5 Reasons Why E-Procurement Makes Sense!

 

When it comes to procurement, everyone that is in the industry will tell you that it is a hard thing to handle as well as master. However, as the times have changed, the way procurement managers work with the procurement of services have also evolved alongside technology. E-procurement has been around for years now and if you ask anyone directly linked in the business, they will tell you that it’s a very daunting system that takes some time to get used to. E-procurement is not for the faint hearted and e-procurement systems can help your business immensely if you figure out the right way to get it done! 

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Operational Procurement/Purchasing II

Our previous article introduced the concept of Purchasing operations and an understanding that the function need not be viewed as a low value-add transactional practice only. Having stated that, it bears to remember that such a concept may not be suitable for all organisations. Smaller organisations which operate from a single location may have adopted a centralised ordering approach operated by a handful of personnel only, and such an approach may be appropriate and optimised for efficiency until the organisation outgrows it.

To address the challenges faced by larger and multi-tiered organisations, this article (and the next) presents some essential building blocks for an efficient Purchasing operation in a de-centralised environment. Many of the topics are phrased around e-Purchasing systems, which are commonly implemented in larger organisations to enable the process. The topics are not predisposed to any brand of solutions or service provider in the market, but are concepts which can be setup or adapted to most e-Purchasing solutions.

 

Authorisation Limits

As organisations grow in size, it is common that resources are separated into operating units to optimise the decisions made for business operations. Some form of hierarchy is created to control and manage the operating units, giving rise to structural views which are synonymous with today’s business organisations.

 

 

A key consideration to efficient Purchasing is the strict implementation of Authorisation Limits for the organisation to control its purchases. Taking a sample organisation structure (above), it is easy to follow the logic that the Managing Director, being the leader of the organisation, is authorised to make all purchases for the organisation. For this organisation, the following Authorisation Limits may be established for the resources:

  • Operations Director: up to $ 100,000
  • Managers: up to $ 50,000
  • Warehouse Supervisor: up to $ 2,000

 

As an example, purchase requisitions raised by Warehouse Staff that are below $ 2,000 will be evaluated by the Warehouse Supervisor. If the purchase requisitions are justified, the Warehouse Supervisor will approve the requisition and orders will be placed for the purchases. This form of control is widely implemented in organisations, with the Approval Limits varying together with the hierarchical form.

The setting of Approval Limits is a fine balance between the need to exercise financial control and the ease (and speed) of operating the business, and is determined by the organisation’s risk profile. An organisation with a high aversion to financial risks may set zero limits to all levels of the organisation, requiring the Managing Director to exercise control and approve all purchases. This approach may work for smaller organisations, but will be extremely cumbersome and inefficient for larger organisations. Here is where the actions of ‘approving’ (and rejecting in case of questionable requisitions) and to ‘be informed’ need to be distinguished. If a Managing Director has a need to be informed of purchases made, a regular report on the purchase orders or requisitions will suffice and without channelling all purchase requisitions to the position. Likewise, a setup where a Financial Controller approves all requisitions before routing to the Managing Director for final approval is a wasteful practice, as the real control and the right of rejection lies with the Financial Controller, and the Managing Director is simply being informed of the requisition. Organisations need to be aware of such pitfalls when an extremely prudent approach is adopted for managing financial risks.

In setting the Authorisation Limits, it is useful to analyse and consider the historical purchases and requisition records. Use the Pareto Analysis on the proportion of requisitions and their purchasing values, and set the appropriate Authorisation Levels for the organisational levels. In the example above, the $ 2,000 level for the Warehouse Supervisor may be established so that not more than 2% of requisitions (by value or occurrence) are approved at that level of the organisation. In the event of malicious acts committed by the Warehouse Supervisor, the organisation will likely face a financial loss of not more than the 2% of the overall purchasing volume and deemed to be within the organisation’s risk appetite.

