The first real footholds for web-based supply-chain applications were e-procurement applications from vendors like Ariba and Commerce One developed in the late 1990s. They simply took the fragmented, paper-based process for buying indirect materials, put them on the enterprise systems where buyers could select items from approved-vendor catalogs, added electronic workflow for approvals and closed the loop with online orders to the vendors.
How the footprint has grown in just a few short years. In addition to indirect materials, companies source an increasing amount of direct materials and components with applications that are integrated with supply-chain planning systems, engineering applications and order management systems. They contract for logistics services, temporary labor and consultants online. They purchase and manage outsourced design and manufacturing services. The entire procurement process - from source to pay - is now web-enabled to include issuing of purchase orders and invoices, negotiation and monitoring of complex contracts and detailed analysis of spending patterns.
While most companies license enterprise-wide software to handle this ever-growing list of procurement and sourcing needs, it is equally possible to use hosted software on a subscription basis or to outsource the procurement process to vendors that not only provide the technology but also the purchasing expertise.
The footprint just continues to grow. According to Aberdeen Group, companies will double their spending on procurement and sourcing solutions to reach $9bn by next year.
The reason for this explosive growth is quite clear. Companies spend between 45 and 80 cents of every revenue dollar to buy materials or services from vendors. As companies increasingly outsource more and more of their operations, this percentage will just grow faster. Every percent or two saved in leveraged spending or operational efficiency immediately converts to profit. Next to selling more product, the fastest way for companies to boost profits is to improve the sourcing process.
To fill this need for better purchasing business processes, many existing procurement-oriented application vendors first broadened their coverage of more types of purchases (indirect, operational, services and direct materials), and then they deepened their offerings to handle more activities (catalog buying, purchasing execution, invoicing, contract negotiation, contract management, spending analysis, etc.).
For example, the original transaction-focused players in this space, such as Ariba and Commerce One, have rapidly expanded the depth and breadth of their footprints. Their built-in link to enterprise resource planning (ERP) makes them an attractive choice for companies that want to take in every type of material and transaction throughout the organization.
Ariba added sourcing service procurement components last year. More recently, Ariba has added modules for analysis, contract management, invoicing and analysis. In fact, Ariba has come up with a model based on the slogan "find it, get it, keep it" to help explain the content of its many purchasing modules.
Commerce One's new 5.0 suite of collaborative sourcing and procurement solutions provides full automation of enterprise source-to-pay processes, while also enabling deep connections between an organization and its trading partners. It leverages its enterprise-wide reach, as well as its collaborative abilities to link with suppliers. By expanding the capabilities of the suite, Commerce One provides an easy choice for its large installed base to add to their online procurement capabilities.
"With Commerce One solutions, Eastman Chemical integrates into suppliers' order processing systems for fast order entry and fulfillment," said Eddie Page, manager, eMRO, Eastman Chemical. "We've reduced the cost of materials by 5 percent, shortened order cycle times from over a week to 24 hours, lowered administrative costs and improved inventory practices to realize an overall return of 126 percent in under 10 months."
Technology vendors from many other disciplines have seen the opportunity to provide solutions in this space and are extending their applications to reach into the realm of procurement and sourcing. They are coming at it from all directions.
Manufacturing-oriented vendors such as Agile Software are entering this arena from the engineering and design direction space to look at what it
|"We've realized an overall return of 126 percent in under 10 months."|
- Eddie Page, Eastman Chemical
|Suffering Savings Leakages|
|In their short existence, internet-based sourcing, procurement, and supply-chain management (SCM) technologies have delivered considerable cost and performance benefits. However, as technology research firm Aberdeen Group points out, deployment of these technologies has often been isolated and disconnected from larger SCM and business initiatives. This fragmented approach has resulted in the "leakage" of procurement savings. Aberdeen has compiled these examples:|
• Planning: Traditionally focused on production ("direct") material purchase requirements, most planning initiatives and engines fail to examine supplier capacity and capabilities. Planning technologies also overlook non-production ("indirect") expenditures, limiting opportunities to aggregate buying volumes and optimize purchase plans for indirect spending.
• Sourcing: Aberdeen research of early adopters of e-sourcing found that users reported cost savings of 14.3 percent, on average. However, most users were unable to fully implement or realize these savings. Reasons include a lack of savings implementation strategies, an inability to effectively communicate negotiated terms to the enterprise, and insufficient integration between e-sourcing and order execution systems.
• Procurement: Aberdeen research of e-procurement users found that enterprises push only 18 percent of total indirect spending through these systems, on average. Reasons for low penetration rates include a failure to conduct detailed spending analysis at the outset of a project, poor supplier enablement, and lack of a system adoption plan.
• Contract management: Nearly 80 percent of business transactions are governed by a contract, yet few companies effectively communicate and manage the terms of these contracts. As a result, companies miss huge savings opportunities by not enforcing internal compliance with contracts or ensuring appropriate price breaks and rebates from suppliers.
• Supplier performance measurement: Evaluating a supplier's operational and financial performance requires metrics to be assimilated from multiple enterprise systems. Capturing an accurate view of a supplier's current and future performance also requires enterprises to access information from external sources as well. Lack of insight into supplier performance can cause buyers to make poor sourcing decisions and to miss indicators of supply-chain risk.
As a result, most enterprises have only realized a fraction of the potential benefits of procurement and SCM automation. Such findings are evidence that advances in procurement and supply-chain technologies have outpaced the strategies needed to effectively deploy them.
Aberdeen believes a new framework it calls total cost management (TCM) will provide the supporting infrastructure necessary to identify, capture and maintain cost savings and operational efficiencies across all areas of enterprise spending - from operating supplies and business services to production materials, parts and assemblies.
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