New Strategies for Electronic Procurement

The traditional way of purchasing in the old economy was a waste of money and time for both buyers and suppliers. To simplify the procurement process and, more importantly, to gain strategic financial initiative, managers must learn to use new-economy procurement strategies.

Some companies are already seeing significant benefits from electronic purchasing strategies such as purchasing cards, purchasing centers and purchasing/payment systems. For example, General Motors, Ford Motor, DaimlerChrysler and Toyota Motor have established a procurement center through cooperation, realized joint online procurement, obtained price concessions from suppliers, and will spend a total of more than 300 billion yuan each year on parts and raw materials U.S. dollar purchase spending, down 10 percent.

Gyzmo recently hired its first CFO, IM Smart. Smart was tasked with re-planning the company's financial structure. So he is well aware of the company's recent financial situation, including capital spending and capital budgets.

Smart specifically wants the purchasing process to be more efficient and has tried to reduce useless inventory by working with suppliers. It turned out that the answer was in the e-procurement software package, which enables online browsing of suppliers' product catalogs and online ordering. Through electronic procurement, buyers can see their preferred suppliers at a glance on their computers and achieve procurement. Some advanced purchasing systems have multi-vendor directories on their network. At the same time, the number of suppliers could be reduced from as many as a few thousand to a mere 100.

Smart found that with e-procurement, buyers were freed from the hassle of previously dealing with paper documents, and procurement experts were able to turn their attention to strategic initiatives, such as negotiating price discounts with suppliers Negotiate prices, discover new sources of supply, reformulate procurement practices, and improve the performance of technical tools such as computers for procurement. The system tracks transactions with each supplier, allowing purchasing managers to document the overall spend to suppliers.

In comparison, the traditional purchasing methods of the old economy were a waste of money and time for both buyers and suppliers. Suppliers suffer from labor-intensive order fulfillment processes that are often error-prone and inefficient. Important resources can be spent on the tedious repetitive tasks of manually entering order information that comes in via fax and telephone, and manually processing shipping notices and transaction invoices. Spending on both the salesperson and the customer side can be excessive.

Using Electronic Purchasing Cards

Many companies allow branch offices to conduct decentralized purchasing in order to maintain friendly relationships with local business groups and to empower managers across the company. Individual businesses make urgent orders directly from suppliers because they want to repay certain suppliers, or because their central purchasing department is unresponsive and a bit bureaucratic. This type of behavior, often classified as solitary purchases, occurs when company employees do not follow internal purchasing guidelines.

According to estimates, independent procurement accounts for 1/3 of the company's operating financial expenditure, costing 15% to 25% of the company's additional costs. In addition, the low-transparency overhead model further limits the benefits of bulk purchasing contracts.

The need for proximity to local supply sources stimulates the use of purchasing cards. It is similar to a credit card, issued by a bank or a supplier to a manager in a company responsible for local small-scale purchases. Cardholders can receive daily electronic information on previous day's purchasing activity, including individual users, locations, quantities, wholesalers, and transaction types. Various restrictions can be built into the code through smart card technology, such as daily purchase amount or purchase type restrictions. When paying by card, any unapproved action will be rejected.

The use of purchasing cards has significantly reduced local purchasing costs. The savings are mainly reflected in the reduction of paperwork. In addition, employees are more empowered and spiritually satisfied because of their increased responsibilities.

The successful use of purchasing cards has significantly reduced the workload of traditional purchasing methods. For example, one agency reported that their use of purchasing cards reduced the 40,000 previously purchased items to the current 5,000. Based on written purchases, even for small items, it takes 4 hours to process the order and 8 days to complete all purchases. The specific work links include preparing purchase requirements, calling out purchase requirements, and accepting bids from suppliers. Get internal approval. The use of purchasing cards reduces the time to process orders to minutes and the time to confirm suppliers to hours.

Establish an online purchasing center

Establish a database that will be logged in after a purchasing action occurs, and the corresponding notification can be logged, which can ensure that everyone involved is aware of the purchasing status. This data can be integrated into a complex purchasing/payment system that includes the history of suppliers, quantities purchased, performance and quality of products supplied.

The establishment of a procurement center is another major innovation in the way of electronic procurement. A purchasing center is a website that integrates product catalogs from different suppliers with the same product category online. There are now about 400 such products that offer e-commerce "deals," offering a variety of web hubs, e-auction tools, and e-catalog tools. Software resellers search the Internet for special "marks" to purchase the most attractive software that meets specific purchasing criteria. Requests entered into the e-procurement system enable suppliers' bids to meet buyers' needs. The services offered by e-procurement are diverse, in addition to providing a marketplace for buyers and sellers, including credit assessment and money transmission.

Recently, General Motors, Ford, DaimlerChrysler and Toyota announced that they have established a center for joint online purchasing. These companies spend a total of more than 300 billion US dollars on components and raw materials each year. Through cooperation, they can enhance their purchasing capabilities, and are expected to obtain price concessions from suppliers and reduce expenditures by 10%. In addition to purchasing raw materials, the center can also perform many functions, such as converting foreign exchange, tracking global export rules, passing customers' special orders to suppliers, etc.

Integrated Procurement/Payment System

Payment functions face piles of paperwork and formalities as they need to check incoming purchase orders over the phone, receive approved reports and invoices , which requires the release of expenditures. Some companies don't want to actively manage the payment function, but simply take the hassle-free approach of paying in person if the other party provides the necessary credit approval and accounting passwords, and attaches supporting documents. Others actively manage payment functions and try to optimize their relationships with suppliers. Management decisions are made based on the importance of each contracting party, and triggers in the payment system can apply cash discounts after the goods are received, or pay on a specified date.

Regardless of the method chosen to manage payment functions, many companies now use integrated purchasing/payment systems. These software products provide different analytical procedures, control purchasing and payment decisions, maintain all relevant supplier data in a single file, and interface with check payment systems.

The shipping and distribution system can be properly designed to avoid the hassle of the payment process and excessive or erroneous charges. Cargo auditors often use a rating system to check for common, excessive charges in freight invoices, such as misclassification, wrong discount criteria, and wrong freight mileage calculations. Overcharged claims can be filed and tracked to receive any overpayments.

For companies with limited financial or human resources, it may be more cost-effective to outsource the payment review and payment functions. Currently, once the payments to be paid are determined, companies have access to all the outsourced services banks provide for payment processing.

The paper-based procurement methods popular in the old economy era are being replaced by e-commerce systems in the new economy era. Electronic procurement provides buyers with access to a large number of suppliers, reduces paperwork, improves procurement behavior, and brings countless efficiencies.

The original text is excerpted from the book "Financial and Process Metrics for the New Economy" by James Sagner with permission. The book is published by AMACOM, a branch of the American Management Association, International Association, and the author registered the copyright in 2001. Translated by Hu Xiaochun.

The author, Dr. James Sagner, is a senior consultant specializing in financial management. He is the Managing Director of the Sagner/Marks Group, the author of Cashflow Reengineering, and has advised nearly half of the Fortune 500 companies.