E-Procurement & Outsourcing

E-procurement (electronic procurement, sometimes also known

as supplier

exchange)

is

the business-to-business

(B2B) or business-to-consumer
government purchase

and

(B2C) or business-tosale

of supplies, work,

and services through the Internet as well as other information

and networking systems, such as Electronic Data Interchange
(EDI) and Enterprise Resource Planning (ERP).

The e-procurement value chain consists of indent management,

e-Tendering,

e-Auctioning, vendor

management,

catalogue

management, Purchase Order Integration, Order Status, Ship

Notice, e-invoicing, e-payment, and contract management.
Public sector organizations use e-procurement for contracts to
achieve benefits such as increased efficiency and cost savings
(faster

and

cheaper)

in

government

procurement

and

improved transparency (to reduce corruption) in procurement

services.
E-procurement in the public sector has seen rapid growth in
recent years. E-procurement in the public sector is emerging
internationally.

E-procurement projects are often part of the countrys larger eGovernment efforts to better serve its citizens and businesses
in the digital economy.
Although early interest centred on the growth of retailing on
the Internet (sometimes called e-tailing), forecasts have
predicted that B2B revenue will soon far exceed business-toconsumers (B2C) revenue.
B2B websites can be sorted into the following categories:
Company websites: The target audience of many company
sites is other companies and their employees. These sites can
be

thought

of

as

round-the-clock

mini-trade

exhibits.

Sometimes, a company website serves as the entrance to an

exclusive extranet, available only to customers or registered
site users. Some company sites sell directly from the site,
effectively e-tailing to other businesses.
Product

supply

and

procurement

exchanges:

These

are

exchanges in which a company purchasing agent can shop for

supplies from vendors, request proposals and, in some cases,
bid to make a purchase at a desired price. Sometimes referred
to as e-procurement sites, some serve a range of industries,
while others focus on a niche market.
Specialized or vertical industry portals: These portals provide a
"sub-web" of information, product listings, discussion groups
and other features. Vertical portal sites have a broader purpose
than procurement sites (although they may also support
buying and selling).

Brokering sites:

These sites act as an intermediary between

providers and potential customers that need their specific

services, such as equipment leasing.
Information sites: Sometimes known as infomediaries (an
Internet company that gathers and links information on
particular subjects on behalf of commercial organizations and
their potential customers) - these sites provide information
about

particular

industry

to

its

companies

and

their

employees. Information sites include specialized search sites

and those of trade-and-industry-standards organizations.
Many B2B sites fall into more than one of these groups. Models
for B2B sites are still evolving.
Another type of B2B enterprise is software for building B2B
websites, including site-building tools and templates, database
and methodologies, as well as transaction software.

Electronic Data Interchange (EDI)

EDI

is

the

computer-to-computer

exchange

of

business

documents in a standard electronic format between business

partners.
By moving from a paper-based exchange of business document
to one that is electronic, businesses enjoy major benefits such
as reduced cost, increased processing speed, reduced errors
and improved relationships with business partners.

Each term in the definition is significant:

Computer-to-computer EDI replaces postal mail, fax and
email.

While

email

is

also

an

electronic

approach,

the

documents exchanged via email must still be handled by

people rather than computers. Having people involved slows
down the processing of the documents and also introduces
errors. Instead, EDI documents can flow straight through to the
appropriate application on the receivers computer (e.g., the
Order

Management

System)

and

processing

can

begin

immediately. A typical manual process looks like this, with lots

of paper and people involvement:

The EDI process looks like this no paper, no people involved:

Business documents These are any of the documents that are

typically exchanged between businesses. The most common
documents exchanged via EDI are purchase orders, invoices
and advance ship notices. But there are many, many others
such

as

bill

documents,

of

lading,

shipping

customs

status

documents,

documents

and

inventory
payment

documents.
Standard format Because EDI documents must be processed
by computers rather than humans, a standard format must be
used so that the computer will be able to read and understand
the documents. There are several EDI standards in use today,
including ANSI, EDIFACT, TRADACOMS and ebXML. And, for
each standard there are many different versions. When two
businesses decide to exchange EDI documents, they must
agree on the specific EDI standard and version.
Businesses typically use an EDI translator either as in-house
software or via an EDI service provider to translate the EDI
format so the data can be used by their internal applications
and thus enable straight through processing of documents.

