School of Business
A380A5000 Kandidaatintutkielma, Kansainvälinen liiketoiminta
Bachelor’s thesis:
Problems related to the adoption of e-procurement for indirect purchases
Viljami Vanjoki 0297809
Contents
1. INTRODUCTION ... 1
1.1 Structure of the thesis ... 2
1.2 Key terms ... 3
1.3 Research problem ... 4
1.4 Objectives and limitations... 6
1.5 Methodology ... 6
1.6 Research process ... 7
1.6.1 Collecting the material ... 8
1.6.2 Analyzing the material ... 8
2. E-PROCUREMENT ... 10
2.2 Different e-procurement solutions ... 10
2.3 Indirect purchases ... 12
2.4 Procurement process ... 13
2.5 Implementation of an e-procurement solution ... 15
2.6 Benefits of e-procurement ... 18
2.7 Challenges and risks of e-procurement ... 21
3. ANALYSIS AND RESULTS ... 25
3.1 Current policies concerning indirect purchases ... 25
3.1.1 Procurement organization and processes ... 25
3.1.2 Categorization of indirect purchases ... 26
3.2 Problems related to e-procurement adoption ... 27
3.3 How to raise the attractiveness of e-procurement? ... 31
4. DISCUSSION AND CONCLUSIONS ... 34
4.1 Implications for future research ... 35
REFERENCES ... 36
APPENDIX ... 1
Appendix 1. Questionnaire ... 1
1. INTRODUCTION
In the recent years the Internet has had revolutionary effects on corporate purchasing practices, in both direct and indirect purchases (Amitt & Zott 2001;
Puschmann & Alt 2005; Quesada, Gonzalez, Mueller & Mueller 2010). Since 1980s companies have been adopting enterprise resource planning (ERP) or manufacturing resource planning (MRP) as a basis for supply chain management.
The diffusion of new e-business technologies in the late 1990s has created new working practices and new business models for corporate business functions (Puschmann & Alt 2005). While the focus of companies has been in the reduction in cost of bought-in goods and services, there has been a need for procurement managers in increasing their productivity and contribution to value creation (Smart 2010). This has prompted the interest of companies in redesigning their relationships also with suppliers of indirect goods and services (Puschmann & Alt 2005).
According to Orr (2002) indirect purchases can account for 30%-60% of a firm’s total expenditures. Especially for service companies e.g. banks the expenditures can rise up to 60 % of overall purchases. However, the focus has been more on the supply chains for direct material suppliers than indirect, due to their low transaction volumes, low product values and low strategic importance (Puschmann & Alt 2005).
In order to achieve substantial savings and / or added value, business managers need to be paying more attention to the indirect purchasing process (de Boer, Holmen, Pop-Sitar 2003). Generally corporate procurement practices related to the purchasing of indirect goods and services have been affected with problems, such as inefficient buying, redundant and disconnected processes, non-strategic sourcing and maverick purchases (Subramaniam & Shaw 2004).
This thesis consists of four phases and aims to find out why the greatly hyped e- procurement solutions for indirect purchases have not succeeded as expected.
Purchasing of indirect materials is gaining more interest from companies, because of its potential impacts on corporate-wide savings and productivity (Puschmann & Alt 2005), and that is why this thesis only concentrates on e-procurement solutions designed for purchasing of indirect materials. The target is to identify why not more
companies have adopted e-procurement solutions for indirect purchases. Next, the structure of the thesis is explained.
1.1 Structure of the thesis
The first chapter introduces the topic of the thesis including the key terms related to the thesis. The research framework (figure 1) describes how the research is structured and what the purpose of the thesis is. Next, the research problem and the sub questions are presented. Later the objective and limitations of the thesis and the research methodology of the thesis are explained. In the end of chapter one the research process is examined. It describes for example how the theoretical and empirical material were collected and analyzed.
In the second chapter the theory of the thesis is reviewed. The theory of the research is based on previous literature regarding e-business and in particular e-procurement.
Even though e-procurement is a relatively young research area, there has been quite a lot of research related to e-procurement and its impacts in the recent years. Most of the research has been focused on the benefits and challenges of e-procurement solutions (Attaran & Attaran 2002; de Boer, Harink & Heijboer 2002; Presutti 2003;
Piotrowicz & Irani 2010; Quesada et al. 2010) and how to succeed in e-procurement implementation (Croom & Brandon-Jones 2005; Angeles & Nath 2007; Smart 2010;
Trkman & McCormack 2010). The theory of this thesis consists of examination of different e-procurement solutions; indirect materials; procurement process;
implementation of e-procurement; and the benefits and challenges of implementing such solutions.
The third chapter introduces the analysis and results of the research and answers to the research problem and its sub question. First the current state of indirect procurement in the case companies is examined. Later in the chapter the findings of the research are presented. Finally, in the last chapter one can find discussion and conclusions of the research as well as suggestions for future research.
Figure 1. Research framework
1.2 Key terms
The key terms related to this thesis are e-business, e-procurement, e-procurement solution, procurement process and indirect materials. The terms are explained here to make it easier for readers of this thesis to fully understand the topic at hand.
E-business: Croom (2005, 55) defines e-business as “the use of systems and open communication channels for information exchange, commercial transactions and knowledge sharing between organizations”.
E-procurement: “E-procurement is a specific area of e-business that covers both internal processes as well as B2B processes” (Versendaal & Brinkkemper 2003, 39).
E-procurement allows companies to leverage Internet technology in the purchasing process. According to Davila, Gupta and Palmer (2003) any technology designed to facilitate the acquisition of goods over the Internet can be defined as e-procurement.
E-procurement solution: There are several different e-procurement solutions for companies to choose from. E-procurement solution is a web-based client / server which automates the buying process and captures the necessary data from purchases for spend analysis. Different solutions can be used for indirect purchases, auctioning, sourcing, tendering and many other procurement related tasks.
Procurement process: Procurement process refers to the purchasing of goods and services. However, it does not only comprise out of buying and paying but involves many other activities too, such as need clarification, purchase order generating etc.
The goal of the procurement process is to satisfy the need of the company by acquiring goods and services from preferred suppliers for the most favorable price.
