, and lower transaction costs. And a hefty contribution to the corporate bottom line.

Let the numbers speak for themselves. A Deloitte Consulting survey found that companies expect to save from 5 to 15% of total corporate spending by implementing e-procurement initiatives. Research firm Aberdeen Group reports that with e-procurement, transaction processing costs drop by 70%, from an average of $107 to $30 per order. And industry experts from PriceWaterhouseCoopers and Killen & Associates claim that a 5 to 10% savings in purchasing costs can increase profit margins by 28 to 50%.

The business case for e-procurement is compelling. With a number of cost-effective e-procurement solutions available today, the real bottom line is that purchasing organizations cannot afford to miss the e-procurement opportunity.

The Benefits of e-Procurement

E-procurement solutions level the playing field between large and small companies alike. For a reasonable investment, every company can bring significant improvements to the purchasing process and enjoy high returns by taking advantage of an e-procurement platform. From productivity improvements to efficiency increases to quantifiable cost savings, the benefits of e-procurement are concrete and eminently justifiable.

To make the proposition even more attractive, service providers such as PurchasePro offer hosted e-procurement solutions that can be deployed for a reasonable cost, with little time or effort, and no ongoing maintenance or support burden. PAGE Co-op, for example, a purchasing cooperative that buys products and services for 750 newspapers and printing facilities across the U.S., uses an e-procurement solution powered by PurchasePro to aggregate and fully leverage its members' $175 million in annual spending.

E-procurement benefits stem from automating procurement activities and streamlining purchasing workflow, both internally and with vendors. These extensive benefits include:

Productivity Improvements

Automating manual processes and reducing paperwork increases the throughput of purchasing requests, and frees purchasing agents for more important work such as managing vendors and negotiating better deals.

Distributing purchasing capabilities to end users allows purchasing organizations to spend more time on management and oversight rather than administrative tasks.

Allowing end users to purchase products directly shortens the cycle time between order and fulfillment.

Standardizing purchasing methods reduces the learning curve for novice purchasers, ensures consistency between POs, and decreases the odds that a purchase order will be delayed due to missing or invalid information.

Efficiency Increases

Eliminating manual processes and paperwork reduces the opportunity for human errors, inaccuracies and reworks.

Automating approvals, escalations and triggering events ensures that POs are expedited quickly.

Finding products is easier when vendor catalogs and product information are available online and amenable to searches.

Issuing a PO is quicker when it is generated and submitted automatically; line item POs -- a single PO with multiple items sourced from different vendors -- reduce the need for separate POs for each vendor.

Built-in auditing and reporting tools make managing the purchasing function more professional and predictable.

Cost Savings

Automating the purchasing process lowers transaction costs per PO and reduces the administrative overhead of the purchasing organization.

Funneling all purchasing through an e-procurement platform reduces or eliminates maverick buying.

Shortening the time between demand and fulfillment lessens the need to stockpile inventory, lowering overall inventory carrying costs.

Using an e-procurement platform to track and aggregate corporate spending gives a company greater leverage with vendors and the ability to negotiate more favorable contract terms.

Relying on the auditing and reporting capabilities of the platform, a company can identify vendors that consistently outperform their peers and direct purchases to these high performers.

Vendors also benefit from participating in e-procurement platforms. Automating and streamlining their selling and order processing functions produce many benefits complementary to those cited above. For example, vendors can enjoy cost savings through improved forecasting. By analyzing e-procurement transaction data, vendors can better match their products and services, and time their production schedules, to fit customer needs.

How e-Procurement Works

e-Procurement solutions consist of online platforms where companies can perform their everyday purchasing activities from requisition to final payment. These platforms rely on technology to automate and streamline the purchasing process, and the Internet to connect with vendors, fulfill orders and transact business.

A pure e-procurement platform is a one-to-many solution. That is, a single company (the buyer) establishes the platform and recruits multiple vendors to sign on. Usually, a company will license the platform from a service provider who will operate and administer the underlying infrastructure. Vendors use this same service provider to hook up to the company's e-procurement platform. Once the platform is established, individual buyers can research and purchase products and services, negotiate with vendors, and take advantage of related, value-added services. Vendors can promote products, respond to requisitions and accept orders. For example, the MGM Grand hotel uses its custom-branded e-procurement platform powered by PurchasePro to aggregate the purchasing of its restaurants, food outlets and banquet functions, and source food and beverage needs to dozens of vendors.

