E-Marketplace Participation: Reaching the Bottom Line
Procurement via e-marketplaces can deliver huge value to buyers and sellers. But it doesn't happen every time. For some companies, in fact, it may never happen. What's more, when anticipated rewards don't materialize, it's usually not the fault of the e-marketplace. The greater likelihood is that the affected company failed to identify the right benefits and secure them quickly.
When planning e-marketplace procurement initiatives, it is not unusual for participants to forego the strategic diligence that ordinarily precedes a new business approach. Sometimes the reason is a mad rush for low-hanging fruit - the lure of easy economies. Other times, e-marketplace participation may have been mandated by senior executives without the buy-in of their operations and procurement professionals. It's also true that most e-marketplaces - being somewhat new and inexperienced - still are learning how to help clients maximize their opportunities. At this stage of the game, most e-marketplace developers are thinking hardest about how to provide the widest range of (one-size-fits-all) benefits. Whatever the reason, buying organizations that are "unstrategic" about e-procurement probably will be disappointed by e-marketplaces.
Fortunately, creating an "accelerated value realization plan" - an up-front strategy for optimizing procurement via e-marketplaces - is a logical process that is easy to understand and invoke. However, it's also challenging because each step demands the acquisition of information that is not easy to come by. Think of this plan as the culmination of a three-stage process:
- Value Discovery: Identifying the exact benefits the buying organization expects to derive from its participation in an e-marketplace.
- Organizational Readiness: Ensuring the buying organization's ability - administrative, technological, and cultural - to capture and maximize the identified benefits.
- On-Ramp Integration: Creating a seamless, well-prioritized, technology-integration approach that is driven by need and value.
The remainder of this white paper presents a high-level view of the core activities that comprise each of these stages.
Value Discovery
Value Discovery is a function of: 1) relating the organization's most pressing procurement needs to the supply chain processes associated with procurement (design, source, plan, transact, move, and dispose), and 2) gauging the potential of e-marketplaces to optimize each of those processes via:
- Price savings (potential reductions achieved through increased buying economies, greater leverage, or improved compliance).
- Process efficiencies (less time required by key procurement activities or the increased ability to act strategically).
- Inventory optimization (e.g., as a result of reduced lead times, better planning, lower safety stocks, higher levels of vendor-managed inventory, or improved supply chain visibility).
- Lower development costs (through collaborative design or increased standardization).
Figure 1 shows a variety of e-procurement capabilities, mapped to a sampling of the supply chain processes they influence most often.
Figure 1 - Sample e-marketplace capabilities and the supply chain process
they influence most directly.
Generally, an e-marketplace's greatest value lies in the source and transact areas. In sourcing, for example, constituents can improve their purchasing leverage with reverse auctions, or reduce overall costs through multi-company buying. Similarly, enhanced transaction capabilities help reduce costs and often improve compliance.
But potential e-marketplace benefits actually reside in all areas - beyond the traditionally-held boundaries of procurement. By slashing costs and development time, e-market-based collaboration can be a significant asset to spend categories with large design components (manufacturing equipment, for example). Likewise, e-marketplace-based transport coordination can minimize redundant movements while maximizing vehicle utilization. And because most companies obtain at least a few items with salvage value, more benefits can be realized at the dispose stage by leveraging e-marketplace auctions. The key is quantifying the need and linking it with the capability.
Consider the case of a large energy concern: "Hypothetical Exploration, Refining and Production, Inc. (HERP)." In early 2000, HERP senior management decided that the company should become a founding member of an industry consortium (a vertical e-marketplace). Immediately thereafter, the company's IT and procurement managers were told to "move all of our procurement activities through the e-marketplace."
But six months later, very little value had been added. Significant effort had been spent building interfaces between the e-marketplace and the company, but it was not at all clear how this translated into real business benefits. In fact, management was very concerned that the cost of materials and services actually might go up. At this point, management decided to step back and take a more strategic approach. Following an assessment of the company's spending needs, it became clear that there were significant procurement opportunities in all areas of the supply chain and in many of the spend categories. The key was prioritizing and extracting those opportunities.
Two more levels of detail comprise the Value Discovery phase. First, the relationship of procurement-related processes (design, source, plan, etc.) and the method of capturing value (reverse auctions, collaborative design, Web transactions, etc.) must be applied to each one of a company's spending "categories." Categories are simply spending groups with similar characteristics, such as items for similar departments, items from a single supplier, or items earmarked for a particular location or use. This level of granularity is key to avoiding a benefits profile that is overly generic. Most companies already have procurement-segmentation approaches in place.
Second, opportunities must be sized for each spend category. This depends primarily on economic factors such as the current amount of spending per category, but it also must take into account the sophistication of current procurement processes and the level of difficulty associated with capturing needed levels of e-procurement value (largely a function of how centralized the procurement operation is).
After identifying two particularly attractive e-procurement prospects, HERP was ready to move ahead. The first opportunity was sourcing "near-commodities" - pipes, valves, and fittings, administrative services, office supplies - that could easily be specified and cataloged. HERP determined that this segment contains numerous potential vendors and that quality could be controlled easily as new suppliers were brought on board. The company then decided that a reverse auction capability and an e-marketplace catalog purchase process were the best ways to leverage these opportunities. The second area was engineered equipment - a huge spend category whose chief value lever would be collaborative design tools, not sourcing or transacting tools.
