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91
C H A P T E R 7
E-procurement
Table of contents
Learning outcomes 91
Management issues 91
Chapter at a glance 92
Learning outcomes
After reading this chapter the reader should be able to:
Identify the benefits and risks of e-procurement
Management issues
Managers will be concerned with the following e-procurement issues:
What benefits and risks are associated with e-procurement?
Which method(s) of e-procurement should we adopt?
What organisational and technical issues are involved in introducing e-procurement?
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Chapter at a glance
Main topics
What is e-procurement?
Drivers of e-procurement
Focus on
Estimating e-procurement costs
B2B marketplaces
Case studies
7.1 Cambridge Consultants reduce costs through e-procurement
7.2 Covisint a typical history of a B2B marketplace?
Suggested teaching and learning approaches
Purchasing and procurement are topics that tend to be poorly represented in generic
undergraduate and some postgraduate business courses. Given this, this chapter takes the
Approach:
1. What is e-procurement?
2. Benefits
These, and the need for re-engineering, are illustrated well by Activity 7.1 which uses flow-
process analysis and is a good seminar activity.
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Activity 7.2 is also useful for showing how the benefits are calculated.
3. Risks
Risks associated with marketplace are a major issue for e-procurement since they enable
Case studies
Case study 7.1 Cambridge Consultants reduces costs through e-
procurement
Questions
1. Given the scale of the purchasing operation at Cambridge Consultants, what benefits
do you think e-procurement has brought?
The large number of suppliers (4000) and range of items (needed for over 120 projects) mean
that many purchases are made annually. If it is possible to reduce the cost of each one, then
2. Why are procurement costs currently as high as £60 to £100 per order?
3. How are procurement costs reduced through e-procurement?
4. What staff benefits accrue to Cambridge Consultants as a result of e-procurement?
The benefits to the internal customers at Cambridge Consultants include ordering whenever
Case study 7.2 Covisint a typical history of a B2B marketplace?
Questions
By reviewing the case study and examples of the different supplier portals available on
Covisint (www.covisint.com), explain why Covisint has prospered as a supplier of e-
procurement portals and business document data exchange rather than as a neutral
marketplace.
Chaffey, Digital Business and E-Commerce Management, 6th edition,
Instructors Manual on the Web
The backing of several major manufacturers willing to try out a new approach initially provided
Questions for debate
Debate 7.1 E-procurement cost savings
The cost-saving benefits of e-procurement are theoretical rather than actual since only
reduced headcount in procurement can result in savings.
Summary of arguments for:
E-procurement often does not lead to reduction in headcount.
Summary of arguments against:
Debate 7.2 The future for independent B2B marketplaces
There is no future for independent B2B marketplaces, exchanges or hubs; instead those
sponsored by buyers in the industry (for example, Covisint in the car industry) will be
dominant.
Summary of arguments for:
Success of exchanges such as Covisint and other non-neutral exchanges.
Failure rates of exchanges see those quoted in articles in chapters. Start-ups are more
Summary of arguments against:
Many industries do have hubs created by new players.
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Exercises
Self-assessment questions
1. Outline the two main methods by which companies purchase supplies and the two
broad divisions of supplies needed.
There are two broad categories of procurement; those that relate to manufacturing of products
2. Taking your answer from 1, give examples of B2B exchanges that have been created
to meet these purchasing needs.
Production-related procurement examples include Vertical Net (www.vertical.net), sites such as
3. Draw a sketch that shows the main stages and people involved in traditional and e-
procurement.
4. Outline the main reasons for e-procurement.
Cost reduction
5. What is maverick purchasing? What safeguards need to be introduced into e-
procurement to avoid this?
6. Explain the differences between the buy-side, sell-side and marketplace options for
e-procurement.
Buy-side Buyer invites bids through tender placed on its own site.
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7. Outline the benefits and disadvantages of each of the options in Question 6.
Buy-side Only suits really large buyers, but displaces work to suppliers. Key suppliers
8. What are the organisational implications of introducing e-procurement?
Less staff time involved with procurement requires making staff redundant or re-skilling.
Essay and discussion questions
1. Chris Miller of Shell Chemical has been quoted as saying:
Discuss this statement through reviewing the benefits and disadvantages of e-
procurement to both buyers and suppliers.
This statement highlights both the advantages (cost reduction and increasing process efficiency)
and the disadvantages (seen as reducing the margin for suppliers). A suitable answer for this
question is:
a. Define e-procurement.
b. Review advantages. Useful approach is: E-procurement should be directed at improving
performance for each of the five rights of purchasing (Baily et al., 1994) which are
sourcing items:
1. At the right price
3. Of the right quality
5. From the right source.
Should illustrate these advantages, particularly time and cost by case studies.
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c. Review disadvantages.
Cause pressure on relationships with suppliers.
d. Discuss current adoption of e-procurement using sources such as Conspectus
(www.conspectus.com) or DTI data from benchmarking study. Conclude by looking at how
the advantages and disadvantages will balance out for future adoption. What will need to
change for wider adoption?
2. For an industry sector of your choice review the current alternative options for, and
business adoption of B2B marketplaces available to, purchasing and IS professionals
and attempt to forecast the situation in five years.
