Electronic purchasing:

determining the optimal roll-out strategy

Govert Heijboer and Jan Telgen
University of Twente Initiative for Purchasing Studies (UTIPS)
University of Twente
!aculty of Technology and "anage#ent ($$%building)
P&'& $o( )*+ +,-- ./ /nschede The 0etherlands
tel&1 23* ,3 4564443
fa(1 23* ,3 456)*,6
e%#ail1 g&j&heijboer7s#s&utwente&nl 8 j&telgen7s#s&utwente&nl
Abstract
/lectronic 9urchasing (/P) also :nown as electronic ordering through catalogs is the
#ost established for# of e%9rocure#ent nowadays yet still in its infancy& Theoretically
changing fro# the ;traditional; way of 9urchasing to /P can lead to huge cost savings&
However the i#9le#entation (roll%out) of /P including #any co##odity grou9s and
#any de9art#ents is a large and costly tas:& In addition not #uch e(9erience on good
roll%out strategies is available yet& This 9a9er contributes to the solution of this 9roble#
by 9resenting a #athe#atical #odel for deter#ining the o9ti#al /P roll%out strategy
into an organisation based on #a(i#isation of the cost savings& <esults fro# this #odel
suggest that the o9ti#al order of co##odity grou9s and de9art#ents for which /P is
*
i#9le#ented can contribute considerably to the 9ossible savings that can be realised and
is therefore an i#9ortant factor for a successful i#9le#entation strategy of /P&
Key words: electronic 9urchasing e%9rocure#ent i#9le#entation dyna#ic
9rogra##ing
Introduction
Since the 5-s auto#ation has found its way into the 9urchasing 9rocess& Traditionally
the o9erational 9urchasing 9rocess involves a lot of ad#inistrative re9etitive tas:s that
add little value1 9rocessing 9urchase re=uisitions 9urchase orders invoices and all sorts
of re9orts& In the 9urchasing 9rocess co#9uters were first #ainly used for data storage
and si#9le s9read sheet analyses& >ater /lectronic ?ata Interchange (/?I) e#erged
auto#ating the interchange of business transactions between buyers and su99liers and
thereby reducing the transaction costs 9er 9urchase considerably& .lthough a lot has
been written about the advantages of /?I /?I ada9tation has been li#ited until now
#ainly because of the large i#9le#entation costs of these dedicated (and therefore not
so fle(ible) networ:s (see e&g& $ergeron and <ay#ond *66+8 Segev et al *66+8 @aefer
and $endoly )---8 .ngeles )---)&
Aith the Internet and Internet related technology it has beco#e 9ossible to co##unicate
electronic data between and within co#9anies based on standard global 9rotocols& This
has o9ened u9 a wide range of o99ortunities for business in general e%co##erce and
)
for 9urchasing in 9articular e%9rocure#ent (early indications by Telgen *66+8 also see
e&g& "in and Galle *6668 "cIvor et al )---8 >ong )--*)& Aith this bac:ground the
definition of e%9rocure#ent (or electronic 9rocure#ent) by ?e $oer et al ()--*) is
a99ro9riate1 ;using Internet technology in the 9urchasing 9rocess&;
In this 9a9er we focus on the #ost established for# of e%9rocure#ent nowadays1
electronic 9urchasing (/P)& Ae define /P as1 the 9rocess of creating 9urchase
re=uisitions by an internal custo#er by #eans of an electronic catalog and using a
software syste# based on Internet technology for (a 9art of) the infor#ation flow and
verifications in the o9erational 9urchasing 9rocess& This definition of /P is based on the
definition of e%"<' by ?e $oer et al ()--*)1 ;the 9rocess of creating and a99roving
9urchasing re=uisitions 9lacing 9urchase orders and receiving goods and services
ordered by using a software syste# based on Internet technology for "<'
("aintenance <e9air and '9erations) su99lies&; This 9a9er ai#s to address all
9urchases hence the restriction to "<' is left out& 'ther co##on ter#s for /P with
si#ilar definitions are1 e%catalogs (Pad#anabhan )--*) electronic catalog syste#s
(Harin: *666) Internet%/?I (.ngeles )---) and web%based 9rocure#ent (Broo#
)---)&
/P offers an o99ortunity to strea#line ad#inistrative routines in o9erational 9urchasing
both for 9roduct related (direct) 9urchases and for non%9roduct related (0P<) 9urchases
(Broo# )---)& Burrently #any /P syste#s are available on the #ar:et& "ajor vendors
are1 .riba $aan Bo##erce'ne Peo9leSoft and S.P& ?es9ite of the o99ortunities
3
co#9anies still hesitate though& <ecent research indicates that i#9le#entation of /P is
still in its infancy& "any co#9anies are 9lanning to start a 9roject in the near future but
only a few are actually i#9le#enting it now (5-%6-C versus 5C of the ,--- largest US
co#9anies according to .berdeen Grou9 ()--*)&
Selecting and i#9le#enting a new IT syste# such as /P re=uires an enor#ous effort
and the (a#ount of) success de9ends on the way this i#9le#entation 9roject is
organised (.berdeen Grou9 )--*8 Sherrill et al )--*)& This 9a9er ai#s to contribute to
the decision #a:ing (setting 9riorities) of deter#ining a good i#9le#entation strategy
for /P in an organisation& . #athe#atical #odel is 9resented for deter#ining the
o9ti#al /P roll%out strategy into an organisation based on #a(i#isation of the total cost
savings&
The 9a9er is structured as follows& In the first section the effect of /P on the traditional
o9erational 9urchasing 9rocess as described in literature is discussed #ore in de9th&
Section two focuses on the advantages of /P in ter#s of cost savings& The third section
9resents an overview of the setu9 and 9roble# areas of i#9le#enting /P syste#s& The
#athe#atical #odel is 9resented in the fourth section describing the in9ut data needed
and describing the i#9le#entation 9rocess in a for#al way& Section five deals with
issues regarding the calculation of the o9ti#al /P roll%out strategy& .lso the #odel is
illustrated with a nu#erical e(a#9le in this section& !inally conclusions are drawn in
the last section together with suggestions for further research&
1. The effect of EP on ordering procedures
4
The 9rocedure of ordering ite#s is one of the basic 9rocedures in 9urchasing and it is
the heart of the o9erational 9urchasing 9rocess& Therefore the ordering 9rocedure always
received a lot of attention1 every general te(tboo: on 9urchasing describes a way how
this 9rocedure should be arranged and this descri9tion does not differ a lot between
the#& .da9ted fro# several te(tboo:s (>eenders and !earon *6638 ?obler and $urt
*66D8 >ysons *66D) below the necessary ste9s for the ordering 9rocedure are given1
*& 9urchase re=uisition fro# internal custo#er1 this could be an actual re=uest fro# a
9erson within the co#9any but also it could be an auto#ated re=uest fro# an /<P
syste#&
)& authorisation of 9urchase1 chec:ing with co#9any regulation and E or obtaining the
authorisation fro# the a99ro9riate 9erson(s)
