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.

https://www.linkedin.com/in/drtomdepaoli/