The Impact of Implementing Information Technology on Procurement Process - Research Paper Example

Table of Contents I. Introduction 2 II. Comparative Review of Past Research 3 III. Impact Analysis 9 IV. Recommendations 13 V. Conclusion 15 VI. Bibliography 15 VII. Appendix 20 The Impact of implementing Information Technology in Procurement Process I. Introduction With the emergence of information technology, the way of doing business processes and how the organisations carry out their activities have modified to a great level. The applications of information technology have provided the organisational processes with transparency, efficiency, and accountability, as argued by Caldwell, et al., (2009). Regarding the organisational success on the basis of its processes, it is important to enhance the organisational internal processes at the first priority. Among these internal processes, one of highly significant and cost-intensive process is ‘procurement process’, which involves a costly operational structure and a considerable amount of clerical expenses by the interaction among the suppliers and purchasers. For lowering these costs, it is important to enable the organisation to reduce the structural complication in the procurement process[Ber14]. In this regard, it is highlighted that the information technology plays an important role in the efficiency and effectiveness of the procurement process, where it can reduce costs, lower paperwork, decrease the errors, and guarantee the optimum productivity[Dan15]. The purpose of this research paper is to analyse the impact of implementing information technology in the procurement process, and this paper is divided into different sections. The first section presents the comparative review of past research on the subject matter, where the previous studies on the impact of IT on procurement process are reviewed and issues are identified. The next section presents the impact analysis, where the impact of issues in IT implementation, as identified in the previous section, are evaluated in the procurement process. Then after recommending some important suggestions for circumventing the issues, the conclusion is made. II. Comparative Review of Past Research Reviewing the previous research can be quite useful for giving significant information and identifying a number of important issues regarding any subject matter, as this section presents. There is a large pool of literature dedicated to the topic of the impact of information technology on the procurement process. Before entering into the main topic, it is important to know about the procurement process and its issues highlighted in the literature. The procurement process has been discussed by many scholars who explain this process in the form of different phases, as the first model was based on three phases originally given by Schmid, (1993). The model was then refined and developed as a four phase model and a number of stages in every phase. According to Kim & Shunk, (2004), the procurement process is based on four phases and sectioned in more phases (as shown in Appendix), where the primary phases include; (1) information, (2) negotiation, (3) settlement, and (4) after-sales phase. Firstly, the purchaser need information about the need of purchasing material, the prospective suppliers in the market, obtaining quotations and proposals, and then the negotiation started. In the negotiation, the pricing, quality, customisation, availability, and payment structures are decided. After the completion of agreements, the settlement is made in which the ordered material is delivered, and payment is made on the basis of decided terms and conditions. In the end, the extended phase is the after sales phase, where the evaluation is made on the supplier’s performance, usage, maintenance, and removal of material [Ler11]. Conventionally, the procurement process has been carried out through paper works and manually, which resulted in higher cost of processing, longer time periods in approvals or delivery of products and so much complexity in the whole process[Mod12]. Also, it is argued that the role of procurement in the organisation has been radically shifted from merely purchasing material or services towards administering an integrated structure of management roles in this era of globalisation[Fra08]. Due to globalisation and increase in competitiveness in the market, there is requirement of more efficient and effective internal processes like procurement process that can enable an organisation to be competitive, as it is stated, “…managing the purchasing process by traditional means can be very inefficient and interminable due to the excessive complexity…” [Ber14]. It can be posited here that information technology applications can be applied in the procurement process for better supplier relations, reduction in complexity and costs for firm’s profitability. In this regard, Mithas, et al., (2012) have provided empirical evidence gained by getting archival data (1998-2003) from more than 400 organisations, and it is evidenced that the information technology has a positive association with the organisational profitability in today’s competitive business environment. The application of information technology in the procurement process provides a number of benefits as suggested in the literature. According to Kelley (2009) and Ordanini (2006), the implementation of information technology applications provides the procurement process with important benefits, such as automation that makes the process streamlined and uniform, reduction in the procurement costs, and enhancing the transparency in the procurement process. Additionally, Badaso (2014) have supported that the information technology provides effortless and efficient process flow, lower transaction costs, and well-organized supply of data, delegation of jobs and choices, improved transparency as well as enhanced control. Regarding the cost reduction benefit of information technology to procurement, Dong, et al., (2009) stated that “…IT can lower coordination costs, and in supply chain contexts, digitally enabled integration capability can substantially improve transactional efficiencies through increased information sharing and communications capabilities, resulting in improved supply chain performance…” (p. 20). In line with this argument, Schoenherr & Tummala (2007) also evaluated a number of studies and argued that the e-procurement (an application of the procurement with information technology) is highly linked to cost reductions, where it lower the manual and transaction costs hugely. In addition, few studies found that the organisations could have achieved a reduction in process costs up to 80% by employment of information technology in the procurement process, as evidenced by Ringhofer, et al. (2008), cited in Zunk, et al. (2014). It suggests that the information technology can lower the procurement costs by effectively communicating and enhanced information sharing abilities, thus it aids in lowering the overall coordination and transaction processing costs. Many studies suggested the cost reductions to be the prime role of information technology in the procurement process by increasing the efficiency in process[Sch07]. In contrary to this argument, a recent research is conducted to evaluate the impact of the application of information technology in procurement process using a survey methodology and studying the case of Kenya, where it is argued that the positive effects found in the procurement process were mainly due to the quality enhancements and time reductions, in spite of the cost reductions that is suggested by many other scholars. Challenging the conventional view of cost reduction in the procurement process through information technology, Wanjiru & Abdalla (2015) established that the organisations are more probable to achieve developments in cycle time declines as well as the quality of the process. However, information technology applications like e-procurement, ERP (enterprise resource planning), EDI (electronic data interchange), RFID technology etc., provides automation to the procurement process that result in shortening of the procurement process as argued by Tatsis, et al., (2006). This automation in procurement through the information technology result in better integration between departments, hence there is enhancement in operational performance as well as the managers become more confident about the prospective organisational performance, as empirically tested by Done, et al., (2011) in which more than 400 organisations are surveyed. Furthermore, Zunk, et al. (2014) have identified some important impacts of the information technology on the procurement process, where they argued that implementation of information technology leads towards the improvement in overall performance by enabling employees to focus on strategic issues more, reduction in time of procurement process, more cost transparency, reduction in transaction costs, enhanced supplier relationships through easy collaboration, overall system improvement enhancing the information sharing, and easy & quick data access[Ber14]. Most of the studies suggested that the information technology has positive impacts on the procurement process and eliminate the issues identified by the traditional way of carrying out this process. Due to these important benefits provided by information technology in procurement process, it is significant to implement it, however, there are many issues and challenges identified in literature that impact on the implementation of information technology, quite important to consider by managers and practitioners. Implementation can be challenging for the managers, as Rodríguez-Escobar & González-Benito (2015) conducted a research through surveying 156 procurement managers and found that the information technology have positive impacts on the procurement process and it is due to the successful implementation of the IT procurement practices in the process. Thus, it is of high significance that there happens a successful implementation of Information Technology in the procurement process, which can be occurred by circumventing the barriers and challenges in the way of effective implementation. According to a study conducted by Smart (2010), it has been seen that the value created by implementing information technology in procurement is usually unidentified due to which many organisations require an unblemished strategy for its implementation. Due to this reason, Kalakota and Robinson (2001) have argued that there is a need to redesign the procurement process for better implementation of information technology, which is also another challenge. In addition to these, some other challenges are recognised in a factor analysis study conducted by Angeles & Nath (2007), where they highlighted three most significant challenges; (1) issues in system incorporation as well as stabilization problems, (2) ingenuousness and novelty of information-technology based procurement process which also sometimes result in the user opposition, (3) individualist procurement and trouble in incorporating IT based procurement system with other electronic systems in the organisation. Among these, the most crucial challenge is the user opposition in the IT implementation, as argued by Banerji (2013) and Kipsoi, et al. (2012). According to Davila et al. (2003), there are many risks that can be faced while implementing the Information technology in procurement, especially for e-procurement, such as risk of the encumbrance of the e-procurement with other suppliers IT system, lack of provision of catalogues for fulfilling the consumer requirements, and most importantly, the safety and security risks of an e - procurement process that can be resulted in sensitive or confidential information leakage and fraudulent bidding and suppliers etc.[Trk10]. Apart from implementation issues, Saeed and Leith (2003) conducted a study to evaluate the purchaser discernments regarding the risks in adopting the information technology in procurement process, and they found three major challenges to be considered; risk of making out wrong transactions (happened due to mistaken products procured or partial or ambiguous information obtained), security hazards and safety issues (can be occurred from unlawful diffusion of exchange boards and stoppage to guard the transaction information during sharing or storing), and confidentiality risks (due to wrong data gathering and information unambiguousness). Many organisations may be reluctant to implement the information technology in procurement process due to two main risks; cost and complexity. According to Wanjiru & Abdalla (2015), high cost can be a risk for the IT adoption, as there are high costs associated with the purchase, fitting and training for the employment of new IT system, or it may be because the organisations have already employed other technology adoptions in human resource, finance and other departments. In addition, the employee capability to run the system can also be a major barrier, which can further result in high cost involved in hiring new and capable personnel[Mos13]. While other major risk that is considerable for both adoptions of IT system and its implementation, is the system complexity, which can also hinder the projected benefits of the information technology adoption in the procurement process, such as reducing the complexity of the procurement process[Dan15]. Though, there are a number of benefits given by information technology in the procurement process, and also the challenges that must be considered while implementation, as outlined above. However, it is also important to highlight that the adoption of information technology in procurement is a need for any organisation in today’s market scenario, where streamlined operations, lower transaction costs, and integrated way of managing the procurement process can make an organisation competitive in such dynamic market. As literature suggested that the information technology not only reduce the paper cost, but it further lowers the inventory carrying costs, as the supplier and customer relations are strong and there is quick communication on both sides[Rut12]. It does not only automate the whole procurement process, rather it is also involved in reengineering and updating the process that allow the information sharing between all of the stakeholders at the same time. III. Impact Analysis This section presents an analysis of the impact of issues discussed above on the implementation of information technology in the procurement process from the perspective of different industries. The application of information technology can have different impacts in different industries, as the literature suggests. From the perspective of the retail industry, the procurement process is considered as highly significant process, where the implementation of information technology applications can have marvellous influences. As according to Wamba, et al. (2008), the application of information technology like applying EPC networks or RFID technology in the retail industry can have positive effects on the procurement process. A recent study conducted by Modak & Kamali (2012) in which a case study is used to evaluate the impact of information technology in the context of a case study from the retail industry, have stated that “…the information technology has enabled grocery retail stores to significantly improve their supply chain and move perishables and other food items with limited shelf life…” (p. 21). It is argued that there is seen modifications in the procurement process in a way that the transaction and inventory costs are lowered, as well as the time of putting the product into the market is shortened. It is further suggested that in today’s competitive retail industry, it is important to optimise the procurement process[Asl12]. Additionally, the retail industry requires agility in its business operations, curtailing the delivery intervals as well as lowering the inventory via quicker information sharing[Sor11], which can be enabled by information technology [Hsi15]. Recently, Su and Fu (2015) have conducted a study in the retail industry, where they have evaluated the impact of IT implementation and found that there was an enhancement of the internal operational proficiency through quick information sharing among suppliers and organisation, and the customer services. Though, the benefits of applying IT in procurement as mentioned above are seen in the retail industry. However, the issues discussed above do have their impacts on the retail industry, for instance the security and confidentiality issues can affect the retail business by making any fraud through illegal information leakage. From the construction industry perspective, there is a high requirement of efficiency in the industry to gain competitive advantage, which can be fulfilled by implementing the information technology. The construction industry has complicated and inconsistent procurement process that results in high costs due to different and customised transactions every time. However, Zunk, et al. (2014) have argued that the information technology can positively affect the procurement process in construction industry, as they stated that “…especially the complex and not standardized procurement process holds high cost reduction potential… to exploit this potential, suppliers need to understand the purchasing routines of their buyers…” (p. 13). IT can be beneficial in reducing a large number of costs in the construction industry, as there are many suppliers in the market and to manage them and streamlined the operations, information technology provide the solution. Zunk, et al. (2014) have surveyed a large sample of construction companies in Austria and found that there are many barriers affecting the impact of IT on the procurement process, however, IT solutions are not usually implemented in the construction industry and its prospects for lowering the costs is not accessed fully still. Also the issues like lack of expertise in IT applications and security concerns highly affect the IT implementation in the construction industry. From the food industry perspective, the impact of IT implementation in the procurement process is not largely studied, but few studies have provided with useful insights. It is accepted for a long time that for food industry, there is a high requirement of effective inter-organisational collaboration and agile procurement process to be competitive in this industry[Sta99]. However, a study conducted by Tatsis, et al., (2006) on the implementation of e-procurement in Greek Food and Drink Industry suggested that in the food industry, the application of e-procurement is quite sluggish and few examples have been there. It further uncovered some significant impairments or challenges regarding IT application in the procurement process, for example the insecurity and ambiguity of applying the technology and regarding the benefits of this application, the deficiency of competence as well as infrastructure in this industry, and the out-dated conventions present in the food industry[Vas06]. It can be noted here that the issues in the application of IT affecting the food industry are similar to the other industries except the outdated ways of procurement persisted in the food industry. In addition to these, the impact of IT in the food industry procurement process is also found to have positive effects as it is argued by Mangina & Vlachos, (2005) that the IT solutions in the procurement process such as Optimisation agents, assist to resolve the issues in procurement effectively, for instance, it lowers the inventories, reduce the bullwhip impact, enhance collaboration and allow better cooperation and communication, devoid of hostile risk involvement. A case of a retail store named Spartan Stores Inc. was studied by Modak & Kamali, (2012) and the impact of adopting information technology is evaluated. Spartan Stores is a prominent local retailer and a wholesale supplier located in Michigan. They chose the Spartan Stores, Inc. due to its exceptional characteristic of coexisting as a supplier to sovereign stores as well as a retailer owning a number of retail stores. It has been using the improved applications of IT for organising its inventory through the computer assisted ordering system. Modak & Kamali, (2012) found that the product data quality, demand forecasting system, order management, better metrics measurement, and inventory & stock management were affectedly enhanced. However, the issues that affected this implementation include, the managerial support, process redesigns, and end user acceptance of new system[Asl12]. Another case is a best practice case of GlaxoSmithKline, regarding the e-procurement implementation, where it is a pharmaceutical firm performing many researches. The company has been facing a number of issues in the procurement process before implementing the e-procurement, such as high costs, paper works, and telephonic communication delaying the research, longer time periods of getting supplies from different suppliers affecting the speed of product to the market, and also unbeneficial deals with the suppliers[Abe05]. Then the company successfully implemented the e-procurement solution for the objective of reducing time and costs, and getting profitable deals from suppliers. The main benefits the company achieved through e-procurement implementation were the substantial reserves because of decreased wholesaler costs, upsurge in agreement amenableness, as well as abridged cycle time owing to extra efficient procurement process[Abe05]. However, the main success factors in the implementation are the end user acceptance of the new system, upper management approval, and first-class as well as perfect catalogue content, as these were the main challenges discussed above that were managed successfully by GlaxoSmithKline. IV. Recommendations After reviewing a comprehensive literature and studying the impact as well as issues of implementing information technology in the procurement process from context of three industries and two cases, this section presents the recommendations that can be made on behalf of the research discussed above. Following are some important suggestions for improving the procurement practices. During implementation of the IT in procurement process, it can be highly beneficial if other organisations, especially the suppliers and vendors are also incorporated in the plan, as Davila, et al. (2003) suggested that the e-procurement can be best implemented by adding suppliers in it, as it heavily depend on the network impacts that can be achieved if others are also embracing the similar technology. For information technology implementation to be fruitful, the suppliers have to be reachable via the Internet as well as they must offer catalogues for fulfilling the consumer requirements[Trk10], as it is seen as a success factor in case of GlaxoSmithKline. Before implementing the information technology, there must be conducted an appropriate training and development program that can be beneficial for the skills and competencies of the personnel. In addition, such programs can also act as an announcement and awareness to the employees regarding the new implementation in the company, which can be helpful in reducing the end user resistance if taking care of change management practices, as change management and end user resistance are significant challenges. Procurement departments must start some educational courses for getting important knowledge regarding the implementation of new IT solutions in the procurement process, as it has been a major barrier in this regard. The information technology must be taken as a strategic decision and must be integrated with other business operations as well, and it must be implemented strategically for lowering the procurement costs and complexity. V. Conclusion It can be concluded that the implementation of information technology can have positive impacts on the procurement process due to a number of benefits it provides, such as the reduction in transaction and inventory costs, streamlined operations, lowering the complexity in the procurement process, as well as enhanced collaboration and information sharing between the company and suppliers. But there are some challenges that affect the acceptance and implementation of IT in procurement, which must be strategically circumvented, in a way as GlaxoSmithKline did. VI. Bibliography Ber14: , (Zunk, et al., 2014), Dan15: , (Wanjiru & Abdalla, 2015), Ler11: , (Lerch, et al., 2011), Mod12: , (Modak & Kamali, 2012), Fra08: , (Butter & Linse, 2008), Ber14: , (Zunk, et al., 2014, p. 15), Sch07: , (Schoenherr & Tummala, 2007; Kelley, 2009; Ordanini, 2006; Angeles & Nath, 2007), Trk10: , (Trkman & McCormack, 2010), Mos13: , (Mose, et al., 2013), Rut12: , (Ruth, 2012), Asl12: , (Modak & Kamali, 2012), Sor11: , (Sorescu, et al., 2011), Hsi15: , (Su & Fu, 2015), Sta99: , (Stank, et al., 1999), Vas06: , (Tatsis, et al., 2006), Abe05: , (Aberdeen Group, 2005), Ber14: , (Zunk, et al., 2014, p. 14), VII. Appendix Figure 1. The Procurement Process. Source: [Ber14] Read More