Indirect purchases: Indirect purchases comprise from goods and services that are not involved in the manufacturing process e.g. office supplies, computers, cleaning equipment, consulting services and telecommunications. Indirect materials are also often referred in the literature as maintenance, repair and operation (MRO) and non- product related (NPR) materials.
1.3 Research problem
The objective of the research problem is to give the reader as well as the researcher an exact idea of the matter the thesis is trying to clarify or search answers for. If there is some earlier knowledge about the matter one is doing research on, the research problem can be presented as a question (Metsämuuronen 2006, 44-45).
While there has been some earlier research regarding the topic of the research, in this thesis the research problem and the sub question are presented as questions.
Research problem:
- What are the reasons behind a company not adopting e-procurement solution for indirect purchases?
The research problem arises from the fact that the success of e-procurement solutions has not been as great as expected (see for example Davila et al. 2003). A lot of businesses are still relying on to traditional procurement when it comes to the purchasing of indirect goods. The increasing need for corporate procurement functions to streamline its processes and create more value to the business is pushing procurement managers to find new ways of making purchasing more efficient. Even though many researchers have found that e-procurement solutions can have a major impact in making the procurement process simpler and more efficient, many businesses are still neglecting these technologies. The objective of this thesis is to find out why. The sub question of the research aims to identify how the problems related to e-procurement adoption, found in the research, can be tolerated and what should e-procurement solution vendors do to make the adoption process more simple and painless for companies.
Sub question:
- How to raise companies’ interest towards e-procurement?
The purpose of the sub question is to find solutions for how to raise companies’
interest towards adopting e-procurement. Is there something to be done, to the reasons why companies are neglecting these solutions, in making e-procurement more attractive to organizations; and how can e-procurement software vendors lower the bar for companies to adopt e-procurement for indirect purchases? The researcher attempts to identify solutions how e-procurement vendors could ease the problems found in the research, by using earlier e-procurement literature and interviews as a basis for analysis.
1.4 Objectives and limitations
The objective of this thesis is to find out why more businesses are not turning into e- procurement in order to streamline their procurement processes for indirect purchases. Even though the benefits of e-procurement solutions have been widely recognized (Piotrowicz & Irani 2010), why are they not used? Indirect purchases can in total account for a big part companies overall spending, especially for service organizations. That is why more companies are also increasingly concerned about their spending. There has been a lot of hype about e-procurement solutions and their benefits to the corporate business functions, but they have not quite lived up to the hype.
While there are several different forms of e-procurement solutions, this thesis only concentrates on solutions, which are aimed to the purchasing of indirect goods and services. The growing awareness towards indirect procurement and how to make it more efficient has brought new e-business solutions designed specifically for indirect purchases to the markets. The lack of success for these solutions has prompted the interest of the researcher towards these solutions and their problems. The research is also limited to the Finnish market, since all the interviews have been conducted in Finland with Finnish companies.
1.5 Methodology
This thesis is a qualitative business research. Qualitative research aims to produce new knowledge about how things work in real-life business context (Eriksson &
Kovalainen 2008, 3). As well as in quantitative business research, qualitative business research also relies on several methods of data collection and analysis (Eriksson & Kovalainen 2008, 3).
In the second chapter, the theory of the thesis is examined. According to Lee and Lings (2008, 109) “a theory is the foundation on which much of the academic research is based”. They continue that without theory researchers do not understand how phenomena are related to each other and why they relate to each other and in
what way. The theory in this thesis has been collected using scientific articles and other literature to create a basis for the research. The empirical data was collected through interviews. In order to find out the reasons behind companies not adopting e-procurement three interviews were conducted, two over the phone and one via email. During the time of the interviews, none of the companies had a comprehensive e-procurement solution for indirect purchases. To protect the privacy of the companies interviewed in this research, they are referred in the text as company A, B and C.
The interviews used in this research were semi-structured. Semi-structural interviews are useful if the researcher has a clear theoretical understanding of the topic, which allows the researcher to create an appropriate questionnaire (Lee & Lings 2008, 218). Semi-structured interview means that there is some flexibility in the wording and order of the questions. The script of the interview is not preplanned and the order of the questions can vary, the interviewer can also ask for examples and so on to get more detailed answers. (Eriksson & Kovalainen 2008, 82; Lee & Lings 2008, 218). The major advantage of semi-structured interviews is that the materials are somewhat systematic and comprehensive, while the tone of the interview is fairly conversational and informal (Eriksson & Kovalainen 2008, 82). The questionnaire used in the interviews is presented in appendix 1.
1.6 Research process
This paragraph describes how the research was executed. The research was written between September and December of 2011. First the theory of the thesis was put together using earlier literature related to e-business and e-procurement. At this stage also the research problem and its sub question were created and the methodology of the research was decided. After the theoretical context of the research was formed it was time to collect the empirical material for the research.
Researcher conducted three interviews to collect the empirical data for analyzing.
Finally, the empirical data was analyzed by using the theory part as a basis for the analysis.
1.6.1 Collecting the material
The material for the research was collected from two different sources. All the material for the theory part of the research was collected using academic literature such as scientific articles and books. Researcher searched various academic databases and journals for appropriate material regarding the topic of the research.
After the material for the theoretical part was mainly collected, researcher started to form the theory, suitable for the target of the thesis.
The empirical material was collected through interviews. Two of the Interviews were conducted over the phone and recorded for later analysis. The third interview was carried out via email. The interviews were semi-structured and the questionnaire used in the interviews included ten questions. Because all of the interviews were conducted in Finnish they had to be translated into English for analysis. When one is translating interviews from one language to another, there is a need for really thorough processing of the language, so that the significance and meaning of the interview does not change.
1.6.2 Analyzing the material
Once all of the empirical material was collected it was time for analysis. The target in the analysis was to find reasons that prevent companies in adopting e-procurement solutions. According to (Lee & Lings 2008, 236) a general approach to qualitative data analysis includes simplifying, focusing and reducing the rich data into its core ideas. After the qualitative data is analyzed and reduced the final part is drawing conclusions. Lee and Lings (2008, 252) warn that one needs to be very careful when drawing conclusion out of qualitative data. They argue that there is a fine line in interpreting data in light of prior theory and researchers own ideas, and biasing the conclusions.