 

Material Catalogues

An e-Purchasing solution is a popular IT system implemented to enable the P2P process, ensuring that process steps and business rules such as Authorisation Limits are applied consistently and diligently. An e-Purchasing solution with an integrated material catalogue will provide all these benefits and more, and it replicates the buying experience of online e-Commerce services made famous by Amazon.com. What are the benefits which the material catalogues bring to the e-Purchasing solution? Here are some of them:

  • Avoids the repetitive entry of data and information (and associated errors due to re-entry of data) such as material descriptions and service specifications required on purchase requisitions, purchase orders and accounting entries.
  • Provides rich information and descriptions of the materials and commodities, including images where applicable, to support users in making their purchasing decisions.
  • Implements the sourcing strategies effectively by offering the preferred or standardised commodities for purchase only.
  • Implements negotiated contracts in timely manner, especially when price changes are involved in re-negotiated contracts.
  • Offers a solution that requires minimal user training and support, as most users would be able to relate their experience with online e-Commerce websites such as Amazon or eBay.

 

Material catalogues may be easy to use but require some effort to prepare and compile. A common practice among matured Procurement organisations is to request the catalogues to be compiled and submitted by contracted suppliers, for the assumption is that suppliers should know their products better than the buying organisations. There are marketplace service providers who take up this responsibility of working with suppliers and sellers to ensure that material catalogues are prepared to a minimum standard in terms of information clarity, and in an electronic format that can be integrated into the buying organisation’s e-Purchasing system.

In conjunction with material catalogues, the ability to view, search and select the required products from catalogues is just as important. The objective here is for users to use the minimum number of clicks or navigation steps to identify and select the desired product. This may require more than just a generic search engine to do the job. In the author’s opinion, the gold standard for cataloguing products and commodities is Amazon.com, which provide catalogues for thousands of products that are labelled, tagged and categorised in a structured and logical manner. The structured catalogue data enables users to rapidly identify the products of interest instead of relying on the results of search engines only.

Other more advanced functions such as ranking the products by specific preferences (from lowest to highest cost, or products that carry an energy efficient certification compared to those with none) are useful to promote specific corporate objectives of the organisation.

 

Commodity Approvers

It is a foregone conclusion that e-Purchasing systems are highly effective in implementing Authorisation Limits of an organisation. The systems operate without prejudices and are programmed to follow the Authorisation Limits without missing a step required from it. To enhance the effectiveness of such a rigid implementation of a business rule, Commodity Approvals can be introduced to the solution.

Consider the situation where an organisation’s IT department is entrusted with the assurance of all IT equipment and solutions (software) are complying with a defined standard. This may require an IT resource to evaluate equipment as capable of operating within the network environment without conflicts and interruptions with other equipment, or ensuring that security protocols of new equipment can be adhered. In such a scenario, the organisation’s e-Purchasing solution can be setup to add an appointed authority from the IT department to approve all purchase requisitions relating to IT equipment and software, regardless of the party requesting for the purchase. Likewise, all purchase requests for services carried out to building facilities can be channelled to the Real Estate department for consideration and approval prior to the finalisation of order for building services. Such a Commodity Approval function extends the reach and control of the Purchasing process to more indirect commodities used by an organisation.

In our next article, we will highlight a key component of e-Purchasing and how it effectively supports the automation of the payables process. Stay tuned.

Operational Procurement/Purchasing

In an earlier article, we introduced the three key components of modern day Procurement, Management, Sourcing and Purchasing. We covered to a large extent the aspects of Management and Strategic Sourcing, and now we turn our attention to Purchasing. The Purchasing function is often overlooked by many organisations, and is perceived as a back-office function that lacks the strategic content when compared with Sourcing. Moreover, the performance of Purchasing in terms of savings achieved (often a key measure on the success of Sourcing) is negligible and pales in comparison with the achievement from sourcing initiatives. It is the author’s opinion that the perception of Purchasing as a lesser function is due mainly to the fact that Purchasing operations need a management approach that is far different and probably unfamiliar to the majority of Procurement professionals who are skilled in the art of sourcing.

As a back-office function, Purchasing is about achieving process efficiency in the downstream activities of the Procurement value chain. The approaches to organise and manage Purchasing operations have more in common with the manufacturing and production environment than with the consulting approach usually associated with Strategic Sourcing. The results from Purchasing should be viewed as complementing Strategic Sourcing and not any lesser in importance. It is not difficult to imagine a situation where a supply contract concluded by hard negotiations is wasted due to inadequate or non-optimised ordering practices in Purchasing. Hence, we continue to emphasize that Purchasing together with Sourcing and Management form the three key components of a professional Procurement function.

