e Procurement 2014

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Dave Chaffey, E-Business and E-Commerce Management, 4th Edition, © Marketing Insights Limited 2009

E-procurement

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How important is procurement?

We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent on indirect goods and services—things like office supplies and computer equipment.

That half dollar represents an opportunity: By driving costs out of the purchasing process, companies can increase profits without having to sell more goods. Hildebrand (2002)

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The 5 rights of e-procurement

• at the right price• delivered at the right time• are of the right quality• of the right quantity• from the right source.

Baily et al., 1994

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Figure 7.1 Key procurement activities within an organization

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Figure 7.2 Electronic procurement systemSource: Tranmit plc

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Figure 7.4 Use of different information systems for different aspects of thefulfilment cycle

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Figure 7.5 E-mail notification of requisition approvalSource: Tranmit plc

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Figure 7.6 Document management software for reconciling supplier invoice with purchase order dataSource: Tranmit plc

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Figure 7.7 The three main e-procurement model alternatives for buyers

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Figure 7.8 Integration between e-procurement systems and catalogue data

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Practical examples

• http://www.yale.edu/procurement/eprocurement/training/videos/TourV2.htm

• https://www.supplycollins.com/portal/server.pt?

http://www.yale.edu/procurement/eprocurement/training/videos/TourV2.htm

http://www.yale.edu/procurement/eprocurement/training/videos/TourV2.htm

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Measurement of e-procurement benefits

Peter Trkman Ph. D.assistant professor

This presentation is based on: Trkman, P. & McCormack, K. (2010) Estimating the benefits and risks of implementing e-procurement IEEE Transactions on Engineering Management, in press.

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Content

Motivation

Importance of evaluation

E-procurement: benefits and challenges

Methodology

Value-at-Risk use in e-procurement

Conclusion & Further research

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Important!

Purchasing has undergone a transformation from merely being a necessary function to one that has become more strategic with a focus on generating a competitive business advantage

Elektronsko poslovanje 14

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Purpose

The challenge that remains is how to measure the increase in efficiency (both value and risks) of e-procurement implementations and simultaneous changes in the organization and strategy.


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Expected benefits

The main benefits of e-procurement are an increase in firms’ competitiveness through cost reduction and/or boosted efficiency with inbound logistics.

Those benefits can materialize in a reduction of purchasing transactions costs, order fulfillment and cycle time, a reduction of the number of suppliers or even a reduction in the price paid and the number of staff to support purchase transactions


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Importance of P2P process

E-procurement is the use of electronic means (the internet, web, e-mail) to enable the purchase of products and services over the internet

One of the major processes (global sourcing)

Both savings & risks are important

Important to study the whole process!

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P2P process

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Importance of benefits estimation

Previous estimates (up to 40-60% of total transactions costs)no methodology reporteddifferent companies may have different savings

Important to:justify such investmentsmonitor the projectsevaluate the benefits

in a specific company settings

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EB evaluation importance

Organizations lose up to 600 billions $ per annum due to unsuccessful IT/EB projects (Gartner)

40% of IT/EB expenditures does not bring any value to the organization (IBM research)

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EB evaluation importance - 2

despite the importance of EB investment the companies are still unsure about the benefits and way to measure the value and what influences this value (Subramaniam, Shaw, 2004).

There is a lack of understanding which methods and techniques are appropriate for evaluation of EB investment (Love et al., 2005)

Therefore the companies often see no real benefit of EB investment (Gunasekaran et al., 2008)…..

….and the expectation of EB investment are rarely fullfiled (Tanner et al., 2008)

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You get what you measure

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Tangible & intangible benefits

Tangible benefits:- increase in sales- stock turnover- transaction costs reduction- quality (e. g. number of mistakes per million products)- lead times

Intangible benefits:improved image of a companysatisfied employeesbetter team-work…

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Qualitative methods for evaluation

Source: Brun et al., 2006

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Cost-benefit analysis

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Quantitative methods for evaluation

Vir: Brun et al., 2006

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Back to our case!


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Main questions

how can the reduction of procurement cost, lead times and employee workloads be measured; and

which advantages and potential risks do organizational changes (in our case a change in approval procedures) bring to the procurement process?

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Methodology

Six major companies’ P2P (different industries) process were examined from 2006 to 2008 via interviews and analyses of transaction data

Process maps developed

The results were validated with the company employees

249,295 orders of an American multinational company used as inputs

Business process simulations (Igrafx 2007) for each scenario

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Why simulations?

