E-procurement -Reengineering the traditional procurement process
Summary
TLDRThis lecture introduces e-procurement and its advantages over traditional procurement processes. The instructor explains key concepts such as procurement, purchasing, and sourcing, emphasizing that e-procurement leverages online technologies to streamline corporate buying. Case studies from General Electric and Tata Steel illustrate the cost, time, and efficiency improvements through e-procurement. The lecture covers how information and communication technologies (ICT) have reengineered traditional processes, highlighting new activities like spend analysis and supplier management. Different e-procurement models such as software solutions, internet market exchanges, and B2B auctions are also discussed.
Takeaways
- đ **E-Procurement Definition**: E-procurement is the application of ICT, especially the internet, to facilitate corporate buying processes.
- đ **Traditional vs. E-Procurement**: Traditional procurement involves manual processes, while e-procurement automates these processes using technology.
- đ **Benefits of E-Procurement**: It reduces administrative costs, shortens order fulfillment cycles, lowers inventory costs, and increases collaboration among partners.
- đïž **Procurement Process**: Procurement includes the entire process from indenting to supplier evaluation, while purchasing is a subset focusing on the buying act.
- đ **Sourcing**: Sourcing is about finding, evaluating, and engaging suppliers of goods and services, and is a part of purchasing.
- đ **General Electric's E-Procurement**: GE's Trading Process Network automated procurement, leading to a 30% drop in transaction costs and 5-20% reduction in material costs.
- đ **Tata Steel's Procurement Solution**: Tata Steel used various e-procurement options, resulting in strategic sourcing savings and reduced order lead times.
- đ **E-Procurement Models**: Models include e-procurement software, internet market exchanges, B2B auctions, and internet purchase consortia.
- đ **Spend Analysis**: A new process introduced by e-procurement, involving data aggregation and deciding sourcing strategy.
- đ **Integration with Internal Systems**: E-procurement software often needs to be integrated with a company's internal systems for seamless operation.
Q & A
What are the three key terms related to procurement?
-The three key terms related to procurement are procurement, purchasing, and sourcing. Sourcing is a part of purchasing, and purchasing is a subset of procurement.
What is the definition of procurement?
-Procurement is the systematic process of deciding what, when, and how much to purchase, the act of purchasing it, and ensuring that what is required is received on time, in the right quantity, and quality specified.
What is the difference between purchasing and procurement?
-Purchasing is only the act of buying the material and services with the right quality, quantity, and at the right price from the right source at the right time. Procurement, on the other hand, includes the entire process from indenting to supplier evaluation.
What is e-procurement?
-E-procurement is the application of information and communication technology, specifically the internet, to facilitate corporate buying. It is an online procurement process that uses technology to streamline and automate purchasing activities.
What are the benefits of e-procurement?
-Benefits of e-procurement include reduced administrative costs, shortened order fulfillment cycles, lower inventory costs, lower prices paid for goods through increased competition among suppliers, and increased collaboration among partners through technological intervention.
What is the significance of General Electric's Trading Process Network in the context of e-procurement?
-General Electric's Trading Process Network is one of the first initiatives for automating the procurement process. It allows buyers to post requests for proposals, suppliers to submit bids electronically, and facilitates transaction processing such as reconciling purchase orders with invoices.
What benefits did General Electric see from implementing their Trading Process Network?
-General Electric saw a 30% drop in transaction costs, a reduction in material costs ranging from 5 to 20 percent, and a procurement cycle time reduction of 6 to 8 days per month.
How does Tata Steel's procurement solution differ from General Electric's?
-Tata Steel uses four different options for procurement: metaljunction (an e-marketplace for the steel industry), an internal e-bidding solution, an internally developed e-negotiation solution, and a stock information system for vendor-managed inventory suppliers.
What is the role of spend analysis in e-procurement?
-Spend analysis is a new process introduced by ICT intervention in e-procurement. It involves data aggregation and deciding sourcing strategy, which was not part of the traditional procurement process.
What are the four types of e-procurement models mentioned in the script?
-The four types of e-procurement models are: 1) e-procurement software, 2) internet market exchanges, 3) internet B2B auctions, and 4) internet purchase consortia.
How does the traditional procurement process differ from the reengineered process with ICT intervention?
-The traditional procurement process consists of defining requirements, selecting suppliers, contract management, and supplier evaluation. With ICT intervention, the reengineered process includes spend analysis, sourcing, supplier selection, vendor management software, tactical procurement, and settlement processes.
Outlines
đ Introduction to E-Procurement
The paragraph introduces the concept of e-procurement, emphasizing its importance in connecting with suppliers. It discusses the traditional procurement process and how it is being transformed by information and communication technology. The paragraph outlines the difference between procurement, purchasing, and sourcing, explaining that procurement is a broader process that includes purchasing and sourcing. E-procurement is defined as the use of the internet and other technologies to facilitate corporate buying. The benefits of e-procurement are also highlighted, such as reduced administrative costs, shorter order fulfillment cycles, lower inventory costs, and increased collaboration among partners.
đ Case Studies on E-Procurement Benefits
This paragraph presents two case studies to illustrate the benefits of e-procurement. The first case study is General Electric's Trading Process Network, which was an early initiative in automating procurement. The system allowed for online bid submission and evaluation, contract management, and transaction processing, leading to significant cost reductions and time savings. The second case study is Tata Steel's procurement solution, which utilized various e-procurement options like metaljunction, an e-marketplace for the steel industry, and internal bidding and negotiation systems. The benefits included strategic sourcing savings, reduced order lead times, and decreased inventory costs.
đ Traditional Procurement Process
The paragraph outlines the stages of the traditional procurement process, which includes defining requirements, selecting suppliers, contract management, and supplier evaluation. It explains the importance of early involvement of the purchase department and suppliers in defining requirements. The selection of suppliers involves maintaining a preregistered list and requesting proposals to finalize specifications. Contract management involves negotiation and formalizing contracts, establishing ordering routines, and transaction processing. Supplier evaluation is based on quality, delivery schedules, and other parameters.
đ Impact of ICT on Procurement
This paragraph discusses how information and communication technology (ICT) has impacted the procurement process. It explains that while some activities like defining requirements cannot be fully automated due to their unstructured nature, many other activities have been reengineered. The paragraph highlights the introduction of spend analysis as a new stage in the procurement cycle, enabled by ICT. It also notes that structured decision-making activities are automated, while unstructured activities remain part of the procurement process but are not automated under e-procurement.
đ E-Procurement Models
The paragraph explores different models of e-procurement, including e-procurement software, internet market exchanges, internet B2B auctions, and internet purchase consortia. It differentiates between these models based on whether the platform is provided by the supplier, a third party, or is industry-specific. The paragraph explains that e-procurement software is typically supplied by the vendor and needs to be integrated with the company's internal systems. Internet market exchanges and purchasing consortia are third-party service providers that facilitate transactions between multiple buyers and sellers, with the former catering to multiple industries and the latter to specific industries. Internet B2B auctions can be conducted by the company itself or with the help of third-party service providers.
đ Recap and Future Discussion
The final paragraph recaps the lecture's main points, including the differences between procurement, purchasing, and sourcing, the transformation of traditional procurement through ICT, and the introduction of new processes like spend analysis. It also summarizes the various methods of conducting e-procurement. The speaker indicates that the next class will delve into the technical details of each process.
Mindmap
Keywords
đĄProcurement
đĄE-Procurement
đĄPurchasing
đĄSourcing
đĄICT (Information and Communication Technology)
đĄSpend Analysis
đĄGeneral Electric's Trading Process Network
đĄMetalJunction
đĄSupplier Evaluation
đĄReengineering
Highlights
Introduction to connecting with external stakeholders through corporate websites.
