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eProcurement 1

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Title: eProcurement 1


1
eProcurement
  • October 16, 2001
  • Jae Kyu Lee
  • (jklee_at_kgsm.kaist.ac.kr)
  • Graduate School of Management
  • Korea Advanced Institute of Science and Technology

2
Table of Contents
  • Benefits, and Components Status of eProcurement
  • Business Models of e-Procurements
  • Model 1 Cost Saving through Exchanges
  • Model 2 Direct Connection of Supply Chain
  • Model 3 Desktop Purchase
  • Model 4 Eliminate Procurement Department
  • Model 5 Procurement of Human Capital
  • Factors, Status and Strategies of eProcurement
  • Chevron Case
  • CSF of eProcurement
  • eProcurement Integration Policy
  • Vendor Selection Criteria and eProcurement
    Solutions
  • ERP in eProcurement SAP B2B Procurement 2.0
  • Key Trends and Concluding Remarks

3
Benefits of eProcurementhttp//www.mysap.com/solu
tions/e-procurement/businessbenefits.htm
  • Reduced purchase costs
  • Enhanced efficiency at every stage
  • Establish adaptive, efficient, collaborative
    supplier relations
  • Monitor and regulate buying behaviors
  • Improve sourcing by discovering more suppliers
  • Ensure deliveries on time, every time
  • Free up skilled employees
  • Reduce training requirement
  • Permit flexible access time, anywhere
  • Manage contracts
  • Perform content management functions
  • Reduce maverick purchase

4
e-Procurement Direct vs Indirect Materials
5
Alternative eProcurement Markets
  • Public Exchanges
  • Sellers Direct Markets
  • Private Exchanges
  • Comparison Portals
  • Direct Connection of Supply Chain
  • Internalized e-Catalogs

6
Components of eProcurement
  • What is eProcurement Process?
  • Requirement Search Select (Negotiation)
    Order Reception Payment After service
    Disposal
  • Reengineering using B2B Platform
  • Tight integration of internal and external
    systems unavoidable
  • Components of eProcurement
  • Content management
  • Requisitioning
  • Approval routing
  • Order management
  • Decision support

7
Transformation of Corporate Purchasing
  • Front-End e-Procurement
  • E-Catalogs
  • Content Management
  • RFQs
  • Approval Routing
  • Order Management
  • Data Management
  • ASP - Ariba,
  • Commerce One,
  • Oracle, Cisco, Clarus,
  • Back-End ERP systems
  • A/C receivable and payable
  • Inventory Management
  • Material Management
  • Order and Sales Management
  • Sales Planning
  • Providers Oracle, SAP, JDE

8
Business Models of eProcurment
  • Model 1 Cost Saving Through Exchanges
  • Model 2 Eliminate Procurement Department
  • Model 3 Desk-top Purchasing
  • Model 4Direction Connection of Supply Chain
  • Model 5 Procurement of Human Capital
  • Any other models?

9
Model 1 Cost Saving Through Exchanges
  • Raytheon Company Case
  • 20 billion defense contractor
  • 40,000 suppliers
  • 200 million of its purchase through two
    procurement site (exchanges)
  • FreeMarkets Auction
  • Exostar Buy, sell, collaborate
  • Saved 5-15 on each online purchase

10
Evolution from Private to Public Exchanges (vice
versa)
  • GE TPN Post Reverse Auction Market
  • Start as a private exchange
  • Evolved to a public exchange
  • GE Information Services
  • EDI solution provider
  • GE Global eXchane Service (GXS)
  • Evolution of GEIS
  • Solutions EAI, EDI, XML, Exchange
  • GE GXS manages GE TPN Post too
  • GXS has 100,000 trading partners
  • 1 billion annual transactions
  • 1 trillion in goods and services
  • Issue Procurement vs. eMarketplace Ownership

