Forschungsprojekt ECOMODForschungsgruppe Unternehmensmodellierung

Referenzgeschäftsprozesse und Strategien im E-Commerce

Focus on Procurement (Pro)


ID: Pro_1
Description
Different ways for cooperation with suppliers can be suggested depending on the supplier's market power and competitive position as well as the specifity of the procured products and services. The term Supplier Relationship Management (SRM) is used to embrace approaches for integrating suppliers in procurement processes (see e.g. [RiKl02], [GroƟ04]). This changes the traditional role suppliers used to have - i.e. being an opponent in price negotiations - to value chain partners, whose integration in procurement processes can lead to sustained competitive advantage. These advantages can be based on cost reductions due to overall process optimization and/or based on differentiation advantages due to a closely coordinated product development.


Derived strategies:
Cooperation with suppliers
Strategic Options:
Cooperation with other buyers
Strategic Options:

ID: Pro_1.1
Description
In long term relationships a skeleton contract with one supplier is defined serving as basis for procuring a product or service over a certain period of time. Assuming a planned volume prices as well as terms and conditions are determined. Such a long term commitment requires demand to be stable over a longer period of time. Each single order refers to the volume contract and specifies the required article number, quantity and delivery date.
Necessary investments
Before a long-term commitment to a certain supplier can be constituted in a skeleton contract various aspects should be thoroughly analysed: contribution of the respective good or service to differentiation from competitors, and the ratio of current transaction costs to its value added , and your own market position as well as the market power of the supplier.
Opportunities
In particular costs for negotiation can be reduced through long term skeleton contracts: negotiations on prices and conditions are not needed for single orders any more. At the same time, it is (theoretically) possible to largely automate the order process and in this way to further reduce transaction costs.
Risks
Entering into long term contracts always implies a certain dependency, which is likely to turn into a disadvantage if competition or technology changes rapidly.
Critical success factors
Periodical reconsideration :
In order to still take advantage of changing competitive powers on procurement markets it is vital to periodically reconsider, and if need be, renegotiate and adapt the conditions of existing skeleton contracts.
Process adaptations :
It is necessary to adapt procurement processes with respect to skeleton contracts in order to maximize reductions in transaction and processing costs.
Standards :
In order to avoid the risk of been locked in to a certain supplier due to supplier specific process adaptations, you should utilise non-proprietary standards for electronic data and document exchange.
Affected processes:

ID: Pro_1.2
Description
Optimizing procurement processes in collaboration with suppliers usually requires a long term contract based commitment.
Necessary investments
Optimizing processes requires initial analysis of existing processes in order to identify opportunities for improvement (e.g. redundant data storage, media clashes). Processes should then be adapted with respect to the analysis results. For a frictionless support of processes in both companies through information systems it is necessary to agree on certain exchange standards and other communication interfaces.
Opportunities
Transaction and processing costs can be reduced significantly through optimizing and automating processes across business boundaries.
Risks
Coordinating and optimizing processes with a certain supplier always implies a higher dependency to this supplier (Lock-In effect). Implementing this strategic option requires considerable effort and - due to the high complexity - implies high risks.
Critical success factors
Standards :
In order to avoid the risk of been locked in to a certain supplier due to supplier specific process adaptations, you should utilise non-proprietary standards for electronic data and document exchange.
Similar strategic options:

ID: Pro_1.3
Description
The wide spreading of the Internet allows multiple - usually geographically remote - suppliers to bundle their demand through new intermediaries. This opens up new opportunities, in particular, for small and medium sized enterprises to take advantage of procurement prices comparable to conditions of their larger competitors, which they would not be able to take advantage of by themselves.
Necessary investments
A prerequisite for bundling your company's demand is selecting an appropriate intermediary and - if necessary - adapting the procurement data formats accordingly. In order to fully take advantage of the benefits the internal procurement processes should also be adapted; in particular for indirect goods (MRO goods: Maintenance, Repair, Operations) it might be necessary to centralise current processes.
Opportunities
The fundamental benefit of demand bundling is the opportunity to reduce wholesale prices, which is due to increased bargaining power and higher volume discounts, which could not be realized by each individual company itself.
Risks
Obstacles for implementing this type of cooperation can come from attitudes of employees, such as "We have never cooperated with competitors before!". For indirect goods the argument of risks stemming from disclosing procurement data to competitors obviously does not hold true; but it might be legitimate, if material requirements for the core business have to be revealed to competitors. Additional problems can come from inflexible processes or employees, since procurement processes usually have to be restructured in order to implement this strategic option.
Critical success factors
Ability to plan demand :
Bundling demand usually requires long-term planning. It is therefore fundamental to be able to plan demand for the required period and to implement procurement processes accordingly, which support techniques for estimating future demand.
Standards :
Cooperation for demand bundling requires interaction with different business partners or intermediaries, respectively. This interaction and communication can only be achieved if a (communication) standard is agreed upon and supported by all parties.
Affected processes:


ID: Pro_2
Description
Using the Internet can support structural change in procurement markets and value chains. We will look at options for eliminating intermediaries (i.e. in-sourcing instead of outsourcing) and for outsourcing current business functions.
Strategic Options:

ID: Pro_2.1
Description
When looking at procurement, eliminating intermediaries implies to produce certain products or services internally instead of outsourcing. This can be beneficial if the required product or service is very specific or requirements for production are so complex, that in-sourcing is more cost-effective in particular in volatile markets. In both cases it can usually be assumed, that the respective goods are central for differentiation from competitors.
Necessary investments
Prior to deciding on in-sourcing or outsourcing the production of a certain good central market and product related aspects should be analysed: market and competitors, relevancy for competition, options for controlling production. If intermediaries are to be eliminated, new procurement processes have to be established and the new production processes have to be integrated with current production.
Opportunities
The goods produced in-house can enable a better differentiation from competitors. The production process can be controlled more easily and cost-effective.
Risks
There is the risk of production costs being relatively high, since you cannot take advantage of economies of scales as former intermediaries did.

ID: Pro_2.2
Description
In terms of procurement outsourcing relates to issues of outsourcing the production of goods and services which have formerly been provide in-house.
Similar strategic option:


ID: Pro_3
Description
Procurement processes can be automated, or at least, supported through continued usage of integrated information systems. Additionally using the Internet allows further improving the efficiency of transaction processes in the different stages.
Derived strategies:
Simplification / Standardisation
Strategic Options:
Reduce costs of identification
Strategic Options:
Reduce costs of selection
Strategic Options:
Reduce costs of inbound logistics
Strategic Options:
Reduce costs of contracting
Strategic Options:
Reduce costs of payment
Strategic Options:

ID: Pro_3.1
Description
Fully automated ordering on the basis of existing skeleton contracts promises to minimize transaction costs for procurement. A total automation can only be advised for stable procurement markets. Furthermore, full automation is only applicable for repeatedly purchased products, whose requirements can be specified formally.
Necessary investments
It is necessary to coordinate purchasing processes with the respective business processes of the supplier. In order to allow full automation it is required to agree on exchange standards and to establish interfaces for the electronic exchange of business documents.
Opportunities
Automation leads to significantly reduced transaction and processing costs for purchasing.
Risks
The necessary commitment and therefore dependency to a particular supplier implies the usual risks (Lock-In effect). Since prices are fixed through skeleton contracts there is the risk of purchasing prices being higher than current market prices.
Critical success factors
Standardization :
It is necessary to use standardized interfaces in order to minimize the dependency to a supplier.
Required strategic option:
Affected processes:

ID: Pro_3.2
Description
Using special software programs (search agents) for searching for particular suppliers or offers on the Internet promises significantly reduced costs of identification. However, usage of a search agent demands requirements of a product or service to be formally specifiable.
Necessary investments
The necessary software has to be implemented or purchased. Appropriate interfaces have to be established allowing the search agent access to other business application systems and vice versa. Additionally, access to the Internet has to be provided.
Opportunities
Usage of search agents leads to a higher market transparency, because the information overload of the Internet can better be managed. Through an automated search costs for searching can be reduced significantly.
Risks
There is the risk of suppliers not supporting automated access to their product information in order to avoid higher market transparency.
Critical success factors
Availability of information :
The information on suppliers and their products or services has to be available on the Internet in a structured format.
Standards :
In order to achieve meaningful results, the search agent software as well as the product information provided by suppliers should utilize relevant standards.
Affected processes:

ID: Pro_3.3
Description
Electronic market places are central platforms on the Internet, which support communication and interaction between buyers and sellers in different ways. From the buyer's viewpoint the search is usually supported through structured listings of suppliers and there offers as well as through further search functions. Electronic market places utilise either static pricing with product catalogues or they support electronic tendering.
Necessary investments
In order to seamlessly access to data on the electronic market place appropriate interfaces have to be implemented. Procurement processes might have to be adapted, too.
Opportunities
Electronic marketplaces allow access independent of time or location and they lead to higher market transparency, because products can be compared more easily. In this way, they offer the chance, to decrease prices as well as costs for searching for suppliers and offers.
Risks
There is the risk of non-representative prices if the number of suppliers is too small.
Critical success factors
Standards :
In order to support reuse the interfaces of the business application systems to the electronic market place should utilize non-proprietary standards.
Similar strategic option:
Affected processes:

ID: Pro_3.4
Description
Standardised electronic product catalogues allow direct access to relevant product data through an information system. In general, buy-side and sell-side systems are distinguished. In buy-side systems buyers collect the information on products from different suppliers. Sell-side systems are maintained by the supplier supporting access through application systems of different buyers. Product catalogue based systems are usually applied for procuring indirect goods (C-parts, MRO-material).
Necessary investments
Apart from adapting processes and formatting supply data, it is necessary to integrate the existing business information systems with the respective system of the supplier. The integration might involve the definition of exchange standards and the definition of interfaces for process control.
Opportunities
Costs can be reduced through the internal bundling of procurement activities and through optimizing procurement processes. Apart from the potential for cost reductions, an E-procurement platform leads to higher market transparency, which tends to result in lower wholesale prices on these market places (see [BHK02] p. 34).
Risks
A potential drawback of engaging in a certain product-catalogue based electronic procurement platform comes from the fact, that usually not all suppliers are willing (or able) to provide their goods over the same platform or channel. It is therefore frequently necessary to concurrently maintain different procurement processes. So, many times the potential of reducing transaction and process costs can not fully be taken advantage of (see [BHK02] S. 34).
Critical success factors
Centralise procurement processes :
In order to take advantage of all the potential benefits, it is necessary to centralise procurement processes, particularly for indirect goods.
Standards :
Exchange standards for product catalogues and open standards for business documents need to be considered.
Integration :
In order to maximize the benefits in terms of reduced transaction costs it is necessary to fully integrate the existing business information systems with the platforms or systems of suppliers.
Affected processes:

ID: Pro_3.5
Description
Automated selection of a certain supplier or offer requires the decision process to be formally specified. Furthermore, fully automating decision making for selection is only reasonable, if the decision is made repeatedly.
Similar strategic option:
Affected processes:

ID: Pro_3.6
Description
Inbound logistics can be scheduled more efficiently if, for example, incoming goods are processed more quickly.
Necessary investments
Improving the efficiency of inbound logistic processes requires the identification of potential trouble spots through (e.g. delays, media clashes) a detailed process analysis. Subsequently, new processes have to be defined and implemented and a system supporting overall process management and control should be introduced, that is capable of access to relevant data of other business application systems.
Opportunities
Processing costs decrease through the higher integration of relevant business application systems.
Risks
If storage times prior to production are reduced the dependency on suppliers increases as well as the risk of production downtime, if necessary input supplies are not available as planned.
Critical success factors
Integration :
In order to increase process efficiency it is vital to integrate the relevant business application systems

ID: Pro_3.7
Description
If demand bundling is applied, you can not only take advantage of reduced procurement prices due to volume discounts. If demand is bundled inside a company (e.g. for office supply and MRO goods), processing costs for purchasing can also decrease.
Similar strategic option:

ID: Pro_3.8
Description
Costs for contracting can be reduced significantly if the process of price negotiation can be (fully) automated. For example, a fully automated access to relevant product catalogue data could be provided. More complex pricing mechanisms - such as electronic English auctions and request for tenders - require more steps for negotiation and pricing. Electronic tendering is usually applied for high-priced and complex products, which require intensive descriptions (see [BHK02] p. 17). The electronic support allows for automated control of the tendering process and the electronic submission of requests and electronically receiving tenders.
Necessary investments
Electronic reverse auctions usually do not require many initial investments. It is however necessary to adapt the data format of the requests to a common standard, so that it can be automatically searched for and processed by potential suppliers.
Opportunities
Since tender based procurement processes are standardized, transaction costs can be reduced significantly (see [BHK02] p. 35). Without significant additional costs a request can be sent to multiple potential suppliers; because of the standardized format proposals can more easily be compared; and using the Internet the search for potential suppliers is less costly. Since Requests for Proposal are usually used for high volume projects and only very few initial investments are necessary, electronic tendering promises quick returns (see [BHK02] p. 35).
Risks
There are no immediate risks.
Critical success factors
Standards :
In order to allow the comparability of proposals, standards for requirements specification and product modelling have to be considered.
Similar strategic option:
Affected processes:

ID: Pro_3.9
Description
Costs for payment can be reduced considerably through the elimination of media clashes in terms of seamless electronic bill presentment and payment. This requires the supplier to support electronic invoicing. If this is given, the process of invoice checking and payment initiation can be performed fully automated.
Necessary investments
Current processes should be analysed with respect to automation potentials and, if need be, processes should be adapted. Furthermore, it is required to agree with the supplier on a standard for the exchange of business documents.
Opportunities
Cost reduction can be achieved through more seamless processes and less errors through data entry. At the same processing times for checking invoices and payment can be improved.
Risks
There is the risk of having to support different processes at the same time, if not all suppliers support the same electronic bill presentment and payment mechanisms.
Critical success factors
Standards :
In order to maintain the same interfaces to different suppliers it is crucial to agree on a non-proprietary standard.
Integration :
For a maximised automation of processes it is necessary to integrate the relevant business application systems.
Necessary Competences
Similar strategic option: