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

From the buyer's perspective, automation is essential to increased productivity -- especially in the retail and manufacturing industries, which need to manage their inventory to survive. The closer the buyer can get to sellers' systems, the greater the opportunity to more succinctly manage the ebb and flow of inventory by decreasing the necessity to overstock or underestimate supplies.

Suppliers, on the other hand, need to sell to as many buyers as possible, while still maintaining the ability to support fulfillment, customer service, and quality. A basic sell-side e-procurement solution lets buyers place and track an order, while more sophisticated solutions, offering better support, also let suppliers help manage buyers' inventory and respond to low-water marks in a timely manner.

For indirect materials suppliers, the name of the game is to get into as many exchanges as they can. Having their product catalog available and viewable by a large number of potential buyers is clearly a competitive advantage.

E-procurement of direct materials, however, is still the most complex of all procurement scenarios. When compared to indirect materials sales methods, direct materials e-procurement requires the seller to implement point-to-point communications using a buyer-specific data format or protocol. This endeavor can be expensive for many suppliers, and it may not make financial sense, depending on the size and volume of the particular buyer's buying patterns.

Linking the Buyer and Seller

Because these solutions already exist for both buy-side and sell-side indirect materials transactions, I'll further explore the needs of the direct materials procurement community.

This problem has two aspects: lowering the cost of entry for suppliers to participate, and facilitating collaborative commerce between a buyer and multiple suppliers.

As I mentioned earlier, the Internet and XML are two key technologies that provide low-cost alternatives to expensive EDI systems. However, groups like RosettaNet and ebXML are creating the open standards that leverage these technologies, which enable affordable software and self-implemented solutions.

However, as more suppliers participate in e-procurement transactions, buyers must increasingly manage hundreds of additional relationships. Therefore, they have a great need for software that will help them manage their trading network. With the transition from a homogenous EDI format to a potentially unlimited number of XML vocabularies and various delivery transports (HTTP, FTP, or SMTP), the software solution must manage a significant amount of additional data for each individual relationship.

Additionally, e-procurement of direct materials is increasingly different from EDI. E-procurement transactions will soon be multipoint transactions. In contrast to traditional EDI, a single transaction will now be distributed to multiple parties simultaneously. For example, a purchase order will still be issued to the supplier, but now it will also be delivered to the trucking company to arrange transportation and to the bank for funds to pay for the transaction.

These multipoint transactions will make it increasingly more difficult for buyers to build and support their own trading networks. I foresee companies emerging that will provide this capability as an outsourced service.

E-Procurement Technologies

E-procurement is technically different from its predecessor. With the introduction of the Internet, participating in an e-procurement transaction requires understanding and supporting a much more complex architecture. This architecture consists of the following components:

• Guaranteed messaging. Ensuring that a message is delivered and delivered only once
• TCP/IP. The underlying protocol of the Internet
• Secure delivery. Verifying that e-procurement messages are delivered in a nonrepudiated manner
• Scalability. Configuring systems so that they can handle more users without changing the existing environment
• HTTP. The underlying transport of the Web
• XML. The grammar for creating new e-business vocabularies.

Although many companies already support these technologies for other purposes, the mission-critical nature of direct materials e-procurement requires these systems and technologies to be available 24373365.

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E-procurement is a component of e-commerce, which, in turn, is a specialized form of e-business. These three categories share a common goal of facilitating transactions over the Internet using open standards, such as TCP/IP, HTTP, FTP, SMTP, and the like.

This approach differs from its predecessor, EDI, in that it lowers the barrier to entry for small- and medium-sized companies that found it financially unwise to participate electronically previously. By lowering the barrier to entry for suppliers, buyers can automate more of their procurement operations and gain better control over procurement spending. Additionally, more buyers create a more competitive marketplace, thus controlling costs.

However, as large organizations embark on this new direction, they will find that managing the additional information needed to support expanding trading communities is an expensive and resource-intensive task. Although buyers may still maintain existing relationships with their tier-1 suppliers, they will outsource the management of their electronic trading network and tier-2 and tier-3 supplier relationships.