11
GE TPN(Trading Process Network)
  • Private Reverse Auction
  • Reengineer purchase process
  • Purchase on the Internet
  • 10B(97.10) 50B(2000)
  • 60 of crews relocated , 30 reduced
  • 520 reduced price
  • Bidding cycle time reduced
  • New vendors found
  • Open TPN to other buyers

Mfr
Distruibutor
Business Buyer
Dell for Bids
VAR
  • Procurement Process Reengineering
  • Cultivate New Suppliers

12
Scope of Services at GE GXS
13
Model 2 Direct Connection of Supply Chain
  • Eastman Chemical Case
  • Barnes Noble SupplyWorks MRO
  • 1,000 Stores
  • MRO purchase Not books and retail items
  • Connect five suppliers
  • Plan to connect another 20 30 vendors eventually
  • What is the architecture of Connection?

14
Model 3 Desktop Purchase
  • KoSa develops and sells polyester-based
    intermediate products and polymers
  • Headquartered in Houston and main office in
    Frankfurt 10,000 employees worldwide
  • Direct access to internal e-catalog over 56,000
    products
  • One-stop procurement from the desk-top
  • 200 employees at six plans in Germany use the
    system
  • Previous 450 suppliers only a handful remains
  • 80 of orders to six selected and quality assess
    companies

15
Desktop Purchasing Cases
  • Lockheed Martin
  • 30-35 of purchase decisions back to end users
  • Goal Make electronic catalog a standard for
    small dollar (less than 10,000) procurements
  • Cisco Case
  • Cisco implemented a Web buying program
  • Low-end items without going through the
    traditional approval process
  • Change the way of purchasing
  • MS Market
  • Other Cases in mySAP.com
  • http//www.mysap.com/solutions/e-procurement/custo
    mersuccesses.htm

16
Case Study - BP International
  • Key learning similar to Lockheed Martin
  • Employees place low-value orders
    themselves without needing approval
  • Professional procurement staff add value by
  • concentrating on the high value / high risk order
  • negotiating the applicable purchase agreements

17
Case Study - BP International
  • Cost of reduction was apparent
  • Cost of purchase - reduce by 5 percent, save 1.5
    million pound per year
  • Eliminate 90 of the transaction-handling
    workload
  • Procurement staff place only 11 of orders yet
    control 92 of company purchase
  • Purchasing order process time - three days to
    few minutes
  • Cut the cost of administering the order process
    by gt250,000 pound per year

18
Model 4 Eliminate Procurement Department
  • Avendra for Lodging Co. Case
  • Hyatt Hotel and Marriott International Hotel
    eliminated purchasing department
  • Joint venture with 5 lodging companies, combining
    their procurement staffs
  • The joint venture, Avendra LLC, procures for
    these hotels.

19
Procurement Service Provider
  • WorldCrest
  • Specialized in negotiating office supplies,
    furniture, gas, chemicals, etc.
  • Bargain by group purchasing
  • Pantellos
  • Membership of 20 large energy companies
  • American Electric Power, Cinergy, Consolidated
    Edison, PGE, Reliant Energy
  • Pantellos supports the members the access to
    WorldCrest for indirect goods and services
  • Potential in Cinergy 100 million annual
    purchase on indirect goods and services

20
Model 5 Procurement of Human Capital
  • ASP for Human Capital Procurement
  • Centralize the hiring process
  • Keep track of which suppliers are providing the
    employees
  • Determine where the hiring company can get the
    most leverage in terms of cost reduction and
    service
  • Offer back-end integration to financial and HR
    systems.
  • ASP White Amber, CascadeWorks, Chimes,
    IQNavigator, Itiliti, Skills Village, and Vivant

21
Case Human Capital Procurement
  • Avis Group Holdings Case (Information Week, April
    16, 2001 http//www.informationweek.com/833/oohum
    an.htm)
  • Car rental company based in New York
  • Implemented Workforce Procurement and Management
    software
  • Help to procure contingent works in the
    administration, finance, and insurance area
  • Pre-negotiate rates and provide automated billing
    and approval ? save cost and time
  • 37 year-over-year cost savings on temporary
    staffing procurement costs
  • ASP White Amber
  • Plan to expand to include personnel such as
    shuttlers and service technician at 400 major US
    locations.