Business partners The exchange of EDI documents is

typically between two different companies, referred to as
business partners or trading partners. For example, Company A
may buy goods from Company B. Company A sends orders to
Company B. Company A and Company B are business partners.
Enterprise Resource Planning (ERP)

Enterprise resource planning (ERP) is business management

softwaretypically a suite of integrated applicationsthat a

company can use to collect, store, manage and interpret data

from many business activities, including:

Product planning, cost

Manufacturing or service delivery
Marketing and sales
Inventory management
Shipping and payment

ERP provides an integrated view of core business processes

using

common

databases

maintained

by

database

management system. ERP systems track business resources

cash, raw materials, production capacityand the status of
business commitments: orders, purchase orders, and payroll.
The applications that make up the system share data across
the various departments (manufacturing, purchasing, sales,
accounting,

etc.)

that

provide

the

data.

ERP

facilitates

information flow between all business functions, and manages

connections to outside stakeholders.
Enterprise system software is a multi-billion dollar industry that
produces components that support a variety of business
functions. IT investments have become the largest category of
capital expenditure in United States-based businesses over the
past decade. Though early ERP systems focused on large
enterprises, smaller enterprises increasingly use ERP systems.

The ERP system is considered a vital organizational tool

because

it

integrates

varied

organizational

systems

and

facilitates error-free transactions and production. However, ERP

system

development

is

different

from

traditional

system

development. ERP systems run on a variety of computer

hardware

and

network

configurations,

typically

using

database as an information repository.

ERP systems can drive huge improvements in the
effectiveness of any organisation by:
Assisting you in defining your business processes and
ensuring they are complied with throughout the supply
chain;
Protecting your critical business data through well-defined
roles and security access;
Enabling you to plan your work load based on existing
orders and forecasts;
Providing you with the tools to give a high level of service
to your customers; and
Translating your data into decision making information.
Benefits of ERP for your Business

Integration across all business processes - To realize the full

benefits of an ERP system it should be fully integrated into all
aspects of your business from the customer facing front end,
through planning and scheduling, to the production and
distribution of the products you make.
Automation enhances productivity - By automating aspects of
business processes, ERP makes them more efficient, less prone
to error, and faster. It also frees up people from mundane tasks
such as balancing data.
Increase overall performance - By integrating different business
processes, ERP ensures coherence and avoids duplication,
discontinuity, and

people

working at

cross

purposes,

in

different parts of the organisation. The cumulative positive

effect when business processes integrate well is overall
superior performance by the organisation.
Quality Reports and Performance Analysis - Analysis on ERP will
enable you to produce financial and boardroom quality reports,
as well as to conduct analysis on the performance of your
organisation.
Integrates across the entire supply chain - A best of breed ERP
system should extend beyond your organisation and integrate
with both your supplier and customer systems to ensure full
visibility and efficiency across your supply chain.

Procurement Outsourcing
Procurement outsourcing is the transfer of specified key
procurement

activities

relating

to

sourcing

and

supplier

management to a third party perhaps to reduce overall costs

or

maybe

to

competencies.

tighten

the

Procurement

company's

focus

categorisation

on
and

its

core

vendor

management of indirect materials and services (commonly

referred to as indirect procurement) are typically the most
popular outsourced activity.
Overview
Outsourced procurement teams allow companies to benefit
immediately from experienced procurement specialists support
& expertise. This avoids the creation of an internal team (new
resources) and the required time for that team to structure
itself, its processes and its expertise.
Outsourced procurement is therefore an available solution for
companies who:
Have no internal competencies but want to quickly benefit
from procurement action (cost reduction, suppliers and
contract management...);

 Have internal procurement expertise (department) but

want to outsource activity on specific area(s) like indirect
materials and services;
Consider Procurement as a non-strategic / core function
and want to have it managed by a procurement service
provider; and
Want to develop quickly a procurement function to deliver
savings, with a willingness to internally develop this
function in the mid-term.

Procurement Outsourcing is being thought of in a big way in

automobile manufacturers in India and China because with
increasing number of cars being produced every passing day
more man hours are required in trivial issues like timely
delivery

of

materials.

