E-Procurement & Outsourcing

E-procurement (electronic procurement, sometimes also known as supplier exchange) is the business-to-business (B2B) or business-to-consumer (B2C) or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP).

The e-procurement value chain consists of indent management, e-Tendering, e-Auctioning, vendor management, catalogue management, Purchase Order Integration, Order Status, Ship Notice, e-invoicing, e-payment, and contract management.

Public sector organizations use e-procurement for contracts to achieve benefits such as increased efficiency and cost savings (faster and cheaper) in government procurement and improved transparency (to reduce corruption) in procurement services.

E-procurement in the public sector has seen rapid growth in recent years. E-procurement in the public sector is emerging internationally.

E-procurement projects are often part of the country’s larger e-Government efforts to better serve its citizens and businesses in the digital economy.

Although early interest centred on the growth of retailing on the Internet (sometimes called e-tailing), forecasts have predicted that B2B revenue will soon far exceed business-to-consumers (B2C) revenue.

B2B websites can be sorted into the following categories:

Company websites: The target audience of many company sites is other companies and their employees. These sites can be thought of as round-the-clock mini-trade exhibits. Sometimes, a company website serves as the entrance to an exclusive extranet, available only to customers or registered site users. Some company sites sell directly from the site, effectively e-tailing to other businesses.

Product supply and procurement exchanges: These are exchanges in which a company purchasing agent can shop for supplies from vendors, request proposals and, in some cases, bid to make a purchase at a desired price. Sometimes referred to as e-procurement sites, some serve a range of industries, while others focus on a niche market.

Specialized or vertical industry portals: These portals provide a "sub-web" of information, product listings, discussion groups and other features. Vertical portal sites have a broader purpose than procurement sites (although they may also support buying and selling).

Brokering sites: These sites act as an intermediary between providers and potential customers that need their specific services, such as equipment leasing.

Information sites: Sometimes known as infomediaries ( an Internet company that gathers and links information on particular subjects on behalf of commercial organizations and their potential customers ) - these sites provide information about a particular industry to its companies and their employees. Information sites include specialized search sites and those of trade-and-industry-standards organizations.

Many B2B sites fall into more than one of these groups. Models for B2B sites are still evolving.

Another type of B2B enterprise is software for building B2B websites, including site-building tools and templates, database and methodologies, as well as transaction software.

Electronic Data Interchange (EDI)

EDI is the computer-to-computer exchange of business documents in a standard electronic format between business partners.

By moving from a paper-based exchange of business document to one that is electronic, businesses enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved relationships with business partners.

Each term in the definition is significant:

Computer-to-computer– EDI replaces postal mail, fax and email. While email is also an electronic approach, the documents exchanged via email must still be handled by people rather than computers. Having people involved slows down the processing of the documents and also introduces errors. Instead, EDI documents can flow straight through to the appropriate application on the receiver’s computer (e.g., the Order Management System) and processing can begin immediately. A typical manual process looks like this, with lots of paper and people involvement:

The EDI process looks like this — no paper, no people involved:

Business documents – These are any of the documents that are typically exchanged between businesses. The most common documents exchanged via EDI are purchase orders, invoices and advance ship notices. But there are many, many others such as bill of lading, customs documents, inventory documents, shipping status documents and payment documents.

Standard format– Because EDI documents must be processed by computers rather than humans, a standard format must be used so that the computer will be able to read and understand the documents. There are several EDI standards in use today, including ANSI, EDIFACT, TRADACOMS and ebXML. And, for each standard there are many different versions. When two businesses decide to exchange EDI documents, they must agree on the specific EDI standard and version.

Businesses typically use an EDI translator – either as in-house software or via an EDI service provider – to translate the EDI format so the data can be used by their internal applications and thus enable straight through processing of documents.

Business partners – The exchange of EDI documents is typically between two different companies, referred to as business partners or trading partners. For example, Company A may buy goods from Company B. Company A sends orders to Company B. Company A and Company B are business partners.

Enterprise Resource Planning (ERP)

Enterprise resource planning (ERP) is business management software—typically a suite of integrated applications—that a

company can use to collect, store, manage and interpret data from many business activities, including:

Product planning, cost Manufacturing or service delivery Marketing and sales Inventory management Shipping and payment

ERP provides an integrated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across the various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. ERP facilitates information flow between all business functions, and manages connections to outside stakeholders.

Enterprise system software is a multi-billion dollar industry that produces components that support a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past decade. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.

The ERP system is considered a vital organizational tool because it integrates varied organizational systems and facilitates error-free transactions and production. However, ERP system development is different from traditional system development. ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.

ERP systems can drive huge improvements in the effectiveness of any organisation by:

Assisting you in defining your business processes and ensuring they are complied with throughout the supply chain;

Protecting your critical business data through well-defined roles and security access;

Enabling you to plan your work load based on existing orders and forecasts;

Providing you with the tools to give a high level of service to your customers; and

Translating your data into decision making information.

Benefits of ERP for your Business

Integration across all business processes - To realize the full benefits of an ERP system it should be fully integrated into all aspects of your business from the customer facing front end, through planning and scheduling, to the production and distribution of the products you make.

Automation enhances productivity - By automating aspects of business processes, ERP makes them more efficient, less prone to error, and faster. It also frees up people from mundane tasks such as balancing data.

Increase overall performance - By integrating different business processes, ERP ensures coherence and avoids duplication, discontinuity, and people working at cross purposes, in different parts of the organisation. The cumulative positive effect when business processes integrate well is overall superior performance by the organisation.

