Requisition and purchase order systems
A purchase order system (PO system) automates and streamlines the procurement process, from initial requisition to final invoice approval. These systems offer functionality such as automatically creating POs from other transactions, administering the approval process with electronic signatures, matching invoices for approval, and transferring approved invoices to accounts payable systems. The detailed data available from PO systems, such as item level, order quantities and price, are useful for spend analysis and category management. In addition, some of these systems offer modules for managing requests for quotes that allow selected supplier bids to be automatically converted into purchase orders.
This technology refers to electronic request for “x.” The “x” generally refers to information (e-RFI), proposal (e-RFP), quote (e-RFQ) or tender. This type of tool can offer a variety of functionality beyond providing a forum for soliciting information. E-RFx tools can streamline the process by offering:
Proposal templates that leverage information, questions and standards from previously completed sourcing efforts.
Automated response compilation and analysis with user-stipulated criteria and weightings.
Messaging systems and communication boards.
Access to supplier login and response status.
Ability for respondents to share completion responsibility across multiple resources.
There is sufficient competition in the market (at least three to five suppliers with comparable cost structures).
A reverse auction refers to a fixed duration bidding event hosted by a single buyer, in which multiple prequalified and invited suppliers compete for business (ISM Glossary 6th edition). Potential suppliers review the requirements, choose to bid, and enter their selling prices. Suppliers’ prices are visible to competitors, often resulting in successively lower bids. This type of auction is logically referred to as “reverse” because multiple sellers are driving the price down for a single buyer. This is unlike a traditional auction where multiple buyers are bidding the price up for a single seller. Auctions are generally used for goods or services that meet the following criteria:
Specifications are defined, clear and easy to communicate.
Switching suppliers is realistic. Switching costs and current contract arrangements should be considered.
Quotes received will be technically and economically comparable.
Goods or services, and the associated incumbent suppliers, are not highly strategic to the business.
Market baskets can be used to streamline subcategories with more than 25 SKUs.
Expected savings are higher than the cost of hosting the auction.
Online reverse auctions have historically been used for sourcing tangible goods primarily due to the standardized nature of goods. Services, on the other hand, tend to be specialized or technical; pricing tends to be driven by multiple and complex cost elements, which can be difficult to quantify. Goods are typically tied to specific SKUs, model numbers or part numbers, or described by using detailed descriptions and/or specifications. Services, though, are more difficult to quantify and supplier selection is largely subjective. Services that are less complex, such as janitorial, temporary/contingent labor, landscaping, security and administrative services, should be considered for reverse auctions because the cost elements can be identified and quantified.
Reverse auctions can be used to source more complex services provided there is internal alignment with stakeholders, and a clear statement of work (SOW) can be written to define the organization’s service requirements. Creating the SOW with the key stakeholders ensures that all requirements are captured and accurately described. The SOW functions much like the detailed definitions and specifications used to describe goods. It is common to use lotting strategies to bid multiple services in a single package with prospective suppliers.
When done correctly, using a reverse auction to identify suppliers for either goods or services yields the following benefits:
Price transparency — Suppliers have knowledge of price levels with results in competitive price movement.
Price validation — Supply management sees “real-time” price movement. Price changes are immediate as suppliers react to new price quotes. New pricing information provides supply management with current information to use to determine which products and services are competitively priced. Suppliers can instantly change pricing at their discretion during an auction event in response to market competition.
Increased productivity and reduced bid cycle time — Traditional price negotiations between supplier and buyer, like face-to-face negotiations, typically require two to six months and traditional competitive bidding can also be time consuming. Online negotiations are usually two to three hours in length, and result in equal or greater levels of success.
Expand bidders’/suppliers’ participation — The online aspect of reverse auctions enables suppliers from anywhere in the world to participate in the bidding event, increasing competition.
Real-time supplier evaluation — Supplier evaluation and analysis can be done during the online negotiation event, as all supplier responses are evaluated electronically at the same time.
Price compression — The price gap between highest-priced suppliers and lowest-price suppliers narrows during an auction, as suppliers compete against each other providing more options for supplier selection and cost containment.
E-design Sourcing Tools
Collaborative e-design technology enables the sharing of product designs between manufacturers and suppliers. This type of technology generally includes functionality to share documents in a collaborative environment so the documents can be viewed, analyzed, marked up and then easily shared with other resources. To support strategic sourcing, e-design technology generally enables users to package various types of documents that are shared with suppliers for quotation. This ensures that suppliers have adequate information to provide an accurate bid and can even allow for suppliers to provide specification alterations to meet price or quality targets.
Contract management tools generally include tools to support contract creation, contract management and contract storage. The contract piece incorporates standard contract templates with standard terms and contract authoring with collaboration functionality. The contract management aspect includes approval of workflows and controls along with automated management reporting. The contract storage is a central repository that allows access to past and current contracts. To be effective, contract management tools need to be implemented jointly by both legal and supply management.
