Sunday, December 31, 2006

E-Procurement: Buying And Selling In The Digital Age






Procurement in its broadest sense describes the acquisition of supplies for all businesses whether they be small retail stores or large international conglomerates like Walmart. The important distinction is of course scale. For multinational firms the problems of procurement such as transportation, standardizaton, quality control to name a few become pronounced as a function of their enormous size.
And so Modern Enterprises today have come to be reliant on the smooth purchase patterns of various needed supplies from intermediaries , an interdependent line of exchange identified as a supply chain.

Given the enormous scales of large modern business organizations the logistics of supply chain management today are best achieved with a well conceived and employed strategy. The elimination of redundancy, efficiency of operations, streamlined work flow, lowered costs and increased quality are always the principal underlying goals of any supply chain management stra
tegy.

In today's business culture the widespread implementation of E-procurement is fast becoming the industry standard.

It has become part of the overall procurement strategy of any large business model:

Indeed having any procurement strategy is no longer optional, E-business is real and it's here to stay. It is no longer optional for companies to have an e-strategy, but developing one that's sustainable can be difficult and often involves passing though a series of stages: awareness, alignment and strategic change. “ (Herman, 2000, p. 24)
There are certain steps must be undertaken before implementing a successful E- strategy . Herman suggests there are the four 4 such goals, namely involving senior management early on, formulating a plan that involves senior management and IT specialists and that moves in new directions, being open to radical change even if that change can only be implemented in small steps and finally to be constantly ready to making new changes in practice.. (Herman, 2000, p. 26)

Traditional Procurement Models

Traditional models of procurement have been marked by many structural problems which Mitchell summarizes well:
Traditional procurement is a paper-based process that often is characterized by fragmented purchasing, off-contract buying, and lack of control over expenditures. Even in its simplest form, a manual procurement system requires that public sector employees coordinate vast amounts of paperwork: purchase orders, supplier acknowledgements, shipping and receiving documents, invoices and accounts-payable vouchers, supplier payments, and account reconciliation reports. Yet, despite this extensive paperwork, most procurement departments lack the transaction data required to negotiate effectively with suppliers. The reality is that procurement managers spend most of their time chasing paperwork, rather than managing their supplier base or negotiating better prices. The National Association of Purchasing Management estimates that for a single purchase transaction of $500, the manual processing cost is an astonishing $120 to $150 per transaction. In addition, these manual processes tend to be slow and prone to error. (Mitchell, 2000, p. 21)


E-procurement is not easily defined but one such conceptual description by Donna Champion provides some understanding:
Electronic Procurement is a business to business purchase and sale of products via the internet.(Haller,2001,p.3)


Origins and Models


Some elaboration of this broad spanning description is in order to further grasp its meaning beginning first with the its beginnings and model variations.

E-Procurement saw its origins in the 1990s with the growth of the internet and the rapidly realised business applications of tapping into the speed of information transfer in this new paradigm. Out of chaotic initial origins researcher
Ruth Haller believes a number of coherent models of E-procurement have emerged . It is useful to use her ideas as a conceptual framework for the scope of E-Procurement in today's business environment. Haller employs the Direction of Coordination criteria used to study Supply chain management from Busch and Dangelmeir.(Haller,2001,p.5)

According to these authors the Direction of Coordination is the most important area in deciding which model of E-Procurement would best serve a particular business type. Haller identifies two broad types of business organizational schemes the heterarchic and the hierarchic.


A supply chain with a hierarchic design involves a
chief enterprise that plays he largest role in the communication and executive function between the consumers, the markets and its various subordinate enterprises.

A heterarchic business on the other hand has no suchcentral chief enterprise but rather a group of enterprises that contribute in different and equally important ways to production. The distinction in approaches is necessary since the the types of E-Procurement models vary on the basis of these organisational types.

The current E-Procurement models all have the structural architecture
of the internet in common and are defined by the the administrative location of the purchasing software that forms the base of all the E-Procurement. The advantages that can be gained through this automation are considerable:
The primary impact of the Internet revolution on purchasing is to break the time- and location-bound aspects of traditional "gravitational commerce." Purchasing agents can place orders, gather information, and communicate with different organizations from any place at any time” (Sheth (Martin & Hafer, 2002)
The use of Extensible Mark-up Language (XML) is indispensable in
these models as it allows a uniform language to describe catalogue information that is readily adaptable.

