Category Archives: Procurement Innovation

A Hitchhiker’s Guide to e-Procurement: Terminology

Mostly Harmless, Part XXIV

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The first post of the series indicated that this brief guide will define what e-Procurement is, isn’t, and how it relates, or fails to relate, to e-Purchasing, EIPP, P2P, and e-Sourcing. Now that the basics of e-Procurement have been covered, this post will address the terminology before the series concludes.

EIPP stands for Electronic Invoice Presentation and Payment. It is not the same as e-Procurement because any system capable of accepting invoices, processing invoices, and queueing them up for payments can be labelled an EIPP system. Such a system does not need to support requisitions, purchase orders, or analysis, all key steps of the e-Procurement process.

P2P stands for Procure-to-Pay. By definition, such a system only needs to support core purchase order functionality, which lets the supplier know that goods and services are desired, invoice functionality, which lets the buyer know that the supplier has shipped and/or delivered the goods and payment is expected, and payment approval, which lets AP know it can queue a payment against an approved invoice. Like EIPP, such a system does not need to support requisitioning and the associated approval process, does not need to support goods receipt, and does not need to support analysis or tax reclamation. It may or may not include catalog support.

e-Sourcing stands for the electronic implementation of the strategic sourcing cycle, which starts with spend analysis, moves onto RFX and/or e-Auctions, then to optional decision optimization, and concludes with an award and contract. Such a solution does not need to contain any e-Procurement functionality whatsoever.

Then, there’s e-Purchasing , the doctor‘s personal pet peeve, as it has no well defined meaning outside of the UK public sector, where it is a hybrid of the core e-Negotiation technology of the e-Sourcing process, namely RFX and/or e-Auction, and the core capabilities of the e-Procurement cycle, namely requisitioning, approvals, purchase orders and SOWs, invoices, and e-Payments. When used by a vendor, it could refer to any combination of e-Procurement and e-Sourcing technology and such a solution should be reviewed with care.

Of course, many vendors will misuse all of these terms as well as e-Procurement, so one will have to review any shortlisted solutions with extreme care, but this is what the terms mean and why none are synonymous with e-Procurement.

Next Post: Summary

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A Hitchhiker’s Guide to e-Procurement: Sectors

Mostly Harmless, Part XXIII

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Enterprises generally fall into two categories: public or private. While the basic requirements for e-Procurement are unchanged whether the installation is intended for the public or private sector, each sector has its own standards for procurement and the system must support the standards, and quirks, of the sector in order to ensure adoption and success.

Since most of the posts to date have implicitly assumed that the application is going to be deployed in the private sector, this post will primarily discuss the public sector and some of the sector specific procurement processes that should have an impact on system selection.

In the public sector, most purchase orders for goods and / or services over a certain value are the result of a public competition. This means that once a requisition is approved for new products or services above a certain value, which can not be assigned to a standing offer or contract, the next step in the process is an RFX or e-Auction. As a result, the e-Procurement system will either need to contain RFX and / or e-Auction functionality, or integrate with such a system. The integration can be as simple as XML file export (of the details of the approved requisition that needs to go do bid) and import (of the details of the winning bidder and submitted pricing), but the workflow has to support the process and integration.

Also, as alluded to in the previous paragraph, new purchases below a certain threshold can be made against standing offers / contracts as long as the appropriate policies are followed. Some organizations will allow a buyer to use the standing contract of their choice (provided a certain dollar threshold is not exceeded in any calendar year), others will dictate round-robin selection in an effort to insure fair allocation of funds, and another group of organizations will use a hybrid policy and allow buyers to select the supplier from a set of preferred standing offers or offers that have not received their “fair” share of business.

Another area of increased complexity is approvals. In the private sector, the rules are usually cut and dry. For example, under 1K for approved products, the employee only, under 10K where all goods that can be bought on contract are bought on contract, the supervisor, under 100K, the VP, and the CPO’s approval is only required if the purchase is over 100K. In the public sector, there are approvals based on value, based on contract vs. standing offer vs. one-time buy, repeating payments, type of good or service (engineering will have to sign off on machine parts, HR on temp labor, etc.), MWBE percentages (as contracts over a certain value may be required to have MWBE components), environmental sign-offs (if the buy is for products or services with a significant environmental impact or products or services for which there are environmental standards), etc. Where it is quite uncommon for a requisition to require more than three approvals in the private sector, many requisitions can easily require six or more approvals in the public sector.