The analyzing of the data in this research began with summarizing the data collected. Researcher tried to identify if there were any similarities or other linkages between the answers. Once all of the data was carefully analyzed, researcher tried to find all the appropriate information related to the research problem and sub
question. By identifying the essential information related to the research problem, the focusing and reducing of data was made much easier. Finally, when all the data was thoroughly analyzed and focused to answer the research questions, the last part was drawing conclusions.
2. E-PROCUREMENT
In today’s rapidly changing business environment the companies with the most competitive supply chain will remain winners (Presutti 2002). According to Lankford (2004) companies that have successfully integrated the Internet into management of the supply chain hold a competitive advantage over those who have not. E- procurement solutions aim to automate workflows and streamline the procurement process in order the make the supply chain more efficient (Davila et al. 2003). This chapter explains what e-procurement solutions are and how they work. This thesis concentrates on managing indirect purchases, which are explained later in the chapter. The critical issues related to the implementation of e-procurement are also presented in this chapter. Finally, the benefits of these solutions are introduced, as well as the challenges and risks organizations may face while adopting e- procurement technologies.
2.2 Different e-procurement solutions
Procurement is usually one of the largest expense items in a company’s cost structure and can have a significant influence on company’s overall performance.
Croom and Johnston (2003) recognize that procurement activity is an important activity in all organizations whether public, private or governmental. Procurement managers are constantly looking for solutions to lower the high procurement costs (processes, risks, reliability) by automating the supply chain (Attaran & Attaran 2002;
Trkman & McCormack 2010).
There are many different classifications for e-procurement, but common to all is that e-procurement consists of different applications (Knudsen 2003). The critical difference of e-procurement compared to traditional procurement is that it allows individual employees to order goods and services directly from their own PCs through the web (Croom & Johnston 2003).
A large number of different applications and systems of e-procurement are identified in the literature. De Boer et al. (2002) divide e-procurement into six forms:
- e-MRO
- web-based ERP - e-sourcing - e-tendering
- e-reverse auctioning - e-informing
This thesis mostly concentrates on e-MRO solutions, which refers to the process of creating and approving purchasing requisitions, placing purchase orders and receiving indirect goods and services by using a software system based on the Internet technology (de Boer et al. 2002). Such solutions can be existing function within systems such as SAP, or totally independent solutions integrated into ERP applications (Smart 2010). The solution enables employees to purchase goods from preferred supplier catalogs, while capturing the spend data in the process. When the purchase has been made the solution automatically routes the employees’ selection of a good through the necessary approval processes and protocols. (Davila et al.
2003)
Submarian and Shaw (2004) define e-procurement system (figure 2) as a Web- based client/ server application used to replace the manual procurement process.
Simply put e-procurement refers to the purchasing of goods and services using the Internet. E-procurement solutions cover three major procurement areas:
procurement transactions, procurement management and market-making. It also impacts four major operative procurement activities, which are: searching of products or services, order processing, monitoring and control, and coordination of relevant information. On the buyer side the e-procurement solution is usually connected to other existing information systems, such as ERP. This allows companies to leverage critical enterprise data present on these systems. On the supplier side, the solution is mostly connected to the suppliers order fulfillment system or product catalogs on the website of the supplier. (Subramaniam & Shaw 2004)
Figure 2. A web-based e-procurement system modified from Subramaniam and Shaw (2004)
2.3 Indirect purchases
According to Neef (2001) procurement materials can be divided into two separate categories: direct and indirect. Direct materials are those involved in the manufacturing process and related to the production of finished goods, whereas indirect materials relate to the materials that do not result directly in finished goods.
Typical indirect purchases involve office supplies and furniture, computer hardware and software, insurances, telecommunications, traveling and cleaning materials (de
Boer et al. 2003). Indirect materials are also widely referred in the literature as maintenance, repair and operation (MRO) and non-product related (NPR) materials.
Most companies implementing e-procurement solutions start their iniatives with the purchasing of indirect goods (Angeles & Nath, 2007). Telgen and de Boer (1995) identified the typical characteristics related to indirect purchases: (1) they consist of a wide range of goods and services, which are often purchased from an even larger number of suppliers, (2) they are often time consuming as they consist of non- standardized items which are usually purchased in small orders, (3) they show high end user involvement in the tactical purchasing phases which implies that indirect purchasing takes place virtually all over the firm, (4) in total a lot of money is involved in indirect purchases, and (5) they attract low attention from managers.
Due to the varying characteristics of purchasing indirect materials, buyers often have to spend a lot of time dealing with individual transactions. This means negotiating with suppliers, converting purchase requests to purchase orders, handling queries and ensuring the correct allocation of invoices received. This huge operational workload is time consuming and derives buyers to neglect more strategic tasks.
(Puschmann & Alt 2005)
2.4 Procurement process
The procurement process is one of the most important processes of a company. The procurement process usually varies between companies due to activity times and relations with suppliers (Trkman & McCormack 2010). A basic procurement process (shown in figure 3) starts with the specification of need and ends with settlement and payment. Presutti (2002) states that e-procurement systems have the power to transform the purchasing process because it has an effect on all of the steps identified.
E-procurement brings about important simplifications of the operational workload for buyers by decentralizing the operational procurement process, therefore improving the effectiveness and efficiency of the purchasing process and enabling buyers to focus on more strategic tasks (Presutti 2002; Puschmann & Alt 2005). When
companies are adopting e-procurement solutions one has to remember that organizational changes (and / or process improvements) can often bring even greater savings than implementation of a simple technology (Trkman and McCormack 2010).
Figure 3. Basic procurement process by Trkman and McCormack (2010)
Kalakota and Robinson (2001, s.308) have listed the five key challenges procurement managers are facing in the increasingly competitive business world:
- “Reducing order processing cost and cycle times
- Providing enterprise-wide access to corporate procurement capabilities - Empowering desktop requisitioning through employee self-service
- Achieving procurement software integration with company’s back office systems
- elevating the procurement function to a position of strategic importance within the organization”
E-procurement can help companies to achieve the targets listed above. It can have an impact on the whole procurement function and its processes, as well as other corporate business functions for example accounting. Next, the benefits and challenges of implementing an e-procurement solution are examined.
