Procurement Management

Chapter 7
Chapter 7: E-procurement
 Topics to be covered

• Evolution of Electronic Sourcing

• Pricing and Business Strategies for an E-

procurement Platform
• E-marketplace and Online Catalogues

• Online Auctions
• Case Study

• Lets Recap
 1. Evolution of Electronic Sourcing

• The first technological innovation was of the Electronic Data Interchange (EDI)
technology in the 1970s.

• The EDI allowed buyers and sellers to transmit purchase documents, like purchase
orders, invoices, etc., online in a secure and standardized format.

• EDI facilitated efficient, secure and formal electronic communication between buyers
and sellers that greatly saved time and cost, and eliminated the hassles of using paper-
based transactions.

• EDI has facilitated speedy and efficient transactions between buyers and suppliers,
which otherwise would have been time-consuming and insecure.
EDI
 2. Evolution of Electronic Sourcing

• The next major technology that transformed the entire business operations including was
of Enterprise Resource Planning (ERP) systems.
• ERP systems helped re-engineer and automate business processes across the
organisation.
• It also allowed the deployment of a single data source, consolidating many independent
applications
• In the case of the procurement function, ERP systems automated the P2P cycle and
integrated the procurement function seamlessly with other management functions with
minimal or no need for any manual data entry.
ERP
 3. Evolution of Electronic Sourcing

• The ERP system was also integrated with EDI, thereby facilitating the transmission of
procurement documents created in the ERP system to the suppliers in a secure way.
• When it came to supply chain management or supplier collaboration, organizations required
applications that could directly interface with supplier systems.

• ERP systems, however, focused only on internal business processes.

• This led to the evolution of several supplier collaboration tools that allowed an interface of the
sourcing and procurement function with external entities.
• In 1990s, the new e-commerce technologies focused on Business-to-Business (B2B) and
Business-to-Customer (B2C) transactions.
B2B / B2C
 4. Evolution of Electronic Sourcing

• At present, e-sourcing is a widely-used technological application in procurement. The

term e-sourcing can be defined as the use of Web-based applications and
technology for identifying, evaluating, negotiating and configuring purchases and
supplier relationships that will effectively support the supply chain.
• E-sourcing mainly involves:
– Contract life-cycle starting from supplier research to supplier on-boarding, supplier
management and evaluation of supplier performance.
– Automatic processing and auctioning of orders enabling speedy procurement
activities at low total cost.
– usage of end-user self-service E-procurement applications
Components of eSourcing
 5. Evolution of Electronic Sourcing

• Decentralized purchase of low-value items with centralised control.

• Usage of electronic-based bidding tools like eRFX and E-auctions.
• Connectivity to external sources of information like databases,
catalogues, portals and E-marketplaces.
• Connectivity to online payment systems.

• Connectivity to internal ERP and supply chain management

systems.
• Project management tracking; i.e. capturing critical activities in
procurement cycle from one end to the other.
 Business Strategies for an E-procurement Platform

• E-procurement platforms provide online markets for buyers and suppliers to interact for achieving
their respective business objectives.
• These platforms are similar to B2C platforms like Amazon and Flipkart.
• In these B2C platforms, buyers and suppliers meet through the Internet platforms provided by a
neutral vendor.
• The revenue for the company hosting an E-procurement platform would depend on actual purchase
transactions and the type of revenue model adopted by it.
• Depending on the nature of buyers and sellers, the pricing structure might involve cross-subsidies
between these two parties.
 Pricing Strategies by eProcurement

• Lower tariff can be envisaged for the side of the market, where members derive smaller
benefits from the platform.
• Tariffs must be assessed globally and efficient price might involve some form of cross-
subsidy between different types of participants.
• Lower tariff can be designed for the side of the market, where the participation level is
sensitive to the quantum of fees charged.
• Price discrimination within sides can go higher when there is competition.
• There are two types of fees applicable for E-marketplaces – membership fees and
transaction fees. Membership fees for primary source of profit, while transaction fees
for maximizing the volume of trade per member.
Few Examples of eProcurement
 E-marketplace

• An E-marketplace refers to an electronic platform where buyers and sellers can meet to make business
transactions online.

