The Most Common Mistakes of Installing E-Procurement Software
By Dr. Tom DePaoli
The rush to e-procurement and e-procurement technologies continues to be fraught with mistakes that have left some companies with unfilled high expectations and little to show for their e-procurement investment. According to Forrester Research, the cost of a traditional procurement transaction or a purchase order can vary from $50 to $250 per transaction. Many companies rushed into the e-procurement arena with the goal of reducing transaction costs as the primary justification. Companies targeted the “low hanging fruit” or the indirect materials that often account for 80% of the procurement department’s resources but account for only 20% of the total spend. The “fruit” was usually non-critical, turn and burn, or MRO materials. E-procurement seemed like an easy win for the procurement department. Much of the initial software and technology mimicked the standard Internet buy experience such as at Amazon.com. Ease of use and straightforward steps to check out strongly suggested a smooth path to high volumes of transactions. For many companies “they have built it… but the transactions have not come.”
This article is an attempt to briefly identify the top mistakes made in e-procurement software and how you overcome these common mistakes.
Procurement is first and foremost the managing and enrichment of relationships. These relationships are broad, multi-dimensional and critical to the success of an enterprise. E-procurement still needs to significantly evolve to become the primary tool to improve these complex relationships. Transaction reductions, shopping convenience, on line auctions, pricing breaks, electronic transactions etc. are just examples of solutions that mislead companies that go down the e-procurement path with excessive great expectations. Companies that do not have existing good solid relationships and communication with suppliers, internal departments and customers cannot take full advantage of existing e-procurement tools. Eventually e-procurement will fulfil its great promise and help companies achieve true collaboration and better relationships with suppliers and customers. Until then, avoiding these top mistakes will keep companies on track towards true supply chain collaboration.
These are the most common mistakes in implementing e-procurement software. These critical mistakes are:
- Not creating a comprehensive procurement strategy first or a plan that aligns with an e-business strategy and an e-procurement strategy.
- Putting the e- before procurement. Technology and e-procurement won’t fix current unsound procurement practices. Workflows and approvals must be clear.
- Not performing comprehensive strategic supplier sourcing first and failure to prepare suppliers for e-procurement.
- Not properly identifying materials-services groups and the proper e-procurement tool(s) to use for these groups. Not assessing supplier capabilities, which include readiness for e-procurement software and compatibility.
- Underestimating resistance to change and the primary need for ease of use for end-users. A strong component in this area is the content (catalogue) quality and the transaction details.
- Not investing in thorough and diverse software training.
- Not enforcing the use of the software system and allowing maverick buying.
- Not having a comprehensive marketing plan for rollout of the software.
- Cutting corners on modules or a partial installation
- Not seriously simplifying all procurement processes before installation of the software. Nor documenting the current processes thoroughly.
- Not seriously reducing (rationalizing) the number of suppliers before installation. Not standardizing payment terms.
- Not reviewing procurement headcount impact of the software.
Mistake 1: Not creating a comprehensive procurement strategy first or a plan that aligns with an e-business strategy and e-procurement strategy.
The Institute for Supply Management (ISM) notes that 95% of procurement organizations do not have a procurement strategy or long-term plan. Of the 5% that do have a strategy, only half have successfully aligned the strategy with overall business strategy. Most purchasing departments are continually embroiled in tactics and transactions. Much of their energy is distracted to the intensive transactions (80% of the work) low dollar volume (20% of the dollars) aspects of the supply chain. E-Procurement is a critical aspect of e-business and must be incorporated into any e-business strategy. You need to first focus on a procurement strategy. How does it fit into the organization’s mission and vision?
Mistake 2: Putting the e- before procurement. Technology and e-procurement won’t fix current unsound procurement practices.
A Company must focus on its current business or procurement practices first. For many companies these still remain very archaic and transaction intensive. The process of the reengineering or leaning of purchasing is an excellent first step in achieving the full benefits of e-procurement. This is where a comprehensive current procurement assessment is mandatory. (The “as is” state). You can do a gap analysis and install standardized purchasing processes and rules that are the essential preceding steps. Procurement procedures should be clearly defined along with current supplier relationship depth. If your organization has ISO9000 or standard operating procedures this is very helpful. E-procurement is a powerful tool but a disciplined procurement approach should be in place before e-procurement solutions are implemented. The procurement must come before the e. Unfortunately, many organizations do not have good information on procurement spend, transactions, commodities and suppliers, which makes a current state assessment extremely difficult.
