Procurement is the process whereby companies purchase goods and services from various suppliers. These include everything from indirect goods like light bulbs, uniforms, toilet paper, and office supplies, to the direct goods used for manufacturing products. Procurement also involves the purchase of temporary labor, energy, vehicle leases, and more. Companies negotiate discount contracts for some goods and services, and buy others on the spot. Procurement can be an important part of a company's overall strategy for reducing costs. Historically, the individuals or departments responsible for purchasing a company's goods and services relied on various methods for doing so. The most basic included placing orders via telephone, fax, or mail. Electronic procurement methods, generally referred to as e-procurement, potentially enable the procurement process to unfold in a faster, more efficient manner, and with fewer errors. These methods include electronic data interchange (EDI), online marketplaces or e-marketplaces, and various blends of the two.
In a January 2001 Works Management article, a report from e-Net revealed that 70 percent of companies in the finance and retail sectors used the Internet for some purchases. The adoption rate was much less among manufacturers, where only 17 percent used formal e-procurement systems. Besides varying from industry to industry, different companies use different blends of traditional and electronic procurement methods, and individual e-procurement systems themselves may incorporate traditional capabilities like telephone or fax.
ELECTRONIC DATA INTERCHANGE.
Since the 1960s, many large companies have relied on electronic data interchange (EDI) for the procurement of goods. EDI deals more with the way information is communicated during procurement than it does with the act of linking buyers and suppliers. By definition, EDI is the electronic exchange of business information—purchase orders, invoices, bills of lading, inventory data, and various types of confirmations—between organizations or trading partners in standardized formats. EDI also is used within individual organizations to transfer data between different divisions or departments, such as finance, purchasing, and shipping. Two characteristics set EDI apart from other ways of exchanging information. First, EDI only involves business-to-business transactions; individual consumers do not directly use EDI to purchase goods or services. Secondly, EDI involves transactions between computers or databases, not individuals. Therefore, individuals sending e-mail messages or sharing files over a network does not constitute EDI.
EDI can occur point-to-point, where organizations communicate directly with one another over a private network; via the Internet (also known as open EDI); and most commonly, via value-added networks (VANs), which function like telephone lines by allowing for the transfer of information. In the early 2000s, although many companies still relied on VANs, the Internet was playing a larger role in EDI. It is possible for companies to translate the files used during EDI and send them to another company's computer system over the Internet, via e-mail, or file transfer protocol (FTP). Because it is an open network and access is not terribly expensive, using the Internet for EDI can be more cost effective for companies with limited means. It has the potential to provide them with access to large companies who continue to rely on large, traditional EDI systems. The low cost associated with open EDI also means that more companies are likely to participate. This is important because the level of value for participants often increases along with their number.
While the automotive and retail industries have experimented with open EDI for some time, the efforts didn't result in widespread adoption by small suppliers, usually due to cumbersome requirements like the installation of on-site software. Incorporating EDI into e-marketplaces was an approach that held more potential. In March 2000, an e-marketplace called the WorldWide Retail Exchange (WWRE) was established. It allowed suppliers and retailers in various industry sectors—including retail, general merchandise, food, and drugstores—to conduct transactions over the World Wide Web. After one year of operation, the WWRE had 53 retailer members with combined annual turnover of $722 billion. Leading retailers, among them Kmart, Rite Aid, Best Buy, and Target, planned to offer a Web-to-EDI translation service on the WWRE so it would be easier for smaller suppliers to do business with them. In this arrangement, the retailers send purchase orders to a data center where they are translated to a language that can be read with a Web browser. Suppliers are then notified about the PO and allowed to respond. This is a break from true EDI, since orders are handled manually by suppliers.
For companies using open EDI, a language called extensible markup language (XML), similar in some respects to hypertext markup language (HTML), allows users to share information in a universal, standard way without making the kinds of special arrangements EDI often requires and regardless of the software program it was originally created in.XML played an important role in the development of online marketplaces like WWRE.