3& sending the 9urchase order to the su99lier (and retaining a co9y for ad#inistration)
supplier: delivery together with good delivered note
4& ins9ection of goods chec:ing it with the goods delivered note (and sending a co9y
to ad#inistration)
supplier: sending invoice (could also arrive before the delivery)
,& clearing invoice1 chec:ing invoice with co9ies of the 9urchase order and goods
delivered note chec:ing co#9liance with contract ter#s
D& 9ay#ent to su99lier
The descri9tion above only a99lies to re9etitive 9urchases& It is assu#ed that the
s9ecifications are clear and that there is a contract with a su99lier so e(tra ste9s
,
regarding those issues can be left out of the 9rocedure& The 9urchasing de9art#ent only
ta:es care of the ordering and other ad#inistrative units ta:e care of the registration of
orders notes and invoices& The ad#inistrative organisation could have slightly different
arrange#ents in 9ractice though for instance a se9arate unit for carrying out the actual
9ay#ents&
The #ajority of the re9etitive 9urchases following this ordering 9rocedure have little
value& They are located in the routine and bottlenec: =uadrants of the @raljic #atri(
(@raljic *653)& <educing this ad#inistrative burden would free #ore ti#e to be s9ent
on value adding activities such as tactical and strategic 9urchasing es9ecially related to
the strategic and leverage =uadrants&
.lthough the 9rocedure above can be 9erfor#ed #anually without any auto#ation the
advantages of using co#9uters and the auto#ated flow of infor#ation are also indicated
in the te(tboo:s on 9urchasing #entioned earlier (>eenders and !earon *6638 ?obler
and $urt *66D8 >ysons *66D)& These advantages can be su##arised into two as9ects1
auto#ation of data storage (#aintaining records standardised for#s etc) and auto#atic
co##unication (/?I with su99liers auto#atic #atching and other 9ossible infor#ation
flows within the organisation)& $oth as9ects hel9 to reduce the ad#inistrative tas:s
hence reducing labour costs and strea#lining and s9eeding u9 the 9rocess&
Aith the definition of /P in the 9revious section the changes resulting fro# using /P in
the ordering 9rocedure above can be derived& In ste9 * this #eans that the 9urchase
D
re=uisition by the internal custo#er will be done by using an electronic catalog and the
re=uisition will auto#atically be sent to the 9urchasing de9art#ent&
Having only this change in 9lace it can already be considered as having an /P syste#&
In this case the inco#ing re=uisitions would be 9rinted out by the 9urchasing
de9art#ent and the other ste9s of the ordering 9rocedure would be 9erfor#ed in the
traditional way& /(tending the /P syste# then #eans that other ste9s are also handled
electronically& !or ste9s )3, and D this could be done only ins9ection of goods (ste9 4)
will be difficult to do electronically& Aith this one can s9ea: of the different
functionality levels of an /P syste#& The syste# could include only ste9 * or for
instance ste9 *) and 3 or ste9 *3 and D& 0ote that when authorisation and the 9urchase
order are done auto#atically basically the 9urchasing de9art#ent is circu#vented and
is not involved in the order any#ore& If all ste9s for which it is 9ossible are fully
auto#ated there is no hu#an interference in the 9urchasing de9art#ent and the
ad#inistrative unit bloc:s& Hu#an involve#ent will still be necessary though not as
ad#inistrator in the 9rocess but as controller of the 9rocess1 to handle e(ce9tions and
in9ut data such as1 content #anage#ent setting authorisation levels and contract data &
. Potential cost sa!ings of EP
Using the descri9tion of the differences between the ;traditional; ordering 9rocedure
and /P the advantages of /P with res9ect to the traditional ordering 9rocedure related to
+
cost savings can be e(9lained& Two advantages are the #ost i#9ortant1 reducing
transaction costs and reducing #averic: buying&
The transaction costs of a 9urchase are the total internal costs to co#9lete a 9urchase
fro# re=uisition to 9ay#ent& <educing transaction costs is achieved by reduction in the
average ti#e s9end by (ad#inistrative) 9ersonnel on a transaction reducing clerical
errors and therefore also reducing the average lead ti#e& . survey by B.PS a#ong *D6
US organisations showed that for "<' 9urchases the costs for an average transaction is
still #ore than US F+, which is #ore than the average "<' invoice (@olchin and
Trent *666)& Guotes fro# Harin: (*666) and the .berdeen Grou9 ()--*) indicate that
transaction costs with /P can ty9ically be reduced fro# on average #ore than US F*--
to about US F3- or less 9er 9urchase order& Blearly the reduction of the transaction costs
will de9end on the functionality level of the /P syste#1 the #ore ste9s are done
electronically the #ore reduction there will be&
The second #ajor advantage is the reduction of #averic: buying (9urchases done
without using available co#9any contracts)& <esearch indicates that #averic: buying
could be #ore than ,-C for certain co##odity grou9s resulting in an average higher
9rice (ty9ically *-%)-C Sherrill et al )--*)& I$" re9orted in their .nnual <e9ort )---
a reduction in the #averic: buying on average fro# 4,C to less than *C fro# *664 to
*666 using e%9rocure#ent& I#9le#enting an electronic catalog syste# can only be done
with a very li#ited nu#ber of su99liers 9er category (because of the costs) hence when
an internal custo#er uses the electronic catalog #averic: buying is 9revented
5
auto#atically& This advantage is already obtained with the basic functionality of the /P
syste#1 only the electronic catalog& . higher functionality level of the /P syste#
basically will not affect #averic: buying directly as this is not 9erceived by the internal
custo#er& $ut it could have an indirect effect through e&g& reduced lead ti#es (resulting
fro# a higher functionality level of the /P syste#)&
$esides the two #ain advantages #entioned above there are also other 9ositive side
effects& !irst with an /P syste# infor#ation about the 9urchase volu#e fre=uency etc
can be #ore easily e(tracted& $etter infor#ation on the 9urchase volu#e 9er su99lier
gives the o99ortunity to negotiate better contracts& .lso reducing the #averic: buying
will increase the 9urchase volu#e 9er su99lier #a:ing the o99ortunity even better
(reductions of ,%)-C in the s9end through /P according to Sherrill et al )--*)&
Secondly as already #entioned i#9le#enting an /P syste# is only done with a li#ited
nu#ber of su99liers because of the i#9le#entation costs& Thus introducing /P will
auto#atically reduce the nu#ber of su99liers& !or the sa#e reason the nu#ber of
