The past two decades have witnessed economic forces and technological advances drastically changing the procurement landscape. The impact is on a company's profitability and long-term business success.

While 30 years ago, a manufacturer may have typically spent 20-40 per cent of the company's revenue on outside supplies and services, today this has doubled.

Market dynamics, too, have changed in the last two decades. More demanding customers, shrinking product life cycles, steep price erosion and decrease in percentage of revenue on purchased product and services have become typical characteristics of a manufacturing industry.

This has put more focus on procurement, once considered a backwater function. Reducing procurement costs is one of the most effective ways to increase profitability as any reduction in the costs of direct or indirect material adds to the bottomline of the company.

The world over, using the e-sourcing engine, companies have saved approximately 15 per cent on material cost, 65 per cent in cycle time and about twofive per cent reduction in internal process cost.

Dynamic pricing mechanism: The dynamic pricing tool provides the organisation with a mechanism to reduce the negotiation cycle time in the procurement process and bring about transparency in the procurement process.

The use of an e-Sourcing engine has brought about significant reductions in material costs - apart from streamlining the procurement process and bringing about significant reductions in costs by reducing the cycle time. For the suppliers, the main benefits include the reduction in the selling costs and new customer discovery.

The e-sourcing engine offers features that closely simulate the offline negotiation process and hence offers all the benefits of offline negotiations. The various features available in the single engine offer the buyer the opportunity to exploit the various negotiation modules for the procurement of various categories of materials.

The dynamic pricing mechanism is being extensively used for the procurement of both materials and services. The most important part in this procurement mechanism is the effective auction making activity that analyses the market dynamics of the procurement category and finalises the negotiation strategy for the buyer.

The auction making activity also ensures faster and easier adoption of the Web-enabled procurement process by buyers. Hence the success of the entire process depends on the offline and online process and the domain expertise of the service provider providing the auction making mechanism and the e-sourcing engine.

The basic procurement cycle involves different phases like freezing of item specifications, supplier discovery and identification, floating inquiry and getting initial quotes, the negotiation phase and then finalising and raising the purchase order.

The traditional procurement process has had long cycle times involving interactions and multiple rounds of negotiation with each of the suppliers. The benefit that the procurement team could obtain from the negotiation process depends on the negotiation skills of the purchase team. From the suppliers' perspective also, the process indicates long sales cycle and complete lack of transparency in the process.

The challenge for the organisations was to improve the efficiency of the procurement process and hence improve the performance of the organisation.

The dynamic pricing mechanism provides a solution to these challenges in the procurement process and hence provides a major opportunity to the organisations to improve the efficiency of their processes.

Critical success factors: The critical success factors for the dynamic pricing mechanism to deliver the desired results involve all the agencies involved in the process.

The buying organisation has to support the process. It requires considerable change management on the part of the organisation and its procurement personnel to convey the need for the change to its suppliers. The unconditional support of the buying organisation is the first step towards the success of this process.

The supplier community is the key participant in this process. The suppliers have to be appraised about this process adequately to allay their apprehensions about the process. This appraisal includes communication of the benefits of the process to the suppliers and training them to bid online.

The service provider brings in the expertise at every stage of the process right from auction making to conducting the bid event and analysing the supplier community. An effective auction making process helps maximise the gains of both the buyers and the suppliers.

Conclusion: Dynamic pricing as a procurement mechanism with its proposition of cycle time reduction, material cost reduction, supplier discovery and transparency in the procurement process offers the invaluable tool to organisations to streamline their procurement processes.

The use of the mechanism has delivered immense benefits to organisations that have used it for various procurement categories.

The author is the head of global sales at Wipro-01 markets.

By Pradeep V. Bahirwani

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