Purchasing Management (Universiteit Twente)

E-procurement

8 October 2010

Dr. Erik van Raaij

Purchasing & Supply Management

Dept. Management of Technology & Innovation

E-procurement

“using internet technology in the procurement

process”

SourcingStrategy

development

Supplier Relationship

Management &PerformanceManagement

Tendering & supplier selection

Supply market analysis

Spend& demand analysis

Invoicing & payment

Order fulfilment &

logistics Purchase order

submission

Search product / service

Requisition & approval

Contracting& implemen-

tation

Supplier RelationshipManagement

E-contract management

E-sourcingE-tenderingE-RfXE-auctions

Purchasing intelligenceSpend analysis

E-orderingE-requisitioningProcure-to-pay (P2P) systems

A short history

• 1980s: First EDI applications in buyer-supplier relationships (American Hospital Supplies)

• 1994 - 1998: Purchasers use the Internet for information search (‘surfing’)

• 1999: The word ‘e-procurement’ first used• 2001: End of dot.com hype• 2005-2008: Proliferation and steady growth of EP

technologies

1990-1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Technologytrigger

Peak ofinflated

expectationsTrough of

disillusionmentSlope of

enlightenmentPlateau ofprofitability

VisibilityDot-com share fall-out

"True"e-businessemerges

Optimisede-business

Post-netbusinesses

Investor disillusionment

Brick-and-mortar failures

Dot-com shake-out

Businessdisillusionment

US Xmas1998

EuropeanIPOs 1999

US IPOs1997/8

Dot-comstarts

InternetWWW

Source: Gartner Research

Gartner’s hype curve for e-business

Worldwide ePurchasing revenues ($mio)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Contract management

Services procurement

Spend analysis

eSourcing

Supplier performance management

Spend management suites /electronic invoicingeMarketplaces / supplier network

eProcurement

Forecast

Source: Forrester Research

Worldwide ePurchasing revenues ($mio)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Contract management

Services procurement

Spend analysis

eSourcing

Supplier performance management

Spend management suites /electronic invoicingeMarketplaces / supplier network

eProcurement

Updated Forecast

E-ordering

Employeeneed

Defineitem

Payment

Sendinvoice

3-waymatch

Receiveorder

Fulfilment

Shipgoods

Createorder Send

order

Internaldelivery

Createrequest

Approverequest

Receivegoods

Checkrequest

Sendconfirmation

Lots of paperworkLots of manual work

Many chances of mistakesLong cycle time

Low contract compliance

Employee

Manager

Supplier

Purchasing

Incoming goods/Mail room

Finance

Traditional ordering process

Payment

Automaticmatch Electronic

receiptconfirmation

Deliveryto desk

Sendelectronic

invoice

Ship goods +track ‘n’ trace

Fulfilment

Electronic orderconfirmation

Electronicpurchase

order

Single-clickapproval, only ifabove threshold

Electronicpurchase

requisition

Select item fromonline catalogue

Employeeneed

Less paperworkLess manual, low value work

Less mistakesShorter cycle time

Higher contract compliance

E-enabled ordering process

Employee

Manager

Supplier

Purchasing

Incoming goods/Mail room

Finance

deals only withexceptions

deals only withexceptions

E-procurement vendors

Source: Forrester Research

Effects of e-ordering

Beforee-ordering

Aftere-ordering

Spend under management

40% 55%

Requisition-to-order costs

$63.20 $32.28

Requisition-to-order cycles

12.4 days 3.2 days

Percentage of maverick spend

40% 25%

Source: Aberdeen, 2006

Adoption of eOrdering

Davila et al, 2003,based on 2001 data

Aberdeen EP benchmark report 2006

" [...] user adoption [...] remains the most challenging aspect of an e-procurement deployment. [...]