Quality Reports and Performance Analysis - Analysis on ERP will enable you to produce financial and boardroom quality reports, as well as to conduct analysis on the performance of your organisation.Integrates across the entire supply chain - A best of breed ERP system should extend beyond your organisation and integrate with both your supplier and customer systems to ensure full visibility and efficiency across your supply chain.

Procurement Outsourcing

Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Procurement categorisation and vendor management of indirect materials and services (commonly referred to as indirect procurement) are typically the most popular outsourced activity.

Overview

Outsourced procurement teams allow companies to benefit immediately from experienced procurement specialists support & expertise. This avoids the creation of an internal team (new resources) and the required time for that team to structure itself, its processes and its expertise.

Outsourced procurement is therefore an available solution for companies who:

Have no internal competencies but want to quickly benefit from procurement action (cost reduction, suppliers and contract management...);

Have internal procurement expertise (department) but want to outsource activity on specific area(s) like indirect materials and services;

Consider Procurement as a non-strategic / core function and want to have it managed by a procurement service provider; and

Want to develop quickly a procurement function to deliver savings, with a willingness to internally develop this function in the mid-term.

Procurement Outsourcing is being thought of in a big way in automobile manufacturers in India and China because with increasing number of cars being produced every passing day more man hours are required in trivial issues like timely delivery of materials. Hence Procurement team cannot concentrate on its core competency of negotiations and vendor selections.

Procurement categories

Procurement specialists usually split procurement activities into two parts:

Direct procurement

Direct categories are all goods purchased by the company which directly enter into the production process of that

company. For the food industry as an example, ingredients and packaging will be the key direct procurement categories.

Indirect Procurement

Indirect categories are all the goods and services that are bought by the company to enable its activity. This entails a wide scope, including marketing related services (media buying, agencies), IT related services (hardware, software), HR related services (recruitment agencies, training), facilities management and office services (Telecoms, furniture, cleaning, catering, printers), or utilities (gas, electricity, water)...etc.

Procurement services providers (PSPs)

Specialized procurement service providers are dedicated to procurement and have developed a strong expertise in procurement and procurement outsourcing, mainly in indirect procurement. Additionally, several consulting companies offer procurement outsourcing services in a limited manner, mainly focusing on strategic inputs or recommendations. Procurement services providers will usually ask for a fixed remuneration against commitment to saving delivery. Some providers also work on incentives or performance related fees (% of savings). Apart from procurement outsourcing, PSPs will offer other services like spend analysis or opportunity assessments.

Buy/Make Decisions

Introduction

Are you outsourcing enough? This was one of the main questions asked by management consultants during the outsourcing boom. Outsourcing was viewed as one of the best ways of getting things done for a fraction of the original cost.

Outsourcing is closely related to make or buy decision. The corporations made decisions on what to make internally and what to buy from outside in order to maximize the profit margins.

As a result of this, the organizational functions were divided into segments and some of those functions were outsourced to expert companies, who can do the same job for much less cost.

Make or buy decision is always a valid concept in business. No organization should attempt to make something by their own, when they stand the opportunity to buy the same for much less price.

This is why most of the electronic items are manufactured and software systems developed in the Asia, on behalf of the organizations in the USA and Europe.

Four Numbers You Should Know

When you are supposed to make a make-or-buy decision, there are four numbers you need to be aware of. Your decision will be based on the values of these four numbers. Let's have a look at the numbers now. They are quite self-explanatory.

The volume The fixed cost of making Per-unit direct cost when making Per-unit cost when buying

Now, there are two formulas that use the above numbers. They are 'Cost to Buy' and 'Cost to Make'. The higher value loses and the decision maker can go ahead with the less costly solution.

Cost to Buy (CTB) = Volume x Per-unit cost when buying

Cost to Make (CTM) = Fixed costs + (Per-unit direct cost x volume)Reasons for Making

There are number of reasons a company would consider when it comes to making in-house. Following are a few:

Cost concerns Desire to expand the manufacturing focus Need of direct control over the product Intellectual property concerns Quality control concerns Supplier unreliability Lack of competent suppliers

Volume too small to get a supplier attracted Reduction of logistic costs (shipping etc.) To maintain a backup source Political and environment reasons Organizational pride

Reasons for Buying

Following are some of the reasons companies may consider when it comes to buying from a supplier:

Lack of technical experience Supplier's expertise on the technical areas and the domain Cost considerations Need of small volume Insufficient capacity to produce in-house Brand preferences Strategic partnerships

The Process

The make or buy decision can be in many scales. If the decision is small in nature and has less impact on the business, then even one person can make the decision. The person can consider the pros and cons between making and buying and finally arrive at a decision.

When it comes to larger and high impact decisions, usually organizations follow a standard method to arrive at a decision. This method can be divided into four main stages as below:

1. Preparation

Team creation and appointment of the team leaderIdentifying the product requirements and analysisTeam briefing and aspect/area destitution

2. Data Collection

Collecting information on various aspects of the decisionWorkshops on weights, ratings, and costs for both

3. Data AnalysisAnalysis of data gathered

4. FeedbackFeedback on the decision made

By following the above structured process, the organization can make an informed decision on make-or-buy. Although this is a standard process for making the make-or-buy decision, the organizations can have their own varieties.

Conclusion

Make-or-buy decision is one of the key techniques for management practice. Due to the global outsourcing, make-or-buy decision making has become popular and frequent.

Since the manufacturing and services industries have been diversified across the globe, there are a number of suppliers offering products and services for a fraction of the original price. This has enhanced the global product and service markets by giving the consumer the eventual advantage.

If you make a make-or-buy decision that can create a high impact, always use a process for doing that. When such a process is followed, the activities are transparent and the decisions are made for the best interest of the company.