Logistics & Supply Chain Management

How Do You Compare Procurement Performance?

To know how well your organization is performing, you need numeric baselines or points of comparison. The baseline can be your prior years' performance. But it is most helpful if you use the same key performance indicators (KPI's) as other organizations you benchmark with or those published by a research firm, such as:

1. Cost Savings. This is the aggregate amount of money you've saved by reducing costs from one year to the next. This KPI measures the procurement department's lump sum contribution to the financial success of the organization.
2. Managed Spend as a Percentage of Total Spend. Total Spend is the amount of money your organization spends externally on products and services each year. It does not include salaries. Managed Spend is the amount of spend that the procurement department controls. This KPI measures the degree of trust that management places in the procurement department's capabilities.
3. Cost Savings as a Percentage of Managed Spend. This KPI measures how effective the procurement department is with responsibilities it has been given.
4. Procurement Operating Costs as a Percentage of Managed Spend. Procurement operating costs represent the costs the organization incurs for having a procurement department. The cost components may include pay, benefits, facilities costs, equipment and software costs and more. This KPI measures the procurement department's cost efficiency.
5. Return on Investment. To calculate return on investment, you must first calculate your “return.” In other words, by how much does your cost savings exceed your operating costs? Then, divide that number by the operating costs to determine return on investment. This KPI measures the procurement department's cost effectiveness.

Definitions:

I have already mentioned the definition and classification of e-procurement in the first chapter, but I need to develop my understanding a bit further. There are a lot of definitions of e-procurement suggested in different literature. Below, some of the collected ones are quoted:

• E-procurement is essentially an Internet/Intranet based purchasing application or hosted service that streamlines buying trading partners, maximizes trade efficiency across the entire supply chain, and provide strategic e-commerce capabilities in Internet time (ITRG, 2002).

• An e-procurement technology is defined as a technology designed to facilitate the acquisition of goods by commercial or government organization over the Internet (Brunnelli, 1999).

• E-procurement is a technology solution that facilitates corporate buying using the Internet. It has the power to transform the purchasing process because it pervades all of the steps identified by the supply manager (Presutti, 2002).

• E-procurement (electronic procurement, sometimes also known as supplier exchange) is the business-to-business or business-to-consumer purchase and sale of supplies and services through the Internet as well as other information and networking systems, such as Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP), (wikipedia.org)

According to Kalakota and Robinson, in the past years, B2B procurement strategies have become a major top management focus. Many executives realized that B2B is not so much a technological revolution as it is a business enabled by technology. Therefore they mentioned that there are five key challenges facing corporate procurement functions today:

• Reducing order-processing costs and cycle times.

• Providing enterprise wide access to corporate procurement capabilities.

• Empowering desktop requisitioning through employee self-service.

• Achieving procurement software integration with a company’s back office systems.

• Elevating the procurement function to a position of strategic importance within the organization

2.1    Benefits associated with e-procurement technology

An e-procurement solution provides access to, and easy purchasing from, catalogues of many different suppliers while eliminating paperwork, automating the approval process and enforcing the purchase polices that apply to each buyers’ suppliers (ITRG, 2002). Typically cost saving is the main motivator for companies to implement e-procurement. As cost per transaction using e-procurement is reduced by 65% compared to “traditional” procurement transaction. By contrast, the source of saving in B2B auctions comes from accessing a broader base of suppliers bidding for the buying needs of organization, thus the saving derived from joining bargaining power would translate into more aggressive discounts for member of the consortia. (Davila et al, 2002)

The use of e-procurement is thought to have implications for information asymmetries or impact in inter-organizational relationships and in particular for search and monitoring costs. Alternative explanations for the benefits of e-procurement arise from the resource-based perspective through which the resources of the firm may be leveraged to achieve competitive advantage with electronic commerce presenting opportunities to enhance firm resources. The other major benefits of adopting e-procurement system are reduced operating costs and searching costs, which lead to high returns on investments (Dai and Kauffman, 2000).
According to ITRG (2002), many companies have found immense benefits from their e-procurement projects, including the following:

• Process efficiencies amounting to annual savings.
• Ability to link into existing systems, such as ERP.
• Reductions seen in lead times within the procure-to-pay cycle, in some cases by 50%.
• Self-invoicing on behalf of clients can add to the bottom line.
• Month-end reconciliation can end the problem of the wrong items being ordered of the wrong prices bring offered as business process have been streamlined and all was working off the same catalogue.
• The buyer is engaged in more strategic product management, leading to better contracts being negotiated.
• Maverick spending is reduced
• Reduction in stock levels can lead to savings of millions of dollars.

Companies that have experienced these benefits have reduced cycle times and have better managed relationships with their global suppliers. E-procurement technology also allows a company to reduce the number of interfaces that it maintains with the suppliers. The business case for e-procurement is convincing. With the number of cost-effective e-procurement solutions available today, purchasing organization cannot afford to miss the opportunity to increase profits for their organizations. To make the proposition even more attractive, service providers offer hosted e-procurement solutions that can be inexpensively deployed with little time or effort while eliminating the burden of ongoing maintenance or support. E-procurement benefits stem from automating procurement activities and streamlining purchasing workflow, both internally and with their vendors. (ITRG, 2002)

E-procurement solutions do not always require additional technology, dedicated personnel or staffing resources. Rather, existing technology infrastructure, including equipment and computers with Internet connectivity (which may already be in place) can be used. From (Carabello, 2001) e-procurement and related technologies promise major improvements in the management of procurement. These improvements are achieved by sliming the supply chain and by acting on (or perhaps creating) markets at either end of that chain. According to Leonard and Cochran (2003), these improvements may include:

• Greater depth and liquidity in purchaser and suppliers markets, as well as a break down of markets barriers that arise though time difference and geography.
• Better access to information and transparency in markets, particularly for regional and small to medium sized businesses.
• Ability to implement “just-in-time” strategies, with resulting reductions in inventory levels and increases in working capital; and
• Streamlining of supply chains by removal of inefficient intermediaries and automation of transactions comprising the chain.

While there is some evidence that electronic commerce in procurement may not result in reduced costs in acquisitions in particular markets, (Lee, 1998), various cost reductions and benefits have been identified, (De Boer et al, 2002). These include the implications of e-procurement for the following:

• The cost of expenditure on goods/services related directly to the production/service delivery.
• The cost of non-production goods and services.
• The cost of operational purchasing activities – e.g. requisitioning, ordering, expediting and administrative support.
• The cost of tactical procurement activities – e.g. formulating specifications, selecting suppliers, negotiating with suppliers, contracting, and disposals…etc.
• The costs of strategic procurement activities – e.g. spend analysis, transaction analysis, market analysis, planning, developing purchasing policies etc.
• Internal benefits arising from investments in particular inter-organizational relationships and,
• The contribution of investments in particular inter-organizational relationships to revenues.

From other point of view sourced to Tonkin (2003), where he mentioned that they are only few and very few studies that systematically evaluated the actual cost and benefits movement associated with the use of various form of e-procurement. And according to Davila et al, (2002) and Persutti, (2002), they mentioned an other similar view of e-procurement benefits, whereas:

• Cost savings
• Process efficiency
• Better information flow between buyers and suppliers
• Reduced maverick spending
• Streamlined process
• Better inventory level

According to Davila et al (2002), cost savings is the primary rationale for investment across all technology platforms, through the manner in which these savings are delivered varies. Adoption of e-procurement technologies report saving of 42 per cent in purchasing transaction costs.

And according to Presutti, (2002), cost reduction and negotiation is one of the reasons that transaction costs fall so precipitously with e-procurement. Reductions in labour costs in the purchasing process, increase in purchase volumes leads to better price supplier and leads to better negotiation i.e. suppliers are ready to reduce the price as they get the assurance of transaction from the buying company. The effect of e-procurement on inter-organization enhances the benefits of e-procurement on an organization.