articles will also be reduced as only the articles of the su99liers connected to the /P
syste# will be available& These articles will still have to cover the functional needs of
the internal custo#ers as #uch as 9ossible to 9revent #averic: buying& !inally
introducing an /P syste# (es9ecially for several ste9s of the ordering 9rocedure) #eans
that there has to be a clear understanding of the tas:s to be 9erfor#ed in that ste9 in
order to be able to auto#ate it& !or instance in the authorisation ste9 all authorisation
levels for a 9urchase for all 9ersonnel have to be defined& $eing forced to thin: about
6
the e(isting ordering 9rocess can lead to a reorganisation of that 9rocess which would be
#ore efficient even without using an /P syste#&
". Implementation of EP
!or #ost 9urchases it is 9ossible to realise cost savings with an /P syste# based on the
advantages in the 9revious section& However these savings should outweigh the effort
and costs of i#9le#enting an /P syste#& ?eciding to go ahead with the i#9le#entation
of an /P syste# will be based on the analysis of the return on invest#ent (<'I) and
often a co#9arison ta:es 9lace between the different 9ossible IT invest#ents (@i# et al
)---)& Ae focus on this <'I analysis&
$efore going into the details of this analysis note that selecting the 9ro9er /P syste# is
also not straightforward& The syste# has to be able to handle the co#9any%s9ecific
infor#ation flows the di#ensions of the syste# and also good co#9atibility with the
e(isting IT syste#s of both the co#9any and #ost of the su99liers would be an
advantage& .ttaran ()--*) recognises a nu#ber of these 9itfalls or attention areas to be
addressed before the start of the i#9le#entation1 the content #anage#ent the necessary
e(9ertise and the organisational change& The last two a99ly to i#9le#enting IT syste#s
in general content #anage#ent is s9ecific for /P1 #aintenance and u9dates of the
electronic catalog (new ite#s obsolete ite# new 9rices etc)& Pad#anabhan ()--*)
defines three a99roaches to this issue1 content #anage#ent can be done by the buying
organisation the su99liers or by a third%9arty& The best solution will de9end on the in%
*-
house e(9ertise the costs and e(9ectation regarding control res9onse ti#e and security
in case the second or third o9tion is chosen&
!or the <'I analysis it has to be identified for which co##odity grou9s and for which
su99liers of those co##odities it is 9rofitable to do the i#9le#entation and also for
which 9arts of the organisation (for which e#9loyees or on a higher level for which
de9art#ents E divisions E business units)& The costs and the benefits of i#9le#enting /P
also de9end on the functionality level of the /P syste#& The functionality level of the
/P syste# is defined as the tas:s to be 9erfor#ed by the /P syste# e&g& does it allow
for searching a catalog only or ordering too authorisation degree level of interaction
with financial syste#s at the su99lier and the buyerHs side 9ay#ent etc& The
i#9le#entation costs have to be assessed 9er co##odity grou9 9er de9art#ent and 9er
functionality level and the sa#e holds for the cost savings&
The i#9le#entation costs of adding a su99lier catalog can differ a lot between su99liers
de9ending on the e(9erience with Internet technology a su99lier has and the
co#9atibility of his current IT syste#s to the /P syste# of the buyer& !urther#ore
#a:ing catalogs #eans #a:ing clear s9ecifications of each ite# in the catalog which
will give #ore or less difficulties de9ending on the co##odity grou9& .lso the nu#ber
of su99liers re=uired to cover all ite#s in a co##odity grou9 differs&
Bosts related to adding e#9loyees (de9art#ents) to the /P syste# include deter#ining
business rules (authorisation li#its) training of e#9loyees and co#9atibility issues
**
regarding IT syste#s which could differ between de9art#ents& >ast but not least for all
i#9le#entation costs a9art fro# the one%ti#e i#9le#entation costs u9date or
#aintenance costs can occur&
Bost savings will only occur if both the co##odity grou9 and the de9art#ent have been
added to the /P syste# (with a certain functionality level)& To gain #ore detailed
:nowledge about the siIe of the cost savings of all co##odity%de9art#ent co#binations
infor#ation has to be collected on the following1
S9end 9er co##odity 9er de9art#ent&
0u#ber of transactions 9er co##odity 9er de9art#ent&
.verage #averic: buying 9ercentages 9er co##odity (before and after
i#9le#entation)&
.verage higher 9rice when #averic: buying&
.verage transaction costs (before and after i#9le#entation)&
Aith the detailed infor#ation on the costs and 9ossible cost savings an <'I can be
calculated& Then for the /P syste# the (#ost) 9rofitable co#bination of1
co##odity grou9s and su99liers8
de9art#ents E division E business units to be given access8
functionality level of the /P syste#8
can be deter#ined&
*)
.s i#9le#enting /P is a huge tas: and still relatively new co##on 9ractice is to start
with a 9ilot ty9ically i#9le#enting /P for one co##odity grou9 (a few su99liers)
only available for a s#all nu#ber of e#9loyees (for e(a#9le one de9art#ent)& The
reason is to beco#e fa#iliar with the technology to see if the 9ro#ised benefits actually
occur and to recognise 9ossible 9itfalls for successful i#9le#entation&
.fter successfully finishing the 9ilot the ne(t ste9 is a #ajor one1 rolling out the /P
syste# into the entire organisation& Given the di#ensions of the /P syste# 9riorities
need to be set on the co##odity grou9s de9art#ents and functionality level& !or
instance given a basic /P syste# with the co##odity grou9 and de9art#ent with which
the 9ilot started should first #ore co##odities be added or #ore de9art#ents or should
the functionality be e(tendedJ /(9erience with /P roll%out strategies is still lac:ing
again because the first /P i#9le#entations just started very recently&
To answer this =uestion in the ne(t section a #athe#atical #odel is 9resented to
deter#ine the #ost cost%efficient way to roll%out /P into an organisation hence setting
9riorities by calculating the o9ti#al order of i#9le#entation&
#. $odelling the EP roll-out
To #a:e a #athe#atical #odel of the electronic 9urchasing roll%out in9ut data has to be
defined and the i#9le#entation 9rocess has to be structured& .n e(9lanation of the
*3
#athe#atical #odel follows below in .99endi( . all notation used is listed for
reference&
4.1 Input data
Ae assu#e that there are jmax co##odity grou9s j and that there are max de9art#ents
(divisions business units) for which /P has to be i#9le#ented& .lso in this first
#odelling atte#9t we assu#e there is only one level of functionality in the /P syste#&

