Chapter Ten

1. Chapter Ten Demystifying e-Procurement: Buy-Side, Sell-Side, Net Markets, and Trading Exchanges

2. Introduction • More than 5-10% revenues spent on non-production goods annually • Office equipment, supplies, software, computers • Top 2000 U.S. corporations = $500 billion annually • Purchase detail for negotiating better supplier contracts not available • Most POs worth less than $500 • Large percentage of that is off contract, outside preferred channels www.ebstrategy.com

3. Introduction • B2B transactions comprise significant market • Several trillion dollars • Big Three automakers do $500 billion/yr worth transactions related to buying and selling car components • Non-discretionary spending, required for business • Both buyers and seller see importance of an efficient marketplace, to streamline processes and reduce costs www.ebstrategy.com

4. Introduction • Procurement not just support function; a valuable weapon • Lower procurement costs, reduce order-cycle times and ensure smooth delivery of materials • B2B strategies now a top mgmt focus • Not so much a technological revolution as a business revolution enabled by technology • Driven by CEO or CFO, reflecting management’s awareness of key challenges facing corporate procurement functions • Reducing order-processing cost and cycle times • Providing enterprise-wide access to corporate procurement capabilities • Empowering desktop requisitioning through employee self-service • Achieving procurement s/w integration with back office systems • Elevating procurement function to strategic importance within organization • Dollar-for-dollar bottomline impact of e-procurement is startling www.ebstrategy.com

5. Introduction • B2B strategies now a top mgmt focus • Driven by CEO or CFO, reflecting management’s awareness of key challenges facing corporate procurement functions • Reducing order-processing cost and cycle times • Providing enterprise-wide access to corporate procurement capabilities • Empowering desktop requisitioning through employee self-service • Achieving procurement s/w integration with back office systems • Elevating procurement function to strategic importance within organization • Dollar-for-dollar bottomline impact of e-procurement is startling www.ebstrategy.com

6. Evolution of e-Procurement Models Industry Consortiums Third-Gen Trading Xchanges Second-Gen Trading Xchanges First-Gen Trading Xchanges Corporate Procurement Portals B2E Requisition Apps EDI www.ebstrategy.com

7. Pre-Internet Era: EDI Networks • Private and limited to large businesses • Linked with major suppliers • Require large capital outlays • Automate procurement process; support automatic inventory replenishment; and tighten the relationship between buyers and primary suppliers • Perform best in strategic partnerships, specialized relationships, and rigid performance contracts • Don’t do well in open sourcing and flexible supply chain world www.ebstrategy.com

8. B2E: Purchasing and Requisitioning Apps • Next gen procurement apps taking hold in corporations • Purchase of goods and services the single largest cost item • For $1 earned on sale of product, $0.50-$0.60 spent on goods and services • Inefficient procurement practices wasting billions of dollars • Desktop requisitioning enables employees to purchase products and services online • Hook up corporate intranet to suppliers’ Web-based commerce sites to eliminate paper-intense and costly purchasing process of traditional business • Consolidating purchasing process with few key suppliers capable of providing volume discounts can generate tremendous cost savings • Ford www.ebstrategy.com

9. Corporate Procurement Portals • For buying both prodn and non-prodn related goods • Procurement portals do more than basic purchasing • Purchasing: the buying of materials and all activities related to the buying process • Procurement: includes requisitioning, purchasing, transportation, warehousing and in-bound receiving processes • Early strategies reengineered, even dismantled hierarchical structures • Recent strategies restructure entire order-to-delivery process www.ebstrategy.com

10. Trading Exchanges – First Gen • Communities, Store Fronts, & RFP/RFQ Facilitators • Information and content hubs • Content communities attracting purchasing professionals • Revenue: Advertisement, Subscription • VerticalNet • RFP and RFQ facilitator exchanges • Centralized online marketplace with preapproved group of suppliers • Fixed-price, sealed bids • Revenue: subscription fees, fees for bids to be read, transaction fees for bids submitted and/or successfully chosen • WellBid in the energy sector www.ebstrategy.com

11. Trading Exchanges – Second Gen • Virtual Distributors and Auction Hubs • First gen trading hubs: “an inch deep and a mile wide” • Transaction necessary for success • Revenue: from every transaction within the exchange • Virtual Distributors • One-stop shopping for buyers and sellers • Product information from multiple catalogs, multiple suppliers and manufacturers into a megacatalog • Do not carry inventory or distribute products; assist buyers in arranging for 3rd party carriers to transport other goods • Streamline sourcing of direct goods by issuing a single PO and then parsing the order to each relevant supplier • SciQuest in life-sciences industry www.ebstrategy.com

12. Trading Exchanges – Second Gen • Auction Hubs • Sales channel for spot buying unique items; used equipment, surplus inventory, perishable goods • Similar to stock market • Buyers and sellers meet anonymously to agree on prices on commodities • Driven by either sellers (AdAuction.com) or buyers (FreeMarkets.com) • Forward auctions allow several buyers to bid for products/services from an individual seller • Reverse auctions allow several prequalified sellers to bid for fulfilling an individual buyer’s need www.ebstrategy.com

13. Trading Exchanges – Third Gen • Collaboration hubs • Provide more than transaction functionality, help with end-to-end mgmt of supply chains • Create common platform for all participants in an industry supply chain • Share information; conduct business transactions; collaborate on strategic and operational planning www.ebstrategy.com

14. Trading Exchanges – Third Gen • Provide value-added services • Increase site “stickiness”; generate multiple revenue streams; increase competitive barriers to entry • Bidcom is a single online workplace for large contractors to collaborate with architects, store blueprints, expedite permit process and purchase building materials • Integrated commerce technology • Automate transaction processing, incorporate static pricing and/or dynamic pricing • Brokering services • Logistic and financial services • Service and support • Customer service support, returns processing, and warranty coverage www.ebstrategy.com

15. Industry Consortiums: Joint-Venture Procurement Hubs • Larger firms responding to competitive threat posed by new startups • Forming either buyers or suppliers consortium • Traditional industry leaders have two advantages over startups: instant commercial activity and liquidity • Buyer consortium • Groups of large companies combining buying power to drive down prices • Covisint www.ebstrategy.com

16. Industry Consortiums: Joint-Venture Procurement Hubs • Supplier consortium • Forming in industries with few high concentration market players • Difference compared to buyer consortium: sponsors get to promote and differentiate suppliers’ products • Not new: Sabre • Major issues: governance, technology and antitrust www.ebstrategy.com

17. Evolution of Procurement Processes • Reengineering procurement process key to deployment of e-procurement solution • E-procurement models all attempting to solve similar business process problems • Fragmentation of channels • Managing by exception rather than by transaction • Controlling maverick buying by automating requisitioning process • Integration of end-to-end process www.ebstrategy.com

18. Reducing Channel Fragmentation • Symptoms of channel fragmentation • Maverick buying, inefficient processes, and non-strategic sourcing • Most procurement processes are paper-intensive • Overhead: $70-300 per purchase www.ebstrategy.com

19. Hands-Free Procurement: Managed by Exception www.ebstrategy.com

20. E-Procurement: Integrating Ordering, Fulfillment and Payment Order Flow Search & Select Requisition Approval & Purchase Backward Integration Fulfillment Flow Customer Service Receiving Tracking Pick, Pack & Ship Payment Flow Invoicing Payment Reporting www.ebstrategy.com

21. Ordering: Self-Service Requisitioning • Traditional purchasing process • Fill requisition form • Submit • Wait for approval & PO • Send PO to supplier • Many procurement guidelines and rules to follow • Archaic given technological options today • Little help available from purchasing dept and POs can take weeks to fulfill • Self-service order work flow www.ebstrategy.com

22. Fulfillment: Order Mgmt and Supplier Integration • Procurement system provides seamless transition from requisition to PO, with no rekeying of orders • Fulfillment workflow steps • Order dispatch • Accounting back-office systems connectivity • Supplier connectivity • Order tracking • Receiving www.ebstrategy.com

23. Payment: Invoice Mgmt • Companies must monitor payments and open invoices • E-procurement should support payment functionality • Invoicing and billing • Payment • Reporting www.ebstrategy.com

24. E-procurement Analysis and Admn Apps • Buy-side functionality alone not enough • Increasing effectiveness and extending responsibilities of purchasing professionals also necessary • Application of spending analysis and planning across the spectrum of procurement activities a core competency of a successful procurement strategy • Data collection • Market analysis • Supplier management decisions • Configuration of spending controls • Continuous feedback www.ebstrategy.com

25. Marketplace Enablers • Ariba: Marketplace Enabler • First vendor of ORMS • Realized opportunity for automating nonprodn procurements processes • 30% spending towards nonprodn purchase, managed via a maze of paper-based process • Gathered customer feedback before building first product • Transformed into a technology platform provider • For building and powering Internet trading exchanges www.ebstrategy.com

26. Marketplace Enablers • Freemarkets: Auction Enabler • Runs buyer-centric auction exchange • Focused on procurement for industrial parts, raw materials, and commodities • $4-5 trillion market • Major opportunity • Direct materials often custom-made with no std price • Current procurement process inefficient • Current asset-disposal methods plagued by imperfect product and pricing info • Offers service to create customer market for direct matls its client purchases • Industrial auctions • Surplus asset auctions www.ebstrategy.com

27. Roadmap for e-Procurement Managers • Chief procurement officers looking to deliver maximum business impact at lowest possible cost • Procurement objectives • Leverage enterprise wide buying power • Quick results at low risk • Supplier rationalization • Cost reduction by automating best practices in strategic procurement • CPOs realizing that e-procurement applications can be powerful when applied to large number of products and services that companies buy www.ebstrategy.com

28. Step 1: Clarify Your Goals • What is your company’s specific e-procurement goal? • Is the goal a comprehensive and consolidated business solution? • Integrated e-procurement mgmt necessary • What are you trying to improve? www.ebstrategy.com

29. Step 1: Clarify Your Goals Order Receipt & Schedule Complete ProcurementLifecycle Order Approval & Placement Select &Search Deliver &Invoice { Approval Workflow Engine Multi-SupplierCatalog Search Order Management Shipping & Distribution Partial Functional Solutions Supplier-side Order Entry Pricing & Availability Receipt & Invoicing Complete Integrated Solutions Integrated e-Procurement Management Applications www.ebstrategy.com

30. Step 2: Construct a Process Audit • Understand current procurement process and factors affecting, impeding and interacting with it • First phase: Model workflows in current procurement • Identify bottlenecks • Create shortcuts • Second phase: What kind of buying do you want to support? • Strategic buying • Long-term relationships • Transactional buying • Paper pushing • Spot buying • One-time deals www.ebstrategy.com

31. Step 2: Construct a Process Audit • Second phase: What kind of buying are you trying to automate? • Collect data to model current procurement chain • Study key areas to ensure processes are consistent with strategic goals, meet customers’ needs and promote efficiency • Identify critical success factors and performance indicators • Also assess problem areas and areas of vulnerability • Determine proper direction for the design phase www.ebstrategy.com

32. Step 3: Create a Business Case for e-Procurement • Return on assets business case forces you to systematically analyze your business • Analysis forces to understand context • Without understanding environment cannot fix it • Can articulate hidden assumptions • Widely used technique in creating business case • ROA = (Revenues-Expenses)/Assets • Increase revenues, decrease expenses, keep asset base as small as possible • Increasing profitability by generating revenue requires substantial investment but through e-procurement requires only a limited addl investment www.ebstrategy.com

33. Step 3: Create a Business Case for e-Procurement • Decreasing expenses can be accomplished by identifying inefficiencies in the procurement chain • Inventory carrying costs • Reducing captive capital makes quick profits • Cost improvements not just cutbacks; enhancements through better coordination and communication; “premium freight” can be avoided for instance • Improving asset utilization can be accomplished by reducing working capital • Eliminating warehouses to maximize stock availability and to minimize inventory holdings • Eliminating excess inventory to reduce leakage or hidden inventory www.ebstrategy.com

34. Step 4: Developing Supplier Integration Matrix • Without supplier commitment, e-procurement difficult • But with ever-increasing velocity of change, few organizations want to commit to long term relationships • Needed: Supplier Integration Matrix (SIM) • Helps determine the best type of relationships to have with individual vendors • An organization applying only one relationship structure to all vendors shortchanging itself • SIM classifies suppliers into • Strategic collaborative, long term, ex. MRO suppliers • Strategic cooperative, ex. computer suppliers • Nonstrategic limited, short term, ex. temp agency services • Nonstrategic commodity, short term, ex. office and book suppliers • SIM should be reviewed periodically www.ebstrategy.com

35. Step 5: Select an e-Procurement App • Wade through vendor hype • Will it support my procurement process? • Does it leverage my other application investments? • Will it work seamlessly with other apps? • Is it extendable? www.ebstrategy.com

36. Step 6: Remember Integration is Everything • Doomed to fail strategy • Gathering requirements, then disappearing for 6 months, then launching the portal • Ideal goal • Continuously iterate towards the target – the integration sweet spot • Focus on all areas of ORM • Iterate development and deployment • Do not take exclusive buy-side or sell-side viewpoint • Integration with back office systems a significant issue • Professional Buyers • Control • Efficiency & Cost Reduction • Supplier Management Integration Sweet-spot • Employees • Convenience • Ease of Use • Consistency • Suppliers • Cost Reduction • Clean Orders www.ebstrategy.com

37. Step 7: Educate, Educate, Educate • How much of a change does your market require on the part of suppliers and buyers? • The lesser the better • Opposition to e-procurement can cause major problems • Schedule slippage, higher costs, poor morale • Senior management must listen, communicate, sell and even fire to deal with this problem • “Soft” implementation roadblocks most reason why projects don’t succeed • Do not underestimate the effort and costs of deployment www.ebstrategy.com

38. E-Business Strategies, Inc. www.ebstrategy.com contact@ebstrategy.com 678-339-1236 x201 Fax - 678-339-9793