E-procurement – a quick introduction
Electronic procurement, usually simply referred to as “e-procurement”, is a term used in professional purchasing and e-commerce for B2B transactions – that is to say business to business. It isn’t about ordering goods from individual customers, but rather communication between businesses. E-procurement isn’t targeted at private customers shopping in a web shop, but instead at companies using a digital solution to regulate purchases between one another. There are several advantages to using this modern purchasing solution, with the automation of several parts of the process saving a considerable amount of time for the companies involved.
In the course of digitization, many areas within companies have changed. Back office processes in particular can be carried out more efficiently with digital solutions. This also includes purchasing. The fact that e-procurement plays an increasingly important role is also because some goods and services, such as software or web services, can only be purchased digitally anyway.
In most cases, electronic procurement is based on so-called ERP systems. Enterprise resource planning systems are software solutions specially designed for companies, which support business processes and simplify merchandise management.
E-procurement is the shortened form for electronic procurement. It uses digital solutions to make purchases within a company. Electronic procurement is a term from the business-to-business (B2B) sector, as it refers exclusively to company transactions.
- What is e-procurement?
- Different types of system
- Advantages of e-procurement over traditional methods
- Security aspects of electronic procurement
What is e-procurement?
In principle, e-procurement is the digital process of procurement. This means that paper order forms, catalogs, and paper price lists aren’t needed, and communication with the supplier is predominantly digital. When it comes to e-procurement, companies rely on software designed to make their purchasing processes more efficient.
It is crucial for e-procurement that the purchasing process is perfectly integrated. Ideally, the systems of both businesses would work together seamlessly – the company can then immediately see whether the supplier has the required item in stock, and whether the order has been received.
Both parties now mostly rely on the internet for communication purposes. Due to the need to keep data secure, some companies also prefer networking via their own extranet. Business partners can then access each other’s intranet via a VPN connection, for example. The data is transmitted via a secure IP tunnel.
Steps of e-procurement
E-procurement systems should offer a digital equivalent for every steps of the purchasing process. Purchasing processes often also require access to other areas of a company, and so electronic procurement can also be linked to processes and programs from other departments as well.
A large part of purchasing work consists of obtaining and comparing supplies. E-procurement solutions can centralize this work, so you can maintain a clear overview. However, this depends on how the system used is set up. Sometimes all supplies get entered automatically into the software. On the most basic level, however, online catalogs can be used to research supply levels and types, whether this is internal or external.
In most companies, specific approval procedures are required before a transaction can be executed. Because not every employee is allowed to make certain orders, “parent authorities” must give their approval. This kind of process can be simplified and sped up by electronic procurement systems. The software can automatically forward the approval process to the next person. In addition, purchasing rights can be assigned and revoked centrally via the software, which can also save time.
Finally, the e-procurement system can also carry out the actual order. Data can be transferred in various ways. In some systems, data can be forwarded directly via the internet or via VPN to the supplier’s server. It is slightly more complicated if information first has to be sent by e-mail to the supplier, but even this process can be sped up if both sides use standardized formats through which the data can be transferred easily.
There is a difference between automatic and manual procurement orders:
- Automated procurement: depending on the product required, e-procurement systems can order goods automatically. This procedure is suitable for articles that are necessary for production, for example. The key factor here is that there are fixed supply contracts.
- Manual procurement: e-procurement can also support individual procurements that are required at irregular intervals, and are not tied to a particular supplier and sometimes require more complex approval processes.
Even after successful order placement, electronic procurement software can still be of use. If the procurement system is given real-time data from the supplier, it is possible to monitor the delivery. This allows the order to be tracked from the manufacturer or distributor to the ordering company.
Financial processing can be handled via the electronic procurement system, provided that there is a link to the accounting software. Both participants can benefit from online processing. On the supplier’s side, it is possible to make invoices via the system. The invoice can also be transmitted directly via the system, and is sent to the person responsible.
However, electronic invoices must be signed with an approved electronic signature. This feature must be integrated in the corresponding e-procurement system for payments to be valid.
Since the e-procurement system documents all processes, creating reports is much easier than with traditional procurement, which relies primarily on paper documents. Analyses can often fall back on the numerous data stored in the electronic system. Reports on individual employees, different departments, or the suppliers used are all possible. This makes it easy to report on the effectiveness of a company’s own employees, as well as the performance of its suppliers.
For e-procurement to function at its best, certain standards should be adhered to – at best, internationally. These go beyond the obvious technical requirements.
- Product identification: retailers have introduced standardized identification numbers. Just the number tells you what the product is without having to look at and compare the other product specifications. Standardized product identifications can also be registered more easily by most databases, such as EAN, UPC.
- Classification: classification of products and services is not always easy, as it is sometimes possible to assign them to several categories. However, uniform standards are useful so that products can be organized into catalogs and correctly categorized. In this way, the customer can also find the product faster.
- Formats: to ensure that both businesses receive the information they need, it is necessary to use data formats that ideally can be handled by all parties without the need for conversions, such as with CSV, PRICAT, PRODAT, cXML.
- Transactions: to complete transactions, purchase orders, and send out deliveries as quickly as possible, it is a good idea to use a uniform format for any transaction documents, which can then be easily processed by machines or software.
