Lecture 3.pdf

# E-procurement and its applications This section details e-procurement, its advantages, disadvantages, security considerations, and provides real-world case studies of its implementation across various sectors. ### 1.1 E-procurement: definition and scope E-procurement refers to the utilization of electronic methods throughout every stage of the buying process. This encompasses the entire lifecycle from identifying requirements to final payment and contract management. A significant portion of business buyers, approximately 75%, leverage the internet for at least some of their purchasing activities. E-procurement can manifest through company buying sites (e-commerce) and extranets. An example of e-procurement in practice is its use within the National Health Service (NHS) [4](#page=4) [5](#page=5). ### 1.2 Benefits of e-procurement E-procurement offers several strategic advantages that can build competitive advantage for businesses. These benefits include [10](#page=10): * **Access to new suppliers:** Expanding the pool of potential vendors [10](#page=10). * **Lower prices:** Achieved through product standardization and consolidation of purchasing power [10](#page=10). * **Speed in order processing and delivery:** This leads to a reduction in the overall purchase cycle time [10](#page=10). * **Information sharing:** Facilitating better information management across the procurement process [10](#page=10). * **Sales tracking:** Improved ability to monitor sales activities [10](#page=10). * **Enhanced service and support:** Leading to better customer service and increased availability [10](#page=10). * **Budget control:** Streamlined management of expenditures [10](#page=10). ### 1.3 Case studies illustrating e-procurement applications #### 1.3.1 Eutilia: online auction for the utility sector Eutilia, a global e-marketplace for the utility sector, successfully conducted a substantial online auction in May 2002. This auction involved 4,500 suppliers and 500 business buyers and had a total value of 23 million euros. Contracts for cars, light commercial vehicles, and trucks were awarded to General Motors and DaimlerChrysler for two British utility companies, Scottish Power and United Utilities. The Heads of Procurement for both client organizations reported numerous benefits derived from this electronic auction [6](#page=6). #### 1.3.2 Police procurement: Thames Valley Police (TVP) @UK PLC expanded its reach into the public sector by providing e-procurement and e-invoicing solutions to Thames Valley Police (TVP). TVP, the largest non-metropolitan police force in the UK, serves 3 million people with 4,200 police officers, 350 constables, 370 volunteers, and 3,000 other staff. Their annual spend on goods and services exceeds 450 million pounds. The @UK Supplier Management System (SMS) was implemented to enhance TVP's procurement system, enabling the electronic transmission of purchase orders and the receipt of electronic invoices from all 1,500 suppliers. The benefits for TVP and its suppliers were significant [7](#page=7). #### 1.3.3 Leeds Hospital: integration for order transmission and e-invoicing Leeds Teaching Hospital successfully went live with the transmission of orders to suppliers and the receipt of equivalent e-invoices. This achievement followed the seamless integration of the @UK network with the ITH Oracle Purchasing system. Similar to the TVP case, this integration offered benefits for both the hospital and its suppliers [8](#page=8). #### 1.3.4 Shell: benefits in 2023 Shell experienced various benefits from its adoption of e-procurement in 2023, highlighting the continued relevance and advantage of these systems for major corporations [9](#page=9). ### 1.4 Disadvantages of e-procurement Despite its advantages, e-procurement also presents several challenges and potential drawbacks [11](#page=11): * **Erosion of relationships:** The continuous search for new suppliers online can weaken existing buyer-supplier relationships [11](#page=11). * **Lack of security, safety, and trust:** Concerns about the confidentiality and integrity of online transactions [11](#page=11). * **E-procurement competence:** A potential lack of expertise in implementing and managing e-procurement systems [11](#page=11). * **Supplier limitations:** Suppliers may also lack the necessary expertise or trustworthiness in an e-procurement environment [11](#page=11). * **Lack of standard data formats:** Inconsistent data structures can hinder interoperability and efficiency [11](#page=11). * **Absence of a legal framework:** This can create uncertainties and risks in online transactions [11](#page=11). * **Poor supplier relationships:** The impersonal nature of online interactions can lead to strained relationships [11](#page=11). * **Lack of technical expertise:** Both buyers and sellers might face challenges due to insufficient technical skills [11](#page=11). ### 1.5 Security aspects of e-procurement Ensuring security is paramount in e-procurement to protect sensitive transaction data and maintain trust. Key security measures include [12](#page=12): * **Authentication:** This process verifies that only authorized individuals can