Discussion on connecting with important supply chain partners, specifically suppliers, through e-procurement systems.
Definition and explanation of procurement, purchasing, and sourcing, and their interrelations.
Procurement as a systematic process involving decision-making, purchasing, and ensuring delivery.
Purchasing defined as the act of buying material and services at the right quality, quantity, and price.
Sourcing as the process of finding, evaluating, and engaging suppliers of goods and services.
E-procurement defined as the application of ICT, especially the internet, to facilitate corporate buying.
Benefits of e-procurement including reduced administrative costs, shortened order fulfillment cycles, and lower inventory costs.
E-procurement increases collaboration among partners through technological intervention.
Case study of General Electric's Trading Process Network, one of the first initiatives for automating procurement.
Features of GE's Trading Process Network, including online RFP posting and electronic bid submission.
Benefits GE achieved through e-procurement, such as a 30% drop in transaction costs and 5-20% reduction in material costs.
Case study of Tata Steel's procurement solution, using different options like metaljunction and internal e-bidding.
Tata Steel's strategic sourcing savings and reduction in order lead time and inventory costs.
Traditional purchasing process stages: defining requirements, selecting suppliers, contract management, and supplier evaluation.
Impact of ICT on procurement, including the introduction of spend analysis and reengineering of decision-making and transaction processing activities.
Types of e-procurement models available: e-procurement software, internet market exchanges, B2B auctions, and purchase consortia.
Differences between e-procurement models in terms of software provision by suppliers, third-party service providers, and industry-specific platforms.
Recap of the lecture's key points, including the traditional procurement process, introduction of new processes through ICT, and various e-procurement methods.
Transcripts
Welcome back We have started discussing about how to connect your external stakeholders
and in this context last class we saw uhh that you can connect to your external stakeholders
who are public through your corporate website
Today we are going to see how to connect to one of your very important supply chain uhh
partner that is your supplier So uhh we are now going to discuss about the e procurement
system So in this particular lecture we are going to learn what e procurement is What
are the benefits of e procurement What is the traditional procurement process and how
it is reengineered with the help of information and communication technology which we call
as the e procurement
Now to start with let us see what the procurement is In fact here three terms when we people
talk about procurement three important terms terms comes in One is your procurement second
one is your purchasing third one is your sourcing Now what is the difference between two In
fact the last one is included in the uhh previous one That is sourcing is a part of purchasing
and purchasing again is a subset of the procurement So what is procurement
Procurement is the systematic process of deciding what when and how much to purchase and the
act of purchasing it and the process of ensuring that what is required is received on time
in the right quantity and quality specified So which means starting from the indentation
till your supplier evaluation the whole thing is actually included in the (proc) procurement
process
Now when it comes to purchasing purchasing is only the act of buying the material and
services with a right quality and right quantity and at the right price from the right source
and at the right time So this is only the act of purchasing But before this purchasing
takes place you have to know which material to purchase so you have to go through certain
indentation process you have to prepare your uhh uhh requirements and so on
So this purchasing is just a subset of the procurement Then comes the term sourcing What
is sourcing Sourcing is the act of finding evaluating and engaging the suppliers of goods
and services
So uhh basically it is about finding the right supplier Now what is e procurement then E
procurement is the online procurement uhh is the application of various online uhh (info)
uhh various uhh important information and communication technologies and specifically
internet to facilitate the corporate buying Or in other words online procurement is a
technology solution to facilitate corporate buying using the internet and other ICT tools
So these are few benefits of procurement It reduces administrative cost it shortens order
fulfillment cycle it lowers inventory cost it lowers the price paid for the goods by
inducing the competition among your suppliers Then it uhh it also uhh increases the collaboration
among the partners through technological intervention and uhh helps in planning together
So here we are going to see uhh two example (situ) example uhh cases where and how it
benefited the specific company The first one that we are going to look at is actually General
Electrics Trading Process Network In fact let me tell you this is the this is one of
the very first initiative for automating the procurement process by any corporate house
So what are the various features uhh of this uhh uhh this General Electrics Trading uhh
Trading Process Network
So the here they had the facility for the buyer to post a request for a proposal on
the internet for access by prequalified suppliers The suppliers were able to download the request
and submit the bids electronically Then the buyer was able to evaluate the bids negotiate
online and places the order with the lowest bidder This system also facilitated transaction
processing that is uhh for example automatically (recon) uhh reconciling the purchase order
with invoices as a part of the payment process
Then this trading process network uhh also uhh managed the contract agreement components
of purchasing process
And look at the benefits that GE got The transaction cost was dropped by 30 percent There was a
reduction in the material cost and the cost was (rang) ranging for from 5 to 20 percent
by exploring the unknown suppliers and in the range of 5 to 20 percent by the organizational
wide spend analysis We are going to learn about spend analysis little late And time
uhh the uhh procurement cycle time was actually got reduced and there was a time save of by
8 to 6 to 8 days per month
This particular example the second example that we are going to look at the second case
that we are going to look at is actually something we we have already discussed at length It
was about the Tata Steel procurement solution And it as I have that we have discussed in
that class Tata Steel actually uses four different options First one is its metaljunction uhh
which is an e market plus for steel industry sponsored by consortium of SAIL and Tata Steel
Uhh Though it was initially started with SAIL and Tata Steel now almost uhh all the big
steel companies are now part of this metaljunction And here they uhh all kind of non routine
items they purchase and they also sell which of course we are not talking about e procurement
but they sell some of their uhh some of their products through this metaljunction
Then they uhh they also have one internal a bidding solution Uhh As I have told you
this was earlier they used to have internal e bidding solution which was actually getting
integrated with their ERP system But right now they are actually using a third party
uhh solution providers uhh platform for this e bidding Then they they also had one e negotiation
solution internally developed and uhh and they had a stock information system available
for their vendor managed inventory suppliers
And this is the benefit over a period of 1999 uhh to 2004 Around 2004 this is the benefit
that they obtained
There there was a strategic uhh sourcing saving of uhh which was actually in the first adoption
it actually got uhh uhh you know like it was actually they tried to they had they wanted
to reduce the cost and they were actually initially there was a difference between their
target value and their actual value but slowly they converse and by the end of 2003 and 04
both their target and as well as uhh uhh actual cost saving strategic uhh sourcing saving
was same Similarly their order lead time got reduced substantially and uhh their inventory
cost also got decreased over the years
Now with these two motivating examples one was the one was from uhh the GE trading process
network which was the very one of the very first application of adoption of e procurement
by any corporate house and the second one was a motivating example about the data Tata
Steel which is a company from our country only Then uhh let us try to understand how
this e procurement what all changes have happened in the traditional uhh procurement process
uhh through the (inter) uhh through this ICT intervention This is the traditional purchasing
process
Uhh In this traditional purchasing process you have four stages First one is you have
to define the requirement then you have to select the suppliers then you have to carry
out the contract management activities and finally evaluate the suppliers So in the first
one while defining the requirement you first task is you develop the specification When
the specification for a new product is gets developed many times there is early purchase
department involvement and early supplier involvement
You take the help of supplier to come up and the help of purchase department to come up
with your specification And this defining the requirement are many times a cross functional
activity It need not be uhh pertaining to your own department Uhh Let us say as an industrial
engineering department we would like to buy a a specific software We may take help of
some other department let us say our uhh computer and information centre to find out uhh about
the software and to find out what features the software should have
Then the next stage is your selecting the supplier In this while selecting the supplier
most of the time the company will be maintaining its own supplier base where the suppliers
we have preregistered list of suppliers And every supplier is not uhh capable of uhh providing
every kind of item So you have to be getting uhh from your company supplier database you
should be getting some of the uhh select the appropriate suppliers which uhh which we call
as the prequalified set of suppliers
And once we have this prequalified set of suppliers we call for quotation We ask for
