Viewpoint -- E-Procurement Can Deliver Success

This viewpoint is based on results of the Fourth Annual IndustryWeek Census of Manufacturers, a massive editorial research project that was designed to collect information about U.S. manufacturing trends, best practices, and specific manufacturing performance metrics. To that end, two questionnaires were developed: A mail survey that targeted plant-level manufacturing executives and a telephone survey aimed at corporate-level manufacturing executives. The research was conducted in association with PricewaterhouseCoopers. More than 3,300 survey responses were collected during the spring of 2000. The e-world is here, and corporate-survey respondents to the Fourth Annual IndustryWeek Census of Manufacturers recognize it. Nearly one-third believe e-business will have a significant impact in shaping their industry over the next 18 months. Most of the remaining executives believe that e-business will have at least a moderate impact on their industry. While executives indicate that improving customer service and attracting new customers are the most important reasons to expand electronic business, the largest planned implementation is for procurement. This supports our experience, which is that one of the early ventures for a company into the e-world often is through procurement. E-procurement provides a relatively safe developmental ground for a company to test the e-waters. The required process changes are intuitive, the technology is relatively proven, and the expected benefits are significant and tangible. Overall, nearly 35% of executives surveyed in the IW Census view reducing procurement costs as an extremely important reason to adopt or expand electronic business processes. Indeed, 78% of the executives indicated that they already use Web-based technologies or intend to utilize Web-based technologies to enable procurement within the next 18 months. The e-procurement function must address three fundamental business issues to drive value into the business:

Develop visibility to expenditures by vendor and by category in order to identify savings opportunities;

Develop spend strategies through a rigorous strategic sourcing process;

Implement mechanisms to execute strategies and realize opportunities. Developing visibility to spend (or expenditures) includes building capabilities to identify strategic sourcing opportunities. Once identified, the opportunities can be captured through the implementation of a strategic sourcing process. Strategic sourcing involves a review of a company's entire negotiable spend base and may realize an impact well in excess of 10% of the total annual expenditure on goods and services. Underutilized Lever Strategic sourcing traditionally has been underutilized as a lever for improved performance for many reasons, including:

Procurement often is viewed as a collection of administrative and logistical tasks focused on transaction processing;

Procurement often is functionally isolated from customer management, replenishment, and manufacturing;

Procurement leadership often is positioned many levels down in the organization with no direct line of sight to key decisions;

Performance measures often lack linkage to business objectives and focus primarily on unit price;

Significant portions of the spend base often do not pass through procurement. Only 6% of all plant-level IW Census respondents and 8% of world-class respondents have extensively implemented supplier rationalization -- a key element of strategic sourcing -- within their manufacturing plants. However, 26% of world-class respondents have extensively implemented the practice of evaluating suppliers on a total-cost basis, another key element of strategic sourcing. One of the key enablers of strategic sourcing is technology. Historically, attempts to migrate a company toward using a new strategic sourcing process seemed to revolve around threats toward everyone who did not follow the newly designed processes. It often was easier and quicker for local resources to bypass the system and its processes and continue to do things the old way. The quickest way to procure involved creativity in circumventing the system and its controls. However, technology improvements today enable newly designed processes to the point that the ideal path often is the path of least resistance. That is, procurement resources find it easier to leverage the new system than to follow their old processes. The following list identifies the percentage of corporate manufacturing executives who indicate "use" or "planned use" of Web-based technologies for each business process over the next 18 months:

• Procurement 78%
• Customer service 76%
• Customer order entry 74%
• Payment processing 58%

This listing highlights the importance of procurement within the overall e-business plans of a company. Clearly the leaders are moving toward e-enabling their procurement process. We believe the technology provides the overall sustainability for the new strategies and realization of the identified opportunities. Who Is Implementing E-Procurement? A manufacturer's implementation level of e-procurement for direct supplies varies by the percentage of materials in cost-of-goods sold (COGS). Manufacturers for which materials represent the lowest levels of COGS are the least likely to use electronic procurement for direct supplies. Manufacturers for which materials represent the highest level of COGS are the most likely to have implemented e-procurement technology. Plant-level IW Census respondents who were leaders in the productivity measurement were more likely than non-leaders to have implemented e-procurement of both direct and indirect materials. Similarly, leaders in the total annual inventory-turn metric were more likely to have implemented direct material procurement electronically. Building In Responsiveness Current business challenges in procurement often center around maverick buying, excessive manual processes, and operating with a lack of data to support optimization of procurement. Companies are utilizing electronic data interchange (EDI) exchanges, supplier consolidation, outsourcing, procurement cards, and consortium buying as tools to build responsiveness into the current processes. The future challenges for e-procurement revolve around procurement integration, policy compliance, and further reducing transaction costs. Innovations regarding total cost of ownership, full-cycle requisition-to-check solutions, linkages within the supply chain among internal and external suppliers and customers, visibility to real-time information, and supplier optimization will enable companies to meet the future challenges. E-procurement can deliver an early e-business success story. E-procurement is low risk, has little impact on strategic processes, has clear measurable benefits for both companies and their suppliers, provides for more strategic relationships with suppliers, and has a clear and persuasive business case. Expect a continued high degree of focus on e-procurement in responses to future versions of the IW Census. Paul Accordino and Debra Aerne are principal consultants with PricewaterhouseCoopers. Accordino is based in Cleveland. Aerne is based in St. Louis.