Know the right questions to ask and the major factors involved when determining the appropriate e-procurement solution for your company
e-Procurement was one of the star technologies of the dot-com era, promising millions of dollars in savings for enterprises looking to streamline their purchasing costs. While it didn't transform corporate purchasing in the way many had hoped, e-procurement or e-purchasing nonetheless continues to be a viable means to achieve real savings if some of the remaining obstacles can be overcome.
Before embarking on the road toward an e-procurement program, companies must have a firm grasp on their own spending and payment data. Where are they spending? What is the method of payment to their suppliers?
Strategic sourcing initiatives enable companies to realize savings: By analyzing detailed information on vendor spending and payment, some companies have reduced their number of suppliers by 90 percent and achieved savings in the millions of dollars. According to the research firm Dun and Bradstreet's report Strategic Sourcing — Two Words that Produce Savings, it is not uncommon for companies leveraging strategic sourcing initiatives to realize savings of 3 to 8 percent of their negotiable spend. Without capturing this data, companies cannot drive purchasing productivity and the ability to negotiate better deals with key vendors.
Highlighted below are four major factors to pay attention to, as well as questions to ask of potential suppliers, when trying to determine the appropriate e-procurement solution set for a company.
Most corporations have heavily invested in enterprise resource planning (ERP) systems and many have doled out more dollars for online purchasing. But problems arise when an organization moves its purchasing function to an online system; because the e-purchasing software may be incompatible with the existing ERP system the result is an integration nightmare. Thus, companies must add more time and expense to the initiative and waste investment in software systems they have already purchased and maintained.
Corporations must be sure to ask suppliers, or whoever is providing the solution, about integration. A full systems check and assessment must be completed prior to implementation. Will these systems integrate? What problems might there be? In particular, one important key to remember is that although systems may be supplied by the same provider, integration is not guaranteed to be easy.
Solutions such as rules-based catalog software often stop short of providing key functions of integration. Instead, organizations must review their needs and invest in a solution that will positively impact their suppliers and complete the necessary automation and integration tasks. It is important to look for a solution that is adaptable to the existing ERP system.
When skeptical of ROI, companies hesitate to allocate additional resources to existing e-purchasing initiatives. Those companies that have already invested heavily in ERP are anxious to protect their investments and are concerned about future expenditures and additional software that will only exacerbate integration headaches. The complex pricing structures of procurement software suppliers may further contribute to the missed ROI and reluctance to continue investment.
To alleviate this pain, companies must evaluate pricing schemes and fully understand costs of software licenses and support. Request information on fees and find out what to expect in terms of ROI. Is this ROI acceptable in both the short and long term?
Companies may want to explore a purchasing card scenario for payment with their supplier where the time value of money is factored into the equation. In this scenario, suppliers can receive payment within 24 to 48 hours, thus improving cash flow and offsetting costs. Is the time value of money important to the company? Most should say yes & a dollar in hand today is worth more than a dollar promised at a future time. Suppliers will come out ahead, not to mention improve their processing costs savings, as a direct result of streamlining and automating their purchasing process.
With the right business model for supplier payment and consolidation of payables, organizations might even realize a revenue stream from their financial institution.
The logical step for many companies has been to jump into the buy side of the equation, but once they do, they find out that it's just one piece. While the slow-but-steady growth in e-purchasing has been a boon to buyers, one of the most critical shortcomings has been the demonstration of any real value for suppliers. Fewer than 20 percent have online catalogs, and continual demands for different data distribution methods, and catalog enablement, have caused suppliers to balk at embracing the revolution. Overcoming the need to reconfigure all of their data has proven to be the biggest hurdle.
e-Purchasing providers must allow the supplier to be part of the solution, not only maintaining the integrity of the process, but also improving it to include rapid payment, automated purchase orders and the ability to accept data in their preferred format. To achieve a truly automated and integrated corporate purchasing environment, today's procurement solutions must provide order delivery, acknowledgment and shipping notification, multiple payment methods, and customized file/message mapping and advanced reporting in one solution for the supplier.
Providers must commit to including suppliers in the planning process early on and work with them to develop a solution set that is customized for their unique needs. Come up with alternatives if the first solution doesn't fit to guarantee that the end result will provide the most appropriate and beneficial solution. Enablement should be a fundamental piece of the contract.
Another barrier to implementing an e-purchasing system is the payment method. Imagine investing millions of dollars in e-purchasing technology only to find that you cannot get the payment and important management information together in a way that avoids invoice processing, costly payment and check processing for payables, and the value of true ERP integration.
Whether a software provider has the capability to offer a payment mechanism is critical when moving forward with an e-purchasing program. By offering the capability for the payment piece, organizations can eliminate paper-based payments and mailed checks, streamlining the entire process for both buyers and suppliers. This not only results in fast product delivery, but also lowered costs and satisfied customers.
In this economy, saving money and improving efficiency are more important than ever before. Clearly, there is still work to be done and obstacles to overcome, but e-purchasing will continue to evolve because the benefits — tremendous cost savings, accelerated payment processes, and greater efficiency — are vital to every company's success.
About the Author: Randy Ford is the managing director, Purchasing Division, at Bank of Montreal.