Online marketplaces bring many buyers and sellers together in an online environment and function as intermediaries between the two parties. In the early 2000s, third-party companies like Commerce One Inc. and Ariba Inc. offered high-end e-procurement software and services that were used to operate different online marketplaces. Numerous other companies provided similar kinds of services and applications. Online marketplaces existed for many different industries, ranging from the food and beverage industries to consumer packaged goods and interior design. The costs for participating in an online marketplace varied. In some cases, participating companies (suppliers, purchasers, or both) were required to purchase special software from a third party. Third parties also levied different charges for making transactions, joining the network, and updating catalogs of available products.
In addition to connecting buyers and sellers, online marketplace providers add value to the procurement process by offering various services, ranging from inventory management and process improvement to tracking shipments and arranging financing. In addition to adding value, online marketplaces also can simplify the process of procurement. For example, some allowed suppliers to choose the manner in which they received orders from purchasers, such as XML, fax, e-mail, or EDI.
In addition to EDI and online marketplaces, there are other approaches to e-procurement. One involves software applications that allow purchasing agents to establish systems for managing things like invoices, purchase orders, receipts, and requests for quotations (RFQs). These applications also enable companies to place orders for products from many different suppliers through one simple interface. Some companies relied on third-party organizations to use these systems via the Web. Acting like an outsourced purchasing department, the third party hosted the software instead of selling it to the user off-the-shelf. This approach was useful to companies without the resources to develop and maintain their own e-procurement systems. Some companies also purchased pre-packaged software products that performed many of the same functions.
Online auctions were another tool companies used to procure goods and services for both contract and spot buys. A number of factors were critical to the success of online auctions, including the kind of bidders involved, the number of bidders, and the length of the bidding periods. Although it's not directly part of the auction, online negotiation also can be a factor if the auction involves complicated elements like delivery and support.
PROS AND CONS
No matter what method is used, there are many advantages to using e-procurement systems as opposed to those involving paper-based forms or oral communications. The main benefits are increased efficiency and cost savings. For example, EDI allows business transactions to occur in less time and with fewer errors than do traditional, paper-based means. It reduces the amount of inventory companies must invest in by closely tying manufacturing to actual demand, allowing for just-in-time delivery. By doing away with paper forms, EDI also reduces postage costs and the expenses and space considerations surrounding paper-based record storage.
Online marketplaces provide similar benefits. As Commerce One explains, they "make the entire business-to-business marketplace more efficient by expanding the range of sellers and buyers and by making the entire market mechanism more transparent. They reduce procurement and sales costs and improve the efficiency of the process. For buyers, these e-marketplaces aggregate content so it's easier to find new sources and pricing. For sellers, the e-marketplaces break down geographic barriers and make product catalogs available to a wider market of buyers."
In some large organizations, purchasing responsibilities are distributed over several different areas of the company. E-procurement systems may enable a company to consolidate orders for similar items with one supplier, resulting in deeper volume discounts and cost savings. Additionally, e-procurement may allow a company to simplify purchasing by reducing the number of variables (available products) involved. Instead of having to sort through large volumes of paper or electronic catalogs, purchasing professionals are able to build custom catalogs that include only the items the company is interested in. Besides simplifying matters, this approach also drives up volumes of smaller numbers of items, which is another possible way of generating volume discounts.
Along with all of the positives, there also are disadvantages to e-procurement. Some EDI users have experienced snags. In Planet IT, Proctor & Gamble, a leading packaged goods manufacturer, reported that it found errors in more than 30 percent of its electronic orders, although they were mainly due to human error. Additionally, some companies have been disappointed by e-procurement software applications that don't meet their needs. InformationWeek revealed that two of the leading obstacles to successful e-procurement are enabling suppliers to support e-transactions and generating and maintaining electronic product information.
Additionally, InformationWeek, explains that numerous firms "sign on for E-procurement without anticipating the long road ahead. They dive into projects only to learn that E-procurement applications are limited in the types and scope of purchasing activity they address. Managing electronic catalogs with thousands of products, providing employees with the right mix of products and adequate information about them, and making it easy to search for items can also be tricky, requiring additional tools and threatening the efficiencies promised by moving purchasing to the Web."
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SEE ALSO: Auction Sites; Business-to-Business (B2B) E-commerce; Electronic Data Interchange (EDI); XML