Hence

Procurement

team

cannot

concentrate on its core competency of negotiations and vendor

selections.
Procurement categories
Procurement specialists usually split procurement activities into
two parts:

Direct procurement
Direct categories are all goods purchased by the company
which directly enter into the production process of that
company. For the food industry as an example, ingredients and
packaging will be the key direct procurement categories.
Indirect Procurement
Indirect categories are all the goods and services that are
bought by the company to enable its activity. This entails a
wide

scope,

including

marketing

related

services

(media

buying, agencies), IT related services (hardware, software), HR

related services (recruitment agencies, training), facilities
management and office services (Telecoms, furniture, cleaning,
catering, printers), or utilities (gas, electricity, water)...etc.
Procurement services providers (PSPs)
Specialized procurement service providers are dedicated to
procurement

and

have

developed

strong

expertise

in

procurement and procurement outsourcing, mainly in indirect

procurement. Additionally, several consulting companies offer
procurement outsourcing services in a limited manner, mainly
focusing on strategic inputs or recommendations. Procurement
services providers will usually ask for a fixed remuneration
against commitment to saving delivery. Some providers also

work on incentives or performance related fees (% of savings).

Apart from procurement outsourcing, PSPs will offer other
services like spend analysis or opportunity assessments.
Buy/Make Decisions
Introduction
Are you outsourcing enough? This was one of the main
questions

asked

by

management

consultants

during

the

outsourcing boom. Outsourcing was viewed as one of the best

ways of getting things done for a fraction of the original cost.
Outsourcing is closely related to make or buy decision. The
corporations made decisions on what to make internally and
what to buy from outside in order to maximize the profit
margins.
As a result of this, the organizational functions were divided
into segments and some of those functions were outsourced to
expert companies, who can do the same job for much less cost.
Make or buy decision is always a valid concept in business. No
organization should attempt to make something by their own,
when they stand the opportunity to buy the same for much less
price.

This is why most of the electronic items are manufactured and

software systems developed in the Asia, on behalf of the
organizations in the USA and Europe.
Four Numbers You Should Know
When you are supposed to make a make-or-buy decision, there
are four numbers you need to be aware of. Your decision will be
based on the values of these four numbers. Let's have a look at
the numbers now. They are quite self-explanatory.

The volume
The fixed cost of making
Per-unit direct cost when making
Per-unit cost when buying

Now, there are two formulas that use the above numbers. They
are 'Cost to Buy' and 'Cost to Make'. The higher value loses and
the decision maker can go ahead with the less costly solution.
Cost to Buy (CTB) = Volume x Per-unit cost when buying
Cost to Make (CTM) = Fixed costs + (Per-unit direct cost x volume)

Reasons for Making

There are number of reasons a company would consider when
it comes to making in-house. Following are a few:

Cost concerns
Desire to expand the manufacturing focus
Need of direct control over the product
Intellectual property concerns
Quality control concerns
Supplier unreliability
Lack of competent suppliers
Volume too small to get a supplier attracted
Reduction of logistic costs (shipping etc.)
To maintain a backup source
Political and environment reasons
Organizational pride

Reasons for Buying

Following are some of the reasons companies may consider
when it comes to buying from a supplier:

Lack of technical experience

Supplier's expertise on the technical areas and the domain
Cost considerations
Need of small volume
Insufficient capacity to produce in-house
Brand preferences
Strategic partnerships

The Process
The make or buy decision can be in many scales. If the
decision is small in nature and has less impact on the business,
then even one person can make the decision. The person can

consider the pros and cons between making and buying and
finally arrive at a decision.
When it comes to larger and high impact decisions, usually
organizations follow a standard method to arrive at a decision.
This method can be divided into four main stages as below:
1.

Preparation

Team creation and appointment of the team leader

Identifying the product requirements and analysis
Team briefing and aspect/area destitution
2.

Data Collection

Collecting information on various aspects of the decision

Workshops on weights, ratings, and costs for both
3.

Data Analysis

Analysis of data gathered

4.

Feedback

Feedback on the decision made

By following the above structured process, the organization can
make an informed decision on make-or-buy. Although this is a

standard process for making the make-or-buy decision, the

organizations can have their own varieties.
Conclusion
Make-or-buy decision

is one

of the key techniques for

management practice. Due to the global outsourcing, make-orbuy decision making has become popular and frequent.
Since the manufacturing and services industries have been
diversified across the globe, there are a number of suppliers
offering products and services for a fraction of the original
price. This has enhanced the global product and service
markets by giving the consumer the eventual advantage.
If you make a make-or-buy decision that can create a high
impact, always use a process for doing that. When such a
process is followed, the activities are transparent and the
decisions are made for the best interest of the company.