Several of the benefits include the following:
Increased visibility, consistency, controls and compliance related to contracts.
Reduced total contract development and signoff cycle time.
Reallocation of resources toward higher value-add activities.
Increased ability to monitor pricing, rebates and discounts to drive savings.
Automated notices of contract expirations and other milestones to assist in ongoing management.
There are many free, or for a fee, online resources for supply management. These include reverse auctions, web-enabled sourcing applications, and social media applications. There are many opportunities for gathering market intelligence, sharing information with suppliers, and obtaining proposals and quotations on a timely basis using online resources.
Collaborative means working together, and optimization means getting the best possible results. Thus, collaborative optimization tools allow buyers to work with suppliers in real time to share information in both directions on volume needs, timing, production plans, specifications, and related issues, so the supplier can also plan ahead and improve its own processes.
Cooperative purchasing groups have created online shopping portals for their members. Buying networks allow members to pool their purchasing volumes to receive lower prices than the individual organizations could obtain from suppliers. These buying networks often target a specific industry segment such as healthcare, agriculture or education, where there are many small organizations.
Software solutions allow buying organizations to gather and analyze data on potential suppliers. The data can range from financial information, risk assessment, business news, and sustainability. Solutions also allow for online supplier surveys in which the data can be gathered and analyzed. These software solutions can reduce the time and effort required to perform supplier evaluations while increasing the amount of data that can be considered.
IT applications are used extensively in sourcing, and in most Organizations the entire sourcing cycle process flow is digital. Most firms have adopted eRFx — “x” refers to information (eRFI), proposal (eRFP), or quote (eRFQ). These tools streamline the solicitation process and reduce errors by providing:
- Proposal templates that leverage information, questions, and standards from previously completed sourcing efforts.
- Automated response compilation and analysis with user-stipulated criteria and weightings.
- Messaging systems and communication boards.
- Access to supplier login and response status.
The ability for respondents to share completion responsibility across multiple resources.
An electronic method for obtaining competitive bids in common use today is a reverse auction. A reverse auction is “a fixed-duration bidding event hosted by a single buying organization, in which multiple prequalified and invited suppliers compete for business. Potential suppliers review the requirements, choose to bid, and enter their selling prices. Suppliers’ prices are often visible to competitors, typically resulting in successively lower prices” (ISM Glossary 6th edition). In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service; this is similar to eBay bidding. In a reverse auction, sellers compete to obtain business. Reverse auctions are generally used when:
- There is sufficient competition in the market (at least three to five suppliers with comparable cost structures).
- Specifications are defined, clear, and easy to communicate.
- Switching suppliers is realistic; switching costs and current contract arrangements should be considered.
- Quotes received will be technically and economically comparable.
- Goods or services and the associated incumbent suppliers are not highly strategic to the business.
- Lotting can be used to streamline subcategories with more than 25 SKUs.
- Expected savings are higher than the cost of running the auction.
If the purchase is appropriate for a reverse auction, preparation includes recognition of need, specification of need, and the search for potential sources, as is done with any sourcing process. In addition, the event must then be set up in the e-sourcing application. If many items or services are to be bid they are combined into lots that are structured to increase cost-reduction opportunities (ISM Glossary 6th edition). Bidding rules can require suppliers to bid on all lots, permit them to bid on only some lots, or allow them to develop their own lots. The suppliers will need training if they have not used the e-sourcing tool before.
After the event, the supply manager may decide to award the contract to the supplier that bids the lowest price or offers the best combination of predetermined performance attributes. Sometimes contracts are awarded to suppliers that bid higher prices depending on the buyer’s specific needs for quality, lead time, capacity, or other value-adding capabilities. Often contracts are awarded to incumbent suppliers, even if prices are higher than the lowest bids, because the switching costs to move work to a new supplier are higher than the potential savings realized by the switch. When used in the correct sourcing situations, the following benefits can be obtained from reverse auctions:
- Lower purchase prices — Suppliers have knowledge of price levels and can instantly change pricing during an event.
- Increased productivity and reduced bid cycle time — Online events are usually two to three hours in length. The preparation before and after the event is similar to traditional competitive bidding except that additional training of suppliers may be required.
- Expand suppliers’ participation — The online aspect of reverse auctions enables suppliers from anywhere in the world to participate in the bidding event, increasing competition.
- Real-time supplier evaluation — Supplier evaluation and analysis can be done during the event, as all supplier responses are evaluated electronically at the same time.
Electronic Data Interchange (EDI)
Electronic data interchange (EDI) is the computer-to-computer exchange of business information in a standard format (ANSI X12). Transaction documents — such as purchase orders, invoices and shipping notices — are transmitted electronically and entered directly into a supplier’s (or supply management professional’s) computer or into a third-party network for processing. EDI allows data and documentation to be directly processed and acted on by the receivers. EDI is the intercorporate electronic transfer of common business forms.