Currently there are according to Haller three types of E-Procurement models at work in modern business organisations: the Buyer Centric, the Seller-centric, and Market place models.

Buyer-Centric models are characterized by the adoption of s
oftware that creates a single catalogue with which the suppliers would deal.There are several advantages to this model.
It allows the centralisation of the financial administration and automates the entire process making it faster, reducing the costs of business and increasing the value of the company apart from sales. It allows the easy comparison of prices for suppliers and reduces the cost for them--savings that can then be transferred back to the buyers.

The most distinct disadvantage of this model are the limited choices in dealing with a single buyer with a single catalogue. The cost of maintaining this single catalogue in terms of specialized manpower and resources also makes this an early model in the evolution of E-Procurement. This model offers the benefits of automation and speed of access but appears to be of limited dimension, preventing the exploitation of all of the growing possibilities of the internet.

Seller-Centric E-Procurement models place the administra
tive software with the seller. This model reduces the cost for the buyer in terms of keeping the catalogue up to date as well as delivery which is all performed by the supplier. There are,however, many organisational problems apart from the advantages.

In this arrangement, the buyer is forced to to use different sites from the many different suppliers, a clearly inefficient process since the logistics of dealing with different sites and different searches quickly becomes disorganised.

There are problems for the buyers as well. Since the software system sits with the seller the buyers financial enterprise does not gain the efficiency of that technology. As Haller points out, Amazon.com provides a very good example, of a Seller Centric E- procurement model. It offers a large catalogue where buyers can choose host of products and ord
er their choice.

The third and most sophisticated E- procurement model is is the marketplace E- procurement model. In this model, buyers and sellers make t
heir financial exchanges on a separate platform. An independent platform provides software where catalogues are offered and various buying capabilities are all offered on the software program.

Of all the Models seen so far seen so far the marketplace E procurement model offers the greatest multiplicity of buyers and sellers coming together; however, this is not to say that every exchange is perfect since with this wide-ranging model, individual needs cannot be perfectly addressed in the broad service nature of the model.

Perhaps the best-known of the marketplace E- procurement model, is E-Bay . With this company, buyers and sellers are brought together in a market that attempts to offer the best prices and products to the maximum number of customers and suppliers based on how t
heir respective purchasing and selling behaviour determines the market price. In this sense, it is a microcosm of classical textbook economics, showing market forces in action.



E-Procurement In Large Scale Organisations


It is useful to first examine the procurement strategies in the largest organizations. Take for example the problems encountered by government organizations in implementing procurement strategies. Oscar sums up the need for such strategies in public organizations eloquently: "We wouldn't think of building a house without a plan and standards. We will never create an integrated federal procurement system without such an architecture and standards either." (Oscar, 2001, p. 11)
The need becomes especially heightened Oscar poi
nts out in making federal contracting, truly competitive, that is ensuring all competing companies have ready and easy access to contract information. This goal is much easier stated than achieved:
“The current problem in the US is that the organization is too labor-intensive, and slow to respond to changing requirements, In fact, a single small change to the Federal Procurement Data System (FPDS) requires each agency to reprogram its computers. Also, it doesn't allow the rapid consolidation of requirements, provide management data to those that need it, or allow rapid, fair electronic buying and selling.” (Oscar, 2001, p. 11)


This would appear to be a classic case of hierarchic structural organization, where there is a need for centralized administrative control but at the same time improved efficiency achieved through better accessibility in the various sub departments; however, surprisingly in practice, the most successful approach implemented has been the marketplace E- procurement model.

The use of FedBizOps(Federal Business Opportunities) ,a web-based portal that allows the listing of contracts with all associated information on-line, offers companies the ability to quickly bid, based on current information.


