E-procurement: supporting opportunities J. W. ten Berge 1, J. H. R. van Duin 1 & P. H. M. Jacobs 2 1 Department of Transport Policy and Logistics Organisation, Faculty of Technology, Policy and Management, Delft University of Technology, The Netherlands 2 Department of Systems Engineering, Faculty of Technology, Policy and Management, Delft University of Technology, The Netherlands Abstract A strategic sourcing research project was done within a large multinational in the food industry. The goals of this project were to research and optimise the procurement process for non-strategic items in the packaging materials portfolio. From the findings in the project followed the need for supplier reduction. Several potential wholesale suppliers were selected to supply the bundled non-strategic items portfolio. The research focussed on the packaging portfolios in the Netherlands and the UK. After having selected the potential suppliers and the portfolio set-up, the E-RFP was set up using the Ebreviate tool [1]. The strategic sourcing project realised reasonable potential savings in the total cost price of the articles and through improvements in the total supply process. The web-based E- RFP as set up in this strategic sourcing project has proved its merits when looking at the results in this project. It is difficult to specify which part of the savings can be ascribed to the E-tool and which part followed from the strategic sourcing process itself. In the procurement process advantages of a web based E- tool are numerous, for example in RFP throughput time, data recollection and data availability. In particular efficiency improvements in the procurement processes are realised through e-sourcing. Keywords: e-sourcing, e-procurement, Request for Proposal, strategic sourcing 1 Introduction This paper deals with the results of a case study carried out at Delft University of technology. It is a strategic sourcing research within the European Supply
300 The Internet Society: Advances in Learning, Commerce and Security Management (ESM) department of a large multinational in the food industry performed in the Netherlands and the United Kingdom. The strategic sourcing process was supported by the e-sourcing tool Ebreviate [1] to engage potential suppliers in an E-RFP and to support the sourcing procedure. The empirical data in this case, both quantitative and qualitative, have been collected through this study in the company. All quantitative data and all processes are mapped in collaboration with representatives of the company. Section 2 contains information about the steps in the procurement process and the definitions used. The third section will handle the portfolio analysis and the supply process analysis performed in this project. In the fourth section the E-RFP procedure and the Ebreviate tool will be introduced. The project results will be shown in the fifth section and the sixth section will round up with conclusions especially about the influences of the use of e-sourcing tools encountered in this case study. 2 Process steps and definitions Procurement consists of all those activities that are necessary to acquire goods and services being consistent with user requirements. [2] Following this very wide definition, the activities involved have to be defined and specified. To define the term supply management, van Weele s definition [3] for the purchasing function can be used as it is considered to be a synonym, with the remark that supply management also involves the responsibility for stock management and transport. The purchasing function comprises the following activities: 1. Specify what should be purchased 2. Selecting one or more adequate suppliers 3. Establishing a contract with the supplier(s) after having negotiated the terms and conditions of supply 4. Actually ordering the items or services 5. Monitoring the delivery of the items or services ordered 6. Following up on delivery, e.g. taking care of claims, administrative activities, etc. van Weele s [3] definition of sourcing comprises the market research for possible sources of supply, the responsibility to ensure the continuity of supply, the activity of looking for alternative sources of supply and keeping up-to-date with all relevant knowledge. This paper focuses on the strategic sourcing research that was done within the Packaging group of the European Supply Management department of the company. In this strategic sourcing process the web-based electronic tool Ebreviate [1] was used to support the Request for Proposal procedure. This E- RFP procedure will be described after the analyses of both the portfolio and the supply processes. The definition of e-sourcing used in this project is presented by the Aberdeen Group [4]: Sourcing is defined as the task, which involves the identification,
