Overcoming the Five Most Common Mistakes Made in
E-procurement by Dr. Tom DePaoli
Introduction
The rush to e-procurement and e-commerce technologies has
been fraught with mistakes that has left some companies with unfilled high
expectations and little to show for their e-procurement investment. According
to Forrester Research the cost of a traditional procurement transaction or a
purchase order can vary from $50 to $150 per transaction. Many companies rushed
into the e-procurement arena with the goal of reducing transaction costs as the
primary justification. Companies targeted the “low hanging fruit” or the
indirect materials that often account for 80% of the procurement department’s
resources but account for only 20% of the total spend. The “fruit” was usually
non-critical, turn and burn, or MRO materials. E-procurement seemed like an easy
win for the procurement department. Much
of the initial software and technology mimicked the standard Internet buy
experience such as at Amazon.com. Ease of use and straightforward steps to
checkout strongly suggested a smooth path to high volumes of transactions. For
many companies “they have built it… but the transactions have not come.”
This paper is an attempt to briefly identify the top five
mistakes made in e-procurement and corporate e-commerce.
Procurement is first and foremost the
managing and enrichment of relationships. These relationships are
broad, multi-dimensional and critical to the success of an enterprise.
E-procurement still needs to significantly evolve to become the primary tool to
improve these complex relationships. Transaction reductions, shopping
convenience, on line auctions, pricing breaks, electronic transactions etc. are
just examples of solutions that mislead companies that go down the
e-procurement path with excessive great expectations. Companies who do not have
existing good solid relationships and communication with suppliers, internal
departments and customers can not take full advantage of existing e-procurement
tools. Eventually e-procurement will fulfill its great promise and help companies
achieve true collaboration and better relationships with suppliers and
customers. Until then avoiding these top five mistakes will keep companies on
track towards true supply chain collaboration.
This paper will address the value of using e-procurement and
e-commerce to help improve relationships and to identify the five most common
mistakes in implementing e-procurement. These critical mistakes are:
1. Not
creating a comprehensive procurement or supply chain strategy first or a plan
that aligns with an e-business strategy and e-procurement strategy.
2. Putting
the e- before procurement. Technology and e-procurement won’t fix current
unsound procurement practices.
3. Not
performing comprehensive strategic supplier sourcing overhaul first and failure
to prepare suppliers for e-procurement.
4. Not
properly identifying the proper materials-services groups and the proper
e-procurement tool to use for these groups.
Not assessing supplier capabilities, which includes readiness for
e-procurement and e-commerce.
5. Underestimating
resistance to change and the need for ease of use for end-users. A strong
component in this area is content (catalogue) quality and the transaction
details.
Mistake 1…. Not creating a comprehensive procurement strategy first or a plan
that aligns with an e-business strategy and e-procurement strategy.
The
National Association of Purchasing Management notes that 95% of procurement
organizations do not have a procurement strategy or long-term plan. Of the 5%
that do have a strategy; only half have successfully aligned the strategy with
overall business strategy. Most purchasing or supply chain departments are
continually embroiled in tactics and transactions. Much of their energy is
distracted to the intensive transactions (80% of the work) low dollar volume
(20% of the dollars) aspects of the supply chain. E-procurement is a critical
aspect of e-business and must be incorporated into any e-business strategy.
Organizations
need to first focus on a procurement or supply chain strategy first.
Mistake 2……… Putting the e- before procurement.
Technology and e-procurement won’t fix current unsound procurement practices.
An organization must focus on its current business or
procurement practices first. For many companies these still remain very archaic
and transaction intensive. The process
of the reengineering or transformation of purchasing is an excellent first step
in achieving the full benefits of e-procurement. This is where a comprehensive
procurement assessment is mandatory. (The “as is” state). Complete a gap
analysis. Standardized purchasing processes and rules are essential preceding
steps. Procurement procedures should be clearly defined along with current
supplier relationship depth.
E-procurement is a powerful tool but a disciplined procurement approach
should be in place before e-procurement solutions are implemented. The
procurement must come before the e. Unfortunately, many organizations do not
have good information on procurement spend, transactions, commodities and
suppliers, which makes an assessment extremely difficult.
Mistake 3……. Not performing strategic supplier sourcing
first and the failure to prepare suppliers for e-procurement
Strategic sourcing is a disciplined process implemented in
order to more efficiently purchase goods and services from suppliers. The goal
is to reduce total acquisition cost while improving value. Forrester reports that
40% of the total reduction in costs are associated with technology while the
other 60% are associated with strategic sourcing techniques. Here are four key points to jump start
strategic sourcing:
1.
Understand the state of current spending.
2.
