Business Essays – Procurement Market System

Procurement Market System

Chapter 2 Literature review

Introduction

The aim of this chapter is to summarise the literature on a range of topics related to e-procurement, previous and current research. It starts with examining the basics of e-procurement and the various models of e-procurement currently in the market. Further, the benefits and limitations of e-procurement system are also examined in detail with the view of understanding the factors which influence firms in the transition from traditional system to the e-procurement system.

As mentioned earlier, the advent of technology and the internet has completely changed the way business is being conducted as companies are continually seeking ways of serving their customers efficiently and effectively in order to provide sustainable value. E-procurement is such a technological advancement which has allowed firms to be beneficial in the procurement function.

E-Procurement

To have a clear understanding about e-procurement, it is important to talk about electronic commerce (e-commerce) and e-business as well. These two are closely related and are often used interchangeably. Turban et al. defines the two terms as follows:

‘E-commerce is an emerging concept that describes the process of buying, selling, or exchanging products, services and information via computer networks, including the Internet’ (2006:4).

‘E-business refers to a broader definition of E-commerce, not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organisation’ (2006:4).

E-Procurement is an important part of e-business. E-business has played a very important role in highlighting the importance of procurement as a strategic issue.

Procurement

Procurement is the act of buying the goods and services that a company needs to operate and/or manufacture products (Saunders, 1997:20). The purchasing department of an average company spends a major part of its revenue on items ranging from raw materials to services; there has been greater focus on purchasing in recent years as firms look at ways to lower their operating costs (Coyle et al., 2003; Chadwick and Rajagopal, 1995). Research by the European Institute of Purchasing Management indicates that 70% of companies purchase external products or services that comprise 50% of their total costs (FitzGerald, 2000:5).

Purchasing was seen as essentially a clerical function. It was focused on getting the right quantity and quality of goods to the right place at the right time at a decent cost. Lysons and Gillingham state thatthe classic definition of purchasing can be ‘to obtain materials of the right quality in the right quantity from the right sources, delivered to the right place at the right time’ (2003:5).

Purchasing is now seen as more of a strategic function that can be used to control bottom-line costs. The attitude has changed in recent years, because of highly publicised cases wherein companies have achieved dramatic operational benefits through revamped purchasing processes.

In addition, increased competition on both the domestic and global levels has led many companies to recognise that purchasing can actually have important strategic functions. As a result, new strategies are being used in purchasing departments at companies of all size. Therefore, purchasing has become a very integral part of an organisation. The British Chartered Institute of Purchasing (CIPS) has defined purchasing as

‘The process undertaken by the organisational unit which, either as a function or as part of an integrated supply chain, is responsible both for procuring supplies of the right quality, quantity, time and price and the management of the suppliers, thereby contributing to the competitive advantages of the enterprise and the achievement of the corporate strategy’ (Lysons and Gillingham, 2003:8).

It must be understood that although the terms procurement and purchasing are often used interchangeably, they are not the same. Lysons and Farrington states that procurement generally has a wider meaning than purchasing, which implies the acquisition of goods or services in return for monetary or equivalent payment. On the other hand, procurement refers to activities involved with obtaining items from a supplier in any way, including borrowing, leasing and even force or pillage (2006:6).

Companies are also seeking to improve purchasing processes as a means of improving customer satisfaction. One of the means of improving the purchase process is by automating the process (Kalakota and Robinson, 1999:235). E-procurement applications are nowadays being used widely by organisation as means of automating the procurement activities.

By introducing electronic procurement (e-procurement), many benefits can be realised such as cost savings which can have a direct impact on the customer.

‘Advances in e-procurement technologies coupled with complementary technologies such as sourcing and contract management have accelerated the adoption and value of e-procurement’ (Aberdeen Group, 2006).

Baily et al., (1994, cited in Baily et al. 2003:314) suggest that, apart from reducing the paper works and communication times, e-procurement should be directed at improving performance for each of the five rights of purchasing which are sourcing items as follows:

• At the Right price

• Delivered at the Right time

• Are of the Right quality

• Of the Right quantity

• From the Right source

E-procurement has been the subject of a great deal of research recently. Inefficient and maverick buying habits, redundant business processes are symptoms of poor procurement practices (Kalakota and Robinson, 1999; Aberdeen Group, 2007).