Payments are a little bit trickier too. Not only must they be processed according to standard terms and conditions, but they generally must be made on regular payment dates, and may be withheld indefinitely at any time due to orders from higher ups, which is common when governments have not approved their budgets for a year by a given deadline. Plus, many government departments are tax exempt (as it doesn’t make much sense for a government to tax itself) from local, state, and federal taxes, and the taxation rules need to be powerful and flexible.

Finally, the reporting requirements in the public sector are much more onerous than in the private sector. If the tool does not contain a modern analysis and reporting package that can meet all of the requirements of all of the departments and divisions and associated reporting requirements, it will need the ability to do a full export of all data required to produce those reports in a third party analysis or BI tool.

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What Is With This New Fangled Procurement Technology?

I say, what is with this new fangled procurement technology?

Back in my day we used a ledger
and a calculator
and we were able to track our costs just fine.
When it came time to negotiations, we offered incentive carrots
like free meals at fine upscale restaurants
and free trips to exotic locales like Aruba and Cancun.
If that didn’t work we brought out the big stick
and threatened to take our business to the supplier down the street
or to expose all the kickbacks the supplier rep took from the last deal.
We didn’t need any new fangled e-Sourcing technology to conduct our negotiations
or marketplace technology to handle our invoices
or e-Payment systems to pay our bills.
When we received the goods at our warehouse
we just handed over a big wad of cash
and everyone was happy.
Now get off my lawn!

A Hitchhiker’s Guide to e-Procurement: Procurement Models

Mostly Harmless, Part XXII

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There are three major procurement models. While they all require the same basic e-Procurement functionality, each model dictates its own e-Procurement requirements and emphasizes certain features and functions above others. This post will address the different models and which features and functions are emphasized by the models.

The first major model is the classic model of decentralized procurement where each business, functional, or geographic unit is responsible for its own purchases. Individual business units are empowered with autonomy and control over their process and design decisions. It allows for quick processes and issue resolution and allows the organization to take advantage of expertise in the local market. However, it does limit an organization’s ability to leverage the corporate spend or to align the business unit objectives with the objectives of the global organization.

If an organization is using a decentralized model, the e-Procurement system will need to be quite flexible as each unit will likely have its own requisition formats, approval processes, purchase order distribution, invoicing, and payment processes. It will have to support multiple workflows, and allow for analyses against multiple budgets. And it will have to meet the different needs of the different units.

The next major model is centralized procurement. In the newer, centralized, model of procurement, all procurement goes through a single centralized model. This has its advantages as it allows the organization to fully leverage corporate spend and drive standardized sourcing processes across the organization. However, it can lead to lost knowledge of local supply markets and consumption patterns, which can result in sub-optimal buys for many regions. It can also increase the risk of maverick spend when the geographically dispersed site managers do not agree with centrally mandated decisions. And it can increase reaction times to unexpected changes in supply or demand.

If the organization is using a centralized model, the e-Procurement system will need to be scalable and high performance as the global organization will be using a centralized instance and a centralized data store. It will need very good fine-grained roles management as there will be hundreds, or thousands, of users, who will not only have different roles, but different levels of access to the system and the data contained within. (A manager might only be allowed to see activity from her team in her local unit.) And it will need fine-grained data classification capabilities to support unit-based analysis, which could be built-in or through an external tool.

The final major model is a hybrid procurement model known as center-led procurement. In a center-led model, a procurement center of excellence (COE) focusses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving tactical buys and tactical execution to the individual business units. It was designed to give an organization the best of both the centralized and decentralized worlds with as few disadvantages as possible.