Lastly, companies can enrich their e-marketplace assessments by calculating the worth of enabling technologies that the sites make available. For one company, seamless access to site-resident supply chain planning tools from i2 Technologies or Manugistics, buying tools from Ariba or Commerce One, or design-collaboration tools from PTC Windchill or Formation Systems might represent a great value. Others may have less need, or perhaps prefer to implement the tool(s) on their own.
Since HERP already had decided to participate in a particular e-marketplace, management did not feel the need to conduct a thorough comparison of e-marketplaces and their offerings. However, a review of the chosen e-marketplace's capabilities revealed that only reverse auctions and catalog procurement could be supported in the short term. Unwilling to give up on collaborative design with engineered equipment providers, HERP decided to work with a second e-marketplace.
Organizational Readiness
Not all organizations are equally ready to pursue e-marketplace opportunities. This is why a discrete project step is needed to assess internal readiness and, if necessary, develop a sequenced plan for building new organizational capabilities. A brief list of assessable internal characteristics include:
- The extent to which the company's IT and procurement operations are centralized (decentralized procurement is significantly more difficult to manage and optimize).
- The company's current level of procurement sophistication (for example, the pervasiveness of "strategic sourcing" approaches, the deployment of purchasing cards and vendor contracts, and the use of metrics pertaining to supplier performance).
- The sophistication of supply chain processes and technologies (such as the availability of decision support systems to support procurement, the deployment of "automatic" programs such as continuous replenishment and the extent to which product development functions are integrated with supply chain operations).
- The absence or presence of a strong communications infrastructure for building inter-facility, inter-division, and inter-enterprise synergies that support advanced procurement.
- The absence or presence of a strong transactional infrastructure (e.g., ERP).
Next, HERP conducted a readiness diagnostic and found that, because of problems with organization and governance, the intended benefits associated with reverse auctions and online purchasing might be unobtainable. The same assessment also revealed that each division was expecting complete autonomy of choice with respect to procurement methods and vendors. Lastly, HERP management discovered that it had no means of measuring compliance with the new contracts. Therefore - before embarking on any new strategic sourcing exercise - HERP had to formulate a new governance structure, rationalize inter-division procurement processes, and develop better compliance measurement and management tools to ensure proper use of contracts.
A final aspect of Organizational Readiness is determining the extent to which the role of procurement professionals and the procurement organization must change to take full advantage of an e-marketplace opportunity. As shown in Figure 2, a shift to e-procurement generally involves a radical shift in competencies at numerous levels within the organization.
Figure 2 - A shift to e-procurement entails a dramatic shift in a variety
of procurement competencies.
On-Ramp Integration
The technological hurdles associated with e-procurement can be frightening. Consider that most buying organizations are tied to several transactional and decision-support systems, and that they probably will need to connect with multiple e-marketplaces. What's more, each connection may speak to a different sort of procurement relationship and thus require a different array of potential integration points. Working first to understand the source and scope of the value being pursued (Value Discovery) and then assessing the company's ability to capture those benefits (Organizational Readiness) is the only way that an on-ramp design team can identify the pre-eminent integration issues and form priorities amongst all the possible integration points.
Strangely, this is not an intuitive sequence: Many companies have opted to focus first on the integration plan, while deferring analyses of core benefits and the ability to realize those benefits. Invariably, such a process delays value capture, ensures the development of misfocused and misaligned capabilities, and ultimately causes the undoing of large amounts of systems integration work.
The first step in developing an integration plan is to document the systems environments of the buying organization and the prospective e-marketplace(s). From there, a tight evaluation of each integration option is needed. This should address areas such as the number of interfaces, cost and time to build and maintain interfaces, flexibility in the face of internal system changes or external e-marketplace changes, and the potential reusability of interfaces. While many companies now offer interface adapters, most are nowhere near as simple to implement as their developers claim. At a minimum, each adapter must be customized to the specific configurations of the e-marketplace and buying organization's systems. Sorting through the possibilities can be a difficult task, but it is a necessary part of assessing the cost and effectiveness of each option.
Nor is the task of optimizing internal interfaces significantly less complex, since e-procurement often requires a great deal more intra-enterprise connectivity. Figure 3 demonstrates the level of systems complexity that e-procurement implies for only one business area. Obviously, the task is exponentially greater for organizations with multiple technology platforms or systems.
Figure 3 - In an e-procurement environment, multiple processes and applications
generate transactions that must be routed internally and externally.
The end products of On-Ramp Integration are an e-marketplace systems architecture and a detailed plan for developing each of the necessary connections. It's basically a roadmap for e-systems design, implementation, and integration.
At this point, HERP had a clear handle on the kind and degree of value that it needed to derive from an e-marketplace environment and the organizational modifications needed to make e-procurement happen. Thus it was much easier to identify the processes and systems that had to be developed, integrated or modified. As it turned out, less effort than expected was needed in some areas, while more robust levels of integration were required in others. At this stage, another important concern was identified: the viability and stability of the two marketplaces in which HERP had decided to participate. Given that many of today's e-marketplaces may not survive, flexible integration is key. Thus, HERP technologists worked to incorporate a hub concept, whereby all the company's systems connect to a central integration hub and then to the e-marketplaces. With this architecture, HERP management is confident that a move to a different e-marketplace, or modifications to its integration approach, can be accomplished with minimal trauma. With this final step, HERP has succeeded in ensuring the value of its e-marketplace procurement initiative.
As HERP discovered, a carefully series of discovery and implementation steps can make a big difference. Core objectives are identified more readily, key barriers are confronted and resolved earlier in the process, and unnecessary initiatives often avoided altogether.