Croom and Johnston (2003) argues that e-procurement is not just an addition of technological aspects to traditional procurement but thus, mirror the procurement process through the provision of two discrete, but connected infrastructures, internal processing (corporate intranet) and external communication processing (internet based plat form).

The growing importance of e-procurement was highlighted by research which report that that around 90% of companies said that they planned to implement an electronic management system within the next five years, with the majority identifying cost savings as their primary goal (Tranmit, 1998 cited in Bocij et al., 1999:263).

Previous research

In last 50 years lot of research have been conducted in the field of procurement and the various factors associated with the field of procurement. This has been due to increasing awareness and acceptance that procurement is a key strategic function of any organisation.

However, research in e-procurement are relatively fewer compared to that on procurement because e-procurement applications have been used widely only since the last decade. Early research on e-procurement considered it a part of e-business and were very generic in nature and the focus of such researches were broadly on e-business than e-procurement.

For example, Wu et al. (2003) studied how e-business adoption affects business performance through a survey of telecommunications, semiconductor, and equipment manufacturing sectors. They analyzed four business processes: internal and external communication, internal administration, order-taking and procurement. They claim that at the time of the study, online order taking and e-procurement were at low levels of adoption.

According to the results, neither online order taking nor e-procurement significantly influenced any performance measures. However, they found that e-business adoption in communications has a positive impact on all four performance measures and adoption in internal administration impacts on customer satisfaction and relationship development. Overall results indicated that the benefits of e-business should be studied independently in relation to different business processes.

Subramani (2004) examined how the suppliers benefit from information technology use in supply chain relationships through a survey of suppliers to a selected manufacturer. The manufacturer has a proprietary system like e-procurement system through which suppliers receive a range of reports about sales, product forecasts, and inventory alerts. Additionally, suppliers have access to field-service records for their products.

The research results indicate that suppliers can benefit by participating in supply chain management initiatives of network leaders. The research identified that suppliers need to deploy relationship specific business processes. However, Subramani (2004) does not provide detailed information or findings as to what the operative and strategic benefits for the procurement operations will be to the firm and the suppliers.

Puschmann and Alt (2005) studied how companies use e-procurement systems and what benefits they bring along to the supply chain management. They studied the e-procurement practices in five multinational companies that are considered to be successful case examples. The study indicates that successful implementation relies on critical analysis of current procurement practices and realignment and reorganisation of processes, cooperation with suppliers, careful content and catalogue management, and integration of e-procurement and back-end systems to achieve operational efficiency.

This research has identified and highlighted a lot of factors which can be considered the critical success factors for the implementation of e-procurement applications. The results identified that e-procurement is a non-technical issue. More effort is spent on organisational than on technical issues.

One of the main issues which have not been addressed in this research is the nature of firms selected for the study. This research has only considered large multi-national companies as possible participants in the research process. One of the main questions that arise here is – what role does the firm size play in successful e-procurement application in the supply chains. There are large numbers of small and medium size companies operating which have successfully implemented e-procurement applications in their respective supply chains.

By size of the company we mean both the number of employees and the annual turnover. In this research only companies with both large turnover and large number of employees are included. However, this does not provide a clear picture of the full industry, which constitutes small, medium and large size companies. Therefore, this research primarily addresses the e-procurement practises adopted by the large multi-national companies.

Nevertheless, this might be due to the fact that success of e-procurement applications can be compared only with firms of similar size. However, it would be interesting to identify if there is any relationship between the size of the firm and the adoption of e-procurement applications.

Patterson et al. (2003) states that ‘larger firms not only have access to greater financial resources, but are also better positioned to assume the risk of investing in various technologies and to take advantage of the benefit of economies of scale from adoption’. (cited in Pearcy and Giunipero, 2008).

A research conducted by Wang et al. in 2004 (cited in Pearcy and Giunipero, 2008) hypothesised that firm size impacts which type of e-procurement application is adopted. Specifically, this hypothesis was supported by the research data and was established that firm size is positively related to the implementation of e-procurement.