If the organization is using a center-led model, the e-Procurement solution needs to be extremely flexible, scalable, and robust as it will need to support distributed instances with different workflows for each business unit for decentralized purchases as well as a centralized instance with a single master workflow for centralized instances. Role management and security will need to be extremely fine grained as users could have different permissions depending upon whether the spend is centralized or distributed. And data management will have to be fairly intelligent as some spend will be centralized while other spend is distributed.

Next Post: Sectors

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A Hitchhiker’s Guide to e-Procurement: Costing a Solution

Mostly Harmless, Part XXI

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Every solution costs more than the sticker price. But how much more? In this post, we’ll outline how to cost the various solutions as well as a methodology for calculating the expected value.

First of all there’s the cost of the license, which can be significant. If the system is enterprise, and especially if it’s an installed solution, this can be a very significant up-front cost in the six figure range. Then there’s the maintenance, which is required for support and mandatory for some solutions, and built into the price of on-demand/SaaS solutions. This can be as high as 22% a year for some solutions. Then there’s the installation and integration costs. Even a SaaS solution will require some setup, and the e-Procurement system will need to be integrated with accounting systems, sourcing systems, payment systems, and other enterprise (resource planning) systems in order for the organization to extract maximum value for the system.

Then there’s training costs. Even though a good system will be extremely easy to use and self-explanatory where basic functions are concerned, some training will still be required. This is especially true for the administrators, who have to maintain the system, and analysts, who have to analyze processes, performance, and spending. In addition to training costs, there will be support costs. Administrators will have to be employed to continually maintain the system (data) and train new users. If the system is installed, they will also have to do patches and upgrades in addition to maintaining system data and (business) processes.

If the organization is looking for an installed or hosted ASP solution, there will also be hardware costs, database costs, application server costs, and middleware costs. These costs can easily dwarf the system costs if the organization doesn’t already have any of these solutions. And even if the organization has some of these solutions in place, there will likely be additional license fees. Finally, there will likely be additional IT (support) costs to maintain the hardware, which will have to be upgraded on a regular basis, and the supporting software.

When all is said in done, the cost of a solution can end up being 10 times the sticker price, so it’s important to understand the total cost of ownership before choosing a solution. This is not to say that a solution with a seven figure total cost of ownership is expensive. It might be, it might not. It all depends upon how much it costs relative to other solutions being evaluated, how many users will use the system, how much it will increase organizational efficiency, and what ROI the organization expects to see.

Fortunately, the calculation of expected value is quite straightforward once the TCO is known. It’s simply a matter of computing the ROI according to the following formula:

(savings expected from increased efficiency +savings expected from maverick spend reductions +savings expected from newly identified opportunities) /total expected cost

While some of these numbers may appear hard to calculate, they are easy to estimate and what is really important is order of magnitude. For example:

  • if the organization expects to increase efficiency 200%, that’s a 65% workforce reduction against current workload; if the organization currently requires 20 people to handle tactical procurement tasks, at an average salary of 62K, that’s a reduction of 13 people or about 800K per year
  • if the organization currently has a maverick spend rate of 30% and expects, using third party benchmarks, to reduce that by 66%, that’s an 20% reduction in maverick spend; if maverick spend, on average, costs the organization 5% of spend on average, if the organization spends 100M annually, that’s a projected savings of 1% (20% of 5%), or 1 M in one-time savings
  • if the organization expects that an e-Procurement system will identify additional savings opportunities on 20% of spend annually and that the average savings that will be obtained will be 10%, then the organization would expect to save 2% of spend, or 2M annually

All told, if the organization expects to use the system for five years, it would expect to save 15M over five years (5*800K + 1M + 5*2M). If the total cost of ownership of the system was determined to be 3M for five years, then the organization would expect to see an ROI of 5X, which should be a buy decision. Of course, if the calculations worked out that the organization only expected to save 5 M, and the ROI was only 1.6, the decision should be to find a more cost effective solution.

For more details on cost calculations, and a starting spreadsheet, see Sourcing Innovation’s post on Uncovering the True Cost of On-Premise Sourcing & Procurement Software in the archives.

Next Post: Procurement Models

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