How does an e-procurement platform work? After selecting a platform, the company determines who will be allowed to transact business on it -- the purchasing organization, individual users or both. Using platform tools, the company sets up authorizations, approvals, spending limits, access rights and other purchasing policies for each buyer and/or by department, mirroring current workflow. The company also identifies preferred or contract vendors that it will invite to participate in its e-procurement platform.

A vendor's initial task is to create an electronic description of its products and/or services, typically in the form of a catalog. An e-procurement solution will often include tools to create, maintain and even import catalogs. Vendors ensure that their contract terms and pricing reflect any pre-negotiated deals or discounts applicable to the buyer.

After these basic set-up tasks, buyers are ready to use the e-procurement platform. They can research items, view vendor promotions and browse catalogs. They can request quotes, ask multiple vendors to bid competitively for their business and engage in price negotiations. Managers can review and take action on automatically routed approvals. Requisitions and POs can be issued through the platform and matched with receipted goods. Buyers can set up automatic POs for recurring transactions. Vendors can advertise sales, update catalogs, respond to bids, negotiate with buyers and accept POs. Both the purchaser and vendors can use the reporting and tracking capabilities of the platform to generate audit trails, analyze the performance of the counter-party(ies), and evaluate buying and selling patterns.

Procurement Considerations

Using an e-procurement platform on a day-to-day basis is straightforward. Deciding how to best deploy and exploit the platform for maximum effect is the real challenge.

A grandiose plan for using an e-procurement platform is hardly necessary, but a company should have some minimal strategy outlining its goals and how to achieve them. Understanding current purchasing patterns and how they fit into an e-procurement environment is a necessary initial step. First, the efficiency gains and cost savings that a company can reap from e-procurement correlate to the amount spent on goods. If the bulk of purchasing dollars are spent on a particular category of goods, then a company should concentrate first on migrating that category to the e-procurement platform. Similarly, if the majority of dollars are directed to certain classes of vendors, then those vendors should be targeted as early recruits to the platform. In addition, certain categories of spending and types of vendors may require more coordination and integration to transfer to the platform, making them better candidates for the latter phase of the rollout.

Companies should consider the following four factors when developing their e-procurement strategy.

Type of spending

Companies buy a great range of goods and services from paper to computers to electricity to flour to steel. These goods can be categorized as indirect or direct goods. Indirect goods and services are ordinary, commodity supplies like paper, airline tickets and cleaning services -- things that virtually every company buys. Companies purchase indirect goods from horizontal, or non-industry specific, vendors such as Xerox, Office Max or Travelocity, and use standard shipping and settlement methods for the goods.

Direct goods, in contrast, are raw materials, parts and components used as inputs into processes that create finished products. Every industry relies on a different set of direct goods, and buyers obtain them from industry-specific or vertical vendors. Direct goods often require special logistics and fulfillment.

Companies may want to start their e-procurement efforts with indirect goods. Their standard nature, and the relative openness of these horizontal vendors to B2B solutions, makes them more straightforward to include. After gaining e-procurement experience with indirect goods, companies can begin to include direct goods. Although a higher percentage of purchasing dollars may be spent on direct goods, their specialized nature and more complicated logistical requirements make them more suitable candidates for secondary deployment.

Contract vs. spot

Companies source goods and services in two ways -- either under contract with a vendor or through spot purchases. Companies use contracts to lock in favorable pricing or ensure a steady supply of goods. These contracts are usually heavily negotiated, tend to be long-term and signal a closer relationship between buyer and vendor. Spot purchases occur when a company has a specific, immediate need and wants to fill it at the lowest possible price. Relationships between buyer and vendor matter little in this situation.

Because companies have closer, longer-term relationships with their contract vendors, and tend to make high volume purchases under those contracts, contract vendors may be willing to be early adopters of the company's e-procurement platform. Further, since these purchases represent high dollars, companies can extract potentially greater savings by conducting them over the platform. Companies may be able to fulfill their spot purchases by using their e-procurement platform to connect to a larger B2B marketplace, populated by many vendors, and sponsored by their service provider.

Vendor recruitment

The success of an e-procurement platform depends in large part on the number and types of vendors that join. A company should not underestimate the time and effort involved in recruiting vendors. Many vendors are barraged with requests to join various competing platforms. The less expense, effort and custom work involved in joining a platform, the more likely a vendor will actually do so. The amount of leverage a company has with a vendor is also instrumental in getting a vendor to sign on. The more business a vendor does with a company, the more receptive it will be to joining the company's platform.