It has become increasingly clear that change management issues related to e-procurement are far from insignificant and remain as a major if not the major hurdle to a broad and successful deployment." (p.6)

Challenges % Selected

Driving employee adoption of the system

43%

Enabling and managing catalogs and transactions

41%

Cost of licensing the EP application

33%

Securing stakeholder buy-in 30%

Cost of maintaining the EP application

30%

Limited functionality of current application

28%

Managing non-catalogable spending

26%

Improvedeffectiveness

Reducedcosts

Improved informationavailability

Increasedproductivity

Shortercycle times

Implementation efforts

Provision of user support

Investments insystem quality

Procurement processredesign

Investments in training

EP adoption:Compliance

OutcomesEfforts

The “hour glass” of compliance

Maverick buying (i.e., non-compliance)

• Why is maverick buying (non-compliance) a problem?

• What could be causes for maverick buying?

• What can you do to prevent MB?

Our own research

Reasons behind non-compliance (maverick buying):

• Unintentional Maverick Buying (MB)– Was not aware of a contract and/or procedures

• Forced MB– Product is not contracted; rush order

• Casual MB– Do as you please is tolerated

• Well-intentioned MB– I think I am a better negotiator

• Ill-intentioned MB– No-one tells me where to buy my stuff!

See: Karjalainen, Kemppainen & Van Raaij, 2009

E-sourcing(incl. E-auctions)

Evaluatecurrentuse &needs

Definerequire-ments

Createsupplierlong list

SendoutRFI

Createshortlist

Setnego-tiation

strategy

RFQ /Auction

Eval-uation

The e-sourcing process

PC Hardware & ServicesEURO

15:00 15:30 16:00 16:30 17:00

850.000

630.000

543.000

Best: 543.000 Delta: 36.11%

RESERVE PRICE

MAXIMUM PRICE

BEST PRICE

Discussion questions

• Is the ERA a welcome addition to the buyer’s toolbox?

• How does it impact the buyer-supplier relationship?

• What are the critical success factors for its use?

KLM example

Are ERAs fair? The jury is still out…

“Previous studies have shown that reverse auctions–with rare exception (…)–damage supplier relationships and create distrustamong incumbent suppliers” (Emiliani, 2004)“All supplier respondents considered that reverse e-auctions have had a negative impact on their businesses, and where they were the incumbent supplier, 82 per cent felt that it was an unfair process” (Tassabehji et al., 2006)

“Suppliers stated that e-RAs were a fairer process of awarding business, indicating that e-RAs helped to “level the playing field” through increased transparency” (Beall et al. 2003)“Auctions have an important benefit over negotiations. By following a strict protocol, auctions have a transparency that gives participants confidence that they are being treated fairly” (Pinker et al., 2003).

Practices considered unfair

Unfair buyer practices:• Inviting unqualified suppliers• “Shill bidding” by the buyer• Changing specs after or during the process• Further negotiations after the auction• Running an auction without serious intention to buy• Not awarding to the lowest bidder

Unfair supplier practices:• Supplier collusion• Bidding without intention to supply (for that price)

• Transparency– Transparency in objectives of the auction– Transparency in who is participating (no 'dummies')– Transparency in awarding of business

• Clear criteria for determining the winning offer– Buyer shall not pull out once criteria are met– Buyer shall not award to outsiders

• Clear specification• Data security and confidentiality• Supervision (on request)• Supplier should participate only when able and willing to

supply.

Sources: EAFA, OESA, CLEPA

E-auction codes of conduct

• Continuous bidding or bidding rounds• Number of suppliers• Number and size of lots• Price only or multi-attribute• Degree of visibility for supplier (all bids; own bid with best

bid difference; own bid with ranking; own bid with yes/no)• Hard close / soft close• Lowest price guaranteed the business / post-negotiations /

no award guarantee• Use of third-party auctioneer / observer• Use of code of conduct• Degree of supplier training and preparation

Some design parameters for ERAs

The 6 C’s of auctionability

Contractual availability No contractual restrictions during proposed supply period

