What Role Do Standards Play in Procurement and Supply Chain Management - Assignment Example

1. What role do standards play in procurement and supply chain management? Provide at least two examples referring to GTINS, GLNs and other applicable standards discussed throughout the semester. Procurement and supply chain play an important role in the performance of an organization. For most businesses, these areas could determine profitability. For example, in the retail industry, procurement is critical in surviving competition and in the outcome of an organization’s profit margins. Procurement officers are considered pivotal in this condition as they navigate the pressure of purchase and transaction costs (Reardon et al., 2003, pp. 1144). They have to meet consumers’ demands by maintaining product diversity and availability. These officers also have to deal with diverse suppliers with their equally diverse system for transactions. The efficiencies in the processes involved diminish organizational performance. To put this in context, one can consider how a product is sold to a customer. The transaction would appear to be simple, with a store selling the product on the shelf. But the process behind this is actually complex involving vast supply chain especially when the organization involved operates globally. It would mean that several players and variables are involved with products changing hands several times, crossing geographic and even political boundaries. Finally, there are the inefficiencies, which aggravate the system further, complicating them even more. They jack up costs affecting all stakeholders in the process. Suppliers, consumers and retailers each incur losses. One could also turn to the case of interoperability to support this further. It pertains to the capability by which different IT systems of firms and individuals communicate and operate. This has been a problematic issue because IT systems have different technical standards, in addition to the differences in policies in the international system with respect to access and release of information. This issue is critical because it affects the deployment and overall processes of e-commerce infrastructure. For example, a company may encounter difficulties in its e-invoicing system if its technical standards have different semantic characteristics with those of its customers or those other firms it transacts with. The semantic layer of an organizations e-procurement system concerns the analysis of data and their meaning and interpretation (Paunovic et al., 2012). Differences in IT systems would mean varying modes of reading and interpreting data, which could impact the way correct information is communicated and interpreted from both ends. There is, hence, for a global standard that can address the inefficiencies of procurement and supply chain systems. This standard involves the establishment of a universal framework of interoperability. Here, companies agree on an open model that would effectively bind all operational processes. The ideal framework includes the standardization of three interoperability components: semantic, technical and process. Specific examples of global standards include Global Trade Item Number (GTIN) and Global Location Number (GLN). GTIN is a 14-digit number assigned to a retail product that include both the UPC and EAN symbols while GLN is presented as a bar code and provides a unique and efficient way to communicate precise names and locations (Moriarty & Klassen, 2001, pp.218). These are just two of the mechanisms that aim to standardize global product identification for purposes of procurement and supply chain management. The GS1, an organization devoted in providing standards for supply chains in various sectors, is also part of this initiative. It is now considered the most widely used standards in supply and demand chains around the world and maintains four standards and these are: 1. BarCodes: the standard used on labels for automatic product identification 2. eCom: used for electronic messaging that guarantees automatic electronic data transmission 3. GDSN: product data repository that offers product updates for organizations 4. EPCglobal: a radio-frequency identification standard for item tracking (Semianika & Silina, 2012, pp. 2). The identification standards cited above are underpinned by the need for easy access to accurate and appropriate information, product transparency and supply chain visibility, among others. These variables increase the collaboration of the multiple stakeholders in the supply chain and in procurement that allows for the reduction of efficiencies and the lowering of transaction costs. This is supported by empirical evidences revealed in studies conducted in recent years. For example, the Aberdeen Group reported four important variables (see Fig. 1) that drive the call for supply chain efficiency: growing number of global operations and the complexities entailed; the need for operational speed and accuracy; increasing demand on the part of consumers and stakeholders for accuracy and timeliness; and, the age-old requirement for organizations to reduce costs (Aberdeen Group, 2012). These variables are highlighted by the fact that around 70% of a firm’s sales revenues are spent on supply-chain related activities (Presutti, 2003, pp. 219). Fig. 1: Drivers for Supply Chain Standards (source: Aberdeen Group) With procurement, the expectation is that it will leverage the organization in its objectives particularly with respect to improved performance and the creation of value. A global standard would mean the elimination of inefficiencies and inaccuracies. This is easier with the mechanism of