Enhancing the Buy Channel

In the late 1990s, many established companies redesigned their processes and started using the Internet as a sell channel in addition to their existing channels. The channel did not help the companies increase their revenue, but did help them reduce costs significantly, improve customer service and gain customer loyalty. This encouraged more and more companies to adopt an e sell channel.

Organizations did not pay much attention to the procurement costs of products not used in production such as office furniture. When they could reduce costs significantly in procuring production goods using the Internet, they began to look for ways to cut costs of procuring non production goods as well. In these organizations, a large number of employees was given the discretion to buy low and moderately priced products in order to speed up the process of procurement. But the procurement process was paper based. Therefore, individual purchases made by different employees at different times through traditional method were expensive and uneconomical. The development of Internet technology made possible the reduction of costs of procuring direct as well as indirect inputs in production.

E procurement value proposition

Suppliers usually offer volume discounts to large organizations. The management of the organization should have a list of the different suppliers with whom the company has negotiated prices in the past. This list and, if possible, the negotiated prices, should be made available to those making purchases in the organization. After going through the list of preferred suppliers, the employee concerned can select the appropriate supplier and place the order electronically. Products procured through electronic orders cost substantially less than the products procured through traditional methods because the products are delivered directly from warehouse to the final customer without passing through intermediaries and processing costs are also nominal.

The company should use information about the amount spent on purchases from each supplier in future negotiations with the suppliers. Many products not meant for production purpose are purchased by employees. The procurement of these goods is called indirect procurement. Some large corporations authorize certain employees to purchase required products without waiting for approval from several layers of management. In such cases, product procurement by employees is similar to consumer purchasing because individual employees make independent buying decisions. Indirect procurement has been found to take up about 10 percent of a company's annual revenues. Thus, controlling expenditure on indirect procurement can help a company achieve significant cost reductions and improve its profit margin.

Saving through compliance, reduced costs and process efficiencies

In traditional businesses, the management created a rigid set of procurement rules to control expenditure on procurement. Often, the rules were too complex (containing several exceptions) and ran into several pages. The length and complexity of the procurement rules often deterred employees from using them at all, resulting in noncompliance with the set procedures. For pre negotiated contracts with suppliers, companies usually made available catalogs listing special prices and product features offered by the suppliers. Employees were supposed to refer to these catalogs before placing orders. However, very often, they remained unused. Companies have found that the compliance rate can be improved by using e catalogs, setting up an intranet and training employees in e procurement. This helps in cost reduction and in higher process efficiencies.

Companies may set up an intranet and post e catalogs containing information about different suppliers and the products offered by them. In case there are pre negotiated prices with certain suppliers, these should be mentioned in the catalogs against each supplier so that orders can be placed quickly. In case prices have not been negotiated, the companies may install software to compare prices, quality and features offered by different suppliers to help employees select the best supplier. These processes can help the organization improve the rate of compliance with procedures considerably. Compliance saves on time and cost of procurement. But the employees have to be trained to use the e procurement application so that they do not choose the lowquality, high cost supplier and nullify the savings realized. Not all products and services (like medical treatment for an injured employee) are e procurable. Hence companies have to use alternative ways of procuring such services.

Other kinds of E purchasing

E procurement is only one of the several forms of electronic purchasing. The other forms of e purchasing are:

E-sourcing: Sourcing is one of the critical business processes of a company. Sourcing involves: identifying suppliers available in the industry, seeking proposals from them, evaluating the tenders submitted by them, selecting the best supplier, drafting a contract acceptable to both the parties, and administering the contract. E sourcing automates all these processes. It also helps companies conduct regular expenditure analysis, re negotiate contracts with suppliers and improve relationships with suppliers.

An e-sourcing system is different from an e procurement system. An e procurement system is usually used by a large number of employees in an organization for lowvalue, frequent and indirect purchases. An e sourcing system is usually used by specialists in various fields for direct purchase of material. Therefore, the number of people using an e sourcing system in an organization is limited.

E auction: E auction is generally used by companies to acquire or obtain goods at the best possible price in a short time. Reverse auction is generally used for sourcing. In a reverse auction, the price offer moves from a higher quote to a lower quote as against the usual trend of moving from a lower quote to a higher quote in a general auction where a good is being sold. Using this process, the buying company purchases products from the supplier who places the lowest bid (offers the product at the lowest price).

Depending on the performance of suppliers in the past, a buying company shortlists suppliers and sends 'them an electronic invitation to participate in an e auction on a particular site at a specified date and time. After the suppliers stop posting their bidding prices, the company purchases the product from the lowest bidder. Companies generally participate in e auctions to buy commodity items which need not be of superior quality or last for a long duration. They save on conveyance paid to purchasing employees to go physically to an auction site, but can still visualize the real time bidding and buy the product using an office system. Some companies participate in e auctions to dispose off their surplus products. There are some companies whose primary activity is e auctioning. E bay is the largest online auctioneer in the world.

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