E-Procurement and the Purchasing
Process
Many
organizations are beginning to re-evaluate their purchasing processes, and
identify new types of e-procurement tools that will meet their needs. This
summer, Karl Mundt and Mark Benson have been working with PPD to map out their purchasing process,
and identify discrepancies in the process that may exist.
The
purchasing process basically involves the following elements:
1.
Identify or anticipate material or service needs.
2.
Evaluate potential suppliers.
3.
Select suppliers.
4.
Release and receive purchase requirements.
5.
Continuously measure and manage supplier performance.
These
stages may vary in different organizations, depending on whether purchasing is
sourcing a new or repetitively purchased item, and also whether there is a
detailed approval process for purchases that exceed a specific dollar amount.
New items require that purchasing spend much more time up front evaluating
potential sources. Repeat items usually have approved sources already
available. The Exhibit illustrates a typical purchasing process used in many
enterprises with some typical contingency elements shown. This diagram also
shows how supplier evaluation and selection involves the purchase of new items
or services, or during a review of existing purchase contracts.
A
document flow accompanies the movement of orders and material throughput the
purchasing process. Historically, preparing and managing the proper purchasing
documents has been a time-consuming process. Most firms have streamlined the
document flow process to reduce the paperwork and handling required for each
purchase. The suite of tools used to achieve efficiency in purchasing
transactions is broadly defined as “e-procurement”. Companies are using
e-procurement tools to manage the flow of documents by (1) automating the
document generation process and (2) electronically transmitting purchase
documents to suppliers. The benefits of electronically generating and
transmitting purchasing-related documents include
A virtual elimination of paperwork and paperwork handling
A reduction in the time between need recognition and the release
and receipt of an order
Improved communication both within the company and with
suppliers
A reduction in errors
Lower overhead costs in the purchasing area
Purchasing personnel spend less time on processing of purchase
orders and invoices, and more time on strategic value-added purchasing
activities.
The
electronic documents often used in the process are represented in the Exhibit
by boxes with cross-hatches.
1.
User Need for Product or Service
The purchasing process begins with identifying or anticipating a material or
service needed by a user, and electronic documents may be used in any of the
following forms:
Purchase requisitions from internal users
Forecasts and customer orders (electronically)
Routine reordering systems (barcodes)
Stock checks
Material requirements identified during new product development
2.
Purchase Approval and Supplier Evaluation
As shown in the exhibit, there may be various steps in the process required,
depending on the size of the purchase, as well as whether the company has
purchased form the supplier before. Once the user need has been recognized, the
system will check to see if an approved supplier has already been entered into
the database. In many cases, for a repetitive purchase, purchasing may have
already negotiated a contract with the supplier, with established terms for
delivery, pricing, quality, etc., and the supplier has already been entered
into the accounting system. If the purchase requisition requests an item which
is a very small dollar amount, the system may allow the user to purchase the
item with no approval required through a system such as a e-procurement system,
online catalog, or purchasing card (such as VISA or America
Express). In cases when the dollar amount exceeds the users’ permission to
generate a purchase order, the purchase must then go through an approval
process, to review the requisition, approve it, and allow a purchase order to
be created.
If
the requisition requests an item for a higher dollar amount with no existing
supplier, then purchasing may obtain quotes or bids from potential suppliers.
Purchasing forwards a request for quotation (RFQ) to
suppliers inviting them to submit a bid for a purchase contract.
When
the size of the purchase dictates that a detailed evaluation is required for a
new purchase, supplier evaluation may be required. The potential evaluation of
suppliers begins after determining that a purchase need exists (or is likely to
exist) and the development of material specifications occurs. For routine or
standard product requirements with established or selected suppliers, further
supplier evaluation and selection is not necessary, and the approval process
may be generated. However, potential sources for new items, especially those of
a complex nature, require thorough investigation to be sure that purchasing
evaluates only qualified suppliers.
3.
Bidding, Negotiation, and Supplier Selection
Final supplier selection occurs once purchasing completes the activities
required during the supplier evaluation process. Selecting suppliers is perhaps
one of the most important activities performed by companies. Errors made during
this part of the purchasing cycle can be damaging and long-lasting. After bids
have been received, and/or the negotiation has taken place, the sourcing team
will select a supplier, and then move on to authorize the purchase through the
purchase approval process.
4.
Purchase Approval
After the supplier is selected or a requisition for a standard item is received,
purchasing grants an approval to purchase the product or service. This is
accomplished through an electronic drafting of a purchase order (PO), sometimes
called a purchase agreement, after supplier selection is complete. Purchasing
must take great care when wording a purchase agreement because it is a legally
binding document. Almost all purchase orders include the standard legal
conditions that the order (i.e., the contract) is subject to on the reverse
side of the agreement. The purchase order details critical information about
the purchase: quantity, material specification, quality requirements, price,
delivery date, method of delivery, ship-to address, purchase order number, and
order due date. Note that firms are increasingly using computerized databases
to perform these processes, and are moving toward a “paperless” office.
5.
Release and Receive Purchase Requirements
This phase of the purchasing cycle involves the physical transmittal of
purchase requirements. This should be a fairly routine, although not
necessarily the most efficient, part of the purchasing cycle. Some
organizations transmit orders electronically, while others send material
releases through the mail or by fax. Electronic data interchange (EDI), which involves the electronic transfer of purchase
documents between the buyer and seller, can help shorten order cycle time. EDI transactions, particularly through the
Internet, will increase over the next several years. The shipping and receiving
processes require several other important documents (which also can be
electronic), including the material packing slip, the bill of lading, and the
receiving discrepancy report.
6.
Continuously Measure and Manage Supplier Performance
One way to identify the best suppliers is to track performance after awarding a
contract. Supplier measurement and management is a key part of the purchasing
cycle. As shown in the exhibit, buyers should not assume that the purchasing
cycle ends with the receipt of an ordered item or the selection of a supplier.
Continuous measurement is necessary to identify improvement opportunities or
supplier non performance.
A
desired outcome from performance measurement is improved supplier performance.
If no formal evaluation takes place, a buyer has little insight into supplier performance
over time, and tracking any performance improvement that results from supplier
development efforts is not possible. Without a measurement and evaluation
system, a buyer lacks the quantitative data necessary to support future
purchase decisions.