access a specific site or system [12](#page=12). * **Firewalls:** A combination of hardware and software designed to control incoming and outgoing network traffic, allowing only authorized access [12](#page=12). * **Encryption:** The scrambling of messages so that they can only be deciphered by individuals possessing the correct "key" [12](#page=12). ### 1.6 Criteria for successful e-auctions The success of electronic auctions hinges on meeting specific criteria, which are crucial for maximizing benefits and ensuring efficient outcomes [13](#page=13). > **Tip:** When evaluating e-procurement solutions, consider not only the immediate cost savings but also the long-term impact on supplier relationships and operational efficiency. > > **Example:** An e-auction for raw materials might appear to yield the lowest price, but if the chosen supplier has a history of delivery issues, the overall cost to the business could be significantly higher due to production delays. Therefore, supplier reliability and service levels should be a key criterion in addition to price. --- # Supplier evaluation and selection processes Supplier evaluation and selection is a systematic process that involves identifying sourcing requirements, determining appropriate sourcing strategies, and appraising potential suppliers to ensure the best fit for organizational needs [17](#page=17). ### 2.1 When supplier evaluation and selection decisions arise Decisions regarding supplier evaluation and selection are not isolated events but occur in various contexts throughout the lifecycle of a business and its operations. These situations include [18](#page=18): * During new product development [18](#page=18). * In response to poor internal or external supplier performance [18](#page=18). * At the conclusion of a contract [18](#page=18). * When acquiring new equipment [18](#page=18). * During expansion into new markets or product lines [18](#page=18). * When conducting market tests [18](#page=18). * When existing suppliers have insufficient capacity to meet demand [18](#page=18). * When there is a strategic decision to reduce the size of the supplier base [18](#page=18). * During analyses related to outsourcing [18](#page=18). * When consolidating volumes across different parts of a business [18](#page=18). ### 2.2 Types of sourcing The nature of what is being sourced significantly influences the evaluation and selection process. Different types of sourcing include [19](#page=19): * Consumable supplies [19](#page=19). * Production materials and components [19](#page=19). * Capital purchases, such as machinery [19](#page=19). * Intellectual property, like software [19](#page=19). * Subcontractors [19](#page=19). * Services [19](#page=19). ### 2.3 Determining the sourcing strategy A tailored sourcing strategy is crucial, as no single approach fits all purchasing requirements. The chosen strategy directly impacts the evaluation and selection methodologies employed. Key strategic decisions include [20](#page=20): * **Single vs. multiple supply sources:** Deciding whether to rely on one supplier or diversify across several [20](#page=20). * **Verification of performance:** Determining whether to assess performance using the same set of suppliers or to re-evaluate [20](#page=20). * **Contract duration:** Considering short-term versus long-term purchase contracts [20](#page=20). * **Supplier capabilities:** Selecting suppliers that offer design support versus those that do not [20](#page=20). * **Service level:** Choosing between full-service and non-full-service suppliers [20](#page=20). * **Geographic sourcing:** Deciding between domestic and foreign suppliers [20](#page=20). * **Relationship expectations:** Determining whether to foster a close working relationship for value creation (synergy/symbiosis) or to engage in arm's-length purchasing [20](#page=20). > **Tip:** The sourcing strategy should align with the overall business objectives and the specific needs of the purchase. ### 2.4 Attributes of a good supplier Research indicates that buyers often exhibit reluctance to change suppliers, sometimes maintaining relationships with less satisfactory sources than might be available in the market. The attributes buyers generally seek in a good supplier are [21](#page=21): * Reliability in on-time delivery (lead time) [21](#page=21). * Consistent product or service quality [21](#page=21). * Competitive pricing [21](#page=21). * A stable financial background, necessitating due diligence [21](#page=21). * Responsive and effective service back-up [21](#page=21). * Responsiveness to the buyer's needs [21](#page=21). * Trustworthiness and reliability in keeping promises [21](#page=21). * Provision of technical support [21](#page=21). * Proactive communication regarding progress [21](#page=21). ### 2.5 Identifying potential suppliers Potential suppliers can be identified through various channels and sourcing alternatives [22](#page=22): * **Identification Channels:** * Current suppliers [22](#page=22). * Sales representatives [22](#page=22). * Information databases [22](#page=22). * Past experience [22](#page=22). * Trade journals, directories, and trade shows [22](#page=22). * Second-party or indirect information [22](#page=22). * Internal sources within the organization [22](#page=22). * Internet searches [22](#page=22). * **Sourcing Alternatives:** * Manufacturer versus distributor [22](#page=22). * Local, national, or international suppliers [22](#page=22). * Large or small suppliers [22](#page=22). * Multiple versus single sourcing strategies [22](#page=22). ### 2.6 Key supplier evaluation criteria Effective supplier evaluation relies on a comprehensive set of criteria to assess a supplier's suitability. These key criteria include [23](#page=23): * **Management and employee capabilities:** The skills, experience, and leadership within the supplier organization [23](#page=23). * **Cost structure:** Analysis of the supplier's cost components and overall pricing strategy [23](#page=23). * **Total quality performance, systems, and philosophy:** Evaluation of the supplier's commitment to and execution of quality management [23](#page=23). * **Process and technological capability:** The supplier's manufacturing processes, equipment, and technological advancement [23](#page=23). * **Environmental regulation compliance:** Adherence to relevant environmental laws and standards [23](#page=23). * **Financial stability:** The financial health and viability of the supplier [23](#page=23). * **Production scheduling and control systems:** The supplier's ability to manage production efficiently and reliably [23](#page=23). * **E-commerce capability:** The supplier's proficiency and infrastructure for conducting business online [23](#page=23). * **Supplier’s sourcing strategies, policies, and techniques:** How the supplier manages its own supply chain [23](#page=23). * **Longer-term relationship potential:** The likelihood of building a sustainable and mutually beneficial partnership [23](#page=23). ### 2.7 Supplier appraisal model by Carter (10Cs) The Supplier Appraisal Model, developed by Carter, utilizes ten criteria, referred to as the "10Cs," to comprehensively evaluate suppliers. This framework provides a structured approach to supplier assessment [24](#page=24): 1. **Competency:** The supplier's ability to perform its intended function effectively [24](#page=24). 2. **Capacity:** The supplier's ability to meet current and future demand [24](#page=24). 3. **Consistency (reliability):** The supplier's track record for dependable performance over time [24](#page=24). 4. **Control of Process:** The supplier's management over its resources, inventory, costs, and products [24](#page=24). 5. **Cost/price and total cost ownership:** Evaluating not just the price but the entire cost associated with acquiring and using the supplier's offering [24](#page=24). 6. **Commitment to quality:** The supplier's dedication to quality, with an emphasis on proactive measures (prevention) [24](#page=24). 7. **Clean / CSR (Corporate Social Responsibility):** The supplier's ethical practices and environmental stewardship [24](#page=24). 8. **Culture and relationships:** The compatibility of organizational cultures and the potential for strong working relationships [24](#page=24). 9. **Cash / Finances:** The financial strength and stability of the supplier [24](#page=24). 10. **Communications (ICT):** The effectiveness of the supplier's communication channels, including information and communication technology capabilities [24](#page=24). --- # Supplier quality management and development Effective supplier quality management is crucial for a buyer's overall quality, encompassing the consistent ability to meet or exceed current and future customer expectations [25](#page=25). ### 3.1 Importance of supplier quality A supplier's impact on a buyer's product quality is substantial, with suppliers often being responsible for approximately 50% of a firm's product-related quality problems. Focusing solely on internal quality issues without addressing supplier performance will likely lead to failure in recognizing and resolving quality-related problems. In today's manufacturing landscape, outsourcing components is common, making it advantageous for progressive buyers to rely on suppliers demonstrating significant capabilities and a commitment to continuous quality improvement [26](#page=26). Factors influencing a supply management department's effectiveness in managing supplier quality include: * The supplier's ability to impact the buyer's total quality [27](#page=27). * The availability of resources dedicated to supplier quality management and improvement [27](#page=27). * The buying firm's capacity to practice world-class quality standards [27](#page=27). * The supplier's readiness to collaborate on quality enhancement initiatives [27](#page=27). * The supplier's current quality performance levels [27](#page=27). ### 3.2 Total Quality Management (TQM) principles in supplier management Total Quality Management (TQM) provides a framework for managing supplier quality. The eight key principles of TQM are [28](#page=28): 1. Define quality in terms of customers and their requirements. 2. Pursue quality at the source. 3. Stress objective rather than subjective analysis. 4. Emphasize prevention rather than detection of defects. 