The Internet Society: Advances in Learning, Commerce and Security 301 evaluation, negotiation and configuration of suppliers, products and services. E-sourcing is defined by the use of web-based applications, decision-support tools and associated services in the sourcing process. 3 Portfolio analyses and supply process analyses The Electronic tools available for strategic sourcing are support tools, which facilitate the process. First of all insight has to be created into the portfolio of materials to be purchased. Then, the performance indicators of the supply process have to be determined in order to be able to realize process improvements through an improved sourcing strategy. This is part of the classic steps in the sourcing process: -identification, evaluation and configuration of potential suppliers and desired products and services- or -the market research for possible sources of supply, the responsibility to ensure the continuity of supply and the activity of looking for alternative sources of supply- The e-factor is added in paragraph three. 3.1 Packaging materials portfolio Since 1999 the company has shifted its procurement activities and supply management approach from national coordinated organisations, through Local Supply Management (LSM) departments, towards a centralised organisation, through the European Supply Management (ESM) department. As from 2004 the former LSM departments will be integrated into the ESM department to form one supply management department. This research project aimed to investigate which part of the packaging materials portfolio was still under national responsibility of the LSM departments. Possible development directions were investigated for this portfolio in order to improve the supply processes. Table 1 and 2 show the general figures from this research. The spend (spend = annual turnover) on packaging materials is not shown for confidentiality reasons. An item is defined as a product with a unique distinguishing article number in the ERP-system. Table 1: Division ESM/ LSM purchasing contribution for packaging materials in the Netherlands (annual figures 2002). NL Spend mln ( ) % No of items % No of suppliers % ESM 94 2,600 82 60 43 LSM 6 600 18 80 57 Total Confidential 100 3,200 100 140 100 Table 2: Division ESM/ LSM purchasing contribution for packaging materials in the UK (annual figures 2002). NL Spend mln ( ) % No of items % No of suppliers % ESM 95 2,600 89 60 60 LSM 5 300 11 80 40 Total Confidential 100 3,200 100 140 100
302 The Internet Society: Advances in Learning, Commerce and Security From these figures it was concluded that: The packaging material portfolio under local supply management responsibility held relatively low-value and/or low-volume articles. (6% spend (spend = annual turnover) on 18% of the items in NL and 5% spend on 11% of the items) The LSM portfolio held a relatively low percentage of the annual spend The LSM portfolio held a relatively high number of suppliers opposite to the ESM managed portfolio. In general this means that for the larger part (almost 95% in NL and UK) of the items the supply management is organised on a European centralised level. This centralised focus realises more bundled volumes, this can be seen from the figures showing relatively larger volumes/ larger values than the items still managed on a local level; for example 94% of the spend represents 82% of the items. Furthermore, the portfolio under ESM responsibility has a more consolidated supply base than the locally managed items; for example 94% of the spend representing 82% of the items is sourced from 43% of the total suppliers for the Netherlands. The supply management responsibility within the company is spread over different material groups where the material managers are responsible for the supply process of these materials for all sourcing units within the company. For the packaging materials these material groups are for instance divided in flexible materials, carton board, corrugated board, glass, etc. These material groups are based on the company s global hierarchy classification. This classification works two ways, the first division is based on the material the product is made of and the second division is based on the form of appearance. The first development direction for the materials in this LSM portfolio is to transfer the supply management responsibility to the existing material groups under European supply management responsibility where they can be classified according to the global hierarchy classification. The advantage of this development direction is that these materials are then put under the responsibility of the person having the most expertise for the supply process of these materials within the company in Europe. Furthermore, these materials can be sourced with the existing European suppliers and bundled with large existing European volumes in order to realise product rationalisation, volume bundling and supplybase consolidation. After this step there are still some products left which do not fit within an existing European material managers portfolio. These items can be referred to as non-strategic items in the Kraljic strategy matrix (1983) [3] shown in figure 1. Their total supply value is relatively low compared to the entire portfolio and their supply market has a low complexity, which implies that the same or comparable products (substitutes) are offered by a wide variety of market parties (suppliers). The strategic sourcing process within this project focuses on these packaging materials. Table 3 shows the figures of this non-strategic items portfolio for the Netherlands and the UK.