Successful Procurement organisations with optimised Purchasing functions have enjoyed the following benefits:

  • Higher level of compliance with stated policies, procedures, codes of conduct and other standards;
  • High degree of automation and consistency in the payment processes;
  • Enhanced level of transparency and granularity of spend data; and
  • Full control of expenses and cash-out situations exercised by business managers.

How are these benefits achieved? We will highlight some of the more notable approaches for Purchasing operations in this and the next articles.

 

Purchasing Process

The Purchasing process is more commonly called “Purchase-to-Pay” (P2P), to associate the act of purchasing with payments made to suppliers. Keep in mind that that this process is an expansion of the last activity (Ordering) of the Strategic Sourcing process; see our article Strategic Sourcing II. When combined together, the end-to-end process is popularly known as the “Source-to-Pay” (S2P) process.

A typical P2P process takes the form:

 

This generic P2P process has been used extensively to manage and control Purchasing activities of a number of organisations, including the design and setup of ePurchasing systems. It should be noted that Invoice Reconciliation and Payment activities typically fall within the scope and authority of the Finance and Accounting department of an organisation. Hence, the output from Purchasing will interact and interface with the Accounting function, preferably in a seamless manner. And likewise, the Accounting function’s authority and criteria may need to be implemented and exercised upstream and within the Purchasing tasks. A continuous and integrated P2P process will ensure:

  • re-entry of data and information is avoided;
  • full process transparency and accountability for processes and tasks; and
  • maximum leverage on technology to automate high volume of transactions.

 

Prerequisite to Efficient Purchasing

For ease of organising and managing Purchasing operations, a clear delineation of Sourcing and Purchasing is required. From an organisation perspective, this involves assigning and allocating resources to either of the two functions, and ensure that the resources have maximum focus on the tasks and activities at hand. For most resources, this delineation would not be an issue. But for resources who are performing or supporting mostly Tactical Sourcing activities (3 or 5-quotes prior to ordering), the choice needs to be made as to consider the activity as part of Sourcing or Purchasing.

To address the Tactical Sourcing situation, let us recall the definitions introduced in our earlier article (Strategic Sourcing I, 17-Jan-2017):

 

There is no doubt that Tactical Sourcing involves making decisions on the choice of suppliers prior to processing or fulfilling the purchase requisitions. However, unlike Strategic Sourcing (with a high number of sourcing strategies and levers to contend with), the considerations for Spot-buying are mostly driven by end-users and the decision criteria are rather limited (price, availability of supplies, delivery schedule). Such considerations can be summed up in a decision matrix such as this:

 

Other forms of decision matrix or evaluation criteria can be drawn up to support the Spot-buying task. When such decision branches are defined and documented, the Tactical Sourcing or Spot-buying activity becomes a routine workflow that can be replicated, scaled up and even automated to a certain extent. From this aspect, it is clear that Spot-buying should be considered to be within the scope of Purchasing operations and not Strategic Sourcing. Once an organisation recognises this fundamental concept, the complete delineation of Sourcing and Purchasing is achieved.

 

Performance of Purchasing

With the Purchasing function delineated, appropriate objectives and performance indicators can be set for the function. It should be clear that savings which is a common measure of Sourcing, is and should not be the main performance indicator for Purchasing. Other more appropriate measurements are required to steer the performance of Purchasing. Among these are:

  • Transactions that are contract compliant – Measures the proportion of order transactions that are made against sourced contracts, as opposed to transactions that are made via Spot-buying. This is a good measure to encourage the Sourcing and Purchasing functions to collaborate and improve on the use of sourced contracts that bring tangible benefits to the organisation.
  • Catalogue-based spend – Measures the extent of which purchases are made from standardised commodities made available through catalogues (electronic or likewise). The use of material catalogues is one of the more effective means of standardising commonly used supplies, and directly supports the sourcing strategy of ‘Volume Concentration’. If an ePurchasing system was used, catalogue-based transactions can be automated, ensuring such transactions to be processed ‘touch-free’, ie. transactions carried out without any human or operator intervention. More insights into the use of catalogues in our future article.
  • Transactions per resource – A productivity indicator that aims to improve the output from each resource deployed within the operation. Similar measures are used in production environments to the same effect.
  • Cost per transaction – A financial measure that is useful in comparing the overall operating costs with plans. In estimating this measure, it is important that all costs associated with the operations is included and used on a consistent basis.