!or the i#9le#entation costs we assu#e that they can be deter#ined beforehand& Ae
assu#e fi(ed costs and variable costs& The fi(ed costs I are the costs of the /P syste#
itself without any custo#isation& There are two ty9es of variable costs1 !!
j
are the
i#9le#entation costs for adding co##odity grou9 j to the /P syste# and si#ilarly "!

are the i#9le#entation costs for de9art#ent & Ae use one fi(ed a#ount for the
i#9le#entation costs& !or calculating this a#ount one could include several
co#9onents1 the initial i#9le#entation costs and u9date costs lasting for (and 9erha9s
discounted over) several years& Ae assu#e that these co#9onents are not de9endent on
anything else e(ce9t for the s9ecific i#9le#entation hence they can be aggregated into
one a#ount& .s indicated in section 3 adding a co##odity grou9 to the syste# #eans
the ite#s of that grou9 are available for all de9art#ents that already have been added&
.lso adding a de9art#ent #eans that all co##odity grou9s that already have been
added beco#e available to that de9art#ent&
'ther in9ut data needed are the costs savings or revenues of the i#9le#entation&
*4
0ote that cost savings will only occur for a co##odity grou9 in a de9art#ent if both the
co##odity grou9 and the de9art#ent have been added to the /P syste#& Ae denote
with #
j
the costs savings 9er co##odity grou9 j 9er de9art#ent & .gain for the cost
savings we ta:e one fi(ed a#ount using the sa#e reasoning as for the i#9le#entation
costs& Bo#9onents of these costs savings will include savings through reduced #averic:
buying and through reduced transaction costs& !urther#ore these savings are structural&
To be able to relate the# to the i#9le#entation costs one has to ta:e into account the
savings for a nu#ber of years& This can be done in several ways li:e1 #ulti9lying by a
fi(ed nu#ber of years discounting the savings over ti#e with or without a ti#e horiIon&
4.$ %odelling the roll&out
.t the start of the i#9le#entation 9roject we assu#e for si#9licity but without loss of
generality that nothing has been i#9le#ented yet& Ae could also have started with an
/P syste# where already so#e co##odity grou9s and E or de9art#ents have already
been added& The i#9le#entation 9rocess is then #odelled as follows1
The 9rocess consists of ' 9eriods& The co##odity grou9s and de9art#ents are
added to the /P syste# one by one& In other words in each 9eriod t (*&&&') /P is
i#9le#ented for one co##odity grou9 or de9art#ent hence ' ( jmax ) max&
In 9eriod t the i#9le#entation costs being either !!
j
or "!