The Internet Society: Advances in Learning, Commerce and Security 303 High Valu Low Leverag Strategi Non - Bottl - Strategi neck Low complexity supply high Figure 1: Kraljic strategy matrix (1983). Table 3: Features non-strategic items packaging portfolio NL & UK (Annual figures 2002). Sum of total spend ( ) No of SUs No of articles No of suppliers NL 4 113 44 UK Confidential 7 67 36 The exact numbers of the sum of total spend (spend= annual turnover), average turnover per supplier and average turnover per article are confidential. They are, however, relatively low compared to the total packaging portfolio. In order to reduce the complexity in this non-strategic items portfolio and to make the most of buying power in this portfolio the possibilities for product rationalisation, volume bundling and supply-base reduction are investigated. Volume bundling can be realized in three ways. Firstly, volumes within material groups can be bundled, this means for example that all tapes should be bundled and sourced from the same supplier. Secondly volumes across material groups should be bundled as much as possible, so that most or all low-value/ lowvolume non-strategic packaging items are sourced from the same supplier. Thirdly the volumes across the different sourcing units per country should be bundled in order to make the most of the buying power of the total organisation within these material groups. Possibilities to expand the geographic vendor base have been researched. Figure 2 shows the conclusions drawn from this research. Figure 2: Geographic vendor base for non-strategic items.
304 The Internet Society: Advances in Learning, Commerce and Security A European wholesale supplier, who can supply the combined portfolio of these non-strategic items is currently not present in the market. A regional party, which could supply more countries, could be a possibility in a few specific regions, for example the Benelux. National suppliers are the most established parties in this portfolio range. They have a strong home-market advantage with an established logistic network. This is a situation expected for items with the features in this portfolio. The low-value/ low-volume commodities have a small supply range, because transport costs over longer distances are too high compared to their value. This is an important factor, which is not changed by using e-tools in the sourcing process or other parts of the procurement process. These findings on the possibilities in geographic vendor base are the same the Netherlands and the UK. Although the UK is more isolated or dependent on its own distribution structure, simply because of the physical barrier formed by the North Sea. 3.2 Supply processes The relatively large number of suppliers in the non-strategic items portfolio, who deliver either low-volumes or items of low-value, indicates possible improvements for the supply process. The related supply processes involved are mentioned below, they all fall under the name of supply chain processes but not all processes are actually performed by the supply management (purchasing) department: 1) Contract maintenance: Every supplier must have signed a contract before the materials can be entered in the ERP system (SAP R/3) and all materials must be part of a contract. Reduction of the number of contracts and the number of contract lines makes contract maintenance more efficient. 2) Price negotiations: This is a regular activity of the responsible material manager (buyer) 3) Ordering: This is the responsibility of the Sourcing Unit planner, who periodically makes call offs for the required volume of the item. This is based on the stock-level and production planning. 4) Delivery/ goods reception: The ordered items are received and placed in stock in the Sourcing Unit warehouse. This is the responsibility of the sourcing unit warehouse manager. 5) Invoice processing: the financial department processes the invoice 6) Quality assurance: All suppliers of the company should be audited to match the company s quality standards In these processes a reduction in the points and moments of contact will be realised when supply base consolidation will be applied. Also a reduced supplybase makes it more interesting to invest, by means of e-business support tools, in the supplier relationships and (joint) process improvements. This is the next phase in e-procurement beyond e-sourcing. Elements like web-based forecast communication to replace the order process are thinkable in the near future.