Companies using e-procurement, report their saving of 42% in purchasing transaction costs associated with less paperwork, which translates into fewer mistakes and a more efficient purchasing process. In a labour intensive, paper-based purchasing process, transaction costs can range from $70 to $300 per purchasing order for example, GE (General Electronic) saw those costs drop to 30%. Other firms have experienced even greater reductions (Presutti, 2002). Different authors have elaborated on the benefits that accumulate from adopting e-procurement technologies. These benefits are expected to accelerate the rate of adoption of these technologies once the uncertainties that remain around e-procurement are reduced to levels that encourage significant resources commitments leading towards process efficiency (Davila et al, 2002).

Buyers and sellers share information in real time to build specification that add value to resulting product and build strong relations. The larger the base of participants (buyers from the point of view of seller and sellers from the point of view of buyers) the greater will be the business value of e-procurement solution. Clear guidelines are established which helps share information across different departments within the organisation (Presutti, 2002).

Organizations expect cost reduction from e-procurement software to be derived from the additional control over maverick spending (purchase of goods from suppliers with which the organisation does not have formal relationships. Negotiated process based on volumes) and the benefits effects associated with the additional purchase-related information inherited in that technology (Davila et al, 2002).

The simplification of the purchasing process that e-procurement technologies are credited which also has a favourable impact on the purchasing cycle time (Davila et al, 2002). The system also allows the company’s purchasing department around the world to share information about their best suppliers. Except reduction in material costs, benefits also include reducing sourcing cycle times by 25-30% and time to market by 10-15%. E-procurement users also report a reduction in the number of suppliers’ associated cost benefits of lower managerial complexity, lower prices and a headcount reduction in the purchasing process. Cutting those cycle times helps in streamlining the process and has a significant impact on the revenue generation potential for the firms because products get to market faster, allowing the firms to position it to capture market share from a first to market position. E-procurement system enables firms to more efficiently and accurately capture and aggregate how much they are spending corporate wide in various purchasing product area, allowing the firms to bring what may be significant buying power leverage to market. Material cost reductions in the range of 5% to 20% were realized because the e-procurement solution helped firms to reach a wider supplier base, identified an unidentified and qualified source of suppliers (Presutti, 2002).

Finally, there is also impact on firm’s asset base and the inventory level can be significantly reduced. There are no problems like stock outs, wrong product ordered faster delivery, etc, and there is a better inventory control. An effective e-procurement strategy for example, extranets like the system of buyers and suppliers over the Internet facilitate real time exchange of the information in the buyer’s production schedule and develops capabilities that allow a degree of flexibility with suppliers (Presutti, 2002).

2.2    Risks associated with e-procurement

As mentioned above, e-procurement has lot of benefits but still its expected growth rate has been revised downwards. Recent market observation indicated that the adoption of e-procurement technology into the business mainstream is occurring in a much slower than expected. One reason is the implicit association that investors have made between e-procurement technologies and the business-to-consumer (B2C) models responsible for the Internet bubble bust. More often, the slow down had been associated with technology related issues (Davila el al, 2002). Internet-based e-procurement systems and B2B electronic market solutions need to be compatible to the greatest possible extent with the existing technologies, to have a reasonable chance to be widely adopted in the marketplace, this leads to problems like investment cost (Dai and Kauffman, 2000).

The risks associated with the e-procurement have been holding companies from adopting it (Davila et al, 2002). A study by a Canadian conference broad in 2004 pointed to the problem in the implementation side and concludes that “organizations are finding e-procurement implementation more complex, more expensive and more time consuming than they originally envisioned, and that consultants have been widely criticized for overstating the business case of e-procurement” (Conference Board, 2004 ).

