E-procurement: Migrating Procurement onto the Internet
Name: Li Huiying Student ID: S08220
Research paper supervisor:Dr.Sekou Conde
Minzu University of China
2008-2009 Academic Year
Abstract
The emergence of the Internet leads to a trend for companies to migrate procurement onto the Internet as a business norm. With ever-increasing competitive pressure, growing numbers of firms use E-procurement in an attempt to reduce costs and supplier selection. However, there is much to be discovered about the factors influencing E-procurement intentions. Findings from analysis indicate that suppliers' participation, external pressure, internal managerial support and the perceived benefits gained through usage all influence E-procurement intentions. To further explore the E-procurement, this paper also describes the success factors and challenges to its implementation in the corporate setting. Factor analysis resulted in three E-procurement success factors: supplier management; E-procurement business processes; and selection strategy. Three challenge-to-implementation factors also emerged: lack of system integration and standardization issues; immaturity of e-procurement-based market services and end-user resistance; and maverick buying.
Key words: E-procurement
Content
1 Introduction. 1
2 Advantages and disadvantages of E-procurement 1
3 Factors Influencing Usage of E-procurement 4
3.1 Negative factors. 4
3.2 Positive Factors. 5
3.2.1 Supplier Participation and Intentions. 5
3.2.2 External Organizational Pressures. 5
3.2.3 Internal Organizational Support 6
3.2.4 Network Integration. 6
3.2.5 Task Improvements. 6
4 Success factors and challenges to implementation of E-procurement 7
4.1 Success factor 1: Supplier management 7
4.2 Success factor 2: E-procurement business processes. 8
4.3 Success factor 3: Selection strategy. 9
4.4 Challenge factor 1: Lack of system integration and standardization issues. 9
4.5 Challenge factor 2: Immaturity of E-procurement-based market services and end user resistance 11
4.6 Challenge factor 3: Maverick buying. 12
5 Conclusion. 12
References. 13
1 Introduction
The Internet has had revolutionary effects on corporate procurement practices. It has become one of significant productivity improvements in various businesses. E-procurement sites, also known as business-to-business (B2B) marketplaces, electronic supply chains, trading hubs, or trading communities, are essentially Web-based procurement networks in which one or more companies try to source their suppliers at the lowest costs possible[1]. From a conceptual standpoint, e-procurement helps companies source input products and services at the lowest cost, while ensuring that those inputs meet technical and other specifications [2].
As Jari Tavi said, “Now more than ever it’s important for organizations of all types and sizes to understand where they are spending their money and uncover opportunities for cost savings and efficiencies.”[3] E-procurement enables users to automate transactions and focus on the buying organization’s activities, such as order placement, payment and so on.
This paper will introduce the advantages and disadvantages of E-procurement, the factors influencing E-procurement intentions and the success factors and challenges to its implementation in the corporate setting.
2 Advantages and disadvantages of E-procurement
B2B marketplaces on the Internet could prove to be the most radical innovation in modern business since the assembly line was invented. Like assembly lines in the beginning of the 20th century, E-procurement sites bring significant increases in productivity in many industries of the economy. Their most often quoted advantage is their potential to cut costs of purchased goods and services [4]. This kind of cost saving allowed by E-procurement is based on the new processes that cut all costs associated with purchasing, that is, the cost of goods and services purchased, ordering costs, and holding costs.
These new economics of purchasing lead to competition and, as a result, to goods and services of better quality purchased for lower cost. A survey conducted by Aberdeen Group in November 1998 found that early adopters achieved a 5%-20% reduction in prices paid for operating resources [5].
Reduction in ordering cost, the second area of large cost savings, is associated primarily with the technological advantages of E-procurement. Estimates made by Goldman Sachs, an investment bank, reveal that the ordering cost savings in manufacturing associated with E-procurement vary between 2% and 39% of the costs of goods and services purchased. The study by Aberdeen Group mentioned above proves the validity of those estimates [6]. The early adopters of E-procurement reached a 70% reduction in administration costs associated with processing a purchase request [7]. Cisco claims that it has already reduced those costs from $130 to $25 per order, and Microsoft, from $60 to $5 per order [8].