Fundamental to the success of this organization has been the use of a variation of XML called gov-ML. The use of this language has been successful because, because it allows mutual understanding without the requirement of reprogramming. The use of work flow mark-up language has also added to increased understanding and efficiency.
Prior to the changes the system was as Oscar described it fraught with problems. In Federal contract offerings there was a seemingly Byzantine organization of mutually in-exclusive departments often at odds from the inability to communicate.
The initial use of the marketplace E- procurement model in FedBizO
Ps has done much to remedy some of these problems; however, there are many more problems to be addressed. Here again, the need for strategy is all-important.

Oscar outlines some of the fundamental requirements of the E- procurement strategy in public organizations. Fundamental to the whole plan is the idea of interoperability, that is seamless communication between all the subcomponents of the hierarchy. After this, is the architecture of the system; and here he employs the marketplace E procurement model which he terms as the use of a middle ware portal. Next, he calls for a system of common standards, in this case he is referring to the use of XML language, which allows mutual understanding without the need for expensive reprogramming since the language is flexible and multifunctional. In this regard, he asks that the use of work flow mark-up language become the standard among the Federal organizations since it has already become a standard in international organizations.(Oscar, 2001, p. 13)

Clearly here, E- procurement has made a vast difference in the way in which government organisations carry out their procurement strategy. Similar improvements can be seen in larger educational institutions which are also hampered by decreased incentive to impro
ve. While there is acknowledgement of the huge benefits to to be reaped from switching to E- procurement there is still a great deal of reluctance to change as is evidenced here,
" While 60 percent of senior college officers rate harnessing the power of e-business as a top priority, only 2 percent of university procurement transactions actually take place electronically, according to Highermarkets, a provider of e-commerce solutions for higher education." (Rivard, 2001)
The principal reason for the unwillingness to change has simply been the the fear of the unknown. The University of Delaware overcame these inhibitions in implementing an E- procurement system. The system known as (University of Delaware Mart)UD Mart is essentially a buyer centric, E- procurement model which allows individuals in the requisition Department up to $5,000 in credit to order supplies from on-line catalogues. While the system used at the University of Delaware, deals with more than a single buyer, and therefore does have some flexibility in changing contracts it is somewhat limited by this arrangement.

The advantage of using this system is the ability to centralize financial administration and perhaps this is the reason for this choice of E- procurement model. W
hile this model may have its limitations it has achieved significant gains over traditional procurement models," "The school earned a Management Achievement award from NACUBO (National Association of College and University Business Officers) this summer for the UD Mart purchasing program. 'As it turns out we have more benefits than we had anticipated,' says Windley." (Rivard, 2001)

A similar success in adopting an E-procurement model was seen by the Massachusetts Institute of Technology (MIT). MIT instituted a buyer centric model for its purchasing department. MIT employed NECX(National Enterprise Coporate Express), the most successful vendor, they could find and
established an on-line catalogue. The partnership has proven to be a great success, "The most significant savings are from the reduction in processing of paper requisitions, purchase orders and invoices. Each NECX order represents one or more purchase orders in the costly paper system." (Hallisey, 1999, p. 68)

E-Procurement In Small Bussineses


Examining E -procurement strategies
in small businesses offers much critical insight into the nature of E-procurement planning at large since these organizations are hampered by limited capital, and therefore potentially stand to incur greater risk by committing to the cost of implement
ing such changes.

Despite the greater risks that small businesses shoulder, there is an equally pressing need to improve operations, especially given the large role small businesses play collectively in any nation's economy. For example in the United States, small businesses play a huge role:
Small businesses represent 99 percent of all employers and employ 52 percent of the private sector workforce. Additionally, small business as an industry employs 38 percent of private workers in high technology fields and provides virtually all of the new jobs. Small businesses are responsible for 51 percent of private sector output, provide more than half of all innovations, and account for 35 percent of all federal prime and subcontract contract dollars and 97 percent of all exporters. (Williams & Fisher, 2001, p. 17)


In this regard, the federal government does now provide an incentive for small businesses to adopt E- procurement models. For example, in 2001 the federal government proposed and then implemented a rule where all federal business contracts would be offered through FedBizOpps.(Williams & Fisher, 2001, p. 18)

The the pressure to adopt an E- procurement model into their overall procurement strategy is not unique to the small American firms alone. In the UK as well, small businesses are under increasing pressure to adapt to E- procurement, "SMALL firms in North and mid Wales are being warned they stand to lose out on potential contracts worth millions of pounds unless they plug into e-commerce." ("E-Commerce Vital for Small," 2005, p. 2)

There does exist, the cost and risk of implementing E- procurement strategies such as when the company that provides the software that supports the purchasing environment goes bankrupt "... Commonfund, a budding e-procurement company founded by Commonfund, was forced to fold this year. The company's demise was caused partly by its reliance on an e-procurement software provider that filed for bankruptcy in May. (Rivard, 2001).