2.5 Implementation of an e-procurement solution
Implementing an e-procurement solution is not as simple as many businesses think (Croom & Brandon-Jones, 2005; Angels & Nath 2007; Smart 2010). According to Yu, Yu, Itoga and Lin (2008) companies implementing e-procurement need to clearly understand the purpose of launching such a system. It involves careful analysis about how e-procurement will affect a company and its strategy and in which area it will obtain financial and non-financial benefits. The drivers and problem factors behind adopting e-procurement technologies vary between companies. Smart (2010) has identified some of the common drivers and problem factors (table 1) related to e- procurement implementation.
Table 1. E-procurement drivers and problem factors modified from Smart (2010)
Drivers Optimize strategic sourcing policy Support spend savings targets Establish common processes
Standard platform for managing procurement spend Knowledge sharing between business units
Move procurement managers from transactional to strategic activities Improving productivity of purchasing personnel
Spend compliance Visibility of global spend
Improved supplier management and selection Integration with suppliers
Auditable spend management data Achieve buying leverage
P.O. (Purchase order) cost reduction Efficient payment and invoice settlement Centralize control
Reduce supplier numbers
Raise standards within procurement function
Problem Factors Unclear original business case Poor legacy systems and data Visibility on spend not solved
Need to use suppliers’ systems to get best deals Change management
Training requirements
Different accounting / reporting rules globally
Misunderstanding of what the technology could deliver Finding new people with right skills
Integration to external platforms Wrong targets set initially Re-defining task and roles role of internal communications Not possible to add all suppliers Buying systems not user-friendly Software needs updating over time Reducing supplier numbers proved difficult
As seen in table 1, when businesses are adopting e-procurement solutions there are several factors to consider on many levels of the organization. To succeed in e- procurement implementation Kalakota and Robinson (2001, s.337-347) have proposed a seven step roadmap for business managers (figure 4). The roadmap starts with clarification of goals and ends to the education of solutions end-users.
According to the authors all of the steps need to be covered thoroughly in order to fully succeed in e-procurement implementation.
Figure 4. Roadmap for e-procurement implementation modified from Kalakota and Robinson 2001
Clarify your goals: Businesses should make sure that the business problem or goal is well defined and understood. Procurement managers need to ask themselves what are the functions you are trying to improve and are the goals clearly defined and reachable (Kalakota & Robinson 2001)?
Construct a process audit: After setting the goal businesses should analyze their current procurement process. It is important to understand where you are now, in order to reach the tomorrow. Businesses should first determine what kind of purchasing is the solution targeted to support: direct or indirect (Kalakota & Robinson 2001)? As Presutti (2002) states, for a business to realize maximum value from an e- procurement initative, the whole purchasing process must be evaluated to determine if it needs to be reengineered.
Create a business case for e-procurement: Setting up a business case for e- procurement implementation can be useful, as it forces the company to
systematically analyze the business (Kalakota & Robinson 2001). Smart (2010) recognizes that there has been a problem in measuring the value of IT investments and in building a business case for such investments. This derives from the fact that, in many cases the benefits from implementing an e-procurement solution are intangible and non-financial therefore some traditional accounting based-methods such as ROI are not able to capture them (Piotrowicz & Irani, 2010).
Develop a supplier integration matrix: Without supplier commitment and involvement, the e-procurement project is useless. Companies should develop a supplier integration matrix. The matrix helps determine what kind of relationship is best for individual vendors (Kalakota & Robinson 2001). Involving suppliers in organizations e-procurement deployment is important, since it also has a significant impact on suppliers IT-infrastructure and strategy (Croom and Brandon-Jones, 2005). As Smart (2010) identified, neglecting the impact of suppliers in company’s e-procurement deployment may lead to the failure of the whole project.
Select an e-procurement application: There is a variety of different e-procurement applications for companies to choose from (de. Boer et al., 2002). By categorizing the products and services purchased, companies can more easily decide on the required procurement strategies and e-procurement applications (Smeltzer, 2001).
Kalakota and Robinson (2001) suggest four questions that managers should think about, in order to define the right application for their company: Will it support my procurement process; does it leverage my other application investments; will it work seamlessly with other applications and; is it extendable?
Remember: integration is everything: Integrating the e-procurement solution with suppliers and company’s existing back-office systems is the most important thing in e-procurement implementation (Kalakota & Robinson 2001). According to Croom and Brandon-Jones (2005) Integration with company’s finance system had a direct impact on the level of process savings and was also an important determinant in selecting the application.
Educate, educate, educate: Redesigning the procurement process and influencing end-user behavior towards the new procedures and business rules is one of the
most critical factors in a successful e-procurement implementation (Angeles and Nath, 2007). Change tends to generate resistance and managers should deal with it by communicating and encouraging employees to comply with the new guidelines (Kalakota & Robinson 2001). Angles and Nath (2007) propose that providing information about their spend to employees encourages them to take ownership of savings targets with the use of re-engineered procurement processes.
2.6 Benefits of e-procurement
The benefits of adopting e-procurement technologies have been widely researched in the literature (Kalakota and Robinson 2001; Attaran & Attaran 2002; de Boer et al.
2002; Davila et al. 2003; Croom and Brandon-Jones 2005). The primary motivation for companies adopting e-procurement solutions has been cost reductions and process efficiencies. Croom and Brandon-Jones (2005) found that cost reductions in goods purchased comprise from three key issues: consolidation of purchase specifications; reducing the number of suppliers and; through improved compliance with existing contracts. A research by Quesada et al. (2010) proposes that e- procurement technologies affect positively to company’s procurement practices and procurement performance. Positive impact on procurement practices facilitates the development of operational tasks in the procurement function, which leads to continuous improving. As the operational tasks are performed more effectively the procurement performance is enhanced.
According to Davila et al. companies using e-procurement solutions report savings of 42 percent in purchasing transactions costs. Another research by Croom and Johnston (2003) found that e-procurement implementation can have up to 75 % cost reduction in procurement process costs and 16 – 18 % reduction in purchasing price for indirect purchases. According to Croom and Brandon-Jones (2005) complying with existing contracts is an important mechanism for realizing lower prices and discounts. The savings that come out from automating the process derive from eliminating paperwork and human intervention, reducing transaction costs and cycle time and also from streamlining and automating the audit trail and approval process (Neef, 2001 s.48). While the cost savings can be significant, de Boer et al. (2002)
argue that the total volume of purchases needs to be high, as well as the amount of internal customers, in order to reach savings as high as mentioned above.
The research by Davila et al. (2003) also identifies that companies using e- procurement gain additional control over maverick spending and can reduce the headcount supporting purchasing transactions. To support this Croom and Johnston (2003) found that e-procurement can have a major impact on compliance on many different levels of the procurement process: it supports managerial budgetary control;
reduces data entering failures; offers greater transparency and accessibility to corporate wide spending; improves system reliability; and improves the access to managerial information. A summary of the benefits of e-procurement found in the literature is presented in table 2.
Table 2. A summary of benefits related to e-procurement found in the literature
Author Category Category Category Category
Attaran &
Attaran (2000)
Operational
Improved financial control Elimination of paperwork Improved auditing and better security
Shortened delivery time Elimination of time zone obstacles
Reduced inventory levels Maximize labor
Enhanced efficiency Flexible access anytime
Strategic
Consolidation of purchasing practices
Accelerated information flow Freeing stuff to do other work
Faster response to the markets
Boosted compliance Improve chance to win new business
Opportunity Enhanced image Improved buyer / supplier relationships Better accuracy
Croom &
Johnston (2003)
Cost efficiency
Reduced transaction costs Reduced purchasing price Reduced internal processing costs
Reduced storage and handling costs
Process compliance Improved budgetary control Robust process
performance
Greater transparency and accessibility across the whole process
Improved system reliability Improved managerial information
Internal customer satisfaction Increased employee satisfaction More control over own spending
Piotrowicz &
Irani (2010)
Customer
Increased customer service (including internal
customers)
Business process Elimination of non-value added activities
Improved order processing Improved procurement process
Improved supplier searching Improved control
Elimination of exceptions Reduced problems with suppliers
Elimination of paperwork
Learn and growth Improved access to information Increased reporting capabilities Increased corporate control
Competitive advantage Improved cooperation and communication with other business units
Financial Reduced bank transfer costs Reduced transaction costs
Reduced buying costs
Reduced service costs
Increased efficiency Faster payments Reduced
warehousing costs Fraud prevention Davila,
Gupta &
Palmer (2003)
Category not classified Reduced transaction costs Faster cycle time Reduced number of suppliers
Lower managerial complexity
Reduced purchasing price Headcount reduction Purchasing order fulfillment time
Hawking, Stein, Wyld, Foster (2004)
Category not classified Price reduction Improved contract compliance
Shortened cycle times Reduced administration costs
Enhanced inventory management Improved visibility Enhanced decision making
2.7 Challenges and risks of e-procurement
A research by Smart (2010) identifies that there are numerous obstacles (see table 1) in implementation projects to achieving in full the benefits which e-procurement offers. In some cases the benefits of implementing an e-procurement solution have been hard to evaluate. Piotrowicz and Irani (2010) propose that companies should use various measuring methods in order to fully track and understand how benefits are distributed according to the level and area of their impact.
Even though the benefits of adopting e-procurement solutions can be significant, there are some internal and external challenges and risks related to the adoption of e-procurement. In a research by Smart (2010) the researcher came to a conclusion that there has been a long term problem with identifying value from IT investments and in creating a case for IT introduction in general. This is why companies need a clear plan for implementing e-procurement technologies.
According to Kalakota and Robinson (2001) before the implementation of e- procurement, a company must first clearly define the business problems its e- procurement solution is intended to address. Furthermore, before an e-procurement solution can be deployed, a company must undergo thorough procurement process reengineering. Automating an existing procurement process will only make matters worse (Kalakota and Robinson 2001). Puschamann and Alt (2005) recognize that in the successful practices the redesigning of the procurement process is focused on:
reduction or elimination of authorization stages; regulation of exceptions to a limited degree in the beginning; elimination of paper; integration of suppliers in the entire process chain; and consideration of the complete process from searching for goods through to invoicing.
A study by Angeles and Nath (2007) identified three important challenges to e- procurement implementation:
- lack of system integration and standardization issues
- immaturity of e-procurement-based market services and end user resistance - maverick buying and difficulty in integrating e-procurement with other systems
Lack of system integration and standardization issues relates to the fact that e- procurement is still relatively new business application and it is not unusual to find a lack of benchmarkable reference models. Another challenge is software immaturity and the lack of certain key features like invoicing, payment reconciliation or managing of different geographical jurisdictions, tax structures, currencies etc. Also, companies need to be aware of the possible hidden costs related to implementation of e-procurement solutions, such as system integration, content aggregation and rationalization, catalog and search engine maintenance, supplier enablement, end user training and procurement process re-engineering. These costs can easily exceed software licensing and maintenance cost by five to ten times (Angeles and Nath 2007).
The second challenge relates to the immaturity of providers of e-procurement services and the lack of supplier preparation, and the resistance of solutions end- users. In some cases the immature service providers may not be able to provide a complete suite of services, especially for more complex or advanced e-procurement implementations projects. The immaturity of suppliers and the lack of preparation is also a challenge for many companies. After all, suppliers need to learn how to generate catalogs, process electronic purchase orders, how to use invoicing mechanisms among other tasks (Angeles & Nath 2007). Including companies preferred suppliers is very important as according to Davila et al. (2003) the success of e-procurement solutions relies on the network effect that will be more effective if enough players are adopting the same technology. The other challenge here relates to the resistance of end-users towards operating the e-procurement solution. To prevent this Angeles and Nath (2007) state companies should encourage using new e-procurement technologies through intensive training and educational sessions with end-users.
The third challenge is linked to the difficulty of changing purchasing-related behavior among the company’s employees. Some companies find it difficult to eliminate maverick buying even after the implementation of e-procurement. This can be prevented by intensive end-user training and educational programs. Companies also need to be aware of the problems in integrating the e-procurement solution with other systems (Angleles & Nath 2007). According to Gilbert (2000) integrating e-
procurement solutions with other business applications (e.g. accounting) can be more complex than businesses think.
In a research by Davila et al. (2003) four risks associated with adopting e- procurement technologies were identified. The authors stress that these risks need to be carefully addressed before these technologies are adopted.
Internal business risks: Businesses have to be careful while integrating e- procurement technologies with other business applications such as accounting, human resources, accounts payable and cash management. Most companies already have invested heavily in these other applications and the integration of e- procurement should go as smoothly as possible, or it can jeopardize the reliability of organizational information.
External business risk: e-procurement solutions also need to be able to cooperate with suppliers IT-infrastructure. For e-procurement solution to be successful suppliers must be accessible through the Internet and provide catalogs to satisfy the needs of their customers. In some cases suppliers might lack the resources to meet the demands of customers in catalog developing and updating. Companies also need to develop mechanisms that provide the buyers with assurance that new suppliers meet the expectations and standards relating to supplier quality, service and delivery capabilities.
Technology risks: Many companies are unsure which e-procurement solution best suits the specific needs of their company. The lack of widely accepted standards blocks the integration of different e-procurement solutions across the supply chain.
The researchers insist that without widely accepted standards for coding, technical, and process specifications, adoption of e-procurement technologies will continue to be slow and will fail to deliver the promised benefits.
E-procurement process risks: This risk relates to the security and control of the e- procurement process itself. Such issues can be related to, for example data security and fraud prevention e.g. fake suppliers, fake bids etc.
As identified in the examination of earlier e-procurement literature, adopting e- procurement solutions can provide substantial cost savings and other benefits, but there are also challenges and risks companies need to take into account when considering e-procurement adoption. Making the procurement process more efficient and faster can be achieved with the use of e-procurement solutions. Nonetheless, this requires that the implementation process must be planned and executed thoroughly in order to minimize the challenges and risks companies might face.
While indirect purchases can sometimes account for a big part of company’s overall spending it is important that also these purchases are conducted following company policies and instructions. Using e-procurement only for indirect purchases in the beginning can act as stepping stone for companies before moving into comprehensive e-procurement which also involves direct purchases.
The next chapter presents the research results and answers to the research problem and its sub question. The problem factors (related to e-procurement adoption) identified in the research are analyzed and compared to the problems found in previous e-procurement literature. Also, some implications on how e-procurement software vendors could make e-procurement for indirect purchases more attractive towards companies are proposed.
3. ANALYSIS AND RESULTS
In this chapter the research results are presented. In the beginning of the chapter some background of the current state of indirect purchasing in companies interviewed is introduced. After examining companies’ current policies regarding indirect procurement, the findings of the research are presented and analyzed. The findings of this research are illustrated with quotes from case companies.
3.1 Current policies concerning indirect purchases
Before presenting the results of the research the current state of indirect procurement in the companies interviewed is examined. First, it is explained how indirect procurement is organized in the companies, is the purchasing of indirect materials centralized to a separate business function or department, or decentralized among company’s employees. Second, the categorization of indirect materials between companies is explained. When the interviews were conducted none of the respondents had a comprehensive e-procurement solution for indirect purchases in place.
3.1.1 Procurement organization and processes
All of the respondents had organized their purchasing of indirect goods differently. In table 3 a summary of the current state of indirect procurement in the case companies is presented. One of the respondents (company A) had created a separate organization for indirect purchases. The target for this organization was to handle all of the company’s indirect purchases centrally. It had its own resources, but while still under developing, did not yet cover all of the indirect purchasing happening in the company.
In company B strategic sourcing for indirect purchases was centralized, but all the operative purchasing was decentralized between different business functions.
Company B had also engaged in testing an e-procurement solution for indirect purchasing, but after the pilot phase decided not to apply one. In company C indirect purchasing was also decentralized and all the different business functions and employees could make purchases within their own budgets.
All the respondents admitted that their purchasing processes are still in need of developing. Especially order approval and documentation of purchases, as well as control over the whole process were identified as critical issues to improve.
Company A reported that:
“All of the steps in the purchasing processes are in need of enhancing. The whole process is lacking some kind of tool to control it.” -Company A
Table 3.Current state of indirect procurement in the case companies
Company Industry Indirect spend Purchasing of
indirect materials
Company A Groceries 50% Centralized
Company B Diversified industry 25% Decentralized
Company C Service 5%-50% Decentralized
While all of the respondents found that their processes were in need of developing;
only company A could name specific process steps that were working well. They reported that price negotiating was a strong part of their purchasing process as well as internal reporting. Company B explained that all the processes are so strongly linked to each other that if one is not working as well as it should be, none of them can be considered good. Company C did not have a clear process for indirect purchasing except for traveling related purchases, which were performed through suppliers own extranet.
“There is no comprehensive solution for indirect purchases in our company, but for some purchases we are using an extranet-based application provided by our business partner” -Company C
3.1.2 Categorization of indirect purchases
Categorization of materials to direct and indirect varies between companies. Usually indirect are considered as the materials that are not involved in the manufacturing of the finished good. In Company A all the materials except raw materials, packing
materials and products acquired from subcontractors were considered indirect. They also included logistics as indirect, which in some cases can be considered as direct.
In company B indirect materials were classified into eight different categories:
Personnel (car leasing, training), IT (software, workstations), travel, MRO (packing materials, chemicals), facilities (cleaning, building lease), marketing &
communication, office (office supplies and furniture) and other (consulting and other services). Company C had six different categories for indirect materials: personnel, office (office supplies, leasing, communications), marketing, travel, other services and insurances. In company C the amount of indirect spend was difficult to estimate since they are a service company and a big amount of their spend goes to buying goods that are leased forward to other companies.
3.2 Problems related to e-procurement adoption
All of the respondents could identify some reasons why they prefer traditional procurement over e-procurement in handling indirect purchases. At the same time they also recognized potential benefits that an implementation of such solution could bring about. Most of the benefits recognized were related to cost savings and process efficiencies. Even though the respondents were aware of the benefits related to e-procurement for indirect purchases, only company A had future plans in introducing such a solution. In this research five problem factors related to e- procurement adoption were identified. They are: standardization issues and lack of flexibility; scarcity of resources; low transaction volumes; integration issues (immaturity of suppliers and immaturity of software vendors) and suppliers’ own portals. Next, all of the factors identified are examined closer.
Standardization issues and lack of flexibility: All of the companies interviewed recognized that in some purchases traditional purchasing methods are considered more flexible. For example when companies are dealing with new suppliers or when purchasing is done very rarely, it is easier to use phone or email in contacting them and making the acquisition. One of the respondents thought that in some cases the purchasing process can be more straightforward when operating over the phone or via email, especially when purchasing is done alongside other daily operations.
“When traditional methods are phone and / or email, the benefits are quickness and ease of use” -Company B
Standardization issues were also considered as a major problem in e-procurement solutions. When most of the purchases are one-time-only or when the products or services purchased are complex and hard to standardize, the benefits from e- procurement are hard to achieve. Company B reported that sometimes the standardization of services and products can lead to resistance among employees of the company if they are not allowed to purchase the goods they like. One of the companies also explained that, the descriptions of the products or / and services, coming from higher level are sometimes defective, which makes it hard to use e- procurement for these purchases.
“If descriptions of the bought-in products are unfocused, it means that you cannot use these modern or optimal tools” -Company A
Scarcity of resources: This issue relates to planning of the investment and the implementation of the solution. IT investments always need to be planned and executed thoroughly if the company wants to achieve the full benefits such investment can offer. Company A reported that at the moment their resources were so limited there was no time for proper planning of adopting e-procurement. They had a future plan in adopting some kind of e-procurement solution for indirect purchases, but right now the amount of time all the process restructuring and integration of the solution would take, it is not yet topical.
“When the load rate of the employees is high as it is right now, there simply is no time for all the restructuring needed for an investment like this. You should be able to invest some time for the planning beforehand and right now we can’t do that.” - Company A
Company B also found that integration of the system is a long process and it can take a lot of time before any of the benefits can be reached. The integration process, if not done smoothly, can eat up company’s resources such as time and money and prolonging it will also distract company’s other operations.
Low transaction volumes: As identified in the theory part earlier in this research, in order to e-procurement to work properly, the transaction volumes need to be high. In company C the volumes of indirect purchases were not high enough for them to benefit from a comprehensive e-procurement solution. Also company B recognized that almost half of their purchases were services, which are hard to standardize and are often bought only once.
“We order a lot of goods and services that are only one-time-buys and bought for a certain purpose; the volumes are not that high” -Company B
Suppliers’ own portals: According to company B many suppliers are engaging in creating their own portals and / or extranets for their customers to make purchases.
Suppliers can therefore commit their customers into their own networks and make their relationships deeper. Company C for example had created such a portal for its own customers as a service for buying office hardware and software. In addition to that, they were also using an extranet solution to acquire goods and services from their own supplier. These portals can urge companies to neglect e-procurement solutions and are a severe threat to e-procurement solution vendors.
“We offer our own customers e-procurement to purchase the products we are selling” -Company C
Integration issues: Integration issues relate to the immaturity of suppliers and the immaturity of software vendors. According to company B the Finnish markets for these solutions are not yet mature enough and there are still a lot of issues that need to be solved before companies can fully benefit from these solutions.
-Immaturity of suppliers: While company B was testing an e-procurement solution for indirect purchases they realized that their suppliers were not yet ready for such a solution. Including the suppliers in the e-procurement solution is essential or the solution has no use.
“During the testing phase we noticed that the Finnish supplier base was not yet able to provide price lists or product catalogs in such forms the solution demanded”. - Company B
If the suppliers are not capable of providing product catalogs etc. the whole meaning of using e-procurement becomes irrelevant. Integrating company’s suppliers to the solution also demands investments from the supplier side and some of them are not willing to do this, especially if they are already providing their own portals or extranets to their customers.
-Immaturity of e-procurement vendors: Company B also noted that e-procurement solution vendors did not have the tools to integrate their solutions properly. While the company had several different ERP systems in place, integrating e-procurement seamlessly to all them proved extremely difficult. Integration of the solution was too time-consuming and did not deliver the promised benefits in time.
“The solution was too inflexible, as there were so many different interfaces we needed to integrate it with. In the end it just made it too vulnerable.” -Company B
Table 4 provides the answer to the research problem and summarizes how the problem factors are divided between companies. As seen in the table, company B recognized the most problems related to e-procurement solutions. This derives from the fact that they had already engaged in testing such a solution, and had experience on how the solution actually works. Companies A and C had not yet gained experience about e-procurement solutions for indirect purchases and therefore did not have such accurate knowledge about them.
Table 4. Summary of the problem factors found in the research
Company Standardization issues and lack of flexibility
Scarcity of resources
Low
transaction volumes
Suppliers’
own portals
Integration issues
Company A X X
Company B X X X X
Company C X X X
The first problem factor, standardization issues and lack of solution flexibility, was identified by all of the companies and is directly linked to the immaturity of the solution and its flaws. Scarcity of resources (company A) is connected to the buying organization itself, as well as low transaction volumes, identified by companies B and C. The fourth problem factor, suppliers’ own portals, is connected to the suppliers of the buying organizations and their willingness to provide catalogs etc. Integration issues on the other hand are connected, at least indirectly, to all of the factors mentioned above. Even though identified by only one company, this can be considered as the most important thing for software vendors to address, as it can have an effect on all of the problem factors identified.
The problem factors found in this research are in line with some of the earlier research regarding problems and challenges related to e-procurement adoption. For example Smart (2010) identified several problem factors that are closely linked to the ones found in this research (see table 1). Also the challenges of e-procurement found by Angels and Nath (2007) are related with the findings of this research. In the next paragraph some implications on how to raise the attractiveness of e- procurement towards companies are examined. The implications are focused on the problem factors that were identified in this research.