Further, E-procurement, as well as other Internet technologies, provides many opportunities for efficient integration of supply chain. E-procurement technologies allow even small businesses to benefit from integrating into supply chains. Supply chains create conditions that stimulate the implementation of modern Just-in-time (JIT), lean manufacturing technologies. Thus, the far-reaching result of economy wide adoption of E-procurement may be lower inventories and, consequently, lower inventory costs. Early adopters of E-procurement already demonstrate 25%-50% cuts in inventory costs [9].
Another important and frequently mentioned result of E-procurement implementation is the supplier selection. As Jari Tavi said, “The traditional approach of squeezing the biggest discounts out of your supplier is outmoded [10]”. There are other criteria beyond cost that are probably more valuable to buying organizations, such as reliability and quality of service. E-procurement will enable buying organizations to identify the quality and performance of their suppliers. For example, “Going green” is no longer just a phrase now. Future suppliers will need to be certified green just to remain on shortlists for enterprise consideration. Companies can choose vendors based on compliance with green initiatives and social responsibility.
But apart from these opportunities, E-procurement poses a number of disadvantages that may make some of its potential users adopt a “wait and see” strategy.
One of the greatest obstacles to E-procurement’s fast adoption is a gap between the expectations of the two sides of the transaction-suppliers and buyers-about the way B2B marketplaces should affect them.
On one hand, buyers adopting E-procurement are becoming increasingly dependent on suppliers because of the wilder adoption of JIT practices, shorter ordering cycles, increased involvement of suppliers in product development, and so on. On the other, suppliers may be reluctant to adopt the idea of E-procurement because of the necessity of dealing with more than one marketplace, high training costs associated with switching to E-procurement, turbulence in this new industry, the high risk of compromising sensitive data, and so on [11]. For example, some suppliers will need to initiate a full organizational restructuring associated with technological changes related to E-procurement. Thus, the usual change management challenges should not be underestimated. Besides, it is probably worth remembering that for B2B commerce, “even in the Internet world it is not what you know, but who you know that matters” [12].
Another great difficulty in adopting E-procurement is the rapidly growing multitude of standards in the industry. It is not clear which E-procurement solution providers will survive, and which will not. Multiple standards in the industry are already causing confusion and increasing purchasing cost, which undermines the cost savings previously described [13].
And now let’s see the factors influencing usage of E-procurement, including the negative and positive factors.
3 Factors Influencing Usage of E-procurement
A number of research papers have indicated that many organizations are pursuing electronic means to conduct business, that there are a number of factors influencing the adoption of E-procurement, including negative and positive factors.
3.1 Negative factors
As an example, although EDI has existed for a number of years, the number of organizations using EDI has been limited, due to the high cost of implementing an EDI system. The use of EDI is generally restricted to large manufacturing organizations and their major suppliers within a close geographical distance [14]. Moreover, with the opening up of connectivity, however, a lowering in the security of data also occurred, and concern over security is a factor limiting the implementation of e-commerce systems [15].
Another factor limiting usage is the readiness of supplier firms to participate. Buyers have indicated that they are willing to use e-procurement, but they perceive that their suppliers are not able to participate. Buyers then have the choice of either limiting the extent of their E-procurement processes or finding new suppliers who are willing to conduct transactions electronically [16].
3.2 Positive Factors
3.2.1 Supplier Participation and Intentions
Some suppliers apply pressure on their customers to become involved in the use E-procurement to reduce costs, improve communications and gain operational efficiencies [17]. Many buyers have indicated that they are not pleased with the online capabilities of their suppliers. An ISM/Forrester survey found that 36.6% of manufacturers rated their suppliers’ online capabilities as very bad or poor [18]. Some suppliers provide encouragements that can be either financial or non-financial. Examples of financial encouragements are lower prices or increased discounts for products ordered electronically or the option to reduce inventories. Non-financial incentives include training sessions, customized web fronts, and better [...]
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