• It can be classified into public and private E-marketplaces.

• An important difference between an E-marketplace and other models of E-procurement is that it allows
one-to-many and many-to-many transactions between buyers and sellers.
 Functions of E-marketplace

• The main functions of E-marketplace are to:

– provide a virtual marketplace for buyers and sellers.

– facilitate interaction between potential buyers with potential suppliers.

– facilitate online procurement transactions.

– Provide E-procurement tools that can be used by buyers, such as online catalogues,
supplier collaboration tools, electronic online auction tools, etc.
 E-marketplace

• Buyers can also use E-marketplaces for e-sourcing.

• They can locate prospective suppliers, send RFPs and may even decide to conduct
online auctions.
• They can also use these exchanges for evaluating, negotiating and selecting suppliers for
their procurement needs.
• Advantages of an E-marketplace for buyers: allowing procurement at low transaction
costs, facilitating price discovery and offering better prices, etc.
• Disadvantages of an E-marketplace for buyers: suppliers in an E-marketplace are mostly
new and unknown, too much emphasis on price can potentially lower the quality level,
etc.
 Online Catalogues

• Online catalogues allow online purchase of materials and other resources.

• These catalogues contain products for online purchasing from predetermined suppliers. Online
catalogues also provide pricing details and applicable discounts for volume buying.
• These catalogues may be available for purchasing goods within the procurement intranet of the buying
organization provided by approved suppliers.
• These catalogues may be developed, maintained and updated for E-procurement processing by the
buying organization based on supplier catalogues and internal inventory system.
• Alternatively, the E-procurement platform can point to an external link to the supplier- maintained
catalogues.
 Online Catalogues

• Three types of catalogues are as follows:

• These catalogues provide a list of basic items, such as stationeries

Simple catalogues with individual descriptions and prices. (60% of all E-marketplace
transactions).

• These catalogues include items like desktop computers requiring

Goods and services
detailed and complex descriptions. (30% of all E-marketplace
catalogues
transactions).

• These catalogues include items which are based on supplier

Contract-driven
contracts already established through sourcing processes. (10% of
catalogues
all E-marketplace transactions).
 Advantages of Online Catalogues
• E-procurement through online catalogues allows bringing greater amounts of total spend under
management. Most indirect spend that happens in a decentralised way across the organisation can
be brought under the E-procurement process.
• Online catalogues allow centralisation of procurement items in terms of visibility and control. All
such purchases are handled through a single platform and this provides a greater visibility and
control to senior management thereby creating cost reduction opportunities.
• These catalogues greatly reduce maverick spending. Any purchase that deviates from the stated
purchasing procedures and policies can be prevented or reported immediately.
• These catalogues create a paperless purchasing environment.
• These catalogues allow quick identification and selection of required materials and services at the
user level.
• Purchasing through the approved supplier-based catalogues makes direct purchase easy for end-
users without resorting to elaborate requisition and approval-related processes, thereby reducing
the P2P cycle for indirect spend.
• Greater empowerment of end-users along with faster turnaround time is achieved
 Disadvantages of Online Catalogues

• It requires implementation of E-procurement software and associated re-engineering of business

processes that cover the scope of purchase. The cost of E-procurement software could be
significant for small and medium buyers. E-procurement software also requires significant
implementation time.

• Established suppliers may be reluctant to adapt to catalogue-based online purchasing

 Online Auctions

• Online auctions are an important component of the E-procurement ecosystem.

