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Heads Up! B2B E-Procurement Is Hard at Work

“Heads Up! B2B E-Procurement Is Hard at Work”

Stop the paper chase; save time and money through B2B online purchasing.

Trailblazing is the very essence of entrepreneurship. So it’s no surprise that more companies are exploring growth opportunities through business-to-business (B2B) e-procurement. By purchasing company-related goods and services over the Internet, you can:

  1. Replace the never-ending stream of paperwork traditionally involved in purchasing, saving time and associated costs.

    Case in point: One Midwest company found its paper-based process took two weeks to transform a requisition into a purchase order. With a new e-procurement system, placing an order now takes three minutes — and less than one minute for simple orders. Direct cost of processing is now $5 for each purchase order, compared to $12 with the paper-based system. The company saves money, and valuable employee time is freed up.

  2. Cut down on rogue purchasing, ensuring that everyone buys according to company policy and only from approved vendors.
  3. Save money on volume discounts and by meeting minimum purchasing requirements from preferred vendors.
  4. Trim the time gap between order and delivery, in some cases down to hours rather than days or weeks.

No Limits

There are virtually no limits to what you can buy online — either through one-on-one transactions or through one of the burgeoning e-marketplaces. And that’s especially good for MRO items. Maintenance, repair and operations represent about 36% of the indirect goods and services that a company purchases, at an average of $79 per transaction. E-procurement can slash those costs by making buying more efficient and getting volume discounts on MRO items such as:

  1. Legal and professional services.
  2. Office equipment and supplies.
  3. Utilities and communications.
  4. Advertising and marketing suppliers.
  5. Computer and IT equipment.
  6. Catering and food services.

Basic E-Procurement

E-marketplaces and other intermediaries are already growing rapidly, and experts believe they will eventually be the major focus of B2B procurement. Consider:

  • The Boston Consulting Group predicts that between 1998 and 2003, B2B e-commerce will grow by 33% per year and will reach $2.8 trillion in transaction value. That means one-quarter of all U.S. B2B purchasing will be done online.
  • Electronic B2B auctions and exchanges are expected to do $700 billion worth of business in 2004, up from an anticipated $29.4 billion this year, according to Forrester Research of Cambridge, Mass.
  • Merrill Lynch predicts that B2B e-commerce sales will reach $2.5 trillion by 2003, with Web marketplaces accounting for 20% or $500 billion of that amount.

But one-to-one e-transactions are, to date, the most common form — and closest to our traditional concept of buying. To make an online purchase, simply visit the seller’s Web site and place an order. You’re connected to suppliers through a common interface with links to catalogs, suppliers’ systems and buyer ERP (enterprise resource planning) systems.

E-procurement is a Web-based application that will integrate your company’s intranet, purchasing process and preferred vendors. To get started, you’ll need to add the appropriate technological tools to existing procurement processes and install software on your internal networks so that employees can order items from preapproved vendors. Here’s how it works:

  • You, or any authorized employee, access the company’s purchasing application through your intranet. (This application can include any product, from computers to office supplies to machinery.) When you want to view a product, the intranet links you to the online-shopping extranet site of a preferred vendor.
  • The purchaser chooses the model, quality and product configuration that he/she wants to buy. This information then goes from the shopping site to your intranet.
  • The purchase choice is routed for any necessary approval, which is done electronically through digital signatures.
  • The approved order is sent to the vendor’s online-purchasing site.
  • The purchaser receives an e-mail from the vendor confirming receipt of the order and verifying delivery arrangements.

E-Procurement Options, Costs

E-procurement is not for mega-corporations only. Some large e-commerce pioneers, such as Commerce One and Ariba, have established online procurement networks for smaller companies to use. Such networks save smaller firms time and money by eliminating infrastructure and implementation costs. As a network member, you also can save by participating in the cumulative volume purchasing of other participants for some items.

These networks offer a range of integration with back-end systems, from none (you use only a browser) to sophisticated integration with ERP systems.

To find out if you’re financially in the running, ask providers upfront what rates they charge. And ask before you spend time and energy exploring any one e-procurement service firm.

Measuring costs is one of the challenging areas of e-procurement. Your costs will be "essentially nothing" if you’re just using a browser to connect to a hosted procurement application provider or a marketplace. Or costs could soar to hundreds of thousands of dollars for buy-side solutions. In fact, light versions of the mega systems can cost a whopping $50,000 to $200,000.

Additionally, a firm providing procurement outsourcing for a small company may charge for expert advice, conducting negotiations on your behalf with vendors, providing financial reports and so on. And the current trend toward bundling makes it difficult to assess the cost of a single component.

Nonetheless, the good news is that there are more options for small business.

Finding an E-Procurement Service Firm

  1. Set up a cross-functional team that includes the CEO, CFO and business-unit managers to evaluate outsourcing of procurement.
  2. Develop a request for proposal (RFP) from vendors (such as Commerce One, i2 Technologies, Oracle or Ariba). Describe your objectives, the function to be outsourced (procurement), specific performance criteria for the system, anticipated costs and benefits, and criteria that will be used to select the winning vendor.
  3. Do your homework. Talk with knowledgeable experts who can help you develop a list of potential vendors.
  4. Send the RFP to potential vendors, specifying the deadline for response.
  5. Evaluate proposals and invite semi-finalists to make a presentation.
  6. Check references. Look for references from other customers with businesses similar to yours who have had a happy experience with the potential vendor.
  7. Negotiate contracts that include service-level agreements linked to compensation. Such agreements should specify items included in the e-procurement system, as well as turnaround times from placement to delivery.
  8. Pick the winning vendor and cooperate in implementing the system.
  9. Keep employees fully informed, and provide the necessary training and support. Only then will your company fully benefit from the new system.

    Case in point: One company found its employees completely ove
    rwhelmed by the flood of e-mails generated weekly by new e-commerce applications that included procurement.

    Employees were responsible for answering these e-mails on top of handling regular duties. Their solution was to redesign their own jobs in ways that would leave adequate time for e-mail response. Management agreed, and every e-mail is now answered within minutes — meaning the company can take full advantage of best-price offers and other deals.

Patience Is a Virtue

How long does it take to get an e-procurement system up and running? That depends on the type of system and whether your company is technology-enabled. Adding an e-procurement module to an existing system can take from a few days to several weeks or even months. For example, your business might use PCs and accounting packages that also offer a procurement module. However, launching a more comprehensive e-procurement system could take up to six months.

A Word to the Wise

Despite its virtues, an e-procurement system is not risk-free. Beware of two potential problems:

  • Employee theft. To minimize the danger, make sure business rules for approval of purchases are properly embedded in the e-procurement system from the outset. Key point: Specific reporting mechanisms, which detail who purchased what items and how much they paid, are important for internal security. Consider embedding price caps for specific (especially high-end) items.
  • Hackers. Watch your back door: The e-procurement system could be an entry point for hackers to access your systems and either view or steal sensitive corporate information. Be sure to discuss security with your e-procurement service or other consultants so that it’s embedded in your system.

Writer: Kathleen Conroy