E-Procurement of Direct Materials

In today’s competitive business world, the corporations are continuously looking for IT solutions to improve the efficiency of their business processes and there by cut cost of operation to improve their margins. The businesses are under constant pressure to improve their bottom line irrespective of the growth in top line. They have no choice but to adopt the new e-procurement solutions, to improve time-to-market, reduce operations cost, avoid costly mistakes to stay on top of competition and avoid risk of extinction

In order to improve the procurement efficiency and realize maximum potential savings, it is necessary that the entire supply chain must be very efficient. The suppliers and the trading partners, such as shipping agents, clearing and forwarding agents and finance agents must be as efficient in order to provide the right materials at the right time at the right place at the right price at the right quality. This is only possible by a collaborative solution between buyers, suppliers and trading partners. It is important that the e-procurement solution must focus on collaborative supply chain practices in order to realize the fullest savings.

There are various types of procurement activities in an organization based on direct and indirect materials. The direct materials are items that are purchased for the production and the indirect materials (MRO items) are purchased for support of production activities. The features and the specifications of the e-procurement solutions vary for direct and indirect materials, depending on the procurement process of different vertical industries. Due to these varied requirements of e-procurement, different e-procurement providers focus on either different vertical industries or horizontal processes based on their domain knowledge and expertise.

E-procurement solutions come in different flavors and colors to cater to variety of industry requirements.

Vertical and Horizontal Exchanges

Public exchanges for various vertical markets

Private exchanges sponsored by corporations

ASP solutions

The above technologies can provide efficient e-procurement solutions, but have limited scope in their effectiveness. Vertical exchanges focus on transacting goods in a single industry, product or material. They typically exist in industries where buyers and sellers are fragmented and inefficient. Horizontal exchanges focus on leveraging expertise in a particular business process across number of industries. Service industries lend themselves well to a horizontal exchange. The most active horizontal exchanges today are competing in the realm of e-procurement.

There are different market making mechanisms employed in vertical and horizontal exchanges. They are:

Auctions One Seller, Many buyers
Reverse auctions One buyer, Many sellers
Bid/Ask exchange Buyers and Sellers interact

However, none of the above market place solutions completely satisfy the requirements e-procurement of direct materials. Following concerns of the businesses must be addressed in the procurement solution of direct materials:

1. Custom and unique procurement and approval processes of direct materials, which have been developed over years of experience
2. Protecting the intellectual property and secrecy of design, drawings, purchase and contract pricing and supplier details
3. Collaboratively perform procurement functions such as RFQ, Purchase Orders, Shipping and Payments between buyers, suppliers, and trading partners
4. Adopt best procurement practices

Why focus on direct materials: Procurement kpis

Research has shown that direct materials present the maximum savings potential in a manufacturing setup. Following table shows the average savings potential for direct and indirect material in a typical manufacturing organization.

Businesses can derive variety of savings by implementing e-procurement solutions.

The direct cost savings are as follows:

a. Lower communication costs – Fax and telephone costs
b. Lower procurement operating costs – By reducing cycle time and improving efficiency of RFQ/PO

c. Lower follow-up costs – By auto reminders and tracking RFQ/PO status
d. Lower inventory costs – By lower supply chain time
e. Lower Product costs – By improving supplier and trading partner’s efficiency

The indirect cost savings are:

a. Improved procurement efficiency – By higher levels of collaboration and no-paper transactions
b. Avoid cost mistakes – By checks and balances in e-procurement application
c. Lower obsolescence cost

E-procurement of direct materials:

Manufacturing companies can automate their procurement of direct materials by collaborating with their existing suppliers and trading partners, such as shipping agents, clearing agents and finance agents to improve the operating efficiency and increase the margins. The direct materials that go into the Bill of materials, account for 70 to 80% of the purchases of companies. Most of the B2B exchanges and procurement solutions address only the MRO purchase, which account for only remaining 20% to 30% of purchases. In order to improve the bottom line of any manufacturing company significantly, it is imperative to improve the procurement efficiency of direct materials.

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