4 E-RFP & E-RFP process The RFP was set up as a web based e-rfp using the Ebreviate tool from A.T. Kearney [1], which supports the sourcing process. The company had selected this package to support the sourcing process. Ebreviate's Electronic Survey Tool can be deployed to capture data needed to implement effective procurement processes. The technology can be used in many ways throughout the e-sourcing process to perform, for example Requests for Proposals (RFPs), customer requirement surveys and user and supplier surveys. 4.1 E-RFP Ebreviate supports the sourcing process by providing a customizable tool, which can be set up and sent out in a protected web environment using the latest SSL (secure socket layer) encryption. The suppliers which where invited to join in the request for proposal phase, received a login name and password to enter the online RFP. Furthermore, there is the library functionality to store templates, sections, or best-in-class RFPs for copy and reuse. The E-RFP was set up to measure two important supplier performance subjects: 1) Pricing table to identify the supplier s material cost-price level: The Pricing table consisted of the selected items, with their specification and asked for the supplier s current price offer (exc. Works) and their transport costs 2) Performance measurement questions for process improvements, for example: References of current comparable activities of the potential suppliers Companies available resources to support and improve the supply chain processes within company s Sourcing Units Examples of or suggestions for supply chain improvements Realizing performance improvement in the supply processes was an important objective in this sourcing research. Therefore it was stressed in the RFP that the business is not necessarily awarded to the lowest bidder, (following the results of the price offers in the pricing table) but overall supply chain performance was just as important. 4.2 The E-RFP process The Internet Society: Advances in Learning, Commerce and Security 305 The RFP process using the Ebreviate e-sourcing tool was first performed in the Netherlands involving four pre-selected potential packaging wholesale suppliers. All suppliers involved received an invitation e-mail with a password and username. The entire RFP cycle from the moment the RFP site went online to the return of all proposals was two weeks. This is half the time spent on former comparable paper-based RFPs. Two weeks after the RFP was completed in the Netherlands the same steps were performed in the UK. The RFP preparation and set-up for the UK took much less time than the process in the Netherlands. The RFP from the operation
306 The Internet Society: Advances in Learning, Commerce and Security in the Netherlands was downloaded from the Ebreviate library and copied. Only the specific details for the UK (dates, locations, product specifications etc.) had to be adjusted, the base text was identical. This saved a lot of time in the preparation. Also in the UK the completed proposals were back within two weeks. The digital uniform way of receiving the proposals in Ebreviate made them much more easy to process. The entire RFP process was much less time consuming in preparation and it also involved less administration. Every part of the RFP is stored in the Ebreviate tool and that is why there was no large paperbased administration, which was sometimes the case in classic RFPs. Furthermore the web-based data availability made it possible to process the proposals simultaneously both in the UK and in the Netherlands with all the people involved in the RFP process. 5 Project results The E-RFP as set-up in Ebreviate facilitated a smooth RFP procedure. The RFP was performed faster than comparable paper-based RFP procedures in the past. It also saved time in the strategic sourcing procedure within the supply management department and therefore the procedure put less stress on the resources of the ESM-department. 5.1 Financial results in the cost price of the items The bundling volumes sourced at a national packaging wholesaler showed a potential direct savings (following the proposals) of 10% - 15% in the cost price of the items purchased. The RFP in the Netherlands as well as the RFP in the UK showed these same saving figures. There are even more opportunities for future savings through product rationalisation and re-specification across all sourcing units. 5.2 Process improvements There is a huge efficiency potential through supply base consolidation. Supplybase rationalisation realises a reduction in the points and moments of contact in the different steps of the supply management processes. The different steps of: contract maintenance, price negotiations, ordering, delivery/ goods reception and quality assurance all benefit from a reduction of the points and moments of contact. Combined transport with all items in this non-strategic portfolio coming from one wholesale supplier, can reduce total transport costs. This can lower the price of the products purchased. The total savings contribution through the process improvements realised in the 6 processes mentioned are estimated at 10-15% of the total non-strategic items portfolio purchasing value. These indirect savings are mainly realised through efficient processing in the physical product flow (goods reception in the warehouses, efficient transporting etc.), the information flow (ordering, contract
