The Last Word: e-Procurement: From the backwaters to the boardroom

In an ever-changing market scenario, purchase managers confront a number of complex issues — the decision to outsource or implement new technologies and practices, deal with new suppliers and manage existing supplier relationships being a few issues they face regularly.

This is an era of value transformation, where companies are expected to dynamically assemble the best-of-breed supply chains to address fleeting market opportunities. Companies that learn the key lessons of past transformations, and carefully navigate the new possibilities and challenges, are likely to lead in the future.

Clearly, supply chain issues are becoming more strategic. Business models are evolving with better ways of contract negotiation and using emerging technologies. With competition becoming intense and geographical barriers virtually disappearing, the only advantage lies in mastering supply chain tactics and being able to adapt to changing customer needs and new opportunities.

The underlying question is this — what will enable organisations, used to years of established and age-old purchasing practices, to move beyond the existing set up and take the purchasing function to the next level?

e-Procurement renders them this opportunity. Today, the concept is fairly well known in the circle of purchasing managers of large corporates. It has made inroads amongst a large section of the CEO community, as well. The reason lies in the obvious benefits that e-Procurement brings to the table.

Let us take a simple illustration. Consider a manufacturing organisation with a turnover of $100 million. Assume that it makes revenues in the order of $10 million or 10 per cent (an accepted thumb rule in the manufacturing industry).

Typically for such companies, purchased products and services are the single largest expense, accounting for nearly 60 cents of every dollar spent (60 per cent). This means that the company spends around $60 million on its procurement spends annually.

Tough time

Supposing you were the CEO of the company and the board decided that you increase revenues by 50 per cent (in effect you will have to increase the revenue from $10 million to $15 million). This means that all efforts by the CEO and his troops have to be directed at increasing turnover by 50 per cent to $150 million — the only way, given the present ratios, that you can possibly reach the magic figure of $15 million is to dramatically increase sales.

In these tough times, it would be a task few companies in this sector can manage realistically. We now arrive at the key issue – if sales cannot be increased at these dramatic rates, what else can the management do to keep its stakeholders happy. The answer lies in adopting eProcurement in a big way.

Direct impact

Say its procurement spends are $60 million. If e-Procurement adoption can help save 10 per cent on its procurement spends, which would translate into $6 million, this amount would directly impact the bottom line. Thus, the company could retain its turn-over of $100 million, while its revenues would go up from $10 million to $16 million.

What is indeed remarkable is that a saving of 10 per cent in an organisation procurement spends can have a positive impact of almost 60 per cent (as in this case) on the bottom line.

Procurement has always been perceived as a backwater function within most organisations till recently. Today, however, things are on the move. The issue we just addressed is not just an interest area for the procurement chief. For, the 'bottom line', a concern at the CEO level, is where the strength of e-Procurement lies.

Companies can no longer afford to look at procurement functions in a haphazard manner. From a vendor perspective, service pro-viders need to prepare for this transition and must offer real value to customers.

From a customer perspective, they need to clearly align themselves with the most eligible vendors — who can offer an integrated 'solution' combined with the domain knowledge, expertise and reliability of service while offering procurement consulting and software to automate procurement functions.

Clearly the best is yet to come. These are testing times, a time where every penny saved is a business saved… when the grain will be separated from the chaff. Surely a time that calls for tact, thrift and tenacity. With companies facing severe pressure to cut costs, reduce selling prices and yet maintain a healthy profitability, their purchase departments have very little choice.

The writer is Head of Global Sales, Wipro 01markets