Another factor which has to be considered while evaluating successful e-procurement application is the supplier cooperation aspect. Since, the suppliers are a vital part of the supply chain, implementation of e-procurement will definitely have an impact directly or indirectly with the suppliers (Fitzgerald, 2000:79-80). The successful e-procurement application can assist firms in supplier coordination, cooperation or integration.

But sometimes during the e-procurement application, suppliers might become less cooperative because they view this e-procurement application as a means for the buyer to extract price reductions, often to the detriment of their own profit margins. For example, research carried out by Pearcy et al. in 2004 (cited in Pearcy and Giunipero, 2008) found under certain circumstances, the use of on-line reverse auctions was significantly related to a lack of supplier cooperation in assistance with designing processes that reduce cost, cycle time, and time to market. Therefore, success of e-procurement also involves successful supplier management.

The supplier perspective also warrants investigation because they are a vital part of the supply chain of the organisation. Consequently, the success of the e-procurement implementation often depends on this aspect.

The findings of Puschmann and Alt (2005) that e-procurement implementation is a non-technical issue, will form the main premise on which my research will be built. My research will built on the critical success factors identified by Puschmann and Alt (2005) and use it as a framework of drivers and barriers for change, for my research in order to investigate which of these factors identified will be impacting the implementation of e-procurement in the organisation of my study. Therefore, I intend to identify through a case study research method, which of these factors identified through previous research will be impacting e-procurement implementation in the context of my research case or organisation.

E-Procurement Models

There are typically three categories of eProcurement applications – buy-side desktop requisitioning, buy-side centralised procurement management and sell-side applications (Kalakota and Robinson, 1999:244).

Buy-side e-procurement is the most common, and is a buyer centric model in which a buyer connects to his or her suppliers. It helps the buyer streamline operations and enhance productivity through reduction of paper flow, electronic transmission of data and automatic purchasing processes.

The system streamlines the entire procurement process from point of need to payment and delivery of goods. The system leverages existing application investments, linking the buyers directly with the suppliers on the internet and delivering product availability and customised pricing directly to the desktop (Kalakota and Robinson, 1999:246).

There are two types of buy-side e-procurement systems – Buy-side desktop requisitioning and buy-side centralised procurement management.

Buy-side desktop requisitioning software enables employees to buy online while the company maintains approval routing and purchasing process. By connecting the corporate intranet to the supplier’s web-based commerce sites, buy-side software routes employee purchase requests internally before turning them in to orders (Kalakota and Robinson, 1999:246).

Buy-side centralised procurement allows procurement managers and professional buyers to manage the process, analyse transactional data and perform supplier management (Kalakota and Robinson, 1999:246).

Sell-side e-procurement is a seller-centric model that helps sellers implement and maintain Web-based commerce and storefronts. In this model, a single supplier may reach many buyers, and the seller can market directly to end consumers, capture and manage online orders, and improve customer relationships by offering cost-effective customer support. These applications often include tools for creating and maintaining electronic product catalogues, as well as transactional support for order entry from customers.

Benefits of E-procurement

Eakin (2003) has defined the benefits of e-procurement under three main categories as follows:

• Hard benefits – which are directly measurable and are required to improve direct share holder value such as price savings and process cost reductions.

2) Soft benefits – these can also be called indirect benefits and can be difficult to quantify accurately but can be good indicators of progress. Examples include individual time freed up through more efficient processes.

3) Intangibles – these are not directly measurable in financial terms. Soft benefits must not be misclassified as intangibles simply because measurement may be more difficult. Intangibles include:

• Cultural change – which involves recognition of strategic sourcing as a longer-term market differentiator, end-user attitude shift, and use of implementing world wide user processes.

• E-platform – which sees e-procurement as a step towards value adding structures

• Financial approval for all spending – ability to ensure that all spending meets organisation standards

• High visibility of supplier performance –“ live” feedback from end-user to buyers

Eakin (2006) further defines the benefits under five main categories:

1 Transactional benefits

E-procurement allows for payments to be done online. Typically, a web based transacting tool is used where items are selected from pre-sourced catalogs and submitted for electronic approval. There is then a link to the back end ERP system for entry, payment of invoices, and collation of management information. Huge time savings and efficiencies are realised as a result of electronic processing due to:

• Global automated processes incorporating best practice and eliminating unnecessary activities

• E-enabled relationships with suppliers which speeds procurement cycle times and facilitates supplier performance improvements

• Greater data accuracy which minimises ordering inaccuracies and provides the essential foundation for management through measurement and analysis.