Electronic Sourcing Tools
A number of e-sourcing tools are available, either through ERP systems that are configured properly or through specialist e-sourcing tool system providers. The supply management professional will need to assess what set of tools are most appropriate for the organization based on individual operating environment, current (and expected) sourcing skill sets, and overall procure-to-pay systems.25 The supply management professional must determine which tools are appropriate for the organization, given the capabilities of the people, the status of supply management processes, and the spend categories in the organization — along with the likely development of these. Key questions to ask include the following:
- Which spend categories are appropriate for electronic tools?
- What are the current and projected technical capabilities of supply management personnel?
- Are rigorous processes in place for most supply management-related activities?
Spend categories may be assessed using portfolio analysis, which is a “segmentation model originally introduced by Peter Kraljic. It is a 2×2 matrix with four spend categories (critical, acquired, strategic, or leveraged) assessed along two dimensions — the risk to acquire in the marketplace and the value or impact of the category on the organization.”26 Electronic tools are readily available to routinize and systematize the acquisition of lower-value-adding and lower-risk-to-acquire items (standard, commodity-type items), often referred to as noncritical or routine and leverage items. Electronic tools that enable collaboration at earlier stages of the process, such as design collaboration, are more appropriate for higher-value-adding and more risky items, often referred to as bottleneck and strategic items.
The supply management professional must link decisions about technology applications to the framework used to categorize and manage spend. This requires strong internal partnerships with other business process owners to ensure alignment with other processes and technology, and to allow the supply management professional to effectively manage change.
Supply management professionals may approach adoption of e-solutions with one or more complementary goals. Examples of these goals may be to 1) use e-procurement internally to improve tracking, compliance, and other internal process efficiencies; 2) use e-solutions through its supply chain for all spend to get price reductions on commodity-type items and process efficiencies on all items; and 3) pick individual tools to achieve specific goals.
Collaborative optimization builds on the traditional e-sourcing approach. It is a best-practice approach dealing with procurement in complex categories — such as logistics, packaging, and MRO — and broader supply chain challenges such as managing the inherent complexity in product portfolios and components sourcing. Collaborative optimization sourcing incorporates “expressive bidding.” Expressive bidding, trademarked by JAGGAER, enables supply management professionals and suppliers to conduct business in a flexible bidding environment, which allows suppliers to bid to their strengths and supply management professionals to analyze sourcing scenarios based on this expressive data. Expressive bidding, as part of JAGGAER’s Advanced Sourcing Optimizer, is also able to gather additional critical information from bidders such as technology advancements and upcoming regulatory changes.27 On completion of the bidding process, an algorithm integrated into the expressive bidding analytic tool calculates the maximum possible savings.
When collaborative optimization with expressive bidding is used for sourcing decisions, a supply management professional will see the difference between a scenario with constraints that may limit cost savings and one without constraints that maximizes total savings. This ensures that the supply management professional understands the impact of self-imposed constraints, such as establishing a limit on how much business the company can award to a new supplier.
The process maximizes cost-cutting potential as procurement can simply change the framework of conditions or specify certain suppliers to calculate the savings in various scenarios. For the suppliers, the process offers flexibility and the opportunity for differentiation by submitting proposals that demonstrate and leverage their unique capabilities.
Internal Process Efficiencies
Allergan, a healthcare company, recognized significant benefits from implementing an internal e-procurement system. The e-procurement manager realized that it needed a system that would be more compliant when industry regulations changed. Previously, the organization used a keycard or purchasing card system that was not sufficient to meet new industry standards and exposed the company to risk. With an e-procurement system, Allergan was able to meet the compliance standards, and send a message to suppliers and partners that it was looking to take some of the risk out of procurement.
End-to-End for All Spend.
Allergan is on the path to implementing e-procurement solutions end-to end throughout its organization and its supply chain. It has been rolling out this process, first at its Irvine, California, headquarters with its information systems (IS) staff. It then rolled through various groups at headquarters: corporate, commercial operations, R&D, and then manufacturing operations. Finally, the system was rolled out in four R&D labs, its 40 commercial locations, and six manufacturing sites.
Employees now have access to 40 online catalogs covering everything from IT to office supplies, lab supplies, and more. The system seamlessly creates requisitions as authorized. Savings have come both from consolidating spend as well as increasing compliance and visibility. Visibility creates greater opportunity for negotiation and process improvement.
In another example, at a Japanese company in the electric equipment industry, four steps were taken to transition to an automated end-to-end system. First, the existing information system was re-examined and EDI was implemented to automate supplier delivery processes (order sheets, change orders, receiving, and so on). Second, the RFQ and bid process was automated. RFQs and specifications were sent via the internet to all suppliers using a bid-support feature that displayed price, order, and delivery date. Third, the internet was used to source long-range inventory parts. Fourth, an automated settlement feature was created to reduce the number of mistakes in the settlement process and to reduce transaction costs. The largest value came from reducing lead times