Prepare a sourcing strategy for particular
commodities and tie the strategy into business and e-business strategy.
3.
Evaluate the current competencies of your sources of
supply and how to extract value from these sources
4.
Decide what’s important for you in your sourcing strategy
and how it relates to selecting your technology solution.
Mistake 4…… Not properly identifying materials-services
groups and the proper e-procurement tool to use for these groups. Not assessing supplier capabilities, which
includes readiness for e-procurement. Initial tactics.
The need to classify materials and services into
particular categories is essential for the success of e-procurement. Each
material group may require not only a different procurement strategy but also a
different e-procurement solution. Companies often try to apply the same
e-procurement strategy across the board to all materials and services. These
categories demand different strategies, different types of suppliers and
relationships along with the use of multiple tools. Currently some e-enabled
tools do not exist for certain specific materials needs. They are however
rapidly evolving.
The placement of a certain materials or services into a
particular group may vary by company, industry or a number of factors depending
on the criteria. The key is to have and articulate a strategy by group and to
utilize the appropriate tool.
Materials Grouping Matrix
|
Leverage
Materials
Strategy:
Price leverage
Use competitive
bids
Long term market agreements
Possible Tools
On Line Auctions
E-RFQ
Hedging
|
Strategic
Materials
Strategy:
Alliances
Long term
relationships
Alliance
contracts
Possible Tools
Partnering
Collaborative
Design
E-sourcing
software
|
|
Non-critical
Materials (MRO)
Strategy:
Consolidation
Improve
logistical costs
Reduce
administrative costs
Possible Tools
E-procurement
software
Exchanges-marketplaces
Outsourcing
Storerooms
|
Bottleneck
Materials
Strategy:
Minimize risk
Replacement or
redesign
Minimize risk
of supply
Possible Tools
Value Engineering
Shared higher
inventory
Product re-design
Collaborative
design
|
Mistake 5……..
Underestimating resistance to change and the need for ease of use for
end-users. A strong component in this area is content (catalogue) quality and
the transaction details.
End-users (internal buyers) demand ease of use and they
want to quickly find the items that they need. Companies need to realize that
e-procurement is competing with the easiest method to buy in the minds of their
end-users. Many end-users would rather pick up a smart phone, tell or text their
supplier what items they want, automatically charge it to a corporate purchase
card and hang up or exit. In many companies this method is still faster then
using the current e-procurement software. Any impediments to the fast purchase
of materials will quickly turn off end-users and kill transaction volumes.
Speed is king in the world of e-procurement.
End-users also want powerful search engines to quickly find their items.
If the content supplier catalogue is poorly organized and the quality poor,
end-users will quickly be frustrated by unfruitful searches and become
non-users of the e-procurement system.
In addition, special instructions that need to be given to suppliers
about delivery or other issues can’t easily be given with some e-procurement
tools or require additional end-user training which raises the frustration
levels.
Finally, there is the relationship factor with new
suppliers. Often new suppliers are installed for indirect materials solely
because they seem to have more e-procurement capabilities. End-users value
relationships with suppliers that they have trusted over the years.
E-procurement is highly impersonal and web based.
Resistance to change for an e-procurement system is fierce
but can be readily overcomes with strong commitment to change management. This change management process must be an
integral part of any e-procurement installation.
Never underestimate the role resistance to change plays in
this transformation.
References
1.
Source: Forrester Research
2.
Source: National Association of Purchasing Management
Author’s Biography
Dr. Tom
DePaoli, (Dr. Tom) is currently an independent management consultant, the
Principal of Apollo Solutions (http://www.apollosolutions.us), which does general business consulting
in the human resources, supply chain and lean six sigma areas. He founded his organization
in 1995. Recently, he retired as a Captain from the Navy Reserve after over 30
years of service. In other civilian careers, Dr. Tom was a supply chain and
human resources executive with corporate purchasing turnaround experience and
lean six sigma deployments. He has worked for over ten major companies and
consulted for over fifty organizations throughout his career. Some of his
consulting projects included: information systems projects, re-engineering
organizations, transformation, e-procurement, e-commerce, change management,
global sourcing and negotiating. His industry experience is in the chemical,
paper, pharmaceutical, Information technology, automotive, government,
consumer, equipment, services and consulting businesses. He has been published
extensively in journals, magazines and books. He has been involved in many
forms of communications including website design, marketing campaigns,
political campaigns, radio advertisements, and scripts. He the author of eleven books. His Amazon
author’s page is https://www.amazon.com/author/tomdepaoli
He has instructed
at six education facilities in numerous roles. He is active in supporting the YMCA, Wounded Warrior, and the prevention of the
bullying of children. For more detailed information about Dr. Tom
see his LinkedIn homepage.
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