A few years ago e-procurement was being touted as one of those applications which would usher in a new internet age – it was up there with the global village and online shopping malls. Unlike many other dot com era concepts e-procurement has largely lived up to its hype, but there have been a couple of hiccups along the way.

One of the most notable hiccups was the government’s ill-fated GoProcure project, an ambitious scheme which was designed to channel all government purchasing through a single electronic procurement system. It was hoped that GoProcure would eliminate mountains of paperwork and eventually allow the government to wield its considerable collective purchasing power to obtain the best volume discounts from its suppliers.

But GoProcure highlighted how e-procurement could be disruptive – many government departments simply weren’t ready to switch from their existing purchasing systems – and the Oracle-based GoProcure system did not suit some users.

Eventually the whole project was canned, but it had already stimulated government departments, Crown Research Institutes, universities, hospitals, and their suppliers to examine what this technology had to offer. This provided a boost to some local solution providers and the result is there are now several mature e-procurement vendors servicing the New Zealand market.

Management toolbox
Denise Donald, business development director at e-commerce company e://volution, says
e-procurement has become “normalised” in the last couple of years.

“When you look at administrative roles in larger organisations, most staff would now expect to order online or by email – they would be quite surprised if they were asked to order something using the fax or the phone. E-procurement’s not leading edge anymore.

E-procurement has been a core business for the company since 1997 and Donald says e://volution’s hosted system now has over 30 customers, all medium to large organisations, and thousands of end users. “Three or four years ago a lot of companies weren’t ready for e-procurement, they didn’t have the human resources to be able to do it and they had far too many suppliers.

But in the last couple of years there has been more emphasis on procurement and companies are a lot more ready, that’s been the biggest breakthrough. People are beginning to realise that they can use e-procurement to manage their entire supply chain and anyone who has done it has been hugely successful.” Donald is also seeing customers use e-procurement for a wider range of tasks including internal requisitioning.

“In these cases the ‘supplier’ might be the company’s own warehouse and orders are for items the company already owns like signage for example. Once you have a reliable supply system in place, users are no longer hoarding stocks and stock rotation is where it should be.”

E-procurement can also deliver direct staff savings or opportunities for re-deployment. Donald says e://volution is working with a government department on a B2B & B2C system that will save three jobs when it is implemented in 2006.

“The department will be changing from a manual ordering system to a fully electronic one and three people who are currently taking orders won't have to do it any more. In our experience this is typical, e-procurement will usually save two or three full time equivalent positions in this way, sometimes more.”

Donald says the biggest benefits of e-procurement come when the system is fully integrated with the ERP systems of both the customer and supplier end.

“We have started to see some of our clients going fully paperless in the last two years and suppliers get orders by email alone,” she says. Donald says one of the advantages of using a third party e-procurement hub such as e://volution is that companies can switch their ERP system or a supplier with no change management issues.

“You can have thousands of end users but changing a supplier is just a matter of loading a new catalogue, users log on to the same system and use it in exactly the same way. And if a client changes its ERP system you don’t have 20 interfaces to change, there’s just one.”

Competitive advantage
Rod Hall, managing director of e-procurement specialist Tranzsoft, says companies are much more aware of e-procurement than a few years ago and users are starting to apply the technology in a wider role. “The focus used to be on taking away the manual costs of paper based procurement but now we are starting to see users looking to gain more of a competitive advantage through these systems,” he says.

Tranzsoft’s clients include Auckland District Health Board and the Health Exchange, which electronically links hospitals to medical suppliers, and some of these same companies are also using Tranzsoft’s e-procurement hub to send out advance notices to alert a supplier that an order is on its way.

“It’s a much closer engagement between a customer and a supplier,” says Hall. “In a hospital type environment you can be dealing with really critical supplies. Once an order is flagged as urgent this could be used to send out an email or an SMS text message and it could even pre order a courier for final dispatch.”

For many organisations, e-procurement delivers some of the most significant benefits when it is deployed in tandem with a reduction in the number of suppliers. One of Tranzsoft’s customers, the New Zealand Police Force, relies on sole suppliers for fuel, stationery and a wide range of other needs. The organisation now processes over 300,000 high volume supplier transactions through Tranzsoft’s Business Connector hub, which has helped to achieve a big reduction in administrative costs.

Prior to installing the SAP ERP system in 1999 the organisation calculated that each purchase order was costing $42.15 to process. The combination of SAP and the Tranzsoft hub has brought that figure down to $5.20.

But Hall says it is important that a e-procurement system is versatile enough to be able to cope with smaller suppliers. “You can only start getting at some of the biggest benefits once you have got to the stage where around 80% of your transactions are being processed electronically, and you can only do that if the system copes with the whole gamut of suppliers from large corporates down to small scale niche operations.”

Carl Mitchell-Turner, CEO of e-procurement company PSB Conexa, (see interview page 22) says the maturity of the e-procurement market is being reflected by the seniority of the people that conexa’s clients are sending to initial scoping meetings. These days, he says IT managers and CFOs are likely to take as much interest in e-procurement as purchasing managers as customers are taking a more whole-of-organisation approach. Mitchell-Turner says e-procurement does deliver direct cost savings but it also introduces efficiencies around procurement which brings down overall business process costs.

“One thing that’s very interesting is that with a manual system clients tell us that their cost per procurement transaction can be as low as $40 or as high as $250 but what they have all had in common is that we’ve been able to reduce those costs by an average of 85%.”

Mitchell-Turner says conexa’s customers are also benefiting by a reduction of maverick spending, a reduction in the number of suppliers, and a reduction in the incidence of invoice errors.

Tony Webster, CEO of supply chain specialist Conduit, says there is a lot more acceptance of e-procurement and EDI (electronic document interchange), as organisations become more familiar with the technology. “There’s less emphasis on websites and more emphasis on back end systems,” he says.

Webster says the benefits of e-procurement are now well known but he stresses that suppliers especially should realise that they need to keep investing in their e-commerce websites.

“They can't just put the site up and leave it. E-commerce needs to be regarded as part of the business not just an add on.”

Conduit, a subsidiary of IT distributor Renaissance, includes Office Products Depot and Gillette agent SellAgence among its clients and is about to go live with a major B2C project involving around 50 suppliers and 2 million products. Webster says the main benefits of using Conduit’s hosted solutions are lower costs per transaction and more accurate invoicing. “The credit to order ratio comes down as there are less credits to process. The cost of doing business drops quite considerably in these areas,” he says.

While Conduit’s solutions are best suited to companies with a turnover of $20 million or more, Webster says the cost of e-procurement solutions has also come down considerably. “What we are now doing for $15,000 or $30,000 used to cost $100,000 to $120,00 a few years ago.”

For more information on e-procurement visit the Supply Chain eCommerce Research Pavilion

January 2006