Other performance measures may be used to gauge the efficiency and effectiveness of Purchasing. And such measures may need to be adapted as the Purchasing operation matures and evolves.

In future articles on Purchasing, we will reveal the intricacies and workings of ePurchasing systems and their advantages over manual processes.

 

Strategic Sourcing III (Final)

Strategic Sourcing III

 

Within the realm of Strategic Sourcing, the term “savings” is probably featured more prominently than others. It is a fact that organisations who implemented a Strategic Sourcing function expect some benefits from the function. Otherwise, why invest time and resources into a business function if not for its positive benefits. And many organisations who operate a matured Procurement function often had savings as the only objective at their start-up phase. For such organisations, their “burning platform” for implementing Procurement was to reduce cost, often during an economically uncertain period. But as the Procurement function develops and matures, other forms of measurements for Strategic Sourcing is needed. Here is a look at the key performance measures of Sourcing.

 

Savings Definition

The idea of savings is a simple one, and in economic terms it is the ‘reduction in money, time or other resource’ (Oxford Dictionaries). And yet, the application of savings in Procurement can be a contentious one, especially between the Sourcing Manager who executed a well-planned strategic sourcing program and the business user who is supposed to have benefited from the sourcing initiative. To understand such a contentious subject, let’s consider a few scenarios of ‘savings’.

 

In its most basic form, savings is defined as the difference between the current price and previously purchased price, if the current price is lower than the latter. This is a definition of savings which everyone understands and accepts readily, and we shall term this form of savings as ‘Cost Reduction’. A number of sourcing strategies are effective in bringing cost reduction savings, namely Best-Price Evaluation, Volume Concentration and Global Sourcing. This situation can be illustrated in the following diagram:

 

Another form of savings which can be defined is termed as ‘Cost Avoidance’, and this is where differences of opinion come in. Consider a situation where price inflation or scarcity of supplies in the market saw an increase in price over the last purchased price. The business will have a negative financial impact based on the newly offered price, which is commensurate with market prices. If the Procurement team was able to negotiate with the incumbent supplier and limits the price increase to a smaller quantum over the previously purchased price, the difference can be recognised as a form of savings, even though the actual price would have increased. A number of organisations would not recognise this form of savings, and have derogatory remarks over it. And yet, if we were to recognise that the role of Procurement is to secure economic benefits for the organisation, then this is an effort that should be acknowledged, for there is an economic benefit to the organisation compared with an option of ‘doing nothing’.

 

Besides these two examples, consider the scenario where a business user has an expense budget of $xx. Based on the last known transaction, the user anticipated that the $xx budget will secure N number of units, and requested the assistance of the Procurement function. By applying the right sourcing strategy, the Procurement function was able to secure N + 8 units of the required commodity at the budget level. In the same approach as ‘Cost Reduction’, the user could have accepted the required N units and saved on the budget. However, the user decided to expense the full budget amount to support the growing business needs. In this case, the Procurement team recognises the additional 8 units (at the contracted price) as a ‘saving’ in the form of Free-of-charge Extras. There is no ‘savings’ in the correct sense, but the free-of-charge extras is quantified as a financial benefit.

 

Performance Metrics

Achieved savings remain one of the most prevalent performance metrics of Procurement. When defined properly, savings provide an indication on the success or outcome of Strategic Sourcing. Other metrics that are often used to measure the performance of Strategic Sourcing are:

  • Addressable spend that is sourced – This measurement looks at the effectiveness of the Procurement function in managing the organisation’s spend. The target of every Procurement function should be to increase this metric progressively, indicating the confidence the organisation has in the professional Procurement approach.

 

  • Spend that is contract compliant – This measurement looks at the effectiveness of the contract implementation process. As stated in our last article, Strategic Sourcing is not only about establishing supplier contracts, but its implementation as well. Well negotiated contracts that are poorly implemented will see leakage of the financial benefits from the Sourcing process.

 

  • Transactions that are contract compliant – Similar to the previous measurement, this metric looks at the effectiveness of contract implementation but from a transaction (as compared to financial) perspective. A low achievement (62% being market average) of this metric indicates a long tail-end spend which may not have been addressed by Procurement, or a symptom of inefficient ordering channels.