It enable the mapping of current and future state and the estimation of reingenering benefits (Caridi et al., 2004)

Can be used for evaluation of various scenarios (Cho et al., 2005)

Enables the comparison of various business process configuration (Roeder et al., 2004)

Several successful examples of use in e-procurement projects (Mohebbi et al.,, 2007; Changchien et al., 2002; Reiner et al., 2004).

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Simulations - problems

The main problemsrelatively expensive {Vergidis et al., 2008),

hard to acquire the neccessary knowledge (specially for SMEs) (Berlak et al., 2004),

the model is always a simplification of reality. Verification and validation of the models is of outmost importance (Persson et al., 2002).

• GIGO principle

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Dave Chaffey, E-Business and E-Commerce Management, 4th Edition, © Marketing Insights Limited 2009Elektronsko poslovanje 32

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The role of simulations

optimizationanalysis of decisionidentification of problems/bottlenecksrisk management

prediction of the future

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Company name Sales (per year in million $)

Headquarters Industry/products No. of purchase orders per year (approx.)

Chemicalia 3500 Houston, TX poly propylene, poly ethylene resins

85,000

Judril 250 Houston, TX skid-mounted drilling, equipment to oil field

48,000

Cementy 500 Nazareth, PA cement 28,000 Energy Company

8000 Calgary, Alberta

oil sands mining and production

85,000

Polymerco multibillion Switzerland various chemicals and resins

52,000

Energocom multibillion Houston, TX gas pipeline company 68,000

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Scenarios

Scenario 1 (scen1): 100% are buyer assisted (BA);

Scenario 2 (scen2): 80% BA, 10% Pcard, 10% e-catalog (EC),

Scenario 3 (scen3): 60% BA, 20% Pcard, 20% e-catalog (EC)

Scenario 4 (scen4): same as scen2, but approval levels tripled (USD 3,000, USD 30,000).

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Business process model


Firm

type

e-catalog

PCard

buyer assisted

material need

End (PCard)

requisition (EC)

requisition (PC)

requisition (BA)

approval, level 1 (PC)

approval 1

needed?

approval 2 needed

approval level 2 (PC)

Yes generate order (PC)

Approve & pay invoice (PC)

End (EC)

approval level 1 (EC)

approval 1

needed?

Yes approval 2 needed

approval level 2 (EC)

Yes generate order (EC)

No

Approve & pay invoice (EC)

No

End (BA)

approval, level 1 (BA)

approval 1

needed?

Yes approval 2 needed

approval level 2 (BA)

Yes generate order (BA)

No

Approve & pay invoice (BA)

No

Yes

No

No

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Lead time distribution

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

no. of days

no. o

f tra

nsac

tions

scen1scen2scen3scen4

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Summary of results

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Table 4: Probabilities that a transaction will finish within a given period of time

time of completion

likelihood of completion within the given time

scen1 scen2 scen3 scen4 8 days or less 5% 23% 33% 36% 14 days or less 89% 91% 91% 96%

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Costs per approval level

approval 1 (indexed)

approval. 2 (indexed)

supervisor workload (FTE)

manager workload (FTE)

approval costs (USD)

value loss costs (USD)

total costs (USD)

10 10 10.6 6.70 3,625,000 397,276 4,022,276 50 50 8.7 0.94 1,589,300 844,015 2,433,315

100 100 6.8 0.08 1,049,500 1,078,234 2,127,734 300 300 2.5 0 379,400 1,466,992 1,846,392 500 500 0.94 0 142,100 1,743,300 1,885,400

1000 1000 0.08 0 12,000 2,000,453 2,012,453


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Total costs & approval level

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Value-at-Risk

Mainly used in financial industry…as the expected loss arising from an adverse market

movement with a specified probability over a period of time.“the sum of the probability of events times the monetary impact

of the events for the specific process, supplier, product or customer” (Supply Chain Council)

Still not widely used in supply chain/procurement management, but its use is increasing.

Methodological approaches are needed (can be computationally intensive)

Several other critics

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VaR & approval level

Which one is preferable?

scenario approval/check costs in USD

VaR (95% probability) in USD

VaR (99% probability) in USD

scen2: more control 1,049,500 2,052,932 2,330,755 scen4: empowerment of employees 379,400 3,740,071 4,315,433

e Procurement 2014

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