E Procurement
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1. E procurement – A birds eye view
1.1 Introduction
E-procurement is the business-to-business purchase and sale of supplies and services over the Internet. An important part of many B2B sites, e-procurement is also sometimes referred to by other terms, such as supplier exchange. Typically, e-procurement Web sites allow qualified and registered users to look for buyers or sellers of goods and services. Depending on the approach, buyers or sellers may specify prices or invite bids. Transactions can be initiated and completed. Ongoing purchases may qualify customers for volume discounts or special offers.
E-procurement software may make it possible to automate some buying and selling. Companies participating expect to be able to control parts inventories more effectively, reduce purchasing agent overhead, and improve manufacturing cycles. E-procurement is expected to be integrated with the trend toward computerized supply chain management.
Companies want to ensure that their processes are:
Reducing the time employees spend purchasing, whether its leafing through Catalogues or surfing the Web.
Leveraging their volume with preferred suppliers in order to get better pricing, service, and access to new technology.
Limiting choices to only those suppliers, materials, and services that they are confident can meet pre-approved levels of price and quality.
E-procurement is rapidly becoming an important issue. A recent survey by Deloitte Consulting found that among a cross-section of major corporations, only about 15% are satisfied with their current level of e-procurement activity. However, of those relatively few companies who have extensively adopted e-procurement solutions to date, 88% are satisfied with the results — and are reporting returns on investment that often approach or
exceed 300%.1 Not surprisingly then, Purchasing magazine reports that over 90% of purchasing professionals expect to be buying online within the next 12 months — with a total of perhaps several trillion dollars of goods and services transacted online over the next several years.
1.2 E procurement and the supply chain
Supply chain planning enables an organization to reduce internal inefficiencies and help chalk out an optimized plan. eProcurement systems that support supply collaboration help in timely communication of the plan. Such systems will also enable organizations to move closer towards a more structured manufacturing environment thereby reducing waste in the entire supply chain and reduce costs.
Also Suppliers stand to gain a lot from eProcurement. They eliminate paper-based catalogs through EDIs and e-mails. Inventory management is made easier through automatic alerts and updates simultaneously enabling buyers to notify suppliers automatically of payment based on the updated match.
1.3 The Process Cycle
A typical e-procurement process has three main process cycles that allow an organization to manage their entire purchase requirement. They are:
Evaluation Cycle
Negotiation Cycle
Fulfillment Cycle
1.3.1 Evaluation cycle
This involves multiple steps beginning with identifying and evaluating vendors, negotiating contracts if not already negotiated. Requirement of purchase is put up by the employee or directly by the purchase dept based on quotations received from vendors. The purchase department gets the Request for Purchase (RFP) from an employee. If it is a regular purchase, they can use their standard RFP templates. In an e-procurement system, the purchase depts have to follow what the marketplace at each step provides:
Identify vendors and evaluate them
The marketplace has buyers and sellers registered with vendor catalogs. Delivery lead times and prices are continuously updated by the vendors. Some marketplaces also have rating mechanisms by suppliers. Based on the supplier credentials and the rating provided by the marketplace, the purchasing department (PD) would then identify the vendors that suit their requirement.
Negotiate contracts
Marketplaces also offer benefits of online negotiation (especially useful if suppliers are located abroad) and standard contract templates based on which contracts could be negotiated. These standard contracts contain all the possible contractual terms collated from multiple organizations that have made these contracts in the past.
Make Request for Purchase (RFP)
Based on employee requirements or forecasts given by sales, a requisition is put for purchase. Marketplaces offer standard RFP templates compiled from the best and most comprehensives in the industry.
The catalog manager ensures that information related to suppliers are available to customers.
1.3.2 Negotiation cycle
During this cycle, the purchasing department ensures that:
RFP to potential suppliers are given
This involves calling the suppliers and giving the RFPs to them. In marketplaces, these requirements can be posted through RFP posting, and response can be obtained through the marketplace bid/ask mechanism or reverse auction mechanisms. The requirements automatically go to the suppliers.
Evaluate the bids
Traditionally, this is done by internally evaluating bids, calling suppliers for clarifications, normalizing the bids of suppliers and then shortlisting them. Through the reverse auction mechanism, this is eliminated as the RFP template itself ensures clarity of bids and the seller agreement ensures that the RFP deliverables are clear and agreed upon.
Negotiations
For large value purchases, the purchase department will call the suppliers based on the bids submitted and negotiate with them. Normally the supplier tries to keep back something thinking that there would be another round of negotiation. On the other hand, the buyer tries to squeeze out the maximum by playing one supplier against the other but