E-Procurement Grows Up

The right e-procurement systems enable companies to reduce materials costs, slash overhead and improve supplier relationships.

For many companies, procurement is fraught with frustrations. There are vendors to oversee, price lists to track and piles of paperwork to manage. As they work to bring the process under better control, companies often discover that they're wasting time juggling numerous suppliers of the same product or that they're paying the same vendor radically different prices depending on which employee makes the order and which system is used. In the end, most companies understand that they can't live without procurement systems. But living with them isn't easy.

"Efficient procurement is essential because it impacts the bottom line and affects profit margins," says John Moore, vice president and general manager, enterprise solutions, at ARC Advisory Group in Dedham, Mass. He points out that many organizations already use indirect e-procurement systems, which typically go through a third-party vendor like Staples Inc. or OfficeMax to aggregate buying via online catalogs. Such a system can streamline the purchase of supplies, personal computers and other items. However, Moore adds, many companies continue to struggle with the technology and business processes required for direct e-procurement, through which they deal directly with critical suppliers. Direct e-procurement usually involves a mix of complex spot and planned ordering. Although many companies use ERP and manufacturing resource planning (MRP) systems to automate the direct purchase of materials, parts and components, only a few are using Web-based tools.

The benefits of Web functionality are palpable. Early adopters are analyzing supplier relationships in ways that weren't possible only a few years ago, so they can simplify transaction processing, gain tighter control over spending authorization and eliminate redundant purchasing. That's allowing many companies to knock 5 percent to 10 percent off the cost of items they purchase, while simultaneously reducing time-consuming and costly administrative tasks.

These numbers mean direct e-procurement is getting finance's attention. In fact, according to market research firm Aberdeen Group, supply-chain expenses consume 10 percent to 20 percent of revenues at most companies. "There is tremendous potential to save money and make a company more competitive by using direct e-procurement tools," says Dave Hewitt, a partner with IBM Business Consulting Services who oversees the inbound supply chain practice. "But the other side of the coin is that the savings can sometimes be elusive. Procurement projects are often sizable and require a great deal of effort to manage. There are no quick hits, and there's no instant ROI." He adds, "It's only beginning to emerge as a solution, [and] it's not ideal for every situation."