Spending Money to Make Money.

At cutting-edge companies around the world, the image of purchasing as a mere corporate "spender" soon will go the way of the typewriter. Electronic procurement is opening the door for purchasing organizations to slash time and expense and focus on strategies that add value.

In fact, data show that implementing e-procurement will save the typical $1-billion company 2 percent or more in purchase costs, and represents a $100-million increase in shareholder value. Companies that cling to more conventional procurement methods never will realize these benefits.

The traditional purchasing organization has become stagnant due to an inability and unwillingness by staff and management to implement new technology. Procurement cost as a percentage of total cost has dropped less than 5 percent since 1996, primarily a result of poor staff utilization. On average, procurement employees spend three-fourths of the workday on basic operational support, and less than 15 percent on strategic, decision-support activities -- a surprising drop from 1996.

Complicating matters, the average company currently has 25 different procurement systems per billion dollars of purchased costs. These Enterprise Resource Planning (ERP) systems -- some as old as six years -- typically are highly customized, complex and poorly integrated with the enterprise's other systems. Even worse, ERP systems normally are capable only of point-to-point communication; for every transaction, data must be entered and routed separately every step of the way.

The Internet holds the promise of reversing these trends. Now procurement -- once strictly an operational issue -- has the potential to become a key strategic initiative. Companies that seize the opportunities e-procurement provides will consistently have an advantage over their competition.

E-procurement creates a virtual "town square" where entry and the exchange of information are easy. Unlike ERP, information provided in e-procurement transactions is accessible to all involved parties, both internal and external. This easy access, combined with the universal language of the Internet, erases the tedious and redundant process of translation and repeat data input.

Expanded Horizons

But eliminating needless paper shuffling isn't e-procurement's only benefit. It also lets companies be more discriminating in choosing suppliers. Before vendors held the power in trading relationships.

Reviewing proposals and price sheets, then mulling over innumerable potential suppliers, has been too costly and time-consuming to permit expanded supplier searches. That's why so many organizations rely on a set of regular vendors.

Today, through "reverse bidding" in online trading communities, a purchasing organization can readily and easily comparison shop. Trading communities let procurement professionals post their needs for specific products -- then let potential suppliers place bids. For example, say a company needs to buy 1,000 widgets. The procurement manager posts this information on a trading site, with the provision that in four hours, the supplier with the best offer will "win" the order. During that time, interested suppliers bid against each other. At the end of the period, the purchasing manager goes back online, finds the best deal and secures the purchase. This process eventually will make pricing differences in many commodities disappear, forcing suppliers to differentiate themselves through value-added services to attract and retain customers. It also will free the procurement department to focus on higher-value activities.

Ironically, e-procurement adds value through purchasing non-strategic goods. The procurement of non-production MRO items is an enormous undertaking. Of course, the time, money and effort spent on procuring MRO items does little to add value to the organization's overall goals. Procurement of these items is, however, vital to any company's existence. Developing a strategy to acquire MRO items electronically is a logical first step for organizations to realize the efficiencies of e-procurement.

Red to Black

Still, one question remains: How does procurement evolve from cost-center to profit-driver? Answer: The Internet enables bundled ordering, a primary value-adding strategy in which a company invites customers to group individual orders into one larger order. Since costs decrease as volume increases, the procurement department can save its customers a lot of money -- particularly if they don't typically buy in bulk -- and charge them a small transaction fee for the service. Not only does the organization lower costs by ordering greater quantities, it profits from transaction fees and builds goodwill by creating bargains for its customers. Done correctly, this practice actually could create bottom-line profits.

As the web changes the face of business, it's critical for e-procurement to keep pace. Companies must realize that e-procurement is more than a matter of cost saving and strategy. It's a matter of survival.

Mark Krueger is a managing director at Answer-Think and leader of its demand fulfillment practice. All the above statistics are from the ongoing procurement benchmark conducted by Hackett Benchmarking & Research.