Despite the risks for small businesses the incentives are far greater, as is seen in the following observation,
" early adopters of e-commerce gained a competitive access to a wider marketplace. Russell Lawson, of the Federation of Small Businesses, said there was a lack of procurement expertise across many central and local government organisations and insufficient knowledge of the role that SMEs could play ("E-Commerce Vital for Small," 2005, p. 2)
The recent response to this need, has seen the birth of of a number of broad-based initiatives to encourage the adoption to E- procurement among small businesses in the UK like for example the work of the Regional Information and Communications Technology (ICT) Steering Group,
" The initiative is the West Midlands' response to the Government's Digital Strategy, which was launched last year. And it is being shaped in a climate where 42 per cent of small and medium sized businesses (SMEs) in the West Midlands still do not use a computer and where only 40 per cent of the 20 million UK workers who use ICT in their daily work do not have any formal training." ("Digital Age to Drive," 2006, p. 23)
These initiatives do much to both allay the doubts and reduce the structural barriers that small businesses inevitably encounter in the U.K.

Security Concerns

There is a dark dimension
to the great advantages of using information technology for procurement , that is the security concerns that are posed by its use. The open and public nature of the Internet has proved to be a great benefit to businesses in accessing a large number of markets at a greater speed than ever before. However, this accessibility also leaves businesses vulnerable to less well-intentioned members of the public.




In light of these truths, the growth of E- procurement has also seen a parallel rise in investment in security technology as Andrees outlines here:
"The growth of e-business has made security a must-have for many companies. IDC ( International Data Corporation), a leader in technology research, predicts that the market for security products will grow to $14 billion by 2005, more than doubling its current size, estimated at $5.1 billion". (Andress, 2003, p. 4)
Interestingly, security has now developed into a component of the E-procurement. It is now typically handled by a specialized team or company that run their security operations on-line. These organizations are called managed-security services (MSS). The MSS organizations offer a range of services, depending on the individual businesses needs: "The client and consultant together determine the need for 24/7 network operations Grand center (NOG) support, and some type of monitoring, analysis, reporting, and response for security incidents." (Andress, 2003, p. 354)
The work of MSS by no means removes the threats that exist in implementing E- procurement strategies, but they do much to ensure that the great competitive advantage of implementing them is not negated by the security risk.

E- procurement is playing a rapidly expansive role in the overall procurement strategy of virtually all industries.

While it is simply labelled, E- procurement is highly complicated and exists in many variations. Some understanding can be achieved by using a framework of classification such as the model utilized by Haller. Further critical understanding of E- procurement strategy is perhaps best observed in those industries that do not have the ideal business philosophy or large reserves of capital available to big businesses. It was clear from examination that E- procurement strategies benefited government and large educational institutions. Systems of E- procurement employed by these organizations were perhaps crude by big business standards but they nevertheless led to improvements in operations. Small business, as this paper made clear are being pushed into a sink or swim scenario, where despite the risks, they were being pushed toward adopting. E- procurement models by concerted government initiatives. These initiatives have grown out of an understanding of small businesses vital role in the growth of the economy. An underlying structural problem in all these business types and indeed one E- procurement faces as a whole is the problem of security. Interestingly the emerging solution to the structural weakness E- procurement today is the adoption of MSS models. These models are in keeping with the speed and efficiency that characterizes E- procurement as a whole. E- procurement will no doubt assume a greater and greater share of procurement strategy since, despite the risks ,the benefits are huge. Also, it is becoming rapidly evident that the cost of not adopting E- procurement is the loss of business.

References

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