Introduction:

The objectives of a world-class procurement organization move far beyond the traditional belief that procurement’s primary role is to obtain goods and services in response to internal needs. To understand how this role is changing, we must understand what purchasing is all about, starting with the primary objectives of a world-class purchasing organization.

Procurement process:

i. Support operational requirements:

This process includes the following activities:

• Understand business requirements

• Buy products and services

  • At the right price
  • From the right source
  • At the right specification that meets users needs
  • In the right quantity
  • For delivery at the right time.
  • To the right internal customer

  Internal customers of purchasing include:

  • Manufacturing
  • Physical distribution centres
  • Engineering and technical groups
  • Research and development
  • Information technology
  • Transportation and other services

ii. Manage the supply base effectively and efficiently:

To manage the procurement process and supply base efficiently and effectively procurement must follow the following key steps:

• Identify opportunities
• Manage internal operations

• Achieve objectives

  a. Identify opportunities where the procurement team adds true value:

  • Evaluation and selection of suppliers

    • All purchases should go through the approved procurement processes
    • Engineering and other functional inputs are part of this process
    • Sales personnel should not be allowed to enter contractual agreements without procurement’s involvement
    • Increasing use of sourcing teams

  • Review of specifications or statement of work

    • Review the requirements for the material or service being provided
    • May be able to suggest alternative standardized materials that can save the organization money
    • Periodic review of requisitions can allow greater leveraging of requirements

  b. Manage its internal operations efficiently and effectively, including:

  • Management of procurement staff
  • Developing and maintenance of policies and processes
  • Introducing and leveraging appropriate technology and systems
  • Defining procurement strategy and structure
  • Developing plans and measures
  • Providing procurement leadership to the organization
  • Providing professional training and growth opportunities for employees

c. Achieve this objective through :

• Leadership of procurement for the organization
• Sourcing management
• Ownership and accountability for sourcing processes
• Communication of purpose, process and pay off
• Collaboration and partnering
• Teamwork

iii. Develop strong relationships with other functional groups:

Develop integrated purchasing strategies that support organizational strategies.

Effective purchasing strategies involve:

• Monitoring supply markets and trends (e.g., material price increases, shortages, changes in suppliers) and interpreting the impact of these trends on company strategies
• Identifying the critical materials and services required to support company strategies in key performance areas, particularly during new product development
• Developing supply options and contingency plans that support company plans
• Supporting the organization’s need for a diverse and globally competitive supply base

Changes and possible outcomes involved in introducing e-procurement.

Risks and Impacts of e-procurement:

i. 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. Even e-procurement system provides numerous benefits to the firms; there is certain amount of risks associated with e-procurement implementation. These risks could be viewed as negative driving force affecting the e-procurement implementation.

ii. Security concerns and lack of faith in trading partners are the most significant factors holding back e-procurement.

iii. Trusted third party certification is required for the level of trust to increase.

iv. The risks associated with e-procurement can be classified into following types:

• Organizational risks:

  1. Companies are uncertain about having the appropriate resources to successfully implement an e-procurement solution. Implementing an e-procurement solution not only requires that the system itself successfully performs the purchasing process, but it integrates with the existing information infrastructure.
  2. The threat of redundancy or redeployment is likely to lead to resistance to the introduction of the systems and this need to be managed.
  3. Since the cost savings of e-procurement are achieved through empowerment of originators throughout the business to directly purchase their own items rather than through purchasing department there is s risk that some originators may take advantage of this.
  4. This is known as ‘maverick or off-contract purchasing’, and it has always happened to some extent.

• Technology risks:

  1. Companies also fear the lack of a widely accepted standard and a clear understanding of which e-procurement technologies best suit the needs of each company.
  2. The significance of this risk factor seems to suggest the need for clear and open standards that would facilitate inter-organization E-procurement technologies.
  3. Without widely accepted standards for coding, technical, and process specifications, e-procurement technology adoption will be slow and fail to deliver the benefits as expected.
  4. There is a different models for procurement. The models are evolving fast, so it is difficult to know which one to select.
  5. Problems introduced by large-scale ERP systems may not dispose organizations to e-procurement.

Cost Savings:

i. Here calculating cost is not straight forward, but it is clearly an important part of the cost justification of introducing an e-procurement system,

ii. To calculate the cost savings, we perform the following operations:

     Savings= No. of requisitions * (Original cost – New Cost)

iii. The cost savings achieved through e-procurement have a significant impact on profitability.

iv. The largest savings and impact on profitability will be for manufacturing companies in which e-procurement is a major cost element.

v. Service industries have lower potential for savings.