Companies were jumping onto the e-procurement bandwagon without fully understanding the inter-organizational collaboration and network effects underlying these technology models, the investment required to move the right information from suppliers to employees, and the complexities of integrating these technologies with existing Enterprise Recourse Planning system (ERP). Most respondents using e-procurement technologies are relatively new to e-procurement; only 34% have been involved in any e-procurement technology related initiative for a year or more. The low adoption rate has also constrained e-procurement technologies users from leveraging the associated capabilities with their suppliers (Davila et al, 2002).

The analysis indicated that the slower than predicted growth is not the consequences of a single problem. Rather, e-procurement technologies are still in their early stages of the traditional technology (S-curve), in which alternative technology models are rapidly evolving and users are still storing out the winning model. Because, a well-defined business process is still unavailable, companies are using different strategies to approach these technologies. The perceived risks that are holding back companies from investing in e-procurement technologies are numerous. In addition to technology-related risks, there are risks associated with the integration of these technologies with existing information systems, with the business model that these technologies impose on supplier-customer relations and with the security and control mechanisms required to ensure their appropriate use (Davila et al, 2002). Certain risk that linked with the adoption of e-procurement those need to be addressed before these technologies are widely accepted. These risks mentioned by Davila, et al, 2002 are:

Internal business risks: Companies are uncertain about having the appropriate resources to successfully implement an e-procurement solution or not. Implementing an e-procurement solution requires not only that the system itself successfully performs the purchasing process, but most important, that it integrates with the existing information infrastructure.

External business risks: E-procurement solutions need to not only “talk” with internal information systems, but also need to cooperate with external constituencies – mainly customers and suppliers. External constituencies need to develop internal systems that facilitate the communication through electronic means – an issue that demands technology investments as well as incentives to succeed; suppliers must be accessible via the Internet and must provide sufficient catalogue choices to satisfy the requirements of their customers. Suppliers, especially in low margin industries, may be hesitant or even unable to meet such demands without guarantees of future revenue streams. And also since the business models associated with e-procurement technologies (e.g. auctions, consortia, and exchanges) clearly envision the use of suppliers with whom the buyer has not previously transacted business, companies need to develop mechanisms that provide the buyer with assurances that the supplier meets or exceeds recognizable and industry enforced standards relating to supplier quality, service, and delivery capabilities.

Technology risks: companies also fear the lack of a widely accepted standard and a clear understanding of which e-procurement technologies best suits the needs of each company. The significance of this risks factor seems to suggest the need for clear and open standards that would facilitate inter-organization e-procurement technologies. Without widely accepted standards for coding, technical, and process specifications, e-procurement technology adoption will be slow and will fail to deliver many of the benefits excepted.

E-procurement process risks: Another set of risks has to do with the security and control of the e-procurement process itself. Organizations must be confident, for example, that unauthorized actions will not disrupt production or other supply chain activities when committing to e-procurement technologies. This strategy however is defined as riskier in the absence of any well-defined solution and companies may end up betting on the wrong technology (Davila et al, 2002).

According to the results in the study conducted by Davila et al (2002), one-third of all respondents believe that at least 40% of their competitors are implementing or have plans to implement an e-procurement strategy. Among organizations pursuing an aggressive strategy, over 50% believe that their competitors are doing the same.(Davila et al, 2002).

Another view about risk associated by e-procurement is that, e-procurement is applied in a uniform way, not differentiating at all between different suppliers (Knudsen, et al, 2000). If all of the company’s traditional purchases were put on the web using reversed auctioned for any kind of items, the result will probably will not be that great. Therefore, the risk is not in only technology itself, it is the imperfect application of technology that processes the biggest risk. Other risks are limitation from geographical, cultural and organizational limitation of the underlying business they serve. Also the biggest expenses associated with implementing e-procurement are the software and license (Ware, 2002).