The features of the e-procurement platform that a company chooses, and the qualities of the service provider, are crucial to the vendor recruitment effort. First, the service provider should make it cost-effective for the vendor to join. Built-in tools should limit the amount of effort involved in setting up a catalog etc., and the platform should require a minimal amount of custom work on the part of the vendor. Second, the service provider should be willing to assist a company in its recruitment efforts by supplying targeted marketing services and programs, and by offering extensive customer service and support.

Access to larger B2B forums

Although a company can reap enormous benefits by setting up its own e-procurement platform populated by invited vendors, it may on occasion want to source goods and services from a wider vendor community. By choosing an e-procurement platform that is compatible with, and can seamlessly connect, to other B2B platforms, marketplaces and exchanges, a company can take advantage of favorable buying opportunities while retaining the benefits of its custom e-procurement platform. Larger service providers will typically sponsor a variety of B2B commerce platforms -- both private and public -- and will allow participants in one forum to interact with others to the extent desired.

Features of an e-Procurement Platform

e-Procurement platforms have a full range of features. Some features are necessary -- the platform must have sufficient security to ensure the integrity and privacy of data exchanged over it. Other features, like administrative utilities to manage authorizations and workflow, will vary among solutions. A good e-procurement platform will offer the following buy-side capabilities to purchasing organizations.

Research -- the ability to browse vendor catalogs, perform keyword searches for products and services, and apply filters for vendor location, diversity status, etc.

Manage vendors -- the ability to access real-time vendor product information, select vendors from contract or even public lists, and analyze transaction data for vendor performance.

Create authorizations/approval routing -- the ability to specify user/departmental authorizations, spending limits, and access rights that mirror existing workflow, and route approvals and documentation to managers for approval.

Request quotes and bids -- the ability to request quotes, solicit bids from one or several vendors simultaneously, view multiple responses based on characteristics such as quantity or price, and negotiate pricing.

Make purchases-- the ability to generate POs (including line item POs) on command or automatically for recurring purchases, send POs to vendors electronically and request order confirmation.

Check order status -- the ability to check the status of all open orders and requisitions.

Handle receivables -- the ability to match received merchandise to the corresponding PO for reporting of partial orders, refusals and damaged goods.

An e-procurement platform must also have capabilities that support vendors. Look for an e-procurement platform that enables vendors to get online with minimal effort, and gives them enough functionality to engage in transactions and process POs with relative ease. Important sell-side capabilities that will attract vendors include:

Manage buyers-- the ability to monitor purchases, analyze buying patterns, and document PO history from initial request to final payment.

Manage catalogs -- the ability to create and/or import product catalogs, and to maintain them on an ongoing basis, using platform tools.

Promote products and services -- the ability to advertise or promote special offers

Respond to quotes and bids -- the ability to respond to quotes and bids, and negotiate pricing.

Accept orders -- the ability to accept POs and track them through payment.

The e-procurement platform may also offer a host of value-added services ranging from reporting and auditing capabilities, specialized content and information management, wireless support, financial services and settlement.

e-Procurement: How to Start

Getting started with e-procurement is easy -- just tap into a service provider that offers a hosted, yet customizable, e-procurement platform. Depending on the service provider, and the range of B2B solutions that it offers, chances are that one or more of your vendors will already be online and participating in one of the provider's B2B marketplaces, exchanges or other forums.

While some companies may choose to build their own e-procurement solution from scratch or implement a proprietary software package, most will find it unnecessary. Building an e-procurement solution takes energy, commitment and a substantial financial investment. Convincing vendors to join is no small task, especially if your platform involves costly, time-consuming, one-off implementation work that is incompatible with other B2B ventures the vendor may join.

Purchaser and Vendor Preparations

If you join forces with the right service provider, establishing an e-procurement platform is a straightforward task. The purchaser and its vendors must prepare, but preparations are not difficult. For a purchaser, most of the rules and workflow that must be specified for the e-procurement engine are already in place and in use at their organization. The work is simply a matter of putting these rules into an electronic format.