22
Case Human Resource Procurement
  • Merrill Lynch Co. (Information Week, April 16,
    2001)
  • Hires between 2,000 and 3,000 contingent systems
    consultants at a cost of 200 to 300 million
    annually.
  • Old system requires 15 different signatures and
    reconciliation of time sheets.
  • Pay process discounts nearly 98 of the time
  • Saves 20-25 million per year by speeding the
    process

23
Factors for eProcurement Policy
  • Pricing Schemes
  • Comparison of the Posted Prices in e-Catalogs
  • Auctions, Reverse Auction and Tender
  • Negotiations and Configurations
  • Usage Level
  • Online auctions 15 eBay Professional
  • Online marketplaces 23

24
Status of eProcurement
  • Items to procure Direct vs. Indirect Materials
  • 9 of total indirect procurement online
  • 11 of total direct procurement online
  • Online purchase experiences (April 20, 2001)
  • Direct 46 Indirect 71 (61 in last Q)
  • Cost Saving Effect Only 26
  • 80 to look for new suppliers
  • Improvement in purchasing process
  • Efficient sourcing Faster transaction
    Standardize the process
  • Decrease the number of suppliers Kosa Case
  • Budget Spending
  • Spending on e-sourcing technology 556 mil, which
    is doubled from last year
  • Only 8 of potential customers are using
    e-procurement tools
  • Slow coming and potential

25
Effect of eProcurement
Source Aberdeen Group Jun 1999
26
Strategic Focus of eProcurement
  • Small Number of Items with Large Volume
  • Tight Integration with back-end system
  • Tight integration with partners along supply
    chain
  • ? Direct connection, private exchanges
  • Partnership based sourcing
  • Large Number of Items with Small Volume
  • Open Sourcing in the public exchanges
  • Loose integration with legacy systems
  • Discover new suppliers
  • Which policy more urgent?
  • Portfolio of strategies Contingency,
    combination, and architectural integration

27
eProcurement Deployment Strategies
  • Evolutionary Deployment of eProcurement
  • Evolutionary start small with single set of
    commodities a particular region
  • Strategic Sourcing systematic
  • e-Procurement process reengineering
  • Only most advanced organization adopts
  • 2/3 of purchasing communities in experimental
    stage
  • Priority and Contingent Policy Portfolio

28
E-Procurement Implementation Profile
  • Budget US2 M to 10 M
  • Team Size 3 to 13 People
  • Project Duration 1 to 3 years
  • No. of Catalogs 3 to 30
  • No. of Users 50 to 1000
  • (Source Deloitte Consulting, Realizing the B2B
    Procurement Vision, 2nd Annual Study, 2001)

29
e-Procurement System in Chevron
  • Corporate Profile
  • US 3rd largest petroleum co.
  • Operating in roughly 100 countries
  • Annual net gain - 3.2 billion
  • Purchase budget - 9.9 billion
  • Two existing ERP systems from SAP and J.D.
    Edwards
  • Two-fold Solution
  • E-Procurement Software from Ariba
  • Web-based front end and user interface for
    catalog search, purchase order and requisition
  • EDI and Catalog services from Harbinger
  • Facilitate interaction with suppliers and manage
    catalog content and customer/supplier
    base

30
eProcurement System Architecture for Chevron
31
Critical Success Factors
  • Selection of right strategy, architecture and
    solutions
  • Management commitment
  • Content management
  • User friendly
  • Seamless integration with back-end ERP
  • Redesign workflow
  • Manage change
  • Fast implementation

32
eProcurement Integration Policy
  • Tight Internal Integration
  • Tight integration with ERP or legacy
  • Internal e-catalog
  • Inter-Enterprise Integration
  • Direct integration with partners ERP system
  • Compliant ERP interface standard necessary
  • Integration with Exchanges
  • ERP-compliant eMarketplaces
  • MarketSet Commerce One and SAP
  • Private Exchange
  • Application Server
  • Communication Platform Standard XML