have to be 9aid& The

fi(ed costs I are 9aid at the start of the i#9le#entation&
The revenues (cost savings) in 9eriod t are the new revenues generated by the
co##odity or de9art#ent added in 9eriod t& Hence these revenues are de9endent on
what already has been connected to the /P%syste#&
*,
Bosts and revenues are discounted (de9reciated) with factor (-KK*) between each
9eriod& $y giving costs and revenues that occur earlier in ti#e a higher value
9riorities can be deter#ined in the order of i#9le#entation& .lso is assu#ed
constant for now by which we i#9licitly assu#e that the i#9le#entation 9eriod is
the sa#e for all co##odity grou9s and de9art#ents&
!or notation 9ur9oses we introduce the variables c
j
and d

with values either * or -

indicating if co##odity grou9 j and de9art#ent res9ectively has or has not been
added to the /P syste#& So all c
j
and d

are - at the start of the i#9le#entation and * at

the end&
0ow the best /P roll%out strategy can be refor#ulated as the strategy (the order of
i#9le#entation) for i#9le#enting all co##odity grou9s and de9art#ents that
#a(i#ises the total 9rofit (the total revenues #inus the total costs) given the
de9reciation of the revenues and costs in ti#e& ?efining de total 9rofit as v the objective
can be for#ulated as1
( )

+
'
t
t t t
t
* i + I v
*
*
*
#a( (*)
Aith the following definitions of the variables1
i
t
is the state of the /P syste# at the end of 9eriod t& This state consists of the values
of c
j
and d

in 9eriod t and it de9ends on the state at the end of the 9revious 9eriod
i
t&1
and decision #ade in 9eriod t& !urther#ore i
,
is the initial state (all c
j
and d

are
-)&
*D
*
t
is the decision what to add to the /P syste# in 9eriod t& 'f course only
co##odities or de9art#ents for which c
j
or d

are still - in state i

t&1
can be added&
Thus the decision *
t
is to turn one of those fro# - to * hence changing the state&
0ote that at ti#e t ( , there are still jmax ) max decision o9tions whereas for t (
'&1 only one o9tion is left&
+
t
(i
t&1
-*
t
) is the direct 9rofit that is generated in 9eriod t& >i:e i
t
it de9ends on i
t&1
and
the decision in 9eriod t& 0ote that the 9rofit can be negative& The direct 9rofit is
calculated in the following way de9ending on whether a co##odity or a de9art#ent
is added to the /P syste#1
( )
( ) ( )
( ) ( )

'

* 1 1
* 1 1

L L L
L L L
#a(
*
*
#a(
*
*
*

t
j
j
j
t j
j
t

j j
t
t t t
d * "! # i c
c * !! # i d
* i + ())
0ote that the fi(ed costs I is just a constant subtracted fro# the 9rofit and therefore I has
no influence on the o9ti#al roll%out strategy&

4.. /sing dynamic programming
The nu#ber of 9ossible i#9le#entation se=uences is 'M #a:ing the calculation of all
values of v nearly i#9ossible tas: already for s#all values of '& However the 9roble#
(*) can be rewritten into a finite deter#inistic dyna#ic 9rogra##ing (?P) 9roble# with
bac:wards recursion& Ae define v
t
(i
t
) as the #a(i#u# total revenues that can be
obtained in state i
t
at the end of 9eriod t& v
t
(i
t
) can be calculated recursively1
( ) ( ) ( ) ( )
* * * *
#a(
*
+ + + +
+
+
t t t t t
*
t t
i v * i + i v
t

(3)
*+
.t the end of 9eriod ' there is only one 9ossible state (all c
j
and d

e=ual to *) and no
decision o9tions are left hence1
-
'
v
(4)
There is also only one initial state i
,
and with the recursive relation above v
,
(i
,
)&I will be
the #a(i#u# total 9rofit and the decisions *
t
that give rise to this #a(i#u# value
deter#ine the o9ti#al order of i#9le#entation&

The nu#ber of states at the end of 9eriod t is

,
_

t
'
and there are ' 0 t decision o9tions
left& Thus for deter#ining the #a(i#u# 9rofit
( )

,
_

'
t
t
'
t '
-
calculations have to be
#ade an e(9ression that can be si#9lified1
( )
'
'
t
'
t
'
t
'
t
t
'
t ' )
)
*
- -

,
_

,
_

(using
( )

,
_

,
_

,
_

t
'
'
t '
'
t '
t
'
t
and
'
'
t
t
'
)
-

,
_

) (,)
.bove the restriction is used that all co##odities and de9art#ents have to be
i#9le#ented& I#9le#enting certain co##odities and de9art#ents could be non%
9rofitable though hence e(cluding the# would increase the overall 9rofit& 'bviously
this would be the case when the i#9le#entation costs for a co##odity j
1
or a
de9art#ent
1
are larger than the revenues gained by adding j
1
or
1
to the /P syste#1
*5
L L
#a(
*
j

j
!! # <

or L L
#a(
*

j
j
j
"! # <

(D)
.ll non%9rofitable i#9le#entations are found at the end of the o9ti#al i#9le#entation
order& $ecause of the discount factor losses are 9ost9oned& Hence the 9rofit is
#a(i#ised when recursively all co##odities and de9art#ents are e(cluded that are
i#9le#ented fro# 9eriod t
1
until '& This 9eriod t
1
is deter#ined by starting fro# v
'
(i
'
)
and going bac:wards in the o9ti#al order until
( )
L L
t t
i v
beco#es negative& This leads to
the o9ti#al roll%out strategy without the restriction that all co##odities and de9art#ents
have to be i#9le#ented&
%. &alculating the optimal roll-out strategy
Using the ?P for#ulation of the 9revious section o9ti#al /P roll%out strategies can only
be calculated on a co#9uter within reasonable ti#e li#its for values of ' u9 to ), or so&
This #eans for 9roble#s with larger ' heuristics are re=uired to deter#ine a good
a99ro(i#ation of the o9ti#al strategy&
2.1 3euristics
.s an a99ro(i#ation we defined a ;greedy #%ste9; heuristic1 loo:ing m ste9s ahead&
In this heuristic at the end of each 9eriod t the decision *
t)1
1
will be ta:en that #a(i#ises
the 9rofit w
t
over m ste9s1
( ) ( ) ( )
,
_