ask for we request for the proposal we and once we get the proposal we may be asking
for the we will be finalizing our specification and then we will be uhh then we will ask for
the quotation Then once we get the quotation and typical as you know there will be there
will be uhh in a typical two cover system you will have a technical bid and price bid
and technical bid will be opened
Then based on the uhh if the supplier actually qualifies in the technical bidding session
then you will be opening the price bid And that is how you select the supplier
Then the next one is actually contract management This contract management has many stages Once
the supplier is selected usually the L1 the lowest uhh quotation uhh the person showing
the lowest price will be getting selected But usually L1 L2 and L3 three of them will
be asked uhh asked to compete with each other by by uhh and giving uhh opportunity to the
L2 buyers to further L2 and L3 buyers to further decrease their prices So this and with L1
also you can negotiate to bring the price further down
Then after this negotiation is over uhh you go for the (formal) you go for formalizing
the contract After the contract is formalized you establish the ordering routine how the
items are going to arrive and uhh uhh how the appropriate transaction processing activities
will be related to it Then final is your supplier evaluation After you get up to the actual
delivery takes place you evaluate the suppliers performance based on various parameters like
your uhh his quality his delivery schedule and so on and uhh finally the supplier gets
a rating
Now with the intervention of ICT definitely your (supp) this particular process is not
going to change drastically In fact uhh as we have discussed in one of the earlier classes
some of the processes now are to be improved and reengineered So now we are going to see
that because of this ICT intervention how some of the activities in the purchase department
have got reengineered But some of the activities cannot be reengineered For example let us
look at this uhh defining the requirement
Now this defining the requirement can this process be automated This uhh while discussing
about the type of decision making we were talking about three kinds of decision making
situations Structured semi structured and unstructured Basically defining the requirement
is a very unstructured decisions So therefore this process even if you have ICT tools and
techniques automating this one completely automation of this one is not possible
So therefore basically this part will not be a part of your uhh uhh reengineered process
due to ICT intervention However uhh due to ICT intervention many things happen Basically
a new procurement cycle this improved procurement cycle because of ICT has four stages again
First one is spend analysis which were actually missing from uhh which is actually possible
because of ICT intervention and this particular part was not there in your traditional process
So this spend analysis involves data aggregation deciding sourcing strategy etc Then next one
is your sourcing This sourcing again you have various options now available for sourcing
It is no more the uhh it is not that you uhh the traditional to cover the tendering process
is uhh uhh adopted here
Here you have now various options for uhh contract uhh for getting the contract It can
be catalog buying it can be a contract negotiation it involves uhh this request for proposals
request for quotation and so on Then supplier selection takes place Then you have vendor
management software to manage the uhh life cycle of a vendor during a particular purchasing
process Then you have another next is your tactical procurement Here making the requisition
approving the workflow supplier enablement (cataga) (manag) catalogue management these
kind of things can happen
And if you look at this these are actually as an indicates They there is uhh they are
not very strategic activities They are routine activities And finally the (pro) process has
to be there has to be settlement processes So finally the purchase order has to be issued
invoicing is to be invoice is to be made accounts payable and receivable needs to be managed
So with this we can see that many things have been reengineered Now what all have been reengineered
Many new activities are possible because of ICT which appear in the reengineered process
Now uhh uhh what are those For example your spend analysis So this spend analysis is one
of the activity which is now a part of e procurement process Then we also saw that the unstructured
decision making activities are not present as not shown as specific activities under
e procurement cycle
Uhh They are actually they are part of the procurement but they cannot be considered
under e procurement which is about automating the procurement process because those are
unstructured activities and they cannot be uhh automated Then all the structured decision
making activities are grouped together in different functional categories and automated
All the transaction (process) processing activities which uhh do not uhh require any kind of decision
do not have any kind of decision making components are grouped together and automated as transaction
processes
Now let us have a look at what are (vari) various kinds of e procurement models available