• In online auctions, the buying organization creates a Request For Quote (RFQ) and invites
potential suppliers to submit bids.
• Next, the auction is conducted to select the lowest-price bidder.
• The auction continues till a pre-established bidding period ends or until no seller is willing
to bid any lower.
• In a regular online auction, prices are revealed to all sellers but the identity of
competitors remains anonymous.
• In another type of online auction, termed as ‘rank online auction’, sellers are only told
their relative rank and will be unaware of their competitor’s prices.
 Type of Online Auctions

• Reverse Auction
• Forward Auction
• English Auction
• Rank only Auction
• Rank with lead
• Dutch
• Japanese
• Generic Info
• Unique Info
• Price Display
• Full display
 Steps involved in Online Auctions

• The steps involved in online auction are given below:

1. The buying organization decides the procurement of items through an online auction.
2. Suppliers are evaluated and approved for participation in the auction process. Only the
technically approved vendors should be made a part of online auctions. Market research may
be conducted by website hosting for identifying the potential sellers.
3. Suppliers are invited to participate in the bidding process.
4. The buying organization prepares an e-RFX, i.e. an Electronic Request for Quotation, and
sends it to all the qualified suppliers.
 Steps involved in Online Auctions

5. The suppliers are informed about the details regarding the bidding place and date and the rules of
the auction.
6. The bidding process begins at the appointed time and usually lasts for about 30 minutes to an hour.
7. Competitors may be allowed to see other bids or it may be a closed auction. However, suppliers’
identities remain confidential during the bidding.
8. The company analyses auction bids and awards the business to the chosen supplier (preferably) who
need not necessarily be the lowest bidder. The choice of supplier depends on technical ranking and
some other terms and conditions also.
 4. Online Auctions

• A certain amount of expertise and professionalism is required for successful usage of online auctions.
• E-auctions have proved their value in many specific procurement situations; for example, in commodity
buying, for which online auctions are quite suitable.
• Commodity purchases have a great potential for cost savings.
• E-auctions provide advantages such as
– Offer significant purchase price savings due to the competitive bidding process.
– Reduction in time and resources needed for conducting sourcing process.
– Allow efficient purchase of services such as security, consulting, housekeeping.
 EProcurement Case Study
Auction Format – Dutch Auction
Let’s Test our Learning !!!
 Question 1

Q. What does the term EDI stand for?

Enterprise Digital Information

Exchange of Defective Industrial goods
Engineering Division Imports
Electronic Data Interchange
 Question 1

Q. What does the term EDI stand for?

Enterprise Digital Information

Exchange of Defective Industrial goods
Engineering Division Imports
Electronic Data Interchange
 Question 2

Q. Online platforms like Amazon and Flipkart can

be classified as _______

B2B platforms
B2C platforms
P2P platforms
C2C platforms
 Question 2

Q. Online platforms like Amazon and Flipkart can

be classified as _______

B2B platforms
B2C platforms
P2P platforms
C2C platforms
 Question 3

Q. In a rank online auction, what is not known to

a seller?

Their competitor's prices

Their relative rank in the auction
The volume or size of the contract
The identity of the buyer
 Question 3

Q. In a rank online auction, what is not known to

a seller?

Their competitor's prices

Their relative rank in the auction
The volume or size of the contract
The identity of the buyer
 Let’s Recap

• The first technological innovation in procurement happened in the 1970s when Electronic Data
Interchange (EDI) was introduced for the electronic exchange
• The application of technology proceeded along with the advancement in procurement management
function, when supply chain planning and management became a source of competitive advantage.
• Several technological tools integrated the procurement function with the supply chain management
activities.
• E-procurement tools were expected to make the entire procurement function Web-based with a close
interaction between buyers and sellers.
 Link of Video featured in Chapter

Video 1 - Electronic Data https://www.youtube.com/watch?v=jV7okF2MVxI

Video 2 - ERP https://www.youtube.com/watch?v=b3KJkkBs-vs

Video 3 – Introduction to eRFP

https://www.youtube.com/watch?v=XNEX9icfsls

Video 4 – Making of eAuction

https://www.youtube.com/watch?v=P-eB0Fsfyvc

Video 5 – Auction 5
https://www.youtube.com/watch?v=fA8a3Q_usEU&t=10s