,
_

,
_

+ + +
+ + +

+ + + + +
+ + + +
m t m t m t
*
m
*
t t t
*
t t t
*
t
* i + * i + * i + w
m t t t t
#a( &&& #a( #a( #a(
*
* )
) * ) * *
) ) *

(+)
*6
The total 9rofit v will be1
( )

+
'
t
t t t
t
* i + I v
*
L
*
*
(5)
0ote that for the greedy *%ste9 heuristic (+) and (5) can be ta:en together1
( )

+
'
t
t t t
*
t
* i + I v
t
*
*
*
#a( (6)
This greedy *%ste9 heuristic is si#9ly ta:ing the best available o9tion at every ste9
without loo:ing at its conse=uences for further ste9s
0aturally it should hold that ' m * & In .99endi( $ is 9roven that below a certain
threshold value
4
of the discount factor the greedy #%ste9 heuristic 9rovides the
o9ti#al solution&
The nu#ber of calculations needed for the heuristic in each 9eriod t is1
( ) ( ) ( ) ( )

+ + +
*
-
* ) *
m
i
i t ' m t ' t ' t ' (*-)
!or the total nu#ber of calculations it has been 9roven in .99endi( B that1
( ) ( )

+
+
+
m
i
'
t
m
i
i '
m
i t '
- *
*
-
*
*
*
* (**)
!or the *%ste9 heuristic this boils down to
( ) *
)
*
+ ' '
calculations and for the )%ste9
heuristic to
( ) ( ) * *
3
*
+ ' ' '
calculations& 0ote that for large m calculating the ?P
9roble# could be faster&
)-
The *%ste9 heuristic has an obvious flaw as in the first 9eriod no cost savings will occur
(only having either a de9art#ent or a co##odity connected to the /P syste#) hence the
co##odity or de9art#ent with the lowest i#9le#entation costs would be chosen& Here
a large i#9rove#ent can be #ade by loo:ing two ste9s ahead as in the second 9eriod
the first savings occur& Bonsidering reasonable calculation ti#e the )%ste9 heuristic can
be used for 0 even larger than *-- #a:ing it a99licable for #ost 9ractical situations& If
not all co##odities and de9art#ents have to be i#9le#ented the non%9rofitable 9arts
can be re#oved at the end of the i#9le#entation order found by the heuristic (as
described at the end of section 4) hence increasing the #a(i#u# 9rofit&
2.$ 5 numerical example
To illustrate how the #odel can be used for 9ractical calculations a s#all scale e(a#9le
is given below with seven co##odity grou9s and si( de9art#ents to be connected to the
/P syste#& The data in the e(a#9les is based on realistic values& !i(ed costs of US F-&D
"illion are assu#ed& !urther#ore the costs 9er co##odity grou9 are assu#ed to be in
the order of US F *----- and the costs 9er de9art#ent around US F 3----& These
a#ounts include discounted #aintenance costs for five years& The variable costs are
shown in Table *& !or the si( co##odity grou9s we assu#e around *,--- transactions
9er year and a s9end of US F), "illion& .lso we assu#e around US F,- can be saved
on average 9er transaction which #eans around US F-&+, "illion 9er year& Aith an
average of ),C #averic: buying that will decrease to ,C with the /P syste# and
assu#ing *-C higher 9rices with #averic: 9urchases the savings 9er year are around
US F-&, "illion& Aith discounted su##ation over five years this leads to an esti#ate of
)*
US FD "illion in total cost savings and these savings have been divided over the savings
9er co##odity grou9 9er de9art#ent in Table )& !inally a discount factor 9er year of
-&5 was ta:en& .ssu#ing 9rojects of 3 #onths this leads to N -&64D&
Table 3 shows the o9ti#al roll%out strategy& The last two 9eriods are 9ut between
brac:ets as they are non%9rofitable and therefore should be e(cluded fro# the
i#9le#entation& Table 4 gives a co#9arison of five roll%out strategies regarding1 the
9rofit i#9le#entation order and the total i#9le#entation costs& They vary between the
strategies as the costs are distributed differently over the total i#9le#entation 9eriod&
The worst case was found by #ini#ising instead of #a(i#ising the total 9rofit& In this
case the #a(i#u# 9rofit is 46C higher than the #ini#u# 9rofit& !urther#ore the
greedy heuristics a99ro(i#ate the o9ti#al solution =uite well& 'ne can see the value of
loo:ing two ste9s ahead instead of one by the 9rofit difference between the )%ste9 and *%
ste9 heuristics& The 3%ste9 heuristic already 9rovides the o9ti#al solution here&
'. &onclusions
The advantages of /P see# undis9uted regarding costs savings and ad#inistrative
9rocess auto#ation& .s i#9le#entation costs are lowering /P is e(9ected to be widely
ado9ted by co#9anies& .t the #o#ent /P is still in its infancy though& Pilot 9rojects are
under way but co#9anies still hesitate with the full roll%out of /P into their
))
organisation because the technology is new and not #uch e(9erience e(ists yet about
i#9le#entation strategy&
The #athe#atical /P roll%out #odel is a fra#ewor: for 9roviding a good roll%out
strategy based on e(9ected costs and cost savings& It deter#ines the o9ti#al order of
i#9le#entation for co##odity grou9s and de9art#ents together with total cost savings
and how these savings will occur over ti#e& !or larger 9ractical cases greedy heuristics
can be used to calculate (near) o9ti#al strategies& Using s#all scale e(a#9les with
realistic values of the costs and cost savings the #odel shows that there can be a large
difference in the total savings between the o9ti#al roll%out strategy and other (rando#)
strategies& . good roll%out strategy is therefore an i#9ortant factor in the successful
i#9le#entation of /P&
.lthough #any as9ects already have been incor9orated in the #odel it is 9ossible to
#a:e so#e e(tensions& ?ifferent functionality levels of /P syste#s different lengths of
i#9le#entation 9eriods can be incor9orated easily& 'ne could also thin: of learning
curves for i#9le#enting /P syste#s& Stochasticity could also be included as in9ut
values #ay not be easy to esti#ate in 9ractice&

