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05/06/2011

No need to eat humble pie

E-procurement lowers costs for the procurement process

Bread, rolls and pretzels don't sell just like that. They first need to be made. Keeping supplies coming without any problems will require a reliable organization. The purchasing department is primarily responsible in this respect. Whenever someone from the specialized departments of the major bakery Lieken requests products for maintenance, repair or for the operative business, Jost H. Buthmann will be much in demand. For Lieken's shopping lists, the head of Central Purchasing and his staff will search in the Heuer Business Catalog among more than 850,000 articles in 60 catalogs. By means of the e-procurement solution docked onto the SAP system, the catalog data will be ordered and released by Group-wide central buyers specializing in individual product groups. The person ordering in the specialized departments can subsequently call the orders. "Through the strategically focused demand of our operational facilities, we realize savings in procurement", says Buthmann. At least enough to justify the costs for the new system and bring in additional sales.

Short shrift
It's all quite simple – according to the providers of electronic procurement systems. As they see it, paper notes, ballpoint pens and phones have long been obsolete in corporate procurement of goods and services. Instead, a continuous process at the workstation will classify and organize all data. A catalog-based system and Internet access will find the offers of individual suppliers. If that's not enough, you can also log onto electronic marketplaces. That's where a number of vendors present their products and services. The perfection in e-procurement is – as with Lieken – a company-own purchasing system with several vendor catalogs. But that's only worthwhile for very large procurement volumes of a few thousand. Programs in the high-end area can easily cost € 2,000 in licensing fees per month. Less sophisticated programs may be had for an all-in price of € 3,000; more economical are leased products with monthly costs of € 99.

Search and find
Common to all platforms is that they will open up new and more economical sellers on the Web. In the area of A-products, a comparison of the offers lets even smaller companies with lower volumes realize price benefits – but only if no long-term ties to specific suppliers are required. Here, the purchase price takes the lion's share with 95 to 99 percent of the total costs. Expenditures for the procurement process are negligible at 1 percent. Conditions are different for B- and C-parts. Here, electronic catalogs are worth it for larger ordering values. For consumables, expenditures in the conventional procurement process are highest with a share of up 80 percent in the total cost for the purchasing department. Looking for low-priced small parts – like printing paper or toner – is annoying for buyers because it takes so much time.

That's where an e-procurement program is just right. "It's a new hype because many companies want to speed up their administrative processes", says Oliver Kreienbrink, Partner and Head of Knowledge Management at Kerkhoff Consulting. Such solutions are especially popular in large-sized companies. Centralized purchasing as such already provides these companies with great streamlining potential. Thanks to such software solutions, their purchasing managers know the ins and outs in terms of vendor prices, their own staff's ordering mentality, as well as their suppliers. Catalog comparisons, product line analyses, price simulations and other analyses bring more transparency into the entire area of procurement of indirect goods and services. "A company's process costs can be reduced by one-third with the use of catalog software", says Rolf J. Heiler, head of Heiler Software in Stuttgart. According to expert estimates, a conventional procurement process will entail costs of between € 75 and € 180 for a company. So we are talking about a lot of money when 500,000 orders are concerned – which is the average for all e-procurement customers of the software house.

Buying faster
Aside from the lower costs, word got out about other benefits as well – like the greater speed in purchasing according to the study "Stimmungsbarometer Elektronische Beschaffung 2010" (Barometer o f the General Mood Concerning Electronic Procurement 2010) by the Bundesverband Materialwirtschaft, Einkauf und Logistik (BME – Federal Association Materials Management, Purchasing and Logistics) in nearly all major companies (90 percent). Many medium-sized companies are still far away from such enlightenment due to e-procurement. A total of 40 percent of smaller and medium-sized companies are doing entirely without any electronic procurement aid. But 14 percent indicated that they are at least planning its introduction. Such ideas will just be long-lasting visions for 20 percent of the medium-sized companies because their procurement volume is too small. Also, other e-procurement tools – such as e-Sourcing and supplier evaluation or Electronic Supply Chain Management (E-SCM) – are of little use for small and medium-sized companies. They are clearly very reserved with 25 percent in tenders and 16 percent in auctions, and one third each is using one of the other two instruments. Even for diligent users of such solutions, it's obvious that a lot is easier said than done.

That's what the BME study has shown. Only few companies have successfully brought into the system all goods and services that can be cataloged. It's also conspicuous that just two-thirds of the user companies order less than half the catalog goods via e-procurement. Reason for the poor user rates are hasty introductory projects resulting in a lack of user acceptance. An additional factor are incomplete concepts which do not name the person responsible or did not do preliminary work, such as preparing the materials groups so they will fit with the e-system. "A lot needs to be done yet in this showpiece for the application of e-tools in procurement", says Professor Ronald Bogaschewsky, co-initiator of the BME study and holder of the Chair for Business Management and Industrial Management at the Julius-Maximilians University of Würzburg.

It remains to be seen whether e-procurement will also prevail on a broad front in small and medium-sized companies. The very serious concern of possibly losing personal contacts with their customers already has many business managers baulk at the use of any electronic procurement solution.

CHECKLIST
You should answer the following ten questions before the introduction of an e-procurement solution.
Source: Kerkhoff Consulting

Know your company's needs

  • How does e-procurement support the objectives of the company and its purchasing department?
  • What are your requirements in purchasing in terms of process optimization and software support?
  • What number of lT introductions can your organization handle?
  • How exactly would you describe your requirements?
  • What interfaces are possible with existing systems? What's the medium- and long-term planning for your lT systems?
  • Which organizational units are affected by the introduction?
  • Should a software solution be purchased or leased, or does the company intend to participate in a public platform?
  • Which software on the market can meet your requirements? What are the answers from sellers with regard to references, support, flexibility, implementation period, multi-lingual capability, training and instructions, scalability, use of standards, as well as initial costs and running costs?
  • How can a rollout take place which will bring fast success (locations, product groups)?
  • Do you have all internal resources available regarding the project plan for the introduction? Does Management fully support the introduction?