From the purchaser's perspective, preparations include:

Determine procurement strategy - the types of goods to be sourced, contract versus spot buys, and vendor recruitment plan

Determine purchasing policies - authorizations, approvals, access rights, spending limits

Determine financial settlement and logistics needs - payment, shipping, receiving

Determine integration needs between e-procurement platform and back-end systems

From a vendor's perspective, preparations include:

Put products and services online - create an electronic catalog

Determine sales terms - pricing, discounts, contract buyer terms

Determine financial settlement and logistics - invoicing, payment terms, shipping

Determine promotion plans - advertising and sales

Determine integration needs between e-procurement platform and back-office systems

Choosing the Right e-Procurement Solution

With many e-procurement solutions available today, companies must take a little time to choose the right one. Sometimes the choice will be obvious -- if most of your vendors are using solutions offered by a particular service provider, then stick with the same provider. In general, however, consider the following attributes when selecting an e-procurement platform.

The characteristics of the platform

The e-procurement platform must have attributes that encourage usage, make it easy for vendors to join, and permit transactions to complete successfully. Key characteristics for success include:

Easy to use so that buyers and vendors can become proficient quickly

Intuitive interfaces, reports and tools to reduce the learning curve

Flexible enough to accommodate direct and indirect purchasing needs, as well as contract versus spot buys

Minimal required set-up and built-in tools to help vendors create catalogs and hook into the platform

Interaction with other B2B forums to give e-procurement platform users access to a broader choice of vendors as desired

Functionality rich enough to perform the range of purchasing tasks from searching, sourcing, bidding, purchasing, tracking, auditing and authorization management to catalog management.

The cost to establish and join the platform

Some e-procurement software packages can be quite costly. Fortunately, there are a range of hosted, yet customizable, e-procurement solutions that are affordable and cost-effective for both the purchaser and its vendors. For a custom, hosted e-procurement solution, a company will usually pay a one-time license fee and a reasonable monthly charge for its operation and maintenance. Most service providers charge vendors a nominal fee to participate in the e-procurement platform. Nevertheless, purchaser and vendors alike must be able to justify any initial and recurring costs, including internal labor costs, associated with the platform. Tools or services, like authorization management and catalog management tools, offered by the service provider can help defray set-up costs. Participants may also decide to make additional investments in integrating their back-office systems with the platform.

Choosing the Right e-Procurement Partner

The party that provides and powers the e-procurement platform will have great influence over your success in using it. It is important to consider the qualities of the service provider as part of your research. As more B2B solution providers emerge, it is critical that companies perform their own diligence to assess the long-term viability of their selected partner. Essential characteristics for an e-procurement partner include:

B2B knowledge

A strong grasp of B2B commerce from a business and technical perspective translates into cutting edge solutions for your e-procurement platform.

Proven track record

A partner with a history of prosperous engagements and satisfied customers is likely to repeat its successes and perform well in the future.

Successful business model

A partner with a winning business model will be financially successful and able to weather market fluctuations.

Plan for growth and support of e-procurement solution

Since most e-procurement platforms will expand over time as additional vendors sign on, the partner should have a scalable operational model able to support the needs of your platform, as well as the other B2B commerce platforms that it supports.

Willingness to make e-procurement platform successful

To be successful, an e-procurement platform must have a critical mass of vendors participating. A good partner will support its customers in their efforts to enlist vendors by providing a comprehensive set of marketing services and programs.

B2B marketplace interaction

Every company can benefit occasionally by sourcing products or services outside of the universe of vendors connected to its own e-procurement platform. A partner that has access to and can connect diverse B2B forums with each other, including your e-procurement platform, allows its customers to reach a wide audience of vendors and/or buyers when needed, without sacrificing their membership in more specialized or custom-branded forums.

Superior customer service

Partners that provide responsive and proactive customer service resolve issues quickly, disperse needed information in a timely manner and ensure the success of each participant in using the e-procurement platform.

Broad value-added services

To extract the full benefits of their B2B solution, companies should look for a partner that offers value-added services, such as wireless capabilities, financial services and more.

Strong partnerships

A partner with ties to other e-procurement platforms and B2B forums, technology companies and service providers can use those relationships to offer additional services to its customers.

With the advent of e-procurement platforms, purchasing organizations have the opportunity to make significant contributions to the corporate bottom line. With over $11 trillion spent purchasing goods in 1999, even a mere 1% cost savings adds $110 billion to profits. Who wouldn’t want a piece of these savings?

A variety of cost-effective yet powerful e-procurement platforms are available today, meaning that every size company can share in the $110 billion windfall. These solutions are bringing considerable productivity improvements, efficiency increases and quantifiable cost savings to their adopters. Making the proposition even sweeter is the availability of hosted, yet customizable, solutions at affordable prices, without the hassle of ongoing maintenance and support.

Want an easy way to be a hero in your company? Just tap into an e-procurement solution, and let the savings and praises follow.