Mistake 3: Not performing strategic supplier sourcing first and the failure to prepare suppliers for e-procurement
Strategic sourcing is a disciplined process organizations implement in order to more efficiently purchase goods and services from suppliers. The goal is to reduce total acquisition cost while improving value. Forrester reports that 40% of the total reduction in costs is associated with technology while the other 60% are associated with strategic sourcing techniques. Here are four key points to jump start strategic sourcing:
- Understand the state of current spending.
- Prepare a sourcing strategy for particular commodities and tie the strategy into business and e-business strategy.
- Evaluate the current competencies of your sources of supply and how to extract value from these sources
- Decide what’s important for you in your sourcing strategy and how it relates to selecting your technology solution.
- Have a standard sourcing methodology.
Mistake 4: Not properly identifying materials-services groups and the proper e-procurement tool to use for these groups. Not assessing supplier capabilities, which include readiness for e-procurement.
The need to classify materials and services into particular categories is essential for the success of e-procurement software. Each material group may require not only a different procurement strategy but also a different e-procurement software solution. Companies often try to apply the same e-procurement strategy across the board to all materials and services. These categories demand different strategies, different types of suppliers and relationships along with the use of multiple tools. Currently e-enabled tools do not exist for certain specific materials needs. They are however rapidly evolving.
The placement of a certain materials or services into a particular group may vary by company, industry or a number of factors depending on the criteria. The key is to have and articulate a strategy by group and to utilise the appropriate tool.
|Leverage Materials Strategy: Price leverage Use competitive bids Long term market agreements Possible Tools: On Line Auctions E-RFQ Hedging||Strategic Materials Strategy: Alliances Long term relationships Alliance contracts Possible Tools: Partnering Collaborative Design E-sourcing software|
|Non-critical Materials (MRO) Strategy: Consolidation Improve logistical costs Reduce administrative costs Possible Tools: E-procurement software Exchanges-marketplaces Outsourcing Storerooms||Bottleneck Materials Strategy: Minimize risk Replacement or redesign Minimize risk of supply Possible Tools: Value Engineering Shared higher inventory Product re-design Collaborative design|
Mistake 5: Underestimating resistance to change and the need for ease of use for end-users. A strong component in this area is content (catalogue) quality and the transaction details.
End-users (internal buyers) demand ease of use and they want to quickly find the items that they need. Companies need to realise that e-procurement is competing with the easiest method to buy in the minds of their end-users. Many end-users would rather pick up a phone, tell their supplier what items they want, charge it to a corporate purchase card and hang up. Unfortunately in many companies this method is still faster than using the current e-procurement software. Any impediments to the fast purchase of materials will quickly turn off end-users and kill transaction volumes. Speed is king in the world of e-procurement. End-users also want powerful search engines to quickly find their items. If the content supplier catalogue is poorly organised and the quality poor, end-users will quickly be frustrated by unfruitful searches and become non-users of the e-procurement system. The software also needs to be seamlessly integrated to mobile apps with a familiar interface. In addition special instructions that need to be given to suppliers about delivery or other issues can’t easily be given with some e-procurement tools or require additional end-user training which raises the frustration levels.
Finally there is the relationship factor with new suppliers. Often new suppliers are installed for indirect materials solely because they seem to have more e-procurement capabilities. End-users value relationships with suppliers that they have trusted over the years. E-procurement is highly impersonal and web based.
Resistance to change for an e-procurement system is fierce but can be readily overcomes with strong commitment to change management. This change management process must be an integral part of any e-procurement installation.
Never underestimate the role resistance to change plays in this transformation.
There are three sayings to be aware of when e-procurement is implemented:
- Sound procurement practices must be in place first.
- Resistance to change is fierce and needs top management attention.
- Indomitable spirit which means never giving up helps.