tracking and accessing product information as they move across the supply chain to the consumer. It means that products are delivered on time and on the right person. It is also easy to track problems since the standards allow the discovery of the pedigree and history of products. This is depicted in the standardized product identification system. Once a standard is implemented, a swift and accurate communication ensues among the stakeholders and participants in the procurement transaction in such a way that it results to an increase in inventory visibility and managerial efficiency. Essentially, it will bring about a convergence that would allow rapid analysis of information and, thereby, accurate and effective decision-making that would surely have bearing on the way suppliers are chosen, schedules are managed, errors are corrected and a host of other variables that collectively determine the ability to cut costs. One of the important components of standardization is the increasing use of information technology and the Internet. All these tools are contributing to the increase in efficiency and speed in procurement and supply chains. This is depicted in the case of eProcurement (see Fig. 2). But, as has been previously cited, different systems could lead to further inefficiencies. This variable is another strong argument for standardization. In the absence of a global standard, companies are enforcing their own across all other firms and individuals that they transact with. For instance, Bayer introduced its own marketplace in order to pool volumes and standardize the procurement process with its suppliers (Puschmann & Alt, 2005). Bayer’s standardization strategy also highlighted the role of standardization in procurement and supply chain. For instance, without a mechanism of organization and classification for all data involved in procurement, these will not be usable. Standardized processes in eProcurement will also successfully consolidate sources and control the so-called maverick buying, which could lead to savings. There are several other benefits to standardization but all these fall within the umbrella of operational efficiency that eventually leads to improved performance, the creation of value and profitability. Fig. 2 Impact of eProcurement (source: Puschmann and Alt) 2. Chris Miller of Shell Chemical has been quoted as saying: "E-procurement is not about screwing suppliers. Its about taking cost out for both suppliers and buyers and reducing institutionalized inefficiencies. Plus it supports smaller buyers and suppliers just as much as larger ones. Its not a big boys club." Discuss this statement through reviewing the benefits and disadvantages. In order to answer this question, it is important to discuss what eProcurement is. Essentially, it refers to the “technology solution that facilitates corporate buying using the Internet” (Presutti, pp. 221). The model included the Internet as a core component. It is for this reason why the concept is also referred to as online procurement. Being a technology solution, it includes several other tools such as software systems, business-to-business (B2B) auctions, B2Bmarket exchanges and purchasing consortia. Collectively, these technologies are used in order to achieve the automation of procurement process, which could lead to increased collaboration, cost efficiency and the ease and speed of identifying and maintaining relationships with suppliers and consumers. The use of Internet and technology makes eProcurement unique in several respects. First, there is there is what Presutti called as the shrinking of product life cycles on account of the elimination of variables that affect sequential deign activity. He pointed out that the Internet created “e-design”, which “facilitates real-time collaboration among all internal members of the firm’s cross-functional buying team, as well as with suppliers, preventing the after-the-fact issues in production and purchasing that create the inefficiencies and competitive challenges” (p221). Anderson and Lee (2002, pp. 16) supported this with a case study of the company, Adaptec, which successfully “reduced design-to-delivery cycle times and saved $10 million in inventory reductions by using Web-based collaborative design processes with key suppliers in Hong Kong, Japan and Taiwan.” For a more comprehensive view of the benefits of eProcurement to an organization, one could turn to the study of Sharman, Rao and Raghu (2011). They effectively identified all important benefits to a range of companies (see Fig. 3) based on a survey of firms with working eProcurement systems in place. Fig. 3: Perceived Benefits of eProcurement Systems (source: Sharman, Rao & Raghu, pp. 304). Furthermore, in eProcurement, the pervasiveness of the Internet in all aspects and levels of the purchasing process is revolutionizing the participations of stakeholders in the procurement and supply chains. This allows the buyers and sellers real-time communication, which for its part lead to an increased interaction among stakeholders. In this condition, suppliers are in the position to become more involved in the process. In Presutti’s study, it was revealed that this does not only to guarantee the accuracy of product information but also the improved quality and content of specifications that result into a better product development and business relationship (pp. 221). Indeed, when both parties could communicate real-time, there is better opportunity to correct errors, understand or limit complexities and other variables that contribute to the increase in product costs. This aspect shows an emerging trend in procurement, which is the empowerment of the suppliers. Based from prior studies, the initial reaction to the introduction of eProcurement systems to suppliers are mainly fear and reservation. Aside from the technical nature of the system, there is the perception that suppliers will be harmed by the new model with concerns regarding system security and information revelation coming to light (Pani & Agrahari, 2007, pp. 202). This explains the low adoption rates for companies that are not effective in training and making suppliers understand the benefits of eProcurement not just to the company and the business relationship but to the suppliers themselves. Clearly, this one of the disadvantages in eProcurement today. Organizations must build an infrastructure to support the electronic procurement process and suppliers must learn new procedures and skills (Assar & Boughzala, 2008, pp.92). Another issue is congruence, different IT systems could create problems regarding interoperability. Without a standard that all parties to the process could follow, the strategy could become a liability for an organization. Contrary to some beliefs, eProcurement can benefit suppliers. This is not merely on account of the fact that companies outsourcing products are using them so adoption is an imperative. Rather, there are tangible benefits to suppliers themselves regardless of whether they are large or small companies. As in the case of companies outsourcing products, suppliers benefit from the system because it increases efficiency. Consider an excellent example of an eProcurement process involving product from suppliers made available in an electronic catalogue. Here, the user “selects items directly from the catalogues and buys on contracts that allow repeat purchases. The firm’s computer system automatically routes the purchase order directly to the supplier” (Wisner, 2011, pp. 121). Based from this example, one understands how the automated process is radically streamlined. It addresses several problems and inefficiencies on the supplier end that could rack up costs, which eventually diminish cost efficiency. For instance, real-time communication and increased collaboration allow a high degree of flexibility and capability to avoid errors in product specifications. This is highlighted in dealing with a huge organization that has several procurement officers. A supplier could incur losses with the delay due to confused orders coming from senior buyers, procurement assistants and other contact personnel in the procurement department (Kotzab, 2005, pp. 293). While the supplier maybe compensated for erroneous information, time was consumed, a resource that could have been translated to more revenue if it was spent productively. EProcurement solves this problem. Also, the streamlined process allows a better capability for suppliers to handle more than one organization. The automation allows for lean operations that could surely benefit small suppliers. It also eliminates opportunities for corruption, which disadvantages small suppliers because of their limited financial capability (Hanna, 2010, pp. 100). Finally, since eProcurement allows for a systematic documentation of transactions, organizations are able to determine those suppliers that perform well and those that contribute best to their organizational objectives. It, therefore, evens out the playing field because the information is available and transparent for the organization to evaluate. A small firm can, hence, compete better with large suppliers provided their performance is excellent. References Aberdeen Group., 2012. Supply chain visibility excellence: Mastering complexity and landed costs. [online]. Aberdeen Group. Available at:0 . [Accessed 7 June 2014]. Anderson, D.L. and Lee, H.L., 2002. The Internet-enabled supply chain: from first click to the last mile: Achieving supply chain excellence through technology. San Francisco, CA: Montgomery Research. Assar, S. and Boughzala, I. (2008). Empirical evaluation of public e-procurement platforms in France. International Journal of Value Chain Management. 2(1), pp. 90-108. Hanna, N., 2010. Transforming Government and Building the Information Society: Challenges and Opportunities for the Developing World. Berlin: Springer. Kotzab, H., 2005. Research Methodologies in Supply Chain Management. Berlin: Springer. Moriarty, M. and Klassen, B., 2001. Power Play: The Beginning of the Endgame in Net Markets. Hoboken, NJ: John Wiley and Sons. Pani, A. and Agrahari, A., 2007. E-procurement in Emerging Economies. London: Idea Group Inc. (IGI). Paunovic, L., Simic, K., Dadic, J., Jovanic, B. and Barac, D., The impact of applying the concept of the semantic web in e-government. IIASS, 5(2), pp. 161-179. Presutti, W., 2003. Supply management and e-procurement: creating value added in the supply chain. Industrial Marketing Management, 32, pp. 219-226. Puschmann, T. and Alt, R., 2005. Successful use of e-procurement in supply chains. Supply Chain Management: An International Journal, 10(2), pp. 122-133. Reardon, T., Timmer, P., Barrett, C. and Berdegue, J., 2003. The Rise of Supermarkets in Africa, Asia, and Latin America. American Journal of Agriculture Economics, 5, pp. 1140-1146. Semianika, N. and Silina, E., 2012. The role of global data identification standards for supply chain visibility: the case of GS1. Ph. D. KTH Industrial Engineering and Management. Stockholm, Sweden. Sharman, R., Rao, R. and Raghu, T.S., 2011. Exploring the Grand Challenges for Next Generation E-Business: 8th Workshop on E-Business, WEB 2009, Phoenix, AZ, USA, December 15, 2009. Berlin: Springer. Wisner, J., 2011. Principles of Supply Chain Management: A Balanced Approach. New York: Cengage Learning. Read More