Authors like Davila et al (2002), have explained that several means of procurement goods and services online have emerged: E-procurement software, market exchanges, B2B auctions and purchasing consortia (groups). E-procurement software distributes electronic catalogues to customers, whose employees can use them to make purchases online. Market exchanges are websites that includes both buyers and sellers who trade online for goods and services with dynamic prices. B2B auctions are sites that’s facilitates bidding for goods and services. Finally the purchasing consortia gather the purchasing power of numerous buyers, who negotiate for price discounts.

Thus the challenge for e-procurement technology adoption is to provide evidence to non-users that these technologies: (1) do not undermine control, security, or privacy requirements, (2) they are not so techincally complex that organization without a sufficient technology skill set cannot use them, and (3) the new business model provide the right incentive to supply chain constituencies of effectively use these technologies (Davila et al, 2002).

What is Supply chain management?

A supply chain is the group of components (suppliers, distribution points, transportation providers) necessary to bring your product from its raw material state to the end user.

Supply chain management is the term used for controlling and regulating your supply chain.
A simple supply chain model consists of four components:

• Supplier: supplies the raw materials
• Manufacturer: produces the product
• Warehouse or Distribution Centre: stores and ships the product
• End User: receives the product

1.1    Background

For the past decade, the impact of web-based technology had added velocity to all the activities and avenues of business. Furthermore, the “dot-com ear” is now fast receding into the past. In today's dynamic global competition scenario, the ability to provide customers with the cost-effective total solutions and life cycle costs for sustainable value has become vital. Business organizations are now under a tremendous pressure to improve their responsiveness and efficiency, and managers are still grappling with turning the e-business concept into a business reality. In this, lead times needs to be reduced to their extreme extent to meet the changing demands of customers in different regions of the world. With the emerging application of Internet and information and communication technology (ICT), the companies are forced to shift their operation from traditional way to a virtual e-business, e-procurement and e-supply chain philosophy. These philosophies transform companies from a local business automation to a global enterprise and business automation. (Lee et al, 2001 - Dave Chaffey, 2004)
E-commerce has changed the business model profoundly. The models appear under a huge list of names such “the new economy”, business 2.0″, “webonomies” just to mention few. All the same, they all have in common the Web in one-way or another. E-commerce (EC) is seen as the new tool that will revolutionize and digitize the business prospects. As we know it today, all the big corporations are using it, and according to one of General's Electric speeches (Jack Welch 2001), the company did not consider “e-business” as an old economy neither a new economy, but a simple new technology.

Application of web-technology is no longer an afterthought in forming business strategy but rather the cause and driver, hence changing the very definition of value (Kalakota & Robinson, 1999/2000). E-commerce has been developed in the last years by the popularization and commercialization of the Internet. In addition to the consumer-oriented commerce of the Internet, EC is practiced through electronic markets or e-market and electronic data interchange (EDI). And according to many sources and magazine, the evolution of the Internet usage, creates a need for an efficient e-commerce enabled supply chain or value chain management. A bit thrust than it previously had, B2B (business-to-business) e-commerce still appears to be on what has been described as “rocket-ship ride” trajectory (Kalakota & Robinson, 1999/2000).

To add more value to this “new economy” or new way of doing business, the Business-to-Customers (B2C) has received also most attention from the rise of companies such Amazon.com and more eBay Inc, the bulk of e-commerce remains to be the B2B sector. The leading research firm Forrester  projected rapid growth in B2B sector of the economy from under half trillion dollar in 2000 to anywhere between approximately $3 and $6 trillion by 2005.

B2B electronic marketplace (e-marketplaces) that uses Internet protocols as communication standards have gained widespread application in the supply chain management. To support these function there are number of activities classified as procurement, technology development and human resources management. An e-marketplace provides a virtual location, where buyers and sellers meet, but it may also provide mechanisms to support the subsequent transaction between buyers and sellers. The purchasing and supply (procurement) activity of organization is one, which spans both internal services and B2B services, according to Kaplan and Sawhney (2000) marketplaces are classified into four categories:

o    MRO (Maintenance, Repair and Operation) hubs are horizontal markets that enable systematic sourcing of  operating inputs.
o    Yield managers are horizontal markets that enable spot sourcing of operating inputs,
o    Exchanges are vertical markets that enable spot sourcing of manufacturing inputs,
o    Catalogs hubs are vertical markets that enable systematic sourcing of manufacturing inputs.

There are two major market (FIGURE 1) places according to Kalakota & Robinson: those tow gender markets are: vertical and horizontal marketplace. Vertical market places, automate supply chains by digitizing and normalizing products catalogs, creating market liquidity by developing facilitator exchange. Horizontal market place, seek to make the procurement of common services more efficient because the audience they address, the goods and services bought and sold over them are common to many industries. Horizontal market makes places provide a venue for transacting such goods and services as MRO suppliers, logistics services, media buying, outsourced human resources services, temporary workers and excess inventory and excess capital equipment.

In the recent years, the focus has shifted to more strategic view of the market and this has accurately assisted in rediscovering supply chain management, like e-procurement is the productive use of the Internet to improve the effectiveness and efficiency of the supply end of the supply chain. Supply chain management can be described as the chain linking each element of the manufacturing and supply process from raw materials to the end user, encompassing several organizational boundaries. This broad definition includes the entire value chain and addresses materials and supply chain management from the extraction of raw materials to its end useful life. By connecting in the new electronic marketplace of the World Wide Web, a buyers firm is able to streamline its purchasing activities electronically, even when not all of its suppliers can automatically process electronic orders. To buyers in supply chain management, procurement systems and B2B electronic markets are perceived as a new procurement channel enabled by the Internet and new technologies of the World Wide Web. Adoption of these technologies and the corresponding business models associated with them, are of great significance to the success of many businesses in a spectrum of industries. (Dai and Kauffman, 2000)

Nevertheless, IT publications and business analysts alike have been full of the promises of B2B e-commerce. At the center of all the hype was the possibility of what e-procurement could offer a company as a means for companies to control costs. Electronic negotiation and contracting and possibly collaborative work in specification can further enhance time and cost saving and convenience. An e-procurement solution automates the key internal procurement process from catalog, requisitioning, procurement, receiving and payment processes for indirect or direct commodities. According to the ISM  in a Forrester reports on e-business (2002) have shown consistent growth in the adoption of web based methods for indirect purchasing instead of direct purchasing, which contains more percentage of dollars spend on purchase.
To resume all the previous paragraphs and to illustrate the overall point of view, I would like to give a better explanation by the following example sourced to Andrea Ovans (2000) a review of Harvard business school:

“One might not think it would matter to an 8.5 billion company how it buys its pencils. However, when they have upward of 60'000 employees in 100 countries, purchasing those pencils, not to mention desk, computers, and spare parts for oil field equipment - the time and costs involve can quickly mount. Rather than trying to centralize such purchase into some worldwide purchasing office, Schlumberger  and other big companies have chosen or choosing to take advantage of the burdening market for e-procurement”.

1.2    Problem discussion

At this point of the thesis, I am going to give an introduction about the supply chain and its concepts, also the relationship or the connection within the new impact of new technologies.

Hereby, the concept of supply chain management (SCM) enjoys growing popularity mainly because it promises nothing less than a sustainable competitive advantage to those organizations implementing it. Successful supply chain management strategies enable organizations to reduce costs while simultaneously improving services and product quality (Gagliardi, 1996). The realization of these benefits can provide a significant competitive advantage over other organizations. However, in order to gain this advantage, it is important to implement a comprehensive supply chain management initiative that includes technological, organizational and attitudinal changes.

Since the appearance of Internet, business organizations invested significant resources to develop new strategies and manufacturing technologies to improve their competitive advantage. During the last twenty years, companies such, Microsoft, Dell and much more, who had already implemented efficient production, total quality management, and reengineering strategies, will decrease costs while increasing their flexibility and quality of services.

Through a well-organized and efficient supply chain management more and more improvements might become realizable. And through an effective supply chain management which requires information to be shared and transmitted beyond the boundaries of the organization. These information systems expanding the availability and transfer of information between various trading partners are called inter-organizational information systems (IOIS). These systems involve elements of traditional information systems spanning across organizational boundaries and thereby permit-shared applications across legal enterprise boundaries.

Such information sharing in a virtual- vertical integration created by IOIS can then be used to reduce supply chain uncertainty. And such electronic cooperation is called information partnership and focuses its attention on creating strategy value through increasing operational efficiencies.

According to Aberdeen (2001), “e-procurement” allows companies to automate the tactical processes and workflow associated with purchasing. Purchasing managers through e-procurement are able to manoeuvre their way out of massive technology are used almost exclusively for purchases that are already on contact with set group of suppliers. From ITRG (2002) and Knudsen (2002), states that e-procurement includes aspects of the procurement function supported by various forms of electronic communication, and its use in both the public and private sectors takes many forms including:

o    Electronic data interchange (EDI) – inter-organizational information system using structured data exchange protocols often through value added networks.o    E-MRO - mechanism for ordering indirect items from an on-line catalogue.o    Enterprise resource planning (ERP) – automation of procurement related workflows including auto-faxing, auto-emailing or other forms of messaging directly with suppliers.
o    Web-based enterprise resource planning – automated procurement workflows but Web based.
o    E-sourcing – way of identifying new sources of supply using Internet technologies.
o    E-tendering – the process of inviting offers from suppliers and receiving their responses electronically.
o    E-reverse auctioning – using Internet technologies for on-line auctions of items for disposal.
o    E-informing – use of Internet technologies for gathering and distributing procurement related information.
o    E-collaboration – collaborative procurement related planning and design using facilitating technologies.

E-procurement systems in essence mirror the procurement process through the provision of two distinct, but connected infrastructures, internal processing (corporate intranet) and external communication processing (Intranet based platforms). The critical difference is that these systems allow individual employees to order goods and service directly from their own personal computers (PCs) through the web on a real-time basis. Requests and orders are channelled through various forms of hubs or databases. It also allows individual employees to search for items, checks availability, place the subject of a great deal of research, but again this has tended to focus on the development of inter-organizational electronic networks. In the efficient and maverick buying habits, redundant business processes and the absence are symptoms of poor procurement practices. (De Boer et al, 2002)

The world of e-procurement is changing at dizzying pace and B2B procurement is rapidly becoming the most efficient way to conduct all these modes of business. According to Kalakota and Robinson  (2000), there are three catalysts driving growth in the e-procurement space, which are as follow:

o    Cost saving: Applications reduce purchasing costs by nearly 90 percent, which translates into dramatically better margins for buyers. Centralizing procurement activities concentrates that total spending and improves negotiating power.

o    Improve efficiency: focus purchasing on strategic, value added upstream portions of the business rather than on transactional, down stream activities.
o    Control: increasing the purchasing role in the company’s total spending, including such non-traditional areas as operating resource procurement. Web-based procurement exchanges provide better inventory management, faster time to market, and use less working capital than traditional means of procurement.

From the same source (Kalakota and Robinson, 1999/2000), one of the objectives of e-procurement is to offer international procurement opportunities to the local business, and to improve market access for small and medium size firms that are typically specialized. As with any e-business effort, efficient procurement strategies integrate a company’s business workflow with robust applications infrastructure. The central objectives of a company’s e-procurement strategy are to better manage the firm’s operational costs.

Over the time, organizations realize such time and cost savings by linking with major suppliers through private networks, such as electronic data interchanges (EDIs)…
Since 1970’s, some large corporations used EDI networks to process batches of highly structured data from trading partners and fulfil a procurement function. Conventional EDI technologies have some limiting characteristics like technically rigid, complex standards, significant start-up, implementation and maintenance costs, and “point-to-point” connectivity. These factors make EDI less optimal when the purchase process with a few key suppliers capable of providing volume discounts can generate tremendous cost savings.