The Internet Society: Advances in Learning, Commerce and Security 307 maintenance, price negotiations, etc.) and the financial flow (processing invoices etc.). Furthermore, there are opportunities for investing in a supplier relationship, i.e. through new e-business/ e-procurement tools, in order to realise further process efficiency. The opportunities for investing in supplier relationships and process improvements with one larger supplier are far better than with over 40 very small suppliers. For example (Web-based) forecast-communication can in time replace the ordering process. 5.3 Outsourcing opportunities Introducing a single supplier packaging wholesaler in this non-strategic items portfolio offers opportunities in the direction of outsourcing activities in the supply management processes. A single, larger supplier has better overview of the desires within the company s organisation regarding the supply of the items. Furthermore, following the supplier responses in the submitted proposals, a partnership relation with a packaging wholesaler offers further improvement opportunities in: Dedicated resources from this supplier, locally and centrally Product rationalization across all sourcing units Looking for substitute items with better performance or prices Just in time delivery service Local stockholding Direct line feed Scheduled reporting for stock Management Partnership approach, continual improvement policy on key performance indicators basis Forecast communication Vendor Managed Inventory All these activities are optimisation opportunities, in which the responsibility for the task is pushed towards the supplier in the direction of outsourcing. All these activities also offer new opportunities for the introduction of e-business tools, which could support these activities very well. 6 Conclusions on the role of the e in this sourcing project Most of the activities performed in this strategic sourcing project would exist even without the availability of the Internet. However, e-sourcing realises several clearly experienced benefits in: Speed/ shortened sourcing cycles; through efficient processing of information the time required for completion of the RFP was reduced to two weeks. Efficiency in sourcing process; no large paper based archive and work reduction through availability of example RFPs in library Equal information distribution; all suppliers involved in the RFPs had equal access to all on-line information.
308 The Internet Society: Advances in Learning, Commerce and Security Scale-ability; it does not take more time to send out the RFP too extra suppliers, it takes just one e-mail address extra and an extra account is made in the on-line RFP. Knowledge distribution; through the available library a knowledge base and proven sourcing methodologies are available company wide The total financial savings through this (e-)sourcing project were a potential 10-15 % in direct costs through the price of the articles and another 10-15 % savings in indirect costs through process improvements. The process improvements were realised through supply-base consolidation and process improvements with the one wholesale supplier for the total portfolio. It is difficult to indicate which part of these savings (if any) can be ascribed to the use of the Ebreviate e-sourcing tool. The findings in this project are that the use of this e-sourcing tool realises savings and improves efficiency especially in the sourcing process itself. For the reason stated in the first sentence of these conclusions it goes too far to say that these savings are only realised through e-sourcing. The normal sourcing activities have a far bigger contribution to the savings than the einfluence. The e in e-sourcing however does really have its influence in the process efficiency of the sourcing process! One point where the e-sourcing tool can really affect the content of the sourcing process is in its possibility for simple scale-ability. Through the efficient data processing and the relative ease to add extra potential suppliers in the Request for Proposal phase, more suppliers can be involved or contacted for a proposal at almost no extra cost. And what is even more important, it facilitates the supply management/ purchasing department so that it can work more efficiently. The e-sourcing tool reduces the sourcing process and administration costs. These improvements create the opportunity to apply strategic sourcing to a greater part of the spending, with the same available resources. This is of course a very huge benefit in itself and offers the supply management department to pick up even more opportunities to contribute to the profitability of the entire organisation! References [1] A.T. Kearney procurement solutions; www.ebreviate.com [2] Coyle, J.J., Bardi, E.J., Langley Jr.,C.J.: The management of business logistics; A supply chain Perspective; seventh edition, west publishing company, 2003 [3] Weele, A.J. van: Inkoop in strategisch perspectief; analyse, planning en praktijk (in Dutch). Alphen aan de Rijn Samson, 1997 [4] Aberdeen group: Make e-sourcing strategic; from tactical technology to core business strategy, Sept. 2002 [5] Berge, J.W. ten; Insight in the supply process of packaging materials, Delft University of technology, Aug. 2003. [6] Seppanen & Suomala: E-business in b-2-b wholesaler s supply chain: effects on costs and activities, 9 th annual conference of European operations management association. Copenhagen, Denmark. 2002