Buying Online is the Future

Feature Article | February 9, 2005 by admin

An old German merchants’ saying states that “the profit is made in the purchase”. “Reducing purchase costs by just one percent improves profit margins to the same extent as an increase in sales of between 12 and 18 percent,” is how business consultants Accenture back up this view in their introductory remarks to the study “The Buying Organisation Of The Future.” Yet SMBs in particular continue to “throw away” large sums because they still purchase MRO or C items, i.e. non-strategic goods and services, manually. Thomas Renner, head of the Competence Center Electronic Business at the Fraunhofer IAO, estimates “that although e-procurement has currently been implemented in one in five companies, around half of SMBs are still at the implementation or planning stage.”

ABC of electronic purchasing

The image of buyers sifting through “mountains of paper” is thus still a reality and one of the biggest “profit eaters”, as a further Accenture study (conducted for American Express) reveals. The ordering and procurement transaction of a C item is not only extremely complex, but also extremely expensive compared with the actual value of the goods being purchased. “The internal process costs per transaction made via traditional procurement processes are between €40 and €100. Companies that use an e-procurement system for purchasing reduce the process costs to around €8 to €20,” is how Thomas Renner illustrates the differences. And this does not include the costs of the material purchased or the costs of “maverick buying”. Accenture also holds that non-transparent expense structures form an additional cost driver in purchasing.
The advantages to the buyer of purchasing via a browser-based desktop system are self-evident. Uniform data enable processes to be simplified and better terms negotiated. Plus, there is only one central point of contact for purchasing MRO goods. Complex approval procedures, purchasing guidelines, and an approved preselection of items are already configured and set out in the system, enabling workflows to be initiated automatically. Further, “custom shops” can be created for specific employee groups (individual departments of a company). The 1999 study by KPMG (now Bearingpoint) entitled “Electronic Procurement. Neue Beschaffungsstrategien durch Desktop Purchasing Systeme“ (“Electronic Procurement. New procurement strategies via desktop purchasing systems”) comprehensively documents the benefits of these systems. “However, some catalog systems only make financial sense if you have several thousand procurement transactions per year,” Thomas Renner cautions, “as maintaining catalog content is a costly business.”

Electronic data exchange produces networks between companies

At the same time, if you want to implement e-procurement “properly”, i.e. comprehensively and with a positive effect on yields, you cannot “avoid automation of individual processes or indeed as many processes as possible,” as Andreas Preissner sums up future requirements in his book “Electronic Procurement in der Praxis” (Electronic Procurement in Practice). “The costs of non-strategic goods can only be reduced if you optimize the entire process from A to Z,” states Tim Gilchrist from Accenture. “This requires a hardware and software architecture that is able to manage the processes and handle networking both within the company and with others,” Preissner continues. One of the most important aspects of an e-procurement network is therefore to link the buyer and supplier to enable them to exchange data in a structured manner. To do so, the purchasing department and supplier must employ common data standards. These include catalog formats such as BMEcat, transaction formats such as EDI, webEDI, and openTRANS, and classification standards such as eCl@ss or UNSPSC (United Nations/Standard Products & Services Code) in equal measure.
However, there are clearly still problems in this area, and integrating suppliers is often a “considerable obstacle in e-procurement projects today,” as Peter Mund from BMEnet and Georg Wall, Chairman of the wallmedien Management Board, soberly assess in the preface to a joint study on the current situation with German suppliers. Studies by the Department of Investment Goods Marketing and Procurement Management at the University of Stuttgart and by Berlecon suggest that only a minority of small and midsize supply companies (between 100 and 499 employees) exchange data electronically, or even have the necessary technology in place to do so. A similar verdict is reached by an e-business report published in the summer of 2003 by the Institute for Supply Management (ISM) and Forrester Research.

Making the right choice is everything

SMBs who want to manage C-item procurement via software should make sure when selecting a solution that it has sufficient functionality in terms of catalog management and supplier integration and also supports common catalog and transaction formats and classification standards. Further, integration with existing systems should be straightforward and should preferably be possible through open interfaces. A high degree of standardized functionality achieved using ready-made modules reduces the amount of customization required in the project and ensures low follow-up costs. Companies that are planning to expand their e-procurement activities can retain sufficient scope for development if they invest in a system that can be extended modularly and is based on an open base platform.
SAP’s EBP (Enterprise Buyer Professional), for instance, represents a professional procurement solution for handling such requirements; and mySAP SRM provides the option of developing a comprehensive buying strategy that guarantees optimum cooperation with suppliers. For SMBs that merely want to procure C-items electronically, SAP SMB partners such as UNIORG with ETSProcure provide an SMB-compatible e-procurement solution that can be easily integrated into an SAP landscape. A comprehensive e-procurement package, including integration into the SAP system, can be rented for under €2,000 per month from the SAP software partner wallmedien.

The human factor must also be considered

Introducing an e-procurement solution involves more than simply the correct software: organizational aspects such as project and change management are also important “as processes need to be re-engineered and implemented,” Thomas Renner explains. “This requires information and training for staff.” Further, Renner continues, company management must promote acceptance of an e-procurement solution by giving it its full support while at the same time preventing potential alternative procurement channels (i.e. maverick buying).
Sonja Hackethal, manager in the Supply Chain Management department at business consultants Accenture, has used a model calculation to ascertain the significance of the “human factor” in procurement processes. With consistent performance management based on a balanced scorecard, a company with sales of €55m, operating costs of €33m, and selling costs of €8.25m can reduce its operating costs by 15 percent (with the same level of sales and selling costs). In summary: “Projects that ignore the human factor will rightly fail,” IT consultant Frank Naujoks states dryly. And there is nothing to be added to that.

For further information:

General: www.ism.ws
Studies: www.accenture.com, www.bearingpoint.de, www.berlecon.de/en/index.html, www.iao.fraunhofer.de/index_e.hbs and www.pwc.com
SAP and partners: www.sap.com/solutions/business-suite/srm

Dr. Andreas Schaffry

Dr. Andreas Schaffry

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