for the user The first one is the use of e procurement software So this e procurement
software uhh or the catalogue uhh software is actual an internet based software application
that enables employees to uhh purchase goods from approved electronic catalogues in accordance
with company buying rules while capturing necessary uhh purchasing data in the process
Now this uhh particular uhh uhh procurement software or the catalogue software is actually
it is supplied uhh this is a software which is actually developed or adopted by your supplier
This is not a part of your own corporation own company So therefore it may be required
that that particular software may become a part of may may have to be integrated with
your own internal system Then second one is your internet market exchanges
Now this uhh uhh internet market exchanges are third party service providers who are
specialized in conducting uhh who are specialized in automating e procurement processes In fact
they bring multiple buyers and multiple sellers together and they simply provide a virtual
market place for them to interact So such things are provided by third party and they
are external to the organization information system Now second one is your internet B2B
auctions
This internet based B2B auctions can either be conducted by that of the corporate uhh
by the company itself or the company can take help of again some third party (ser) service
provider who provides the platform for conducting such (B) B2B auctions Then the fourth one
is actually your internet purchase consortia In fact one example of one internet purchasing
consortia we have already seen in case of uhh steel industry
So in case of steel industry we were talking about your metaljunction and we know that
this metaljunction website provides a uhh portal where many of the steel buyers and
sellers actually come in and they transact with each other So these are the four options
for uhh electronic procurement Now the let us try to differentiate what is the uhh uhh
what are the I mean how they are actually different
If we look if uhh if we try to differentiate in terms of whether the software is provided
with the whether the platform is provided by the supplier or by the seller or by the
third party For example the first one the procurement software or which is which we
call at call as the online catalogue software is actually provided by the supplier And the
company has to integrate its business process with the with uhh this particular supplier
In fact uhh if you are (ac) you are going to use any uhh uhh procurement software on
any electronic catalogue provided by your uhh by your uhh uhh upstream supply chain
partner that is your vendor then what you have to do first is that you have to have
uhh already approved list of items which can be purchased from that supplier And once that
list is prepared than that list uhh list only will be displayed to your corporate buyers
Typically the corporate buyers will be using their uhh payment cards uhh to buy the items
from this catalogue with a pre specified or pre agreed price Now the second one that is
your internet market exchange There is a subtle difference again between the internet market
exchange and (inter) internet purchase consortia In fact both of them are the third party (serv)
service providers
But the difference here is this internet market exchange actually uhh is uhh this internet
market exchange is a third party which can conduct uhh conduct this uhh uhh which can
provide a platform for different category of products It is not that it is for only
one kind of product Whereas this internet (pur) purchasing consortia is for a particular
industry So (in) internet purchasing (con) consortia is for a particular industry where
as the internet market uhh exchanges are for multiple industries
Then you have your uhh internet based B2B auctions Now this internet based B2B auctions
can be conducted either by the company it can be conducted by this internal market exchanges
it can also be conducted by your internet purchasing consortia So let us try to (reca)
recapitulate what all we have covered in this lecture So first uhh thing that we uhh covered
is that we actually understood what is the difference between purchasing procurement
and sourcing and we have understood that purchasing is a superset of procurement
Procurement is only the buying and selling activities and sourcing is about selecting
the right supplier Then we saw that how the traditional (pros) procurement (pros) what
is the traditional procurement process and how it got improved uhh by the use of information
and the communication technology And then we also understood that because of information
communication technology many new processes have been introduced and one such process
is actually your uhh spend analysis
Uhh Then it we also understood that we can we can because of these ICT technologies we
can actually group uhh decision support and transaction activities together uhh in different
groups and you can carry out the process Then we also understood that what are various ways
to conduct this e procurement activity Thank you very much Next class we are going to discuss
the uhh the technical details involved in each of the processes
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