The a99licability of the #odel with 9ossible e(tensions still has to be verified with
e#9irical evidence in the near future& !or 9ractical 9ur9oses it is good to e#9hasise that
only financial as9ects of /P i#9le#entations are o9ti#ised in the #odel& To i#9le#ent
/P successfully also other organisational factors #ay need to be considered& These
)3
factors could influence the 9referred i#9le#entation se=uence& However with the #odel
at least the financial conse=uences of other roll%out strategies can be calculated&
(eferences
.berdeen grou9 )--*& e%Procure#ent1 finally ready for 9ri#e ti#e .berdeen grou9
*4())&
.ngeles <& )---& <evisiting the role of Internet%/?I in the current electronic
co##erce scene >ogistics Infor#ation "anage#ent *3(*) 4,%,+&
.ttaran "& )--*& The co#ing age of online 9rocure#ent Industrial "anage#ent O
?ata Syste#s *-*(4) *++%*5-&
$ergeron !& and <ay#ond >& *66+& "anaging /?I for cor9orate advantage1 .
longitudinal study Infor#ation O "anage#ent 3* 3*6%333&
$oer >& de Harin: J&H&.& and Heijboer G&J& )--*& . conce9tual #odel for assessing
the i#9act of electronic 9rocure#ent acce9ted for 9ublication in the /uro9ean Journal
of Purchasing O Su99ly "anage#ent&
Broo# S&<& )---& The i#9act of web%based 9rocure#ent on the #anage#ent of
o9erating resources su99ly Journal of Su99ly Bhain "anage#ent Ainter 4%*3&
?obler ?&A& and $urt ?&0& *66D& Purchasing and su99ly #anage#ent1 te(t and cases
si(th edition "cGraw%Hill&
Harin: J&H&.& *666& /(celling with e%9rocure#ent PriceAaterhouseBoo9ers
0etherlands&
)4
@aefer !& and $endoly /& )---& The ado9tion of electronic data interchange1 a #odel
and 9ractical tool for #anagers ?ecision Su99ort Syste#s 3- )3%3)&
@i# S&H& Jang ?&H& >ee ?&H& and Bho S&H& )---& . #ethodology of constructing a
decision 9ath for IT invest#ent Journal of Strategic Infor#ation Syste#s 6 *+%35&
@olchin "&G& and Trent <&J& *666& <educing the transactions costs of 9urchasing low%
value goods and services B.PS focus study (htt91EEwww&ca9sresearch&org)&
@raljic P& *653& Purchasing #ust beco#e su99ly #anage#ent& Harvard $usiness
<eview Se9te#ber%'ctober *-6%**+&
>eenders "&<& and !earon H&/& *663& Purchasing and #aterials #anage#ent Tenth
edition Irwin $oston&
>ong $&G& )--*& Ten /%Bo##erce Guestions .ll Purchasing "anagers "ust .nswer
9roceedings of the 5Dth .nnual International Purchasing Bonference&
>ysons @& *66D& Purchasing !ourth edition Pit#an Publishing >ondon&
"cIvor <& Hu#9hreys P& and Huang G& )---& /lectronic co##erce1 re%engineering
the buyer%su99lier interface $usiness Process "anage#ent Journal D()) *))%*35&
"in H& and Galle A&P& *666& /lectronic co##erce usage in business%to%business
9urchasing International Journal of '9erations O Production "anage#ent *6(6) 6-6%
6)*&
Pad#anabhan S& )--*& /lectronic catalog #anage#ent Purchasing Today June 9& D-&
Segev .& Porra J& and <oldan "& *66+& Internet%based /?I strategy ?ecision
Su99ort Syste#s )* *,+%*+-&
),
Sherrill !& .nthony T& ?anish S& and Bhrist @& )--*& eProcure#ent1 the 9ro#ise
and reality Peo9leSoft white 9a9er series (htt91EEwww&9eo9lesoft&co#)&
Telgen J& *66+& <evolution through electronic 9urchasing& Aor:ing Pa9er University
of Twente 0etherlands&
Appendi) A
The notation used 1
Indices1
j 1 denoting the co##odity grou9 (*&&&jmax)
1 denoting the de9art#ent (*&&&max)
t 1 denoting the 9eriod (*&&&')
Here jmax and max is the res9ectively the nu#ber of co##odity grou9s and the
nu#ber of de9art#ents to be added to the /P syste#& ' is the nu#ber of
i#9le#entation 9eriods and therefore e=ual to jmax ) max.
In9ut data1
I 1 Bosts of the uncusto#ised /P syste# itself&
!!
j
1 I#9le#entation costs of /P for co##odity grou9 j ( -)&
"!