Commercially attractive Large enough spend to attract suppliers

Competitive supply base Sufficient number of qualified suppliers

Clearly defined requirements

Clear requirements/specifications

Compressible margin Opportunity for savings

Commitment Sufficient support from buyer through all stages

Ariba e-auction category experience

Office Eqpmt/Supplies• Furniture• Copiers• Faxes• Phones• Office supplies

• Stationery• Promotional• Cleaning

supplies• First aid

Inf Technology• Desktops• Laptops• Monitors• Printers• Networking• Servers

• IT consulting• Tape media• Scanners• eProcurement

technology

Facilities Services• Janitorial• HVAC• Landscaping• Construction• Waste• Snow removal

• Household moves

• Electricity• Food service• Security

Business Services• Print• Media• Legal• Consulting• Payroll• Travel

• Temp labor• Telecomm• Real estate

investment mgmt• Vehicle leases• A/P recovery

• Machines• Engineered parts• Specialty papers• Raw materials• Ingredients• Conveyors

Manufacturing• Chemicals• PCBs• Explosives• Drives• Gears

MRO• Bearings• Fasteners• Fuel• Power supplies• PVF

• Gaskets• Gauges• Wire• Rollers• Cable

• Latex gloves• Trees • Tires• Call centers

Others

• Private label• Data entry• Retail

Installation• Goods for resale

Packaging/Handling• Corrugated• Labels• Plastics• Bags• Bottles

• Fulfillment• Pallets• Rail• Trucking• Air Freight

Our own current research at RSM

• A study into supplier opinions of e-auctions• Questionnaire sent out to 800 suppliers of Dutch MNC• Two parts:

– General opinions of e-auctions– Satisfaction and perceived justice related to most recent

e-auction• Do all suppliers dislike e-auctions?• How can you design e-auctions that are perceived by

suppliers as being fair?

General opinions

When we look at the mean score of these five questions, 38% is really negative about e-auctions (an overall mean score of less than 3), the majority (52%) has an overall mean score around the midpoint (between 3 and 5), and a small group (10% of respondents) has a favourable opinion of ERAs (an overall mean score of 5 or higher)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

ERAs damage relationships

I try to avoid ERAs

I have generally had positiveexperiences with ERAs

I am generally satisfied withERAs

ERAs are a good means ofobtaining business

strongly disagree disagree somewhat disagree neutral somewhat agree agree strongly agree

Perceived fairness of e-auctions

Satisfactionwith ERA

Perceiveddistributive

justice

Perceivedprocedural

justice

Communicationfrequency

Ease of contact

Communication quality

Auction procedures,such as:

Number of suppliers,Bid visibility,

Code of conduct

Gains

Efforts

Intention toparticipate again

Fair process and outcome impact satisfaction

Interaction plot

Explaining satisfaction for subgroups

Interaction plots for subgroups

Satisfaction impacts future intentions

ERA conclusions

• The ERA is one sourcing tool amongst others (face-to-face negotiations, sealed bids, collaborative design)

• Not all categories are suitable for ERAs• ERAs put a focus on price, and less on other

dimensions of value• ERA success depends on supplier participation• Supplier participation is influenced by perceived

fairness of outcomes and procedures

EP technology typology

• EP technology for communication/collaboration– Supplier portals– E-marketplaces– Lower transaction costs, 24/7 availability

• EP technology for competition– E-sourcing, E-auctions– Lower prices, lower transaction costs, higher proficiency,

global reach

• EP technology for coordination– E-ordering– Lower transaction costs, higher compliance

Different technologies for different situations

LEVERAGE

ROUTINE BOTTLENECK

STRATEGIC

Lo Supply risk Hi

LoP

urch

asin

g im

pact

Hi

LEVERAGEeAuctions

negotiation

ROUTINEeOrdering

transaction

BOTTLENECKSupplier eSolutions

information

STRATEGICeSupply chains

synchronization

eProcurementportal

Are you ready?

• Clearly outlined e-Procurement strategy present and embedded in overall corporate purchasing strategy?

• Generally accepted purchasing procedures in place?• Purchasing authorisation (who responsible for what and

when) clear?• Is intended e-Procurement solution compatible with

present ERP-system?• Have ordering and payment routines been defined and

are these supported by Work Flow Document Control?

• The first benefit of e-Procurement is often the improvement of the purchasing processes!

• Main EP challenges are change management challenges!