- Business processes: in addition to individual transactions, it is possible to standardize business process mapping. This allows multiple actions within a process to be triggered at once, such as with ebXML, Biztalk.
Different types of system
There are different types of systems that can be distinguished according to technical aspects, or according to which one of the commercial business partners involved determines the system defaults.
Technical implementation refers to the communication between the companies, i.e. between buyers and suppliers, using uniform standard forms. This allows different software solutions to exchange information.
The systems are distinguished primarily by how “open” they are:
- Closed systems: in a closed system, suppliers and purchasers are connected. To do this, both sides must either use the same software or adapt their interfaces. The latter can sometimes be very complex, which is why the installation is only worthwhile if it can be assumed that both sides communicate with each other permanently and frequently.
- Semi-open systems: these systems usually originate from the supplier. They have a self-contained network and offer their customers access via an interface. Companies can either access the system via a browser and place orders, or adapt their own software to the supplier’s interface.
- Open systems: with an open system, there is no direct connection between the systems of both parties. Instead, a kind of online catalog is regularly posted on the internet by the supplier, through which customers can place orders. This system is asynchronous because the software does not compare orders and stocks in real time.
Commercial implementation is differentiated according to which side of the transaction (supplier or purchaser) makes the specifications for the system used. This is usually related to which of the two partners is financially stronger and more influential.
Although the three models presented below are in principle independent of each other, it is now often possible to combine the different systems due to increasing standardization of formats and techniques.
In this model, the vendor specifies how the recipients are to place orders. However, since it is in the interest of the provider to generate as much turnover as possible, naturally it is in the interest of the vendor to guarantee buyers the easiest possible access. For this purpose, the supplier can provide an easy-to-use web application, offer corresponding software, or supply the customer with a hardware solution.
Sell-side systems are often comparable to a web shop, because the customer can see the product range of the supplier and place orders directly. The disadvantage for the buyer is that there is no possibility to compare offers. Suppliers’ offers can be integrated in different ways. For example, it is possible for suppliers to send their information by e-mail, and these are then entered manually into the company’s system.
If companies have enough influence or demand, they can choose for their system to be used by the suppliers. Suppliers must then adapt their solutions to the system of the respective company. This gives the company many options and makes it easier to customize processes (e.g. rights distribution and accounting simplification), which would be more difficult with a sell-side solution.
Companies often implement these structures in the form of desktop purchasing systems (DPS). This means that every employee with corresponding rights can process all orders from their workstation. Such solutions do not have to be developed or maintained by the company itself. Instead, procurement service providers often offer complete packages where maintenance is carried out by external specialists.
A marketplace is provided by a third party. In this system, the starting position for suppliers and purchasers is the same: both sides have to adapt their processes to the specifications of the e-procurement operator, who charges both for use of the system. It is also possible that a group of customers and suppliers could offer to manage this kind of marketplace. The advantage for purchasing companies is that, unlike the sell-side model, several providers are available in this kind of marketplace. However, this kind of solution cannot be easily integrated into the purchaser’s ERP system. To overcome this, some marketplaces offer additional services that make working with the system easier.
Advantages of e-procurement over traditional methods
Electronic procurement can have considerable advantages for both purchasing companies and the suppliers involved. However, first an e-procurement system must first be put into use – and this does not only apply to the technical implementation, but includes the work routine within the company, which must be adapted to the new system. Tasks may have to be redistributed and all employees have to be trained in electronic procurement.
Once these initial challenges have been made, e-procurement offers the following advantages:
- Automation: in traditional non-digital procurement, purchasing and related departments spend a lot of time performing routine tasks over and over again. Requesting supplier catalogs takes time – this process that can be automated through electronic procurement.
- Procurement time: even without automation effects, e-procurement saves the working time of the employees involved and reduces the procurement time. This can already be attributed to the fact that the transmission speed of digital data is higher than that of printed information. If a supplier has a good e-procurement interface, order data is immediately integrated into the supplier’s system. This saves time in processing orders.
- Distribution of rights: an electronic procurement system also helps users to optimize the allocation and compliance with release rights. This technology can be used to ensure that no one carries out orders without the appropriate rights – they have to have been approved first. Corresponding rights can be assigned quickly via an IT solution and can also be withdrawn easily.
- Costs: procurement processes are often costly. Printing and paper costs alone cost a lot of money, and are not good for the environment. The installation of e-procurement systems is also expensive, but in the long run it pays off to purchase and integrate digital solutions.
- Flexibility: with e-procurement offer comparison and research is much easier to carry out.
- Quality: increasing levels in electronic procurement are primarily related to the quality of product information. Since all information (such as product data) is transmitted electronically, e-procurement reduces the number of data entry errors. In addition, the digital publication provides suppliers with much more information on goods, which in turn can be filtered as required. This means that every buyer can display exactly the data that is important. In addition, product or service information can be enhanced by high-quality multimedia content (images, sound, video).
Security aspects of electronic procurement
In the professional procurement of services and goods, important information passes between businesses, and it is essential that the exchange is secure and reliable.
- Data security: when using e-procurement systems, it must be ensured that the transmitted data cannot be read or accessed by third parties. It is best if data transmission is not carried out via the public internet. It is better to use a secure, encrypted VPN connection.
- Reliable transmission: it is also important that all information reaches business partners without missing any details. This is generally easier to achieve with e-procurement than with traditional purchasing methods.
- