Everyone is guilty of it. The office printer is running out of tonernd a huge chunk of time when it comes to administration. So how long will it be until the entire process is automated? or you fancy a more svelte mobile phone. While there is a formal process for buying them, you are vaguely aware that the company can get a bulk discount. But this method involves a trek to the purchasing department, finding out which models you're allowed to buy, filling in three forms, getting the manager's approval and waiting a week for the thing to arrive.
So instead, you nip out to the high street and stick it on expenses, under some helpful heading such as entertaining clients.
It's called maverick buying and it's expensive. It can account for 30 per cent of an organisation's spend and costs between 20 and 25 per cent more than centrally co-ordinated purchasing, resulting in six or seven per cent overall wastage.
Even if people use the proper channels, there is the cost of processing the paperwork, getting authorisation, placing and chasing orders, checking delivery and correcting the inevitable errors.
Peter Loughlin, head of the electronic procurement team at consultancy firm KPMG, says: 'When all of this is taken into consideration, it may cost #100 to buy anything at all. Some organisations have found they were spending #500 per order, just to buy a pack of pens.'
There are other inefficiencies, such as the overhead of having hundreds of suppliers, many of them infrequently used, or discrepancies in pricing between geographical areas. Loughlin adds: 'In broad terms, companies waste about 30 per cent of their spend on procurement - that's #100 billion of waste every year in the UK.'
Part of the problem is the sheer number of low or medium-value purchases, which can account for between 30 and 60 per cent of an organisation's turnover. These are usually called maintenance, repair and operations (MRO) purchases - items that support the business rather than being central to it, such as stock-in-trade or raw materials. MRO purchases can encompass everything from PCs, software, phones, furniture, books, stationery and consumables to catering, conference facilities and marketing.
MRO buying can create a lot of work for relatively little value. For example, Microsoft found 70 per cent of its purchases accounted for just three per cent of its spend - it is a task that cries out for automation.
As a result, the vendor, along with General Electric (see box, page 36), was one of the early pioneers in this field, building its own system.
Packaged systems are now beginning to appear on the market from vendors such as InfoBank, Commerce One and Ariba.
The core of MRO automation is usually an intranet-based workflow system.
Staff choose what they want from an electronic catalogue containing details of pre-approved, price-determined items. The selection they see will depend on who they are, their allocated budget and the goods or services they are allowed to buy. The system may give additional information, for example on service levels, returns procedures and so on. In addition to ordering, it can also be used to obtain quotations, check availability and chase delivery.
The order is sent automatically to the appropriate person to be authorised and consolidated with other orders before a purchase order is generated.
This can be transmitted electronically - through an extranet, by email or EDI - or by conventional methods such as post or fax. The goods can be delivered directly to the employee's office.
The key is to make the MRO system easier and quicker for staff to use than maverick methods. Handled properly, it allows employees to make their own purchasing decisions under strict control. Graham Sadd, chief executive of InfoBank, says: 'All the processes and business rules are built into the system to put control in the hands of the purchasing department.'
But it's early days yet. Commerce One has sold MRO systems to just 18 customers, three of them in the UK, including retail giant Boots. But vendors claim sales will improve this year, as corporate purchasers begin to realise the advantages. 'In the past three months, we've moved from "why?" to "when?",' Sadd says.
The claimed benefits are phenomenal. The purchase prices of goods and services may not be significantly reduced, except by using bulk discounts instead of maverick buying. But the administrative cost of processing an order can be halved. Colin Billinge, European marketing director at GE Information Services, says: 'You're doing something wrong if you're not getting a 40 or 50 per cent increase in efficiency.'
Networking giant Cisco installed an Ariba system last year and now uses it for two-thirds of MRO purchasing in the US. The vendor saved $2 million on order processing costs alone in the first six months - $40 dollars per transaction on 50,000 transactions.
Phil Smith, UK director of business development at Cisco, says: 'It's allowed us to remove a lot of the administrative overheads of order processing. You can just click on a catalogue and order a chair.'
Microsoft estimates its own Microsoft Market system - a mixture of in-house intranet development and SAP R/3 - has cut the cost of processing a purchase order from $60 to $5. At 250,000 transactions a year, this should save the vendor nearly $14 million - not bad for a system that cost little more than $1 million to build.
'The system puts us back in control,' says Steve Harvey, director of finance at Microsoft UK. 'I have an instant picture of what my commitments are and I know how much we're spending with each supplier, which would have been too complex to calculate beforehand.'
Microsoft Market requires fewer staff, so Harvey has shed the two administrators from his purchasing department. The three purchasing professionals left say their job is more enjoyable because they can focus on meetings with suppliers, rather than pushing paper around.
Other common benefits of MRO automation include reduced elapsed time between initiating the order and receiving the goods - which can be cut by at least half; significant reductions in inventory; improved accuracy in purchase orders; and the ability to buy on a more global basis, with the attendant economies of scale.
Supplier information within an MRO system can be provided in a number of ways, including direct links to the supplier's own internet or extranet Website. But most packaged systems are based on a catalogue held by the system vendor, with prices and product information automatically updated by the supplier, designed with a common look and feel and tailored to each customer.
Suppliers are being brought into MRO systems because particular clients want to trade with them electronically. Over time, vendors hope to build up a pool of leading MRO suppliers, such as stationers and resellers.
'I want to get very quickly to a situation where we go to a purchasing customer and they can open the supplier's file and just click on the boxes of the suppliers they already use,' Sadd explains.
Unlike traditional EDI, where the prime movers and main beneficiaries were the companies that did the buying, MRO automation promises benefits for the sellers too. They can automate their processes, receive orders in the correct format and get paid on time, with the advantage that there are fewer queries and mistakes. Suppliers only have to provide their catalogue content once - to the MRO vendor - rather than to each customer separately, and they may gain a fresh channel to market.
Jon Sofield, UK country manager at Commerce One, says half the suppliers the vendor has approached have signed up virtually on the spot. 'We believe we will have 200 mainstream suppliers on board by the end of the year,' he comments.
If MRO vendors create a pool of tier-one suppliers for customers to choose from, the prospects for tier-two and three suppliers - and those in the middle of the supply chain, such as resellers - could be less than healthy.
MRO automation is more complex the more suppliers you have, so it often provides the incentive to rationalise a supplier base - Microsoft cut its own base in the UK from 1,300 to 500 when it automated its purchasing process two years ago.
But there are also opportunities. Compaq reseller CSF is setting up a hosted service, based on Commerce One's MarketSite. The system will have a catalogue of CSF's own stock but will also link to other MarketSite members, such as office equipment and stationery suppliers, providing a kind of portal site or one-stop shop for office needs. BT has signed a deal with Commerce One and InfoBank and plans to introduce its own managed service very soon. As the online purchasing market grows, the range of specialist market sites is expected to increase.
One benefit of managed services and portal sites is that they will bring electronic procurement within reach of smaller customers, on an ad hoc, dial-up basis. Full-blown MRO systems are very expensive - #130,000 upwards for InTrade and between #300,000 and #2.5 million for Commerce One's BuySite - which means they are only suitable for large companies. They need to be heavily tailored and integrated with back-end, legacy systems if they are to achieve their full potential.
An MRO system consists of a set of tools rather than a shrink-wrapped package, offering opportunities for resellers. InTrade is already being taken up by the big consultancies and systems integrators that specialise in SAP and similar resource planning systems. Once the technology becomes more widely accepted, there should be opportunities for smaller Vars as well, especially in integrating with portal or specialist market sites.
Smaller businesses, especially on the supply side, will have to become involved to survive. 'It won't be long before buyers start saying, you've got to deal with us like this or you won't deal with us at all,' says Sofield.
UK government e-commerce initiatives, which aim to see as much as 90 per cent of routine purchasing taking place electronically by 2001, should give the market a further boost. And to prove that the government is putting its money where its mouth is, the Stationery Office was one of InfoBank's first customers for InTrade.
Large-scale procurement of raw materials, components and products for resale is called ERP and tends to be better controlled than the purchasing of ancillary goods and services. But savings are possible here, too, in both purchase price and efficiency.
One of the pioneers of electronic procurement was US industrial giant General Electric (GE), which has been sourcing raw materials, machine tools, office leases and even contract staff electronically for more than three years.
Suppliers can register free of charge at GE's Website, where each is given a private area accessed by a password. A basic browser interface is supplemented with special software, including a viewer for technical drawings and a form for submitting quotations, all downloadable from the site. Existing suppliers are invited to register by GE's purchasing department, but any potential supplier can apply, subject to status.
Buyers within GE search the supplier database and decide who they want to receive bids from - usually all available suppliers. Then they place an invitation to tender in each supplier's private area. This can be very detailed, specifying manufacturing tolerances, standards, manufacturing capacity and equipment, as well as basics such as price, quantities and timescales.
'The technology enables the exchange of complex information, such as technical standards and drawings, on a wide basis,' says Colin Billinge, European marketing director for GE Information Services (GEIS).
The suppliers return sealed bids via an electronic form on the Website and receive feedback on the stage their bid has reached - unlike the previous manual system, where they could be left dangling. There is also a project calendar, showing the current status of the procurement. Final negotiations may still be conducted by conventional means.
GE has found a few suppliers through the Web, including a Hungarian components manufacturer that was 20 per cent cheaper than GE's previous supplier.
But most of the benefits have come from streamlining existing relationships.
'There have been significant breakthroughs in sourcing globally,' says Billinge. 'Small local suppliers to GE in one area now have the opportunity to supply us all over the world.'
Last year, GE spent about $5 billion online and saved between 10 and 15 per cent on price. Additionally, the cost of processing orders has been cut by between 50 and 90 per cent compared with manual methods and timescales have been slashed. 'You can bring cycle times down from weeks to days, or even hours if you're really slick,' Billinge claims.
GOING FOR BROKER
Smaller businesses that cannot afford a six-figure investment in electronic purchasing software may prefer to use electronic brokers, such as Industry to Industry (ITOI), which was launched in January.
ITOI - based in Cambridge, Massachusetts - is a type of online Dutch auction, where buyers publish requirements in detail and potential suppliers can bid for the contract. Companies pay a registration fee - $100 for buyers, $400 for sellers - which covers the cost of vetting participants to ensure they are solvent. The contracts can be very valuable so the system is generally only used by senior procurement or purchasing people.
ITOI takes a commission of between one and eight per cent, but promises savings.
'I know of sites that charge more commission than us but are cheaper than traditional brokers,' says Michael Fix, president and chief executive of ITOI .
Dealing online with an unknown party carries risks of non-payment and non-delivery, so ITOI has enlisted the experts to help the wheels turn smoothly. Financial information provider Dun & Bradstreet will verify status and finances; certification specialists Bureau Veritas and SGS will inspect the goods to ensure quality; freight-forwarding company Danzas will handle logistics and distribution; and Deloitte Touche Tohmatsu will take care of import/export taxes and paperwork.
Early registrants include automotive manufacturers, construction and engineering companies, consumer electronics firms, food and beverage suppliers and textile companies. It's too early to say whether ITOI will achieve the critical mass it needs, but similar sites for Web trading, such as eBay, have proved successful.
The average value of transactions on consumer sites is $40. Fix sees no reason why small firms should not use a business system like ITOI's for deals worth as little as $100.
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