The Strategic Route To E Procurement Success 2001

The Strategic Route To E Procurement Success 2001

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  The Strategic Routeto eProcurement Success JULIAN CURTISS (PURCHASING DIGEST, CONFERENCE EDITION, 2001) Michael Porter recently said “the new economy is just the old economy with access to new technology” (Porter, M. (2001): Strategy and the Internet, Harvard Business Review, Volume 79 – Number 3: Harvard, USA). If the Y2K Bug taught us anything, it should have been that that the organisation, in its pursuit for operational efficiency through the leveraging of new technology, should be aware of the limitations and possible long term effects that technology may have on its activities. It should also have ushered the business managers back into the driving seats of technology decisions, and placed IT firmly in its place, as an integral support function of the business. Technology decisions should never be taken in isolation of the business process they are intended to support and those business processes should never exist in isolation of the organisational strategy they are there to deliver upon. With this in mind it is sobering to think that many of the eBusiness decisions that have taken place in the last 20 months appear to be been done in abject isolation of standard corporate strategy principles. It is this that Porter alludes to. Interestingly he applies two of his legendary business models to the “Internet” world and arrives at some interesting conclusions. The models referred to are the “Five Forces Model” and “The Value Chain”, business models all to familiar to business school students yet mostly lost on technology managers. In these models Porter encourages the strategist to look first at the nature of the organisation’s environment (The Five Forces Model) and then to look at the manner in which the organisation plans to operate within this environment (The Value Chain). The Five Forces Model The Value Chain Porter is concerned that the departure from conventional strategic thinking is what lies behind the “Dot-Bomb” failures that we have seen. This is not too far fetched. Stock market analysts threw away their rulebooks when measuring the value of dot-com businesses, so why shouldn’t the businesses themselves do the same? © TRANSACTION TECHNOLOGY SOLUTIONS -1- 16 January 2009
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  THE STRATEGIC ROUTETO EPROCUREMENT SUCCESS The reality is that businesses HAVE TO return to the tried and tested methods of measuring the viability of any business project such as Return on Investment (ROI) modelling, Discounted Cash Flows (DCF) and the good old Business Case. The reality here is that very often the business case for an endeavour such as eProcurement can seldom be proved with the above methods. The reason lies in the profile of many organisation’s spend. Below is an example of a typical manufacturing organisation’s spend. Capital Equipment expenditure is of sufficiently high value and low volume to justify the close personal attention of an experienced buyer. Direct Goods are of sufficiently high strategic value to justify the close personal attention of an experienced buyer, as are Strategic Indirect Goods. It is no good buying the best components for your production line if sub-standard bearings bring it to a halt. The savings an organisation can hope to achieve from an intervention in these categories of spend are usually related to the Sourcing component of Strategic Procurement and not the transactional component. As eProcurement derives most of its business case from the anticipated transactional savings it is clear that the case will seldom be made for eProcurement in this category of spend. Recently, with many of the eProcurement software vendors releasing Auctioning technologies, there have been claims that they can indeed add value to the sourcing component of procurement. The key issue here lies in the fact that auctioning, or reverse auctioning, is most effective when Price is the critical element and not quality or supplier performance. While this technology can technically handle these issues, computer systems are typically not predisposed to making soft decisions. On supplier performance, this can only be tracked after a reasonable period of time (say, one year) and therefore is not of immediate value. There have also been concerns raised by the Chartered Institute of Procurement and Supply (CIPS) in the United Kingdom on the impact of reverse auctioning on supply chain stability. Reverse auctions have the potential to create price wars if not used responsibly and in adversarial supply markets, such as South Africa, this could be particularly damaging. A protracted period of low pricing will squeeze out smaller suppliers, reducing the supply base and ultimately result in higher prices. Just look at the airline industry in South Africa. In © TRANSACTION TECHNOLOGY SOLUTIONS -2- 16 January 2009
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  THE STRATEGIC ROUTETO EPROCUREMENT SUCCESS terms of strategic goods, it is unlikely to be in the organisation’s best interests to use this tool, and therefore its case for use is limited. Traditionally, the Maintenance, Repair and Operational (MRO) costs are a classic target for cost saving interventions through reducing process costs, due to their low value, high volume nature. However with Strategic Indirect procurement removed the case becomes less compelling in this category of spend. The technology itself is compelling. It offers the organisation the ability to bring self-service procurement to the users in the organisation for stationery, computer equipment, services and travel. Additionally, in terms of its profile, this category of goods is weighted on price, and therefore reverse auctioning technology comes into its own. The challenge the organisation faces however is that with the reduced transaction volumes, it becomes harder to justify the business case for eProcurement software. Recently South Africa has seen the introduction of a number of ASP (Application Service Provider) eProcurement offerings, such as Miraculum from Dimension Data, MyMarket.com from Bidvest (a Supplier portal) and Buyit from Scion (a Member of the First Rand Group). The critical issue at this stage is that with the exception of Buyit, they only address the buying element of the purchase-to-pay cycle, while invoicing and payment actually account for up to 60% of the cycle costs. This reduces the potential savings even further and therefore in some cases even the ASP offering is unsustainable. When embarking on eProcurement, whether internally or through an ASP, it is useful to consider what Porter says about the Internet’s impact on the bargaining power of suppliers: Procurement using the Internet tends to raise bargaining power over suppliers, though it can also give suppliers access to more customers; The Internet provides a channel for suppliers to reach end users, reducing the leverage of intervening companies; Internet procurement and digital markets tend to give all companies equal access to suppliers and gravitate procurement to standardised products that reduce differentiation; and Reduced barriers to entry and proliferation of companies downstream shifts power to suppliers. This can impact industry stability in the following ways: Reduces differences among competitors as offerings are difficult to keep proprietary; Migrates competition to price; and Lowers variable cost relative to fixed cost, increasing pressures for price discounting. Bill Gates said that the Internet has the potential to fundamentally reshape the way we do business. He didn’t say it will change the business we do. As strategy determines “the business we do” it is important therefore for the organisation not to lose sight of this in its pursuit to leverage the benefits of the “new technology”. What is clear is that eProcurement is not a technology decision. It is a strategic business decision that has at its heart the ability to leverage the benefits of a new technology to reduce costs. It is a decision that that must therefore be made strategically. © TRANSACTION TECHNOLOGY SOLUTIONS -3- 16 January 2009
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  THE STRATEGIC ROUTETO EPROCUREMENT SUCCESS ABOUT THE AUTHOR Julian Curtiss holds a Masters of Business Administration from Thames Valley University in the United Kingdom. He has more than ten years experience in IT business consulting. He worked for three and a half years in the United Kingdom consulting to small and medium businesses. In 1995 he returned to South Africa where he worked for IBM South Africa, initially implementing JD Edwards software and then working as a Market Segment Manager, designing custom supply-chain solutions for the travel related services, agricultural and retail industries. After IBM Julian worked for FirstRand Bank in the capacity of eCommerce Strategist, initially in the Card Division of FNB and briefly thereafter for MC2, now Hyphen Technology (Pty) Ltd. Most recently Julian held the position of Head of B2B eCommerce at Prism Transactive, a division of Prism Holdings Ltd. Julian is currently a regular contributor to the procurement industry journals. He is also project managing the implementation of an eProcurement solution at a large financial institution. © TRANSACTION TECHNOLOGY SOLUTIONS -4- 16 January 2009