How To Dramatically Improve Competitive Advantage Through The Procurement Of Indirect Goods And Services

Author(s):

Carl O. Falk
Carl O. Falk, Vice President, Commerce One, Walnut Creek, CA 94596, 925/941-6016, www.carl.falk@commerceone.com

84th Annual International Conference Proceedings - 1999 

Abstract. In an increasingly competitive and global business environment, enterprises face constant pressure to reduce costs and increase productivity. Corporations are now realizing that procurement organizations play a vital role in the strategic positioning and financial well being of enterprises. The savings realized in procurement go straight to the bottom line - and they have a multiplying effect on profit margins. That is, depending on an enterprise's purchasing volume as a percent of revenues and its profit margin, a 5% reduction in purchasing can result in a 30% improvement in margins. Payback periods for the investment to realize these savings are almost always less than one year. With this in mind, it is easy to see why procurement automation for the procurement of indirect goods and services is the hottest segment in the electronic commerce marketplace.

Indirect spending encompasses a wide variety of goods and services, including maintenance, repair, and operating goods (MRO), communications and capital equipment, computer hardware and software, advertising, and corporate expenses, industrial and office supplies, travel and entertainment expenses, facilities and services. Historically, companies have been hindered by the inability to control and track indirect expenditures. Even today approximately 95% of these purchases remain manual.

The automation of the procurement of indirect goods and services can provide enterprises with a substantial cost reduction. Recent surveys of actual installed customer sites shows a reduction in the cost of goods and services purchased from 5-15%. In addition, the cost of the procurement process itself has been reduced by 70%, which corresponds with a cycle time improvement of 50-70%. In almost all cases the results have far exceeded expectations with payback periods of less than one year.

The solution that achieves results of this magnitude uses a business approach that empowers employees to directly select needed goods and services and completes the order process in a totally automated manner. Facilitated by web technologies and the deployment of Intranets and Extranets, a growing number of organizations are now employing next generation, desktop electronic procurement applications. These easy-to-use applications streamline internal processes associated with indirect spending and dramatically reduce costs related to the procurement of indirect goods and services.

Commerce One and several industry analysts have studied extensively what it takes for a buying organization to maximize their Return On Investment from an indirect procurement automation intiative. These studies are outputs from the Commerce One Commerce Council, an advisory group comprised of both buying and selling organizations, as well as interviews with customers of other application vendors. The results are conclusive that the following three elements are in fact Critical Success Factors for a successful desktop electronic procurement initative. They are:

  • The Desktop Electronic Procurement Application
  • The Management of Transactive Content
  • Trading Partner Interoperability

A complete solution must encompass both sides of the procurement process in order to bring both buyers and sellers together in a virtual trading community.

In retrospect, the interrelationship of the solutions elements is intuitive. Using an analogy, the electronic procurement application is like a high end sports car. It's great looking, fun to drive, highly responsive, quick, analog dials for accurate, rapid feedback - we could go on and on. However, it is little more than something to look at without - you guessed it, high octane fuel. Try driving it off the lot without even a little fuel. It just doesn't work. Nor will the electronic procurement application work without Transactive Content. It may not be exciting, it may not be great to look at, but Transactive Content is a critical element for the user to have a saftisfying experience. And just like the high octane fuel in our analogy, in its raw state supplier content is much like unrefined oil as it comes out of the well. Until it is refined, processed, and enriched it doesn't work well for our intended purpose. Only then does supplier content become Transactive Content. Now we have the ultimate sports car and the highest octane fuel to power it. But we still don't have a complete solution. Unless we have a state-of-the-art road, the experience will be less than satisfying. Imagine driving this high powered sports car on a road designed for the horse and buggey. This is akin to having a "best of class" desktop electronic procurement application, high powered Transactive Content management to fuel the procurement application, and then using EDI or fax to communicate back and forth with your suppliers. The complete solution requires an Autoban type of experience. And that's true Trading Partner Interoperability.

The following features and requirements resulted from Customer input at the Commerce One Commerce Council, an advisory group comprised of both buying and selling organizations, surveys of customers of other application providers, as well as in-depth analysis by the Gartner Group, a leading industry analyst.

Customer Driven Features And Requirements For Desktop Electronic Procurement Applications.

  1. Intuitive User Interface
    • Zero training should be the design point in order to speed deployment and eliminate maverick buying


  2. Efficient Product/Service Search
    • "Shopping basket" functionality for repetitive purchases
    • Multi-supplier catalogs
    • No need to know item numbers, supplier or manufacturer names


  3. Transactive supplier content must be there!
    • The breadth of supplier content to cover a high percentage of their purchasing needs


  4. Graphical View of Status
    • Users don't want their request going into a "black hole"; they want to"see" where their request is at any time


  5. Reporting Capabilities
    • End user and business departments should be able to customize their own reports so they can manage their own departmental expenses
    • Should provide a core of commonly generated reports to better manage procurement costs


  6. Management of User Profiles
    • Exchange of user profile information with legacy/ERP HR systems will save time in adding and managing users
    • Group or role based administration cuts down on management efforts and allows for more flexible business rules
    • Administration of user profiles should not require I/T professionals


  7. Work Flow Management
    • The ability to route purchase orders through establish corporate authorization procedures, known as workflow
    • A visual business rule configurator will speed up deployment time and make the system usable by non-developers
    • Business rule flexibility is important as you drive costs out of procurement which will allow for better indirect expense management
    • Being able to extend rules to handle third party workflow requirements will prevent extensive custom coding efforts


  8. Software Ability
    • Maintainability, manageability, availability and scalability
    • Price-performance


  9. Architecture for Integration with Internal Legacy Systems
    • Integrate with the corporation's existing procurement applications


  10. Implementation & Integration Services Capability
    • Requires a trained staff and methodology
    • World class partners to help manage growth


Customer Driven Features And Requirements For Transactive Supplier Content To "Fuel" The Desktop Application.

  1. Multi-supplier catalogs


  2. Extensive, pre-packaged content
    • The breadth of supplier content to cover a high percentage of their purchasing needs


  3. Content kept up-to-date

  4. Efficient searching for products/parts

  5. Comparative shopping
    • The capability to shop comparatively for the best prices from a variety of suppliers


  6. Product availability assurance
    • Part and product substitution


  7. Supplier transaction analyses


Customer Driven Features And Requirements For Trading Partner Interoperability.

  1. Real-time application interoperation between trading partners


  2. Support XML, EDI and Fax
    • A flexible message-brokering tool must be provided for integration into home-grown or non-packaged applications


  3. Dramatically reduced cycle times and process costs

  4. Improved accuracy reducing returns

  5. Price and availability checks
    • Support of complex vendor pricing scenarios


  6. Purchase order submission, processing and reconciliation

  7. Taxation

  8. Freight and shipping

  9. Invoicing and payment

  10. Trading and community intelligence

  11. Tools to create and maintain buying organizations own internal catalogs

  12. Tools for suppliers to create, maintain, and update their own catalogs.

In summary, only when enterprises have carefully planned for the implementation of each of the above critical success factors in their electronic procurement automation initiative have they realized their full return on investment. Savings in the cost of goods and services from 5-15% are typical, as well as process cost savings of 70%. And with a 50-70% reduction in the procurement cycle time, inventory costs are reduced accordingly.


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