The More the Merrier
The need for pervasive supply chain automation is fueling various e-procurement scenarios -- but which is right for you?
by JP Morgenthal
If you review procurement automation over the past 20 years, a noticeable pattern emerges: Attempts to automate procurement are only as successful as the number of sellers or suppliers that can participate in the automated transaction. Even today, many large companies can only claim 20 to 30 percent automation across their supply chain. The costly hurdles involved with participating prevent a fully automated supply chain.
However, an industry movement to lower trade barriers so more suppliers can participate in e-procurement is emerging. In many cases, the buyers themselves are leading this effort as they attempt to reach greater levels of productivity within their own organizations.
Central to this effort is the ubiquity of the Internet and the widespread availability of tools and products that support extensible markup language (XML) and XML-based e-business vocabularies. The rise of these two intertwined technologies results in a low-cost transactional network that any computer with a modem can access.
In this column, I will examine the new e-procurement environment and its requirements, architectures, benefits, and pitfalls.
Buy-Side and Sell-Side Solutions
When discussing e-procurement, you need to clearly specify whether you are discussing this topic from the buy-side or sell-side perspective. Either standpoint will radically alter the architecture and requirements of any solution.
Additionally, you must specify whether your purchasing requirements involve predominantly indirect materials (nonbusiness-critical goods and services such as pens, pencils, or paper) or direct materials (business-critical goods and services such as steel and fiberglass for automobiles). Again, each has varying sets of requirements that change the overall solution.
A buy-side solution offers you the ability to manage relationships with multiple suppliers. Where possible, this solution also lets you manage supplier catalog data and other key pieces of information that you need to procure goods and services.
The availability of indirect materials exchanges and a wide variety of distributors makes e-procurement relatively simple. For example, if you want to buy Paper Mate pens, you would most likely go through a local distributor for Paper Mate, not Paper Mate itself. By going through an exchange, you can receive better pricing. The exchange can offer the bid to multiple Paper Mate pen suppliers and facilitate the transaction between you and the supplier with the lowest price. Ultimately, a Paper Mate pen is a Paper Mate pen. If you ignore the service aspect, who the supplier is does not matter -- the item is a known quantity.
Direct materials procurement is a very different beast. Knowledge about the supplier is an essential part of the transaction. Indeed, companies like General Motors and John Deere spend millions every year managing their supplier relationships.
In most cases, these procurement transactions occur directly between you and your supplier, with little opportunity for the introduction of a third party. In this case, a buy-side solution must implement all the technologies necessary for delivery, receipt, and processing of procurement information. Of note, 95 percent of automated direct materials transactions still occur using electronic data interchange (EDI) over specialized networks.