5. Focus on the process rather than the output. 6. Strive for zero defects. 7. Establish continuous improvement as a way of life. 8. Make quality everyone's responsibility. ### 3.3 Supplier performance measurement and evaluation A vital aspect of supplier management is the continuous measurement, evaluation, and analysis of supplier performance. Key performance areas to measure include [29](#page=29): * Delivery performance [29](#page=29). * Quality performance [29](#page=29). * Cost reduction [29](#page=29). There are three primary types of supplier evaluation methods [29](#page=29): * Categorical system [29](#page=29). * Weighted-point system (also known as a Supplier Performance Scorecard) [29](#page=29). * Cost-based system [29](#page=29). #### 3.3.1 Categorical system The categorical system is considered the least precise evaluation technique. It relies on historical data of supplier performance, gathered from individuals involved with the supplier. This method involves identifying evaluation criteria and assigning a grade to each supplier for each criterion based on past experience, often using a plus, minus, or neutral rating. Internal departments that use the supplier's services, such as quality, engineering, operations, and logistics, can provide input for this method [31](#page=31). #### 3.3.2 Weighted-point system (Supplier performance scorecard) The weighted-point system, or supplier performance scorecard, provides a more structured approach to evaluation [32](#page=32). #### 3.3.3 Cost-based system The cost-based system uses financial metrics to evaluate supplier performance. A key metric within this system is the Supplier Performance Index (SPI) [33](#page=33). The formula for the Supplier Performance Index (SPI) is: $$ \text{SPI} = \frac{\text{Total Purchases} + \text{Non-performance Costs}}{\text{Total Purchases}} $$ A lower SPI generally indicates better supplier performance, as it suggests that non-performance costs are minimized relative to total purchases. --- # Global sourcing strategies and challenges This topic explores the definition and rationale behind global sourcing, outlining its advantages and the obstacles businesses face when implementing it. ### 4.1 Definitions and rationale Global sourcing is defined as the proactive integration and coordination of common items, materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations. This approach stems from the broader concept of globalization, characterized by the interdependence, connectivity, and integration of economies across social, technical, and political spheres. International purchasing, a component of global sourcing, specifically refers to a commercial purchase transaction between a buyer and a supplier located in different countries [34](#page=34). ### 4.2 Benefits of global sourcing Businesses engage in global sourcing for a variety of strategic advantages: * **Cost and price benefits:** Accessing lower-cost labor or raw materials in different regions can significantly reduce overall procurement expenses [35](#page=35) [37](#page=37). * **Access to product and process technology:** Sourcing globally can provide access to specialized technologies or innovative manufacturing processes that may not be available domestically [35](#page=35). * **Quality improvements:** Suppliers in certain regions may offer higher quality components or finished goods, leading to improved product quality [35](#page=35). * **Access to the only source available:** In some cases, a unique or sole source for a critical component or material might only exist in a foreign market [35](#page=35). * **Introducing competition to domestic suppliers:** The threat or reality of global sourcing can incentivize domestic suppliers to improve their pricing, quality, and service levels [35](#page=35). * **Reacting to buying patterns of competitors:** To remain competitive, companies may need to match or exceed the sourcing strategies of their rivals [35](#page=35). * **Establishing a presence in a foreign market:** Global sourcing can serve as an initial step towards building a physical presence, understanding market dynamics, and developing relationships in a new international territory [35](#page=35). * **Greater supplier responsiveness:** Engaging with a wider pool of suppliers globally can lead to improved lead times and flexibility in responding to demand changes [37](#page=37). * **Greater sourcing process consistency:** Standardizing sourcing processes across international locations can lead to more predictable outcomes [37](#page=37). * **Improved supplier relationships:** Developing strong partnerships with international suppliers can foster collaboration and mutual benefit [37](#page=37). * **Improved sharing of information with suppliers:** Global sourcing can encourage more open communication and information exchange with suppliers, leading to better integration and problem-solving [37](#page=37). ### 4.3 Challenges and barriers to global sourcing Despite its advantages, global sourcing presents several significant challenges: * **Lack of knowledge and skills concerning global sourcing:** Many organizations may lack the expertise, understanding, and trained personnel required to effectively navigate international procurement complexities [36](#page=36). * **Resistance to change:** Internal resistance from employees or management accustomed to domestic sourcing practices can hinder the adoption and success of global sourcing initiatives [36](#page=36). * **Longer lead times:** The increased distances and logistical complexities involved in international supply chains typically result in longer transit times for goods, impacting inventory management and responsiveness [36](#page=36). * **Different business customs, language, and culture:** Navigating diverse cultural norms, communication styles, and business etiquettes across different countries can lead to misunderstandings and operational inefficiencies [36](#page=36). * **Currency fluctuations:** Volatility in exchange rates introduces financial risk, as the cost of goods purchased in foreign currencies can change unexpectedly, impacting budgets and profitability [36](#page=36). > **Tip:** Successfully implementing global sourcing often requires a dedicated team with expertise in international logistics, legal frameworks, cultural intelligence, and financial risk management. Continuous training and development in these areas are crucial. --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | E-Procurement | The utilization of electronic methods throughout the entire buying process, from identifying requirements to payment and contract management. | | E-commerce | Electronic commerce, specifically referring to online platforms and company buying sites used for purchasing goods and services. | | Extranets | Private, intranet-based networks that allow authorized external parties, such as suppliers, to access a company's information systems. | | Electronic Auction (E-auction) | An auction conducted online, allowing buyers and sellers to bid on products or services electronically, often leading to competitive pricing. | | E-invoicing | The transmission and receipt of invoices in an electronic format, streamlining the billing and payment process between organizations. | | Authentication | A security process that verifies the identity of a user or system, ensuring that only authorized individuals can access specific resources or sites. | | Firewalls | A network security system that monitors and controls incoming and outgoing network traffic based on predetermined security rules, acting as a barrier between a trusted internal network and untrusted external networks. | | Encryption | The process of encoding information so that only authorized parties can access it, using algorithms and cryptographic keys to scramble data. | | Supplier Evaluation | The systematic process of assessing potential or existing suppliers based on various criteria to determine their suitability and performance. | | Supplier Selection | The decision-making process of choosing the most appropriate supplier from a pool of evaluated candidates based on predefined requirements. | | Total Quality Management (TQM) | A management approach that emphasizes continuous improvement in all aspects of an organization, focusing on customer satisfaction through employee involvement and process enhancement. | | Sourcing Strategy | A plan outlining how an organization will acquire the goods and services it needs, considering factors like the number of suppliers, contract duration, and supplier relationships. | | Lead Time | The total time elapsed between the initiation of a process and its completion, often referring to the time from order placement to delivery. | | Due Diligence | The investigation or audit of a potential investment or product to confirm all facts, such as the financial health and stability of a supplier. | | Supplier Scorecard | A performance management tool used to evaluate and track supplier performance against key metrics, often involving a weighted-point system. | | Categorical System (Supplier Evaluation) | A supplier evaluation technique that relies on historical performance records and assigns grades to suppliers for various criteria based on past experience. | | Weighted-Point System (Supplier Performance Scorecard) | A method of supplier evaluation where different criteria are assigned specific weights based on their importance, and suppliers are scored accordingly. | | Cost-Based System (Supplier Evaluation) | An evaluation system that focuses on the costs associated with a supplier's performance, including both direct purchase costs and non-performance related costs. | | Supplier Performance Index (SPI) | A metric used in cost-based supplier evaluation, calculated as the ratio of total purchases plus non-performance costs to total purchases. | | Globalization | The process of interaction and integration among people, companies, and governments worldwide, characterized by the interdependence of economies, cultures, and populations. | | International Purchasing | Commercial transactions involving buyers and suppliers located in different countries, focusing on cross-border trade. | | Global Sourcing | The strategic practice of proactively integrating and coordinating common items, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations. |