33
Architecture of Integrating EC with ERP
34
Vendor Selection Criteria
  • Functions
  • Technical architecture
  • Cost
  • Service and support
  • Viability
  • Vision

35
eProcurement Solutions
  • Ariba
  • Commerce One
  • Oracle
  • Saved for itself 1 bil in 2000 plan 2 bil in
    2001
  • Boeing Ingersoll-Rand
  • Clarus
  • SAP B2B Procurement
  • Commerce One SAP MarketSet
  • Allows desktop purchasing through SAPs financial
    system
  • Track the procurement process as life cycle
    product management, SCM, and data warehouse
  • Moai Eastman Chemical adopted
  • SupplyWorks Inc. Barnes Noble adopted
  • GE GXS

36
Business Position of ERP Provider
37
Resources in E-Procurement Study
38
SAP B2B Procurement 2.0 (I)http//www.mysap.com/s
olutions/e-procurement/pdf/btobfactsheet.pdf
  • For ad-hoc and strategic procurement of direct
    and indirect B2B procurement of SAP R/3 users
  • Support requisition-receive-pay process
  • Empower Employees
  • Users can check price, availability, and delivery
    time from their desktop
  • Employees handle the entire procurement process
    themselves Discuss Pros and cons
  • From creating a requisition, confirming receipt,
    approval of invoice for payment

39
SAP B2B Procurement 2.0 (II)
  • Internet Bidding Public and private tendering
  • and Reverse Auction.
  • Intelligent Procurement
  • Interface with SAP Business Information Warehouse
  • Assess supplier performance and Analyze buyer
    habits
  • Content Management
  • Catalog engine and authoring tool
  • Link with the third party catalog if it uses
    SAPs open catalog interface
  • Direct links to mySAP.com and other Internet
    marketplaces MarketSet with Commerce One
  • Buyers purchase order means sellers sales order

40
SAP B2B Procurement 2.0 (III)
  • B2B Procurement is independent of Material
    Management in ERP.
  • Tight integration with SAPs MM
  • Integration with multiple back-end systems
  • Also can be deployed with non-SAP compliant ERP
    systems
  • B2B Payment
  • Invoke payment either to banks or vendors by
    back-end accounting system
  • Via XML, EDI or any other communication methods
  • Secure Date Transfer Secure Socket Layer
  • Secure-HTTP Secure Electronic Transaction
  • Mobile Access

41
Demonstration of E-Procurement Process
42
Case Study - Lockheed Martin
  • Technology solution
  • SAP Business-to-Business Procurement
  • Integrate with the existing core SAP applications
  • Key learning
  • Free up procurement, finance, manufacturing,
    and logistics personnel for more value added
    activities by pushing purchasing decisions back
    to the end users for about 30-35 of the
    transactions

43
e-Procurement Key Trends
  • Service companies e-Procurement of MROs
    offers them great savings whereas for
    manufacturing companies, e-procurement of
    direct material contributes their ROI.
  • Most companies are taking a cautious approach.
    According to Ariba, only about 8 of
    potential customers are
    using e-procurement tools.
  • Large e-procurement gain from process
    automation not from reduced purchase price
    (David Mannion, ICL).
  • Deloitte Touche, AMR, Jupiter others
    predict that private marketplaces will
    dominate, with eMarketer citing 93 of all B2B
    commerce is already flowing through private
    exchanges.
  • Public private e-procurement models co-exist.

44
Conclusion
  • eProcurement as Procurement Process Reengineering
  • Selection and combination of eProcurement models
    critical
  • Conformance of strategy and integration
    architecture essential
  • Small MRO Exchanges
  • Key Purchases Private Supply Chain
  • Conformance of integration policy and solution
    selection crucial for the successful deployment
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