1 I#9le#entation costs of /P for de9art#ent E division ( -)&

#
j
1 Bosts savings (revenues) obtained when co##odity grou9 j and de9art#ent
have been added to the /P syste# ( -)&
1 ?iscount E de9reciation factor (-KK*)&
)D
Pariables1
c
j
1 Palue * or - if co##odity grou9 j res9ectively has or has not been added to the
/P syste#&
d

1 Palue * or - if de9art#ent E division res9ectively has or has not been added to

the /P syste#&
i
t
1 The state of the /P%syste# at the end of 9eriod t consisting of the values of c
j

and d

at the end of 9eriod t&

*
t
1 ?ecision what to add to the /P%syste# in 9eriod t (turning one c
j
or d

fro# -
to *)&
+
t
1 ?irect 9rofit in 9eriod t&
v
t
(i
t
) 1 "a(i#u# 9rofit in 9eriod t for state i
t
&
Appendi) *
Theorem
$elow a certain threshold value
4
of the discount factor the greedy #%ste9 heuristic
gives the o9ti#al solution&
Proof
Su99ose the greedy #%ste9 heuristic does not give the o9ti#al solution then for at least
one 9eriod t
1
it holds that the o9ti#al decision *
t)1-opt
gives a lower 9rofit in the ne(t m
ste9s than the decision based on the heuristic *
t)1-gr
1
)+
( ) ( )

+

<
*
*
*
*
L
L
L
L
L
L

m t
t t
gr t t
t t
m t
t t
opt t t
t t
* i + * i + ($&*)
while still the value of v
t
(i
t
) is higher than when the greedy decision is chosen1
( ) ( ) >
L L L L
t gr t t opt t
i v i v
( ) ( ) ( ) ( ) + > +
+ +
+

+ +
+

m t gr m t
m
m t
t t
gr t t
t t
m t opt m t
m
m t
t t
opt t t
t t
i v * i + i v * i +
L L
L
L
L
L L
L
L
L

*
*

*
*

( ) ( ) ( ) ( ) ( ) ( )
m t gr t m t opt m t
m t
t t
opt t t gr t t
t t
m
i v i v * i + * i +
+ + + +
+

+ +

<

L L L L
L
L
L

*
* *
*

*

($&))
.s can be chosen arbitrarily close to - choosing below a certain threshold value
4

will lead to a contradiction&
Appendi) &
Theorem
!or 0 N *)3&&& and # N * ) &&& 0 it holds that
( ) ( )

+
+
+
m
i
'
t
m
i
i '
m
i t '
- *
*
-
*
*
*
* (B&*)
Proof
<ewriting the indices of the l&h&s& leads to1
( ) ( ) ( )

+ +
'
t
m
i
'
t
m
i
'
t
m
i
i t i t i t '
*
*
-
*
-
*
- *
*
-
* *
(B&))
0ow we 9rove with induction that1
)5
( ) ( )

+
+

m
i
'
t
m
i
i '
m
i t
- *
*
-
*
*
*
(B&3)
!or 0 N * (B&3) holds as * N *&
Su99osing (B&3) holds that it re#ains to be shown that1
( ) ( )

+
+

m
i
'
t
m
i
i '
m
i t
-
*
*
*
-
)
*
*
(B&4)
Starting with the l&h&s& we get1
( ) ( ) ( ) + +

*
- *
*
-
*
*
*
-
*
m
i
'
t
m
i
'
t
m
i
i ' i t i t
( ) ( ) ( ) +
,
_

+
+
+
+ + +
+

*
-
*
- -
* *
*
*
* *
*
*
m
i
m
i
m
i
i '
m
m '
i ' i '
m
( ) ( )


+
+
+
,
_

+
+
m
i
m
i
i '
m
i '
m
'
- *
)
*
*
)
*
)
(B&,)
)6
Table 1: Implementation costs of the commodity groups an departments +in 1,,,
-. dollars/
&ommodity
+0/
CC
j
1epartment
+2/
DC
k
B* *5, ?* ),
B) *-- ?) 6,
B3 6, ?3 )-
B4 *4, ?4 3D
B, 6) ?, *)
BD D- ?D ++
B+ *4,
3-
Table : E)pected cost sa!ings R
jk
per commodity per department +in 1,,, -.
dollars/
1epartment +2/
&ommodity +0/
11 1 1" 1# 1% 1'
&1 3-- ,DD )4- *6- *,- 6
& )-- *5- )3, *3- *6- D
&" +- *), *-- ,)3 **- 3
&# ),- 3D, 3), *)) *4- ,
&% 3*- *+, D- *)- *,, *4
&' **, 4- 3) +- 3D, 5
&3 *, 34 *3 )+ ), ,-
3*
Table ": 4ptimal roll-out strategy together with the re!enues associated with each
implementation period +in 1,,, -. 1ollars/
Period 4ptimal
solution
1irect profit 1irect profit
+discounted/
&umulati!e
profit
* ?) %D6, %D6, %D6,
) B* 35* 3D- %33,
3 ?* )+, )4D %56
4 B4 4+- 365 3-6
, ?3 ,4, 43D +4,
D B) ,*, 36- **3,
+ ?4 4-D )6* *4)D
5 B3 +)3 46- *6*D
6 ?, ,+5 3+* ))5+
*- B, +)5 44) )+)6
** BD ,D) 3)3 3-,)
(*)) (B+) (%3*) (%*+) (3-3,)
(*3) (?D) (*5) (6) (3-44)
3)
Table #: (esults regarding the e)pected profit +in 1,,, -. dollars/ using !arious
roll-out strategies
$ethod Profit Total
in!estment
Implementation order
'9ti#al 3-,) *)6, ?)B*?*B4?3B)?4B3?,B,BD
Greedy *%ste9 )6)- *)3) ?,BDB)?*B,?3B4?)B*?4B3
Greedy )%ste9 3-4* *)5) ?4B3?)B*B4?3?*B)?,B,BD
Greedy 3%ste9 3-,) *)6, ?)B*?*B4?3B)?4B3?,B,BD
Aorst case )-4) *45* B*B4B+B)B3B,BD?D?3?,?4?*?)
33