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Increase your Profit Margin through Electronic Procurement

By Chia Chin Nam, C.P.M.
IBM Singapore Pte Ltd
E-mail: chiacn@sg.ibm.com
Chin Nam is a Procurement Systems Consultant with IBM Singapore, specializing in Electronic Procurement Services. He has a unique combination of extensive hands-on purchasing experience, combined with a thorough technical background and understanding. Chin Nam has a Bachelor degree in Electrical & Electronic Engineering and a Master's degree in Business Administration. He has been active in purchasing training and education in the Asia region, and is a professional trainer of NAPM's Singapore affiliate and a member of NAPM's PMA-Boston affiliate. He has received several special awards from IBM for his achievements in both purchasing and e-commerce.

All around the world, Purchasing and Supply Management (P&SM) professionals are now advocating harnessing purchasing as a strategic function to increase profit margins. Many organisations are waking up to the fact that every dollar saved in P&SM contributes directly to the bottom line. Some of the tactics used in this transformation process are volume purchase, buying from approved supplier, selecting the right supplier, awarding business based on performance, improving quality of buy and reducing paper work and administrative cost.

As a rule of thumb, about 20% of an organisation’s purchases constitutes 80% of the total purchase value. To reap quick returns from purchasing, the organisation spares no effort on improving the effectiveness of high value and big volume purchases. This approach requires purchasing personnel to perform functions like consolidate buy, buy only from approved source, improve quality of existing suppliers, do contract negotiation and form partnership with suppliers. This in turn causes purchasing personnel to spend a lot of time and effort on upstream procurement activities such as qualifying suppliers, building rapport with strategic suppliers and carrying out supplier evaluation and certification.

It is also common to hear purchasing people complaining they expend 80% of their time on 20% of the total purchase value. A high percentage of this time is spent on non-value added activities such as performing data entry, correcting errors in paperwork, expediting delivery or solving quality problems. As such, they do not have sufficient time to put their full attention on upstream activities. Organisations then try to redress this balance by implementing new purchasing policies and ISO9000 procedures. However, all of them face the uphill task of enforcement because these structured procedures require more work and time to execute.

What many organisations fail to understand is that a fundamental change in their internal processes must be effected to maximise the full benefits of such a move. The two critical success factors which most organisations overlook are to cut down the number of routine tasks and to reduce the overall procurement cycle through the use of appropriate technology.

The latest technological ‘in-thing’ is to get on the high-speed information technology highway. For the purchasing industry, electronic procurement is an IT-enabler for procurement; a tremendously powerful tool that will revolutionise the purchasing climate and beef up the organisation's bottom line. It automates and streamlines the laborious routine of the purchasing function, thus freeing up purchasing professionals to focus on more strategic purchases.

Singapore Electronic Procurement System (SEPS)

The Singapore Electronic Procurement System (SEPS) is a ministry-wide effort by the Singapore government to harness current technology for more effective procurement. SEPS is a complete end-to-end procurement solution which facilitates the generation of demand by the buyer to the fulfillment of the demand by the supplier. Spearheaded by the National Computer Board(NCB), SEPS was launched in October 1996. Two sites were initially selected for the maiden run and since then, numerous sites have already implemented SEPS.

The government aims to electronically link all civil service departments by 1998. Its long-term goal is to improve the island state’s competitive edge and enhance the efficiency and productivity of its ministries by:

1. Reducing purchasing cycle time and cost

2. Enhancing budgetary control

3. Eliminating administrative errors

4. Increasing buyers’ productivity

5. Lowering prices through product standardisation and consolidation of buy

6. Better information management; e.g. supplier’s information and pricing information, and

7. Improving the payment process

What EPS can do

The immediate benefit which electronic procurement can bring about is in the purchase of maintenance, repair and operating (MRO) items. All the existing manual processes of purchase requisition (PR) creation, requesting for quotation (RFQ), invitation to tender (ITT), purchase order (PO) issuance, goods receiving and payment, are streamlined and automated through EPS. The proficiency and accuracy of routine and repetitive purchases such as housekeeping items and stationery items are improved through the instantaneous on-line retrieval of the product specifications maintained in a centralised product databank. It becomes a matter of minutes to create a PR to initiate the procurement cycle.

To select a supplier for the RFQ process, it is done through a centralised supplier databank. The supplier/product relationship built by the intelligent database system is based on past purchases. This enables a pool of suppliers to be automatically presented to the purchasing officer for any specific buy.

EPS increases the accuracy of information by reducing the number of data entry points in the process. All key information relevant to the purchase is entered into the system only once. Creation of PR, RFQ, ITT and PO documents for approval are not only done electronically through the system, but will be automatically routed to the appropriate approving authority. Electronic routing eliminates problems such as loss of documents and the need for manual tracking. In fact, tracking of documents are facilitated through the real time update of the approval status. Bottlenecks in the approval process are highlighted and resolved for urgent purchases. Electronic documents can also be routed to personal e-mail addresses for approval.

EPS enhances term contract (TC) purchases as it is able to monitor the contract to the last unit consumed with an in-built early warning feature. This useful feature, plus the consumption history which is stored in the system, enables precise control of contract management and reduces inventory carrying cost.

Centralised receiving and payment can also be effectively carried out with EPS. With EPS-enabled suppliers, manual data entry is eliminated as delivery information is sent directly to the appropriate mailbox. The central receiving body then retrieves the information from the mailbox and verifies the contents of the DO against the actual delivery. Any discrepancy between the specified and received quantity is quickly updated in the system.

Similarly, invoices from suppliers are electronically sent to the appropriate mailbox. Payment for the purchases is made upon the automatic matching of the invoice, the DO and the PO. This process results in a shorter payment cycle for the suppliers, thereby extracting more competitive pricing from them.

New Age in Procurement

We have just scrutinised the purchases of MRO items and seen the many areas in which the electronic procurement could be used to streamline and enhance productivity and efficiency in procurement.

Implementing electronic procurement is equivalent to installing a host of time-saving perks such as the elimination of manual information tracking from separate sources. These labour-saving tactics free up time for value-added activities such as supplier qualification, quotation award and negotiation. The ability to electronically generate documents and track the status of approvals on-line dramatically reduces the cycle time from the initiation to fulfillment of a buy.

The tangible benefits from EPS are a reduction in overall administrative and purchase costs and a tremendous saving in time. Thus, will the organisation live out the maxim that every dollar saved in P&SM goes directly to its profit margin.