2 Compliance benefits

In many organisations issues of compliance and maverick spending are quite significant and require attention. This usually because employees are not usually aware of the arrangements that are in place rather than the fact that they want to ignore the laid down processes and procedures. E-procurement has a way of addressing this through tools such as catologs and standard order processing and approval catalogs. Compliance will be achieved due to:

• A simple and quick requisitioning-to-payment process including a user friendly interface and pre-sources catalogs tailored to the requirements of the individual user.

• A simple and quick strategic sourcing process with standard procurement processes and tools as well as easily accessible information.

• The e-procurement system, the only purchasing mechanism available.

3 Management Information benefits

The fact that key information such as cost center and commodity codes is hard coded against the user dramatically reduces coding errors and provides highly detailed and easily accessible data. This is very important in maximising the potential benefits of strategic sourcing. A successful e-procurement implementation will provide high quality, detailed management information and will negate the need for data warehousing or resource heavy data mining.

4. Price benefits

The ability to prove to your suppliers that you are using e-procurement as a tool to ensure end users do honour their contract status will enhance ability to negotiate down prices through :

• Greater enhanced capture and therefore reliability of spending information

• Increased confidence that spending volumes can be guaranteed from increased compliance with system, thus allowing volume price breaks and discounts to be achieved.

5 Payment benefits

The successful operation of the first four benefits enables electronic payment of invoices. This includes the ability to better control the business cash flow and to manage the efficient payment of the suppliers due to more streamlined procurement processes providing more timely and accurate information to the accounts payable department.

Potential benefits include reduced manpower (a hard benefit only if improvements lead to head count reduction) and reduced spending on postage and stationery. When it comes to negotiations, procurement can guarantee the supplier a certain level of prompt payment which was not possible prior to e-procurement. In fact, e-invoicing benefits are often under-assessed and ignored.

Transition from Traditional procurement to E-Procurement

In the highly competitive modern business environment, the role of systems management in business organisation and competitiveness continues to demand increasing attention and redefinition. From this standpoint, the integration of effective, efficient, and cohesive procurement systems actively reduced the resource allocation within this sphere of business management. E-procurement represents a much broader category than the act of purchasing alone, integrating information and communication technologies (ICT’s) to streamline a broad range of administrative capabilities that are optioned over online channels (Croom and Brandon-Jones, 2004).

By realigning procurement practices to an automated and user-defined online system, purchasing teams are reallocated to more comprehensive administrative duties which directly influence the efficiency of overall business operations. Overall the emphasized benefits of e-procurement include a reduction in administrative responsibilities, improved organisational efficiency, and a reduction in transaction costs (Garicano and Kaplan, 2001; Garrido et al., 2008).

Yet when undertaking a competitive stance on e-procurement implementation, the potential pitfalls and systematic frailties often overwhelm and stifle front-running innovations, thus limiting a firm’s appropriation of new resources and efficiencies. Competitive commerce relies on innovative systems and enhanced knowledge capital; through the orchestration of e-procurement systems, multiple service providers can be electronically linked, thereby realigning activity sequences within the business model (Leymann, 2002).

It is through the redefinition of daily operations that corporations substantiate their change initiatives and successfully benefit from enhanced value structures and competitiveness. In 2002, Attaran and Attaran concluded that of 5,000 surveyed firms, only 8-10 percent utilised a functioning e-procurement system. By 2003, over 85 percent of firms in the McKinsey Company study were actively sourcing software components to implement an automated procurement processes (Hensley et al., 2003).

Given this data, firms across the globe are recognising that modernisation integrates electronic procurement channels, thereby minimising geographic areas and enhancing market exposure. Enhancing successful operations through active systems management enables a firm to dynamically control its transaction cost basis and over time, reduce the effect of negligent purchasing and material limitations.