 

  • Contracts stored in a central, searchable repository – This measurement tests the proficiency of the Procurement function in internal processes. Using central repositories to store and manage contract records (hard-copy or otherwise) will mitigate the ill-effects associated with staff movements and resignations, as well as promote the knowledge exchange and development of Procurement resources within the team.

 

  • e-Enabled suppliers – This metric measures the extent of the Procurement function in adopting and using enabling technologies such as eSourcing, ePurchasing, eInvoicing and marketplace catalogues. Connecting suppliers with technology has been proven to deliver process efficiencies for both the buying and selling organisations. As there are numerous facilities and service offerings that provide enabling technology at reasonable rates, the excuse for not using such technology becomes moot.

 

Success of Strategic Sourcing

Based on the last two example above, should these financial benefits be recognised as savings? If the Procurement function had taken no actions to influence the outcome, would the organisation be in a financially disadvantaged position? These examples show that the definition of ‘savings’ is not a straightforward and simple exercise. It does not help when Procurement professionals could not establish a common definition of savings, unlike other more established professions like Accounting. And yet, the expectation to demonstrate results from Strategic Sourcing is ever present.

 

And here lies the predicament of Procurement, which is to adopt a definition for savings that recognises the efforts of Strategic Sourcing, and without excessively overstating the outcome or benefits of their efforts. Eventually, the organisation’s stakeholders (executive management and business users) will have to determine if a definition of savings will support the organisation’s core and/or financial objectives, and at the same time use the definition to reward or motivate further actions from the Procurement function. Debates with the absolute terms of ‘right’ or ‘wrong’ in the definition of savings (besides the simple and most basic definition of the Cost Reduction) is both counter-productive and distracting to the organisation. Hence, Procurement Managers are well advised to seek the organisation stakeholders’ agreement and buy-in to any definition of savings which deviate from the obvious, and to establish other measures that demonstrate the value contribution of Procurement.

 

From the market perspective, this mindset is reflected from Ardent Partners’ latest CPO Rising research, which states that “only 7% of procurement departments use savings as the sole measure of their performance”. Of the rest of the organisations, a variety of measurements are used to demonstrate the value of Procurement. These metrics again do not seem to be standardised, and will likely to remain as such for a further period of time, before the Procurement function reaches the next level of maturity.

 

As with other performance metrics which organisations use, there is no single rule that applies and no absolute right or wrong. Each organisation is unique in their own right, and is well advised to establish clear definitions of ‘savings’ to measure the effectiveness of Procurement. Let the definitions be applied to actual cases and scenarios, and adapt the definitions to avoid any dysfunctional and undesirable effects that distract the organisation from its core objectives and goals.
This is our last article on the topic of Strategic Sourcing. There are other articles in this blog that provide deep market insights and knowledge that can help Procurement Managers in the conduct of their Sourcing initiatives. Readers are well advised to consult and refer to these other articles for ideas and inspirations for their Sourcing efforts. In the continuing articles on the strategy of Procurement, we will look at Operational Buying. Please stay tuned.

Best Business Practices: Marketplace

Running a business is definitely not an easy feat. Often times you’ll have an amazing idea but find yourself stuck, not knowing what your next move should be. Other times, you could have just reached a deadlock. Entering the world of startups is definitely intimidating if you don’t have a clear idea on how to run your business. These days with the trend of market places making its way into the startup scene, it would definitely save you a lot of time if you were already equipped with the right practices to run your business.

Here’s a list of best business practices we have gathered to help you out!

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Spend Analysis, Part 4 (Final)

In our previous articles, we defined the concept and key activities of spend analysis using a basic business process. We revealed that the core function of spend analysis is to assign material categories which represent the supply market view to payment data incurred at the organisation level. This concluding article will help to define the material categories, and some metrics that could be adopted to manage the spend analysis program.

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Spend Analysis, Part 3

Financial Accounting View

As stated in our previous article, it is common for spend data to be extracted from accounting and financial systems. These systems are reliably maintained to provide payment data in currency units. It follows that spend data extracted from accounting systems do inherit a number of accounting terms with it, and these terms do not match Procurement’s view of the supply market. Let us use an example to illustrate the situation.

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