3.3 How to raise the attractiveness of e-procurement?
This research identified five obstacles related to e-procurement adoption. E- procurement solution vendors need to address these problems and find solutions how companies could avoid them. If the adoption process is made more painless for companies, they might be more tempted in acquiring e-procurement solutions. This chapter answers to the sub question of the research by proposing some actions e- procurement solution vendors could take in order to make e-procurement more attractive towards companies.
The first and the most important thing e-procurement solution vendors should address is how to make the integration process simpler and less time-consuming. As identified in many previous researches (Davila et al. 2003; Angeles & Nath 2007), integrating e-procurement with companies other back-office systems for example
ERP and also with suppliers IT infrastructure is essential for the solution to work properly. Integrating the solution is not simple, especially if the company has many different ERPs and other electronic systems. Solution vendors should develop tools that make the integration of the system easier and faster, while allowing the solution to work seamlessly with other systems of a company. All of the respondents in this research had some previous e-business solutions in place for example invoice automation. Being able to move information and spend data acquired from transactions between e-procurement and other e-business solutions for analysis is one of the benefits e-procurement can offer. In order to achieve this, e-procurement needs to be integrated into the heart of a company’s IT infrastructure. When the integrating of e-procurement is made easier, the amount of time used for planning and implementing the solution can be reduced. This would also solve the problem of directing a lot of resources for the planning and execution of e-procurement implementation.
E-procurement vendors should also concentrate on how to integrate all of the company’s suppliers into the solution. They need to create ways and tools that support supplier integration into the solution. Angeles and Nath (2007) identified that some e-procurement vendors are not capable of providing supporting services for e- procurement implementation. They propose that the buyer companies should include their preferred suppliers in the planning process for implementation. Supplier integration services are an important part of e-procurement vendors’ service suite and can help buying companies in succeeding in the implementation. When suppliers are creating their own extranet solutions or portals some companies might consider separate e-procurement solutions useless. Creating and uploading of product catalogs and price-lists should be made as easy as possible for suppliers. If providing product catalogs and price-lists into a separate solution is made easier than maintaining an own portal or extranet company’s suppliers could be persuaded into moving to e-procurement.
All of the case companies identified that in some cases traditional procurement can be more flexible than using an e-procurement solution. Some solutions might lack key features that are needed for example in making transactions globally (Angeles &
Nath 2007) Company C recognized, that for example operating in the Russian
market it is sometimes more flexible to use traditional methods to acquire visas and plane tickets etc. One of the advantages of e-procurement is consolidating purchases and preventing maverick buying. When products or services are hard to standardize or are bought seldom, it is difficult to try to take advantage of e- procurement. Company B identified that e-procurement did not suite purchasing of services which were usually purchased only for a specific purpose. The solution itself should be made more flexible and versatile, so that it would suit better for a variety of different purchases.
Gaining value from e-procurement is hard if the transaction volumes are low. If this is the case e-procurement vendors should look the other way, because they can’t really influence other companies spending. It has also been identified that larger companies are more likely to adopt e-procurement (Soares-Aguiar & Palma-dos- Reis 2008). Larger companies usually have larger overall spending and these are the companies e-procurement software vendors should target in their selling process. High transaction volumes are a key to achieve the benefits an e- procurement solution can offer.
There is still a lot of work to be done in the e-procurement solution vendor side, before companies are fully accepting these solutions. Making the solution easy to use, and integrate with other e-business applications are the main issues vendor companies need to concentrate. Developing the solution to match the expectations of its end-users is very important for these solutions to succeed.
4. DISCUSSION AND CONCLUSIONS
This chapter summarizes the research and its most important findings and also presents some implications for further research. Using semi-structured interviews this research aimed to identify reasons to; why have not more companies adopted e- procurement for indirect purchases; and how can e-procurement vendors make e- procurement more attractive for companies. The interviews were carried out to Finnish companies that did not have e-procurement solution for indirect materials in place during the time of the interviews.
While the benefits of e-procurement have been widely described in the academic literature, there are still major issues companies need to overcome before the benefits of e-procurement can be enjoyed. Based on the interviews, five factors that were preventing companies in adopting e-procurement for purchasing of indirect materials were found:
- Standardization issues and lack of flexibility - Scarcity of resources
- Low transaction volumes - Suppliers own portals - Integration issues
The results of this research are somewhat in line with earlier research (Angeles &
Nath 2007; Smart 2010) regarding e-procurement and its problems. The problems factors found in this research are related to the e-procurement solution itself (standardization issues and lack of flexibility, and integration issues), e-procurement solution vendors (Integration issues), suppliers (Integration issues and suppliers own portals) and also the buying organizations (scarcity of resources and low transaction volumes). For e-procurement solutions to be successful, vendors have to find ways of easing these problems and making the implementation process smoother for companies. The easiest ones to address for solution vendors are the ones that are related to the solution and to themselves. One of the companies interviewed, indentified that e-procurement solutions for indirect procurement were not yet on the level they expected them to be. They also commented that the solutions are still
developing and especially in Finland they are just only coming to the markets and into businesses awareness. If solution vendors can develop tools for making the integration of the solution to both, buyers’ IT infrastructure and to suppliers’
infrastructure easier, it could also have an impact to the problem factors related to buying organizations and suppliers. Those problems are hard for the solution vendors to impact directly, but when the solution is made easy to use and integrate, they could be affected as well.
4.1 Implications for future research
This research only included three companies and only from the Finnish markets.
While the Finnish markets for e-procurement solutions are still relatively young, one might need to include some companies from other countries as well and increase the sample size in order to get more accurate information about the problems related to e-procurement. Future research could also include the solution vendors’ perspective into the research and do some comparison between vendor and buyer perspectives.
There is also a possibility to study companies who have successfully implemented e- procurement and examine the problems they have had during the implementation process. Finally, another research direction could be supplier perspective and their willingness to adopt these technologies and the problems suppliers might come across when their buyers are adopting e-procurement solutions.
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