Essentially this transition must be considered a form of process management, one in which flexible and scalable applications are associated with competitive operations and business strategy, thereby reorienting the corporate structure to the market (Harris, 2002).

Transition from traditional procurement systems into online methods is sometimes rejected at the purchaser level, a direct result of several growth debilitating variables. Organisational change, according to Chan and Swatman (1998) is indicative of temporal allowance, allowing integration of revised systems over an extended period of time. Many firms will rapidly evolve systems to meet industry demand without proper preparation and pragmatism, undermining their organisational realignment and causing system-wide complications.

As traditional procurement relies highly on the relationships and long standing commitments with supplier firms, the abandoning of human control is oftentimes a direct hindrance to e-system implementation, requiring a gradual transition and participation. Implementing an e-procurement scheme within a traditionally saturated model often entails systems redefinition that can lead to instability and structural collapse of the supply chain (Puschmann and Alt, 2005).

In order to appropriately integrate an electronic methodology, Peleg et al. (2002) identified a three scope strategy including strategic long term partnerships with suppliers, online supplier sourcing, and integration of e-linked secondary suppliers through online channels.

Whereas firms once competing within the traditional model leveraged their supplier partnerships and relational contracts as modes of gaining competitive edge, the new source of knowledge capital and leverage able resources exudes from online interactivity and e-commerce. Price negotiation and logistical expectations were previously negotiated over the phone or face to face with suppliers, establishing a firm understanding of procedures, and enabling a long term commitment to evolve from the human capital support structure.

Oftentimes trust variables challenge the transition from traditional systems to e-procurement methods, as firms are likely to resist the extensive information capital which is exposed through the online procurement systems (Carter et al., 2004). This reorganisation of knowledge capital into a strategic opportunity mostly evades the initial evolutions of participating firms, causing both buyer and supplier to feel uninformed regarding product choices and pricing measures (Pearcy et al. in 2004, cited in Pearcy and Giunipero, 2008).

As the division between buyer and supplier continues to widen, the tendency to adjust buying schemes to exploit lower prices from a widening number of competitors will also contribute to supplier extended trust (Rohm et al., 2004). Expanding the breadth of purchasing operations, firms will mostly reject long term commitments to supplier partners for the cost basis of competitive offerings. Whereas relationship capital would once detract from such disagreement, in the modern global market, electronic capital is rapidly replacing the historic systems of past generations.

Within the competitive business scheme, the assumption of technological innovation and expansion of e-systems continues to evade many firms, inhibiting expansion and limiting their scope market penetration. Perhaps the most significant blockade to adoption of e-procurement systems has been the reluctance of firms to modify successful business processes in order to meet technological and distributional demands (Day et al., 2003).

Such recognition becomes essential to the reorganisation around market defining procedures, as opposed to those business operations which restrain and undercut broader marketization. Given that studies have demonstrated that a lack of system integration or available technology is the main cause of e-procurement hindrance, the rejection of evolving such capabilities inherently undermines innovation efforts (Angeles and Nath, 2007).

Transitory firms must option the advances which the market generates for their benefit, meeting consumer and supplier demand structures through strategic realignment of processes and enhanced market awareness. Integration of e-procurement systems within the scope of logistics management substantially reduces lead times for product reception, improves the long term pricing basis in both shipping and material costs, and offers a direct-to-consumer approach that is unparalleled in historic business models.

Benefits and Pitfalls

There is a wide breadth of benefits and pitfalls which can occur when implementing e-procurement methodology; however, the majority of system failures arise from a rejection of technological advancement and broader market opportunities. The meritorious nature of expanding procurement practices to exploit material costs and availability cannot be rejected, however, and continues to enhance the redirection of transitory firms.

Essentially, e-procurement integrates order systems enabling the user to automate purchasing transactions, realigning operational duties to alternate focuses including logistics, payment, and inventory and catalog management (Rajkumar, 2001). Given the demanding nature of competitive markets, generating additional resources without substantial overhaul is a significant benefit for corporations, enabling the redirection of principle actors towards operations which better support overall business operations.