Internal customer service improvement emerged as a significant and relevant issue for procurement professionals and e-business project teams. Electronic negotiation and contracting and possibly collaborative work in specifications can further enhance time and cost savings and convenience. According to an analyst named Bob Austrian working for banking services, he cited; purchasing via Internet technology can reduce transaction cost by 90%, this can save billions in overheard cost annually for organization.

Herby, for suppliers, the benefits are in more tendering opportunities possibly on a global scale, lower cost of submitting a tender and possibly tendering in parts that may be better suited for smaller enterprises, or collaborative tendering in case the e-procurement site supports forms of collaboration. All in one, the main source of income is reduction of cost (of tendering processing and getting more cost effective offers).

At this point and after the entire introduction of the problematic, the terms purchasing versus procurement haven’t been mentioned in their real meaning. Therefore, those terms (purchasing # procurement) have been until now almost used interchangeably. However, they differ significantly in their scope; purchasing refers to the buying of materials and all the activities associated with buying process. Electronic purchasing addresses only one relatively minor aspect of the procurement problems companies face. Procurement on the other hand, is broadly defined to include a company’s requisitioning, purchasing, transportation, warehousing, and in-bound receiving processes. Recent procurement strategies focus on restructuring the entire order-to-delivery process rather than on specific tasks within the process. The new procurement models leverage a nearly ideal combination of volume advantage, flexible contracts and valuable supplier’s alliances, along with decentralized and user-responsive purchases. (Kalakota and Robinson, 1999/2000)

Web-based procurement systems became apparent to early adopters; respondents were highlighting the substantial improvement in internal customer satisfaction from users of electronic procurement systems and a consequent major improvement in user compliance. For today’s industrial age companies must change their current procurement practices to become tomorrow’s e-business leaders. By providing improved visibility into the process flow, e-procurement can strengthen management control. E-procurement reduces maverick buying, ensures compliance with corporate policies and institutionalizes a company’s best business practices. While improving accountability and control, implementing e-procurement can improve productivity. E-procurement cannot only build strategic supplier relationships but uses aggregate buying to gain volume discounts from suppliers.(Evans & Wurster, 1999)

Nevertheless, e-procurement’s benefits fall into two major categories: efficiency and effectiveness. E-procurement’s efficiency benefits include lower procurement costs, faster cycle times, reduce maverick or unauthorized buying well organized reporting information, and tighter integration of the procurement functions with key back-office systems. E-procurement’s effectiveness benefits include the increased control over the supply chain, proactive management of the key data, and higher-quality purchasing decision within organizations. (Kalakota and Robinson, 2000)

Many companies are implementing e-procurement strategies concurrently with their integrated supply chain efforts. The web provides the technologies basis for achieving the supply and procurement chain management most firms seeks. However, for many companies, development of a truly effective integrated procurement strategy is still in the future. Relatively a few firms have a clear vision of what a companies must achieve when reengineering and integrating their procurement processes. Furthermore, no good roadmap exists for how such integration is to be achieved or what the ultimate destination. (Kalakota and Robinson, 1999/2000)

According to Davila et al (2002), new –procurement technologies will become an important part if supply chain management and the rate of adoption will accelerate as aggressive adopters share their experiences and perceptions of work risk. The actual benefits and risks of e-procurement technologies and manager’s evolving perceptions about the benefits and risks will determine the speed at which the technology moves from its developmental infancy to the adoption and the maturity stages.

In addition to the technology risks, there are risks associated with the integration of these technologies with existing information systems, with the business models that these technologies impose on supplier-customer relations and with the security and control mechanisms required to insure their appropriate use (Davila et al, 2002). Ironically although the e-commerce and e-procurement are inherently global, many of its limitations come from the geographic, cultural and organizational limitation of the underlying businesses they serve (Avery, 2002).

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