Examples that could be chosen and referred to in the text:
Covisint in motor industry (Ford, DaimlerChrysler and GM). Here former exchanges
WorldWide Retail Exchange (Kingfisher, Kmart, Marks and Spencer).
An answer to this question should:
Introduce the characteristic nature of procurement in this industry.
List neutral and company-backed exchanges currently available, and contrast with use of
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3. Critically assess the claims made for cost savings and increased profitability
available from e-procurement.
To answer this question, students could assess the assumptions of savings made through
analysis such as Activity 7.1 on p. 302 and Activity 7.2 on p. 309. How many of these are valid?
4. Analyse the procurement process for an organisation with which you are familiar.
Explain the changes and possible problems involved with introducing e-
procurement.
5. Fully automated end-to-end procurement is not practical. Discuss.
This question addresses practical barriers to e-procurement. The section on Implementation
e-procurement covers many of the issues. Cases and industry data from analysts can be used
to show that end-to-end procurement is rare. An answer to this question can start by illustrating
the procurement process using Figure 7.1 on p. 299 and the range of applications used
(Figure 7.3, p. 311). Difficulties that should be referred to are:
Range of applications that need to be integrated often from different vendors (Figure 7.3)
Examination questions
1. Draw a diagram explaining four types of B2B exchanges that are dependent on the
type of purchasing and what is purchased. Give one example of a product that could
be purchased at each and the name of an exchange offering this service.
Should refer to Table 7.7, p. 319. Examples shown on table.
2. Describe the different elements of an e-procurement system.
See Figure 7.1, p. 299
a. Originator request and selection (integration with catalogue systems)
b. Manager authorisation
Chaffey, Digital Business and E-Commerce Management, 6th edition,
Instructors Manual on the Web
3. Draw a diagram that summarises the main differences in processes within an
organisation for traditional procurement and e-procurement.
4. Outline the main benefits of e-procurement.
Lower costs flexibility of source
Shorter cycle time
5. Explain the differences between buy-side and sell-side e-procurement. Give an
advantage for each type for the purchasing company.
6. Current adoption levels of e-procurement are low. Identify the main reasons for this.
There is conservatism within purchasing departments, perhaps to avoid redundancies or
redeployment.
7. Explain how cost savings may arise from e-procurement.
More competition between suppliers, for example, at exchanges.
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8. Why do some commentators suggest real cost savings from e-procurement may be
nearer to 10% than higher figures suggested by e-procurement solutions providers?
Activity answers
Activity 7.1 Evaluating the benefits of the e-procurement process for a
typical B2B Company
1. Identify inefficiencies in the traditional procurement process (Table 7.1).
It is evident that the major delays are introduced through the transport of material (this may
2. Identify process benefits to Table 7.1 that would be possible through the automation of
a system through an email-based workflow system.
3. Summarise why the e-procurement process in Table 7.2 is more efficient.
The real benefits of applying technology accrue through changing the process. In Table 7.2 the
Activity 7.2 Modelling cost savings and profitability arising from e-
procurement
Imagine you are a procurement manager, IS manager or consultant who needs to demonstrate
the cost savings of e-procurement to a senior management team in order to obtain approval
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1. Cost-saving calculations. Using the input parameters for the two companies in Table 7.4,
develop a spreadsheet model to calculate traditional overall purchasing cost, new overall
purchasing cost, percentage change in cost per order and percentage change in overall
purchasing cost.
Table below shows that much greater savings are possible where there is combination of a large
number of orders and low order value.
Answers for cost-saving calculations for two companies A and B.
Input parameters (Company A) Input parameters (Company B)
Number of orders 25,000 Number of orders 2,500
Traditional cost per order (average) £50 Traditional cost per order (average) £50
2. Profitability calculations. Using input parameters of turnover, traditional purchasing costs,
other costs and a 5% reduction in purchasing costs as shown in Table 7.5, develop a model
that calculates the profitability before and after introduction of e-procurement and also
shows the change in profitability as an absolute (£) and as a percentage.
Table below shows that change in profitability is much greater for a company such as
Company X where purchasing costs are a higher proportion of overall costs. Company X is more
Input parameters for profitability calculations for two companies X and Y.
Input parameters (Company X) Input parameters (Company Y)
£10,000,000
Turnover
£10,000,000
Traditional purchasing costs £5,000,000 Traditional purchasing costs
£1,000,000
Other costs
£4,000,000 Other costs
£8,000,000
% Reduction in purchasing costs
20%
% Reduction in purchasing costs
20%
Before After Before After
Turnover £10,000,000 £10,000,000 Turnover £10,000,000 £10,000,000
3. Analyse the sensitivity of the models to differences in volume of orders and values of
purchases (Table 7.4) and the balance between traditional purchasing costs and other costs
such as salaries and capital by using the parameters (Table 7.5). Explain to the managers
Chaffey, Digital Business and E-Commerce Management, 6th edition,
Instructors Manual on the Web
Combining the answers from Question 1 and Question 2, the greatest benefits will be
achieved by a company with:
Large volume of orders
Typically low value purchases
Activity 7.3 Avoiding maverick purchasing
To avoid maverick purchasing, businesses introducing e-procurement need to put safeguards
into the e-procurement system. Think about the type of rules that could be written into an e-
procurement system.
You may have identified the following:
Overall limits on purchasing for each individual over a time period (e.g. spend limit/month)
