Chapter Four: Concepts of E-procurement
4. Introduction
Procurement is usually one of the largest expenses in a company’s cost structure and can have a
significant influence on company’s overall performance. Procurement activity is an important
activity in all organizations whether public, private or governmental. Procurement managers are
constantly looking for solutions to lower the high procurement costs by automating the supply
chain, among the alternative solutions e-procurement is one and the best.
E-Procurement is the process wherein the physical tendering activity is carried out online using
the Internet and associated technologies. In its broadest sense, e-procurement involves electronic
data transfers to support operational, tactical and strategic procurement.
4.2. Overview of E-procurement
The beginnings of e-Procurement were in the early 1980s with the development of electronic
data interchange (EDI).
This allowed customers and suppliers, most often in the fast moving consumer goods
business to send and receive orders and invoices via secure store and call forward
networks.
These EDI systems allowed businesses to exchange and synchronise master data files on
products, prices, specifications and information about each other’s locations and trading
practices.
In the 1990’s internet software started to become available, and software companies
began to develop buyer managed electronic catalogues for use by vendors.
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Basically (e-procurement) refers to the electronic integration and management of all procurement
activities including purchase request, authorization, ordering, delivery and payment between a
purchaser and a supplier. E-procurement has therefore been around for much longer than the
term itself which first came into usage after the establishment of the internet in the 1990s. From
the 1960s until the mid-1990s, e-procurement primarily took the form of electronic data
interchange (EDI).
E-procurement should be directed at improving performance for each of the ‘five rights of
purchasing, which are sourcing items:
At the right price
Delivered at the right time
Of the right quality
Of the right quantity
From the right source.
4.2.1 Traditional vs. e-procurement
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4.2.2. Trends in E-procurement
Nowadays, e-procurement is often supported by internet technologies and is becoming more
prevalent. The historic context is demonstrated in the chart below:
Figure 4.1: Trends of E-procurement
Those involved in the procurement function need to understand the e-procurement concepts and
tools to provide input into their development, use, evaluation and refinement as a means of
improving procurement efficiency and effectiveness.
Procurement officers and managers can make a contribution to decisions about investments in,
and configuration and use of e-procurement tools by:
having a general understanding of the various e-procurement applications
identifying the procurement processes that are effectively supported by e-procurement
understanding the sources of benefit of e-procurement
identifying the risks associated with the adoption of e-procurement
Contributing to the development of e-procurement tools through identifying scope for e-
commerce supported process improvement.
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4.3. E-procurement tools and applications
Some e-procurement tools and applications include:
electronic systems to support traditional procurement
EDI (electronic data interchange)
ERP systems
internet as a support or complement to traditional procurement
electronic mail (e-mail)
web enabled EDI
extensible markup language (XML)
world wide web (www)
internet tools and platforms that replace traditional procurement
Electronic systems to support traditional procurement, these include mainframes
and personal computers (PC), Electronic Data Interchange (EDI) and
Enterprise Resource Planning (ERP).
EDI (Electronic Data Interchange)
EDI is an application whereby electronic messages can be exchanged between computer
programs of two separate organizations. Some features of EDI include:
Messages are exchanged in groups, known as batches.
Messages can automatically be sent, transmitted and stored between computers without
retyping or keying data.
EDI has to be implemented by each pair of organizations (sender and receiver) who wish to
use it. This means that the implementation costs of EDI are relatively high.
EDI is mostly used where the messages exchanged concern such matters as orders,
confirmations, transport information and invoicing.
EDI traditionally runs on so-called, “Value Added Networks”, which are closed networks
(unlike open networks like the Internet).
ERP systems
ERP systems are management information systems that integrate and automate many of the
business practices associated with the operations of a company or organization. ERP systems
typically handle the manufacturing, logistics, and distribution, inventory, shipping, invoicing,
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and accounting for a company or organization. ERPs aid in the control of many business
activities, like sales, delivery, billing, production, procurement, inventory management, and
human resources management.
4.3.1. Internet as a support or complement to traditional procurement
There are various types of internet based applications that serve different purposes. Some well-
known applications that use the internet are described below:
Electronic mail (e-mail)
Email is an Internet based application through which electronic messages are exchanged between
people.
Web enabled EDI
web enabled Edi is like traditional EDI (see above), but run on the Internet; also known as EDI-
INT.
Extensible Markup Language (XML)
XML is used to allow for the easy interchange of documents on the World Wide Web.
World Wide Web (WWW)
The WWW is a major service on the Internet. The World Wide Web is made up of "Web
servers" that store and disseminate "Web pages," which are "rich" documents that contain text,
graphics, animations and videos to anyone with an Internet connection.
The figure below illustrates the categories of electronic communication exchange between
people and computers.
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4.4. Types of procurement
There are two broad categories of procurement:
1. Those that relate to manufacturing of products (production-related procurement) and
2. operating or nonproduction- related procurement that supports the operations of the
whole business and includes office supplies, furniture, information systems, MRO goods
and a range of services from catering, buying travel, and professional services such as
consulting and training.
Moving to how items are bought, businesses tend to buy by one of two methods:
◦ Systematic sourcing – negotiated contracts with regular suppliers, typically in long-term
relationships.
◦ Spot sourcing – fulfillment of an immediate need, typically of a commoditized item for
which it is less important to know the credibility of the supplier.
4.5. Forms of E-procurement
Many authors divide e-procurement into six forms: These include:
Internet tools and platforms that replace traditional procurement
Some internet tools and platforms that replace traditional procurement include:
E-sourcing
E-tendering
E- auctioning
E-ordering
web-based ERP (e-MRO) and,
E-information
E-sourcing: E-sourcing supports the specification phase; it can be used to pre-qualify
suppliers and also identifies suppliers that can be used in the selection phase. For suppliers
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the benefit is: “marketing” and for the buying organizations the benefit is facilitating the
sourcing of suppliers. The UN Global Market Place (UNGM [Link]) is an example
of an E-sourcing tool.
E-tendering: E-tendering supports the selection stage and acts as a communication platform
between the procuring organization and suppliers. It covers the complete tendering process
from REOI via ITB/RFP to contracting, usually including support for the analysis and
assessment activities; it does not include closing the deal with a supplier but facilitates a
large part of the tactical procurement process. It results in equal treatment of suppliers;
transparent selection process; reduction in (legal) errors; clear audit trial; more efficiency in
the tactical procurement process and improved time management of tendering procedures.
Some UN organizations such as UNDP-IAPSO and UNHCR have used E-tendering in the
formulation of long-term agreements for vehicles, tents, motorcycles and pharmaceuticals
through an in-house developed tendering portal.
E-auctioning: E-auctioning supports the contract stage. It enables the closing of a deal with a
supplier if parties agree on price. They operate with an upward or downward price
mechanism e.g. e-auctioning with upward price mechanism for the selling organization and
e-reverse auctioning with a downward price mechanism for the buying organization. They
can be made in accordance with traditional ITB/RFP. They are internet based using open or
closed systems.
E-ordering and web-based ERP: E-ordering and web-based ERP is the process of creating and
approving procurement requisitions, placing purchase orders, as well as receiving goods and
services ordered, by using software systems based on the Internet.
System Usually used…
E-ordering For indirect (facility) goods and services.
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System Usually used…
By all employees of an organization.
For ad-hoc ordering.
Web-based ERP / Electronic For direct (product related) goods and services.
maintenance, repair and By a procurement department.
operating (e-MRO) /. For planned ordering.
E-informing: E-informing is not directly associated with a stage in the procurement process;
it is the process of gathering and distributing procurement information both from and to
internal and external parties using Internet technology.
4.5.1 E-procurement in the procurement cycle
The figure below shows the six forms of e-procurement plotted in the procurement process
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Each of these forms can be explained as follows:
E-sourcing supports the specification phase; it identifies suppliers that can be used in the
selection phase.
E-tendering supports the selection phase; it facilitates the REOI and ITB/RFP activities,
usually including support for the analysis and assessment activities.
E-reverse auctioning supports the contract phase; it enables closing a deal with a supplier;
E-ordering and web-based ERP is the process of creating and approving procurement
requisitions, placing purchase orders, as well as receiving goods and services ordered, by
using a software system based on the Internet.
E-informing is not directly associated with a phase in the procurement process; it is the
process of gathering and distributing procurement information both from and to internal and
external parties using Internet technology.
4.6. Benefits of E-procurement
Most organizations suffer inefficiencies when using the traditional procurement process.
The procurement process consists of sourcing (negotiating prices), procurement (raising
and fulfilling orders), and payment (collecting invoices and arranging payment).
These processes can be handled in an efficient way through electronic procurement
system.
The following are major benefits of e-procurement;
Reduced purchasing cycle time and cost
Enhanced budgetary control (achieved through rules to limit spending and improved
reporting facilities)
Elimination of administrative errors (correcting errors is traditionally a major part of a
buyer’s workload)
Increasing buyers’ productivity (enabling them to concentrate on strategic purchasing
issues)
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Lowering prices through product standardization and consolidation of buys
Improving information management (better access to prices from alternative suppliers
and summaries of spending)
Improving the payment process (this does not often occur currently since payment is not
always integrated into e-procurement systems).
4.7. Risk in implementing E-procurement system
The following are amongst the different risks that organizations may face in implementing,
Security concerns and lack of faith in trading partners are the most significant factors
holding back e-procurement.
Change resistance:
Maverick or off-contract purchasing might happen: Maverick purchasing occurs when
items are ordered that are unnecessary or too expensive.
Technological risk:
Lack of vendor support for e-commerce
Require big expenses associated with software license and training
4.8. Implementing e-procurement
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Organizations should not simply automate existing procurement processes and systems
but should consider improving ways of working and re-engineering business processes
prior to the implementation of e-Procurement.
Purchasing and supply management professionals should challenge established
procurement practices to test whether these have evolved around a paper-based system
and as such can be replaced.
To introduce e-procurement the IS (information System) manager and procurement team
must work together to find a solution that links together the different people and tasks of
procurement.
Different types of information system cover different parts of the procurement cycle.
The different types of systems are as follows.
Stock control system:
This relates mainly to production-related procurement; the system highlights
when reordering is required when the number in stock falls below reorder
thresholds.
CD or web-based catalogue:
Paper catalogues have been replaced by electronic forms that make it quicker to
find suppliers.
E-mail- or database-based workflow systems:
Integrate the entry of the order by the originator, approval by manager and
placement by buyer. The order is routed from one person to the next and will wait
in their in box for auctioning. Such systems may be extended to accounting
systems.
Order-entry on web site:
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The buyer often has the opportunity to order directly on the supplier’s web site,
but this will involve rekeying and there is no integration with systems for
requisitioning or accounting.
Accounting systems:
Networked accounting systems enable staff in the buying department to enter an
order which can then be used by accounting staff to make payment when the
invoice arrives.
Integrated e-procurement or ERP systems:
These aim to integrate all the facilities above and will also include integration
with suppliers’ systems.
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