E-procurement: The Future of Purchasing.

As many Fortune 500 corporations have already implemented electronic procurement (e-procurement) systems to manage their purchasing, more printed circuit board (PCB) manufacturers will also soon begin using this new technology. E-procurement offers many benefits to PCB manufacturers and engineers. For example, industry analysts have stated that one manual purchase order can cost a company as much as $150 to process, even if the purchase order was issued to buy a $25 part. E-procurement can drastically reduce these high costs and, more importantly, it can keep engineers and technical staff doing what they do best, designing and inventing the products of the future, not filling out purchase orders and ordering parts over the phone.

What Are E-procurement Systems?

If an e-commerce-enabled Web site is like a grocery store open to anybody with a full selection of products, then an e-procurement system is like a private store in your company. It is only open to your employees and only carries products that your company buys. It also offers the best prices that you have been able to negotiate with your preferred suppliers.

With e-procurement, the time needed to issue a manual purchase order, place the order and follow-up with a vendor can be reduced to a few simple points and clicks. In some cases, an order can be received the same day it was placed.

Many leading original equipment manufacturers (OEMs) use systems from the key players in the e-procurement industry like Ariba(r) and Commerce One(r), who started out with their sole product focus on the business-to-business procurement area. Several large enterprise resource planning (ERP) companies have also entered the e-procurement software business, including SAP, i2 and Oracle. Although these systems can offer companies substantial cost savings, they also can carry million-dollar price tags, which is why major corporations are the first to implement them.

Why Use E-procurement Systems?

For most companies in the PCB industry, the procurement process consists of several steps, including selecting product, finding the right vendor, negotiating price, getting approvals, ordering product, receiving product and paying the invoice. The time, labor and resources associated with this process cost companies millions of dollars each year. Errors or delays in shipment add to the procurement costs, slow down the design process and leave design engineers waiting for products they need to complete their jobs on schedule. Accordingly, procurement professionals are under tremendous pressure to eliminate errors and reduce these costs.

E-procurement systems can improve the purchasing process in several ways. First, they eliminate paperwork by generating electronic purchase orders and routing them instantaneously to the correct person for approval and execution. This capability increases the purchasing staff's productivity. Second, e-procurement systems compel end users to purchase from preferred vendors with whom the company has negotiated contracts. Finally, e-procurement systems allow management to track spending with individual suppliers and product categories, giving visibility to problem areas. Because a billion-dollar corporation can potentially save tens of millions of dollars, many companies are rushing to implement e-procurement systems.

E-procurement systems typically work as follows (Figure 1):

-Online catalogs from key suppliers are loaded on to the e-procurement system. Typically, these hosted catalogs contain the most commonly ordered parts.

- Employees can access the system from their desktops to browse catalogs and place orders. If the correct item cannot be found in the hosted catalog, users can use "punch-out" technology to go to the supplier's Web site for selection.

-Orders are routed electronically through the approval chain, similar to email, and then are transmitted electronically via XML to suppliers. XML is a markup language for documents containing structured information.

- Suppliers process the order immediately without human intervention.

These new automated processes have already displayed several benefits to many companies including reduced cost of purchasing, reduced "maverick" buying and better reporting on spend. While purchasing over a supplier's Web site may offer some efficiencies such as faster purchasing, it does not offer the benefits of corporate e-procurement.

What Is the Supplier's Role?

Suppliers and distributors face many challenges while supporting customers moving to e-procurement. Purchasing managers have favorite sales representatives, who offer them information about how to select and service their goods. The challenge is duplicating this information in an online catalog. Suppliers must find a way to capture, manage and deliver the content according to the e-procurement vendor's specifications along with the individual customer's designated commodities and contract pricing.

An added challenge includes taking raw data that resides in internal back-end systems and creating clean, searchable product descriptions, product attributes, units of measure and product names. Also, multiple coding classifications such as the United Nations Standard Products and Services Code (UNSPSC) or Requisite Unified Structure (RUS) must be supported to permit drill downs and internal commodity tracking.

While the information that a sales representative can provide is vital, even the best sales rep cannot provide 24-hour, real-time access to order submission and tracking, inventory availability and pricing updates, elements critical to an electronic procurement system. Purchasers want to know, for example, whether the 50 cases of a product have actually been shipped. Suppliers need to support real-time access to this product data via the XML standard. And, while XML may be the basic standard, each vendor has its own nuances for the same transactions.

In the end, many buying decisions are not based on product price, but on factors that add more value. In this case, the supplier that supports e-procurement may win out over the supplier with the lowest prices. Companies are looking to suppliers who have invested in the technology, so they can realize returns on their investments in e-procurement as soon as possible.

Successful implementation of e-procurement requires an investment from both buyer and seller. Because many e-procurement benefits come from limited partnerships with a few suppliers, those companies who make this investment to help their customers save money will be rewarded with loyal customers and long-term partnerships.

What Has Slowed Adoption?

Although companies have been using e-procurement for the last three years, buyers and suppliers have been slow to fully embrace these systems. While many view e-procurement as new technology, it really is a complete transformation of business processes.

Many companies mistakenly select the technology first and then try to adjust their processes to fit the product. If using the system internally is not mandated, buyers will typically call their favorite supplier, whether under contract or not.

Many suppliers have been slow to adopt e-procurement due to a fear of commoditization, insufficient catalog data and an unwillingness to invest in high technology. The XML standard is also in flux, with each vendor using its own version of XML.

What Does the Future Hold?

E-procurement is in a very early stage, and the industry is undergoing a lot of change. Many companies are still struggling to implement electronic data interchange (EDI) with their tier-one suppliers. A few years from now, we may be able to move beyond that, as XML becomes the standard for trading business documents and connecting to business partners.

The focus on cost savings is the driving force of e-procurement. With the need to show return on investment, senior management will begin to mandate e-procurement usage to drive costs down. As use becomes widespread and business processes change, the demand for data will increase.

The demand for automation will also increase. While much of today's e-procurement focuses on known or commonly ordered items, buyers will begin to look for automated ways to find and buy new products. Customers that today order a known part through e-procurement by looking at the part number, a brief description and price will need access to better data and improved search capabilities. Today's part number and price will expand to include detailed descriptions, attributes, online data sheets, technical specs and even pictures. Customers that currently browse through paper catalogs will want to browse through online catalogs with the same information available.

The globalization of purchasing is another factor in the future of e-procurement. A significant number of North American companies' revenues come from overseas, and these companies are well aware of the strategic importance of global sourcing and procurement. As many suppliers of materials used by the PCB industry are based in Asia, PCB manufacturers need to source globally and experience the cost effectiveness of buying nearby.

Along with the benefits that suppliers and buyers can see in faster times to markets, many challenges also exist. Global suppliers participating in e-procurement must adapt to issues like language and currency conversions, order processing, and the tariffs, customs and logistics of handling global orders.

As PCB manufacturers adopt more efficient purchasing practices to increase their profits and productivity, e-procurement will become an even more attractive solution. However, PCB manufacturers, whether they have e-procurement systems in place yet or not, should be proactive and establish partnerships with e-procurement-enabled suppliers now. Established relationships with these suppliers will give PCB manufacturers a competitive advantage when they move to e-procurement systems.

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Tony Chien is vice president and general manager, electronic commerce, and Dianne Ahrens is director of business development and Internet partnerships, both with Newark Electronics, Chicago, IL; e-mail: [e-mail].

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Automatic Quoting System Saves Time and Money

Effectively sourcing products for a PCB stockroom is a difficult and time-consuming job. Sourcing costs often exceed product costs and can really add up when managing hundreds, or even thousands, of items in non-production inventory.

Many stockroom managers in the PCB industry are now turning to suppliers who can produce detailed stock quotes for their entire stockrooms. However, producing a detailed quote is not an easy task for the supplier. The turnaround time for a large quote is also a challenge for the inventory manager who needs a quick response to help design projects move forward and keep the maintenance department up and running.

Additionally, the need among PCB engineers for hard-to-find parts can consume valuable time and increase the cost of the quoting process. As a result, many suppliers now charge customers to source products.

As the time spent finding and quoting uncommon items increases, customer and supplier costs rise dramatically. A single step to quote all the products in a stockroom is by far the most cost-effective way to source current and future product needs.

In addition to getting a quote quickly, stockroom managers have many other issues to consider, such as lead times, pricing and minimum order requirements. For example, if a part is quoted at $25 each, but the quote fails to specify a minimum purchase quantity of 100, the stockroom manager may not realize that his company is paying a much higher price for small quantities. Such over-looked quote details can add up quickly and significantly affect a company's bottom line (see chart).

Some suppliers have taken steps to simplify the quoting process for their customers as a way of providing additional value. For example, a supplier could establish a program for qualified customers that provides quotes in 24 to 48 hours for any number of products. The quotes could be returned on paper or electronically and should include prices, lead times, minimum order requirements and substitutions.

Another recommended feature of this program should be an inventory management software tool that monitors stock levels and notifies the stockroom manager when inventory reaches a predetermined reorder point.

These types of technology-based systems can help stockroom managers in the PCB industry get quotes faster, manage inventory better, and monitor pricing and supply issues more effectively.

-Steve Hopkins, assistant vice president, value-added services, Newark Electronics; e-mail: [e-mail].

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