Redirecting activities towards logistical management alone dramatically enhances responsiveness and proactive techniques of supply chain maximization. Overall, the benefits of e-procurement systems far outweigh the potential pitfalls or resource allocation during the implementation process, enhancing firm market exposure and streamlining efficiency measures throughout the corporate structure.

There is a duality within e-procurement systems, that when leveraged from a business model standpoint, offers multivariate enhancements over a long term operational spectrum. Croom (2000) highlighted that e-procurement systems offer benefits, activated through both strategic and operational developments, contributing to the overall market competitiveness of an organisation. Redefining a corporation’s systems to integrate e-procurement benefits, however, is oftentimes difficult and a collaborative methodology including substantial participation from key corporate actors is necessary to ensure its multi-segment patternization.

Garrido et al. (2008) determined that expanded procurement capabilities, and an enhancement of internet intensity within the scope of business operations will often lead to more diverse organisational actors, thereby potentiating accountability yet detracting from communication effectiveness and participant expertise.

In order to malign such pitfalls, organisational management teams must recognize variables which detract from the cohesive structure of procurement systems, realigning participants in a well-designed pattern that enhances chains of communication. Inefficiencies in such systems can arise as an offshoot of broadened operations and evolving responsibilities; therefore, e-procurement can only generate substantial benefit for a corporation when all participants are symbiotic in operation.

The nature of such technology revolves around an enhanced market exposure, one which connects primary and secondary supplier sources for the maximum cost and material benefits over a long term business plan. In e-procurement, Muffatto and Payaro (2004) recognized an enhanced competiveness which enhances order accuracy, consumer attentiveness, and intra and extra-firm communication practices.

Perhaps the most important variable for reducing systematic collapses and operational down time, the merits of e-procurement systems are substantial and broadly distributed across the business spectrum. Firms can ensure that their materials arrive in time for production, that products are completed and shipped to consumers in a timely fashion, and that pitfalls are navigated through direct communication and feedback.

This proactive methodology utilizes technology as a resource, enabling the integrated nature of procurement processes to remain a commoditization of processes, and placing emphasis on firm operations and alternate priorities. Essentially, e-procurement redirects purchasers towards strategy enhanced responsibilities, including business partner management and sourcing (Gunasekaran and Ngai, 2008). Firms can actively manage their external partnerships and enhance their long term cost basis through improved market awareness and redirection of procurement practices to more competitive supplier partners.

In spite of the multiple benefits of e-procurement systems, as with any business model enhancement, there are potential pitfalls and frailties within an untested system such that many transitory firms will reject its integration due to their realization. As underscored by Hawking et al. (2004) in their Australian research, pitfalls to e-procurement systems can include security risks, limited supplier integration, technological cost basis, educational requirements and training, and a detracted supplier relationship focus.

Perhaps the most influential of all such variables, the rejection of broader educational requirements and technological expertise is oftentimes a hindrance to firm evolution. Similarly, the up-front resource allocation for system implementation is oftentimes cost prohibitive and undermines the long term benefits of e-procurement processes.

Firms must utilize market partners and supplier principles as a method of business development, leveraging long term relationships to collaborate on systems development and integration. Through the joint initiative, firms will communicate in a more effective and indiscreet manner, enhancing systems operations once they are fully composite with logistical expectations.

Essentially, the majority of pitfalls within the e-procurement method arise from systems limitations or critical intra-firm trust variables Research demonstrates that within the e-procurement system, requests for quotes or proposals are frequently not handled in an accessible format as would human contact and negotiation, thereby limiting the responsiveness of the electronic system as well as reducing the potential cost savings to the purchaser (Benslimane, 2007).

The nature of procurement in complex industries is formed by an integration of mutually supportive systems; however, when accessing proprietary data such as sales and inventory, separation is often needed to protect long term business objectives. Therefore, proprietor firms will oftentimes guard their profit data and competitive variables in an attempt to waylay the opportunistic compulsions of a partner firm.

Benslimane (2007) also concluded that many suppliers do not offer a complete range of procurement services and instead opt for online catalog and reference materials while relying on personal services for sales and distribution. These limitations prevent the efficient maximization of e-procurement systems, thereby enhancing a propensity to reject and extensive failure protocol within the purchasing firm.