How E-Procurement Differs from Traditional Purchasing Techniques - Literature review Example

E-Procurement Student’s Name Course Title Tutor’s Name Name of Institution Name of Department 8th September, 2012 Table of Contents Table of Contents 3 Goodman, S., Ladzani, W., Bates, B., De Vries, C., and Botha, S. 2005. Business management: Fresh perspectives. Cape Town: Pearson South Africa. 12 Lenders, M.R. and Fearon, H. 1997. Purchasing and Supply Chain Management. Boston: McGraw-Hill. 12 Lamming, R., 1995. Strategic Procurement Management in the 90s: Concepts and Cases. Stamford: East Gate press. 12 Monczka, R., Handfield, R. and Trent, R. 1997. Purchasing and Supply Chain Management. Cincinnati: International Thomson Publishing. 12 Neef, D. 2001. E- Procurement: From Strategy to Implementation. New York: Prentice Hall. 12 Zenz, G. 1994. Purchasing and Management of Materials. New York: John Wiley and Sons. 12 Abstract Emerging technologies and advancements in the information technology sector have greatly improved the procurement process of businesses through better service quality, increased flexibility and timelier location and receiving of products and services. Among these emerging technologies is e-procurement, which is discussed in detail in this report. Introduction Also known as supplier exchange, electronic procurement refers to the business-to-business, business-to-consumer or business-to-government purchasing and sale of supplies and services over the internet and other information and networking systems. According to Yi-Chen (2005), Electronic procurement can be carried out in a number of ways that range from public e-market centers which involve several firms in a certain industry to private exchanges for big companies. According to Shim et al (2000), one major benefit of an e-procurement system is that it facilitates the automation of the routine buying and selling procedures. The various reasons why a firm may choose to switch to an e-procurement system are cost reduction, improving productivity and bypassing of unnecessary elements in the supply chain. This method of purchasing is also advantageous to the customers as it provides them with a wide variety of merchandise that can be purchased at low prices. There are three main e-procurement methods according Yi-Chen (2005). These are sell-side (web shop), buy side and marketplace model. In a sell-side model, the supplier sets up an online shop and a catalogue from which buyers shop there for their supplies. In the buy-side model, the buyer invites bids through the tendering process on its own site. In the marketplace option, the buyer purchases his goods and services from a neutral marketplace. Discussion Origin and Evolution of E-procurement According to Lenders; Fearon, 1997 and Monczka et al., 1997, as a major part of the supply chain management, supply chains in the procurement process were traditionally supported by IT. Electronic Data Interchange (EDI) connections with the suppliers were established in the 1980s as a result of the implementation of Enterprise Resource Planning (ERP) or MRP systems. Since mid 1990s, most companies have been revamping their relationship with their business partners for the purpose of indirect procurement. Lamming (1995) stated that direct procurement relates to all raw materials and components used in the process of manufacturing a finished product. According to Zenz (1994), indirect procurement addresses all products and services used mainly for maintenance, repair and operations (MRO) and mainly focus on the products and services which are neither resold directly nor are part of the end product. The potential for reorganizing the MRO supply chains has been created by the diffusion of e-procurement systems in the late 1990s. These systems were less expensive and more flexible as compared to ERP. According to Neef (2001), the main purpose of the E-procurement systems was to include the end user in the procurement process using an electronic catalog and close the gaps existing in the supply chain of indirect goods. The third phase in the development of e-procurement has been observed with the integration of E-markets in the supply chain since the late 1990s. The electronic markets evolved alongside early system vendors and supported the outsourcing of operational functions of procurement systems while offering tools for auctions and requesting for quotations. How E-procurement differs from traditional purchasing techniques The main way in which e-procurement differs from the other traditional procurement systems is that it is generally done online while the traditional procurement methods are done via telephone or face to face. Traditionally, the procurement process was paper and conversation based. The procurement officers would interact directly with the long time partners or well known suppliers and purchase the products and services at fixed prices. However, in e-procurement, this is a strategic function whereby the procurement officers only seek the suppliers that fit within the company’s overall strategy. In E-procurement, the procurement process is moved online in order to cut down steps in the procurement process hence saving money. On the other hand, traditional procurement involves getting quotations and then waiting for their approval from the finance department, then getting a purchase order, a process that can take more a week. In e-procurement, this process is considerably simplified and speeded up by the real time interaction between the suppliers and the trading partners. The purchasing process can be approved and done online within minutes with the purchased item arriving within days. This way, a company gets to reduce the staff time that is involved in purchasing resulting in a decline in the company’s cost of operation. Advantages and disadvantages of E-procurement on the purchasing process The following are the advantages of using e-procurement. (a) Reduction of operation costs. According to Goodman et al., (2005), cost cutting is the major benefit of using E-procurement. This is because the business gets to have more control as it can see clearly the goods that are ordered and the amount that is to be paid. It also helps the company in limiting uncontrolled buying. The company can also cut costs in administration and logistics management. (b) Efficiency The ordering process is all done in the computer meaning that the business no longer requires the use of paper. The purchasing process therefore becomes easy and efficient as the procurement manager will no longer waste time looking for files in the cabinet as the whole process is recorded and visible in the computer (Goodman et al., 2005). (c) Speed The e-procurement process is usually quicker resulting in better output. Ordering is done online and recorded immediately after the order is placed. It is also relatively quicker to access all the records. (d) Accuracy According to Goodman et al., (2005), E-procurement consolidates an in-built mechanism that prevents a placed order from going through unless all the requirements e.g. payment are met. (e) E-procurement also reduces the time spent by a buyer by eliminating phone calls and visits to the seller’s office since all the purchases are made online from anywhere in the world. On the other hand, E-procurement also has several disadvantages as discussed below. (a) High start-up cost E-procurement systems are associated with very high start-up costs. These originate from purchasing the procurement system, computers, bandwidth among other items required for it to operate. All this materials can be very expensive. (b) Time consuming According to Monczka et al., (1997), the procurement system must be installed and tested taking a lot of time. A lot of time is also wasted when training the employees on how to use the new system. (c) Suppliers who used traditional procurement method and were used to dealing with clients face to face may find online trading difficult and uncomfortable as they do not know who they are dealing with. Explanation of terms E-Auction Also known as reverse electronic auctions, e-auctions are online auctions where several bidders submit their offers against the specification of the purchaser. According to Nora (2011), all the communication between the sellers and the buyer is done electronically. E-Catalogue These are digital brochures made up of images and salient features that contain information about a certain product or service offered by an organization. E-catalogues are an effective and innovative technique of advertising and promoting a company’s product range. E-Marketplace E market places are internet locations that are owned by companies where other individuals or companies may get buyers or suppliers for their products. Through e market places, trading networks may also be created and this makes the process of negotiation and delivery easy and efficient. E-Payment This is the electronic transfer of money from one account to the other through computer based systems. E payments are financial exchanges that take place between online buyers and sellers. The exchange is facilitated by a digital financial instrument e.g. credit card numbers and is backed by an intermediary such as a bank or a legal tender. Conclusion E-procurement has a constructive impact on the performance measures of an organization’s procurement system. The electronic interface between suppliers and buyers saves time, cost and effort unlike when using traditional methods of procurement. All organizations should therefore make use of e-procurement in order to reduce the amount of time spent when selling or purchasing products and services (Monczka et al., 1997). This will result in reduced production costs. References Goodman, S., Ladzani, W., Bates, B., De Vries, C., and Botha, S. 2005. Business management: Fresh perspectives. Cape Town: Pearson South Africa. Lenders, M.R. and Fearon, H. 1997. Purchasing and Supply Chain Management. Boston: McGraw-Hill. Lamming, R., 1995. Strategic Procurement Management in the 90s: Concepts and Cases. Stamford: East Gate press. Monczka, R., Handfield, R. and Trent, R. 1997. Purchasing and Supply Chain Management. Cincinnati: International Thomson Publishing. Neef, D. 2001. E- Procurement: From Strategy to Implementation. New York: Prentice Hall. Nora R. 2011. Current adoption and future prospects of electronic reverse auctions in the Austrian automotive industry. Munchen: GRIN Verlag. Shim, J.K., Anique A., Qureshi, Joel G. Siegel, and Roberta M. 2000. The International Handbook of Electronic Commerce. New York: AMACOM. Yi-Chen, L., 2005. Global Information Society: Operating Information Systems In A Dynamic Global Business Environment. Hershey: Idea Group Inc (IGI). Zenz, G. 1994. Purchasing and Management of Materials. New York: John Wiley and Sons. Read More