E-business applications in materials management

THE INTERNET has changed the manner in which companies conduct business. It has revolutionised the way they communicate both internally and externally via e-mail and corporate web sites and the manner in which business is conducted with partners, suppliers and customers. Research firm IDC estimates that the number of users of Internet commerce procurement applications will grow from six lakhs in 1999 to 250 million by 2003. Appropriately, the apex professional body, Indian Institute of Materials Management (IIMM), has chosen the theme of e-business for this year's Materials Management Day being observed on April 23.

We seem to be entering that phase in the adoption of Internet technologies, where the hype and media attention is giving way to the application of technology tools for serious business purposes. Some of the visible aspects of this silent revolution is the sudden appearance of multicoloured plastic pipes sticking out of corners of city streets and junctions of roads, pieces of the thousands of miles of fibre optic cables being laid out across the country by corporates such as Reliance Infotech. In fact, a few years ago Mr. Shiv Nadar, co-founder of HCL, had stated that if we were able to create an information network as extensive as the Indian Railways by laying fibre optic cables along the tracks, and have business conducted by transmitting data along these channels, the working capital that would be released as a result of the efficiencies of operations over 12 months would be equivalent to the entire external debt of this country! That's the power of e-business.

The key benefit therefore of e-business is in creating efficiencies and productivity, a much needed ingredient for Indian business to remain competitive in the new borderless world economy. With WTO implementation around the corner, and the threat of Asian competitors, especially China stormtrooping into the Indian domestic market, many Indian companies are looking at e-business as a tool to drive those efficiencies in all aspects of the supply chain. The last one year has seen a large number of Indian banks, (ICICI, HDFC, SBI) public sector companies (Maruti Udyog, ITI, and BHEL), private sector companies (Tisco, HLL, and Mico) take significant strides in adopting e-business to generate supply chain efficiencies.

Materials management in general and specifically procurement is an area where the use of combinations of Internet technologies can drive major efficiencies. The most successful companies in the coming years will be those that can effectively control costs and continually improve employee productivity. Research indicates that Internet-based procurement automation (electronic procurement) can effectively deliver the necessary leverage required to achieve significant results in both of these areas.

So how exactly does this happen? What are the benefits that e- procurement can deliver? What are the criteria that an effective e-procurement system should meet? Some of these issues are examined here.

All companies need to purchase the items employees require to do their jobs; office supplies, furniture, personal computers, and travel and stationery. Worldwide the value of corporate purchasing of this type of item (sometimes referred to as indirect goods and services) is estimated at $400 billion annually. Surveys have shown that over 95 per cent of all goods and services acquired by corporations are purchased using paper based processes. These processes are designed to manage purchasing and associated costs.

In many cases, these systems are traditional, paper-based, cumbersome to use and difficult and costly to administer. It is not surprising that in many organisations, employees take matters into their own hands and acquire their needs from their own resources via local stores, or other unapproved vendors. The cost of this `ad hoc' purchasing has a detrimental effect on a company's bottomline; in the time taken to process invoices and payments and in the lack of corporate buying power through pre- negotiated agreements.

Electronic procurement manages the entire process of indirect goods and services through the Internet. It manages the internal workflow and budget control, supplier management, order placement, receiving and invoicing: in fact the entire request to payment process. Electronic procurement increases a company's effectiveness in the following ways:

Lowering procurement costs: Medium and large organisations process thousands of purchase orders annually. Most of these orders are for amounts under Rs. 10 lakhs. The costs associated with processing a purchase order remain the same whether the order being processed is for Rs. 1,000 or Rs. 1 lakh. While there is little data available in the Indian context, the National Institute of Purchasing Managers in the U.S. estimated that using an electronic procurement system can reduce the cost of raising a purchase order from $142 to $17. Every rupee saved in reduced purchasing cost goes straight to the bottomline, improving the company's profitability.

Removing paper work: Traditional, manual purchasing systems generate mountains of paper work in requisition forms, purchase orders, invoices and shipping bills. These documents can be costly to produce, are often misplaced and are time consuming to file and administer. Electronic procurement, removes the necessity for all of these documents as the information is stored electronically and is easily accessible.

Improved supplier relationships: By reducing the overall number of suppliers and directing more business to a select few, better volume discounts and terms can be negotiated with preferred partners. Purchasing personnel are able to focus on agreement negotiation and strategic sourcing. Supplier reporting makes it easy to identify those suppliers that aren't performing. Day- to- day dealing with suppliers becomes more of a business to business relationship, rather than the continual need to check deliveries and track purchase orders.

Reduction in unauthorised purchasing: Electronic procurement allows employees to order the supplies, equipment and services they need from an on line catalogue of corporate approved vendors. The faster and easier to use process means that employees are less inclined to go outside the corporate procurement system and purchase items at the local retail outlet and claim the purchase later as an expense. Studies have show that this kind of purchasing can add around 25 per cent to procurement costs.

Employee empowerment: Using the Internet for corporate purchasing gives employees a self-service way to request items and eliminates the paper and labour intensive processes associated with current systems. Employees can peruse up-to-date catalogues of approved goods and services, simply make a selection and then submit their request for approval. Using guidelines set by corporate purchasing, the supplier continuously updates catalogue items, so they are always current. At any time an employee can make an inquiry on the status of any requests that they have placed, eliminating the need to call the purchasing department with these queries. As an e-procurement system is easy to use, employees require minimal training and are less likely to go outside the system for their needs, reducing the incidence of unauthorised purchases.

Key requirements in an e-procurement system: To meet the goals of streamlining the purchasing process, be responsive to users needs and strengthen supplier relationships, e-procurement systems must address the following issues:

Configuration: Though the overall goal is the same, each company has its own set of rules and standards which must be catered to in a procurement system. The administration of approval levels, cost centre and project budgets, delivery locations and the interface to the corporate ERP system must be adaptable to an organisation's unique requirements. An effective e-procurement system can be customised to suit corporate requirements and not vice-versa. When necessary, the parameters can be altered to accommodate changing business conditions.

Easy to use: Placing purchase orders and requesting items from a variety of suppliers needs to be transparent to the end-user. A seamless integration of approved items into a single catalogue and the processing of requests and purchase orders must be available in a single user interface. The ability to track a request and purchase order through to final delivery means employees can easily check the status of requests from their desktop PC.

Security: Security is always an issue in sending company details electronically. The e-procurement system must have in-built controls to guard against illegal access to any company details. Adaptability in dealing with a variety of suppliers means a number of communication methods will be required. The ability to alternate between e-mail, automatic fax and Internet EDI for the sending and receiving of purchasing orders as well as interfacing with corporate back office systems is a requirement.

Corporate e-purchasing or e-procurement has emerged as the new way in which Indian companies can increase efficiency, reduce costs and positively affect bottom line performance. Most companies receive an ROI in the first year of implementing electronic procurement. Success stories in the Indian e business scenario include majors such as HLL, Maruti Udyog, among others. The time is therefore ripe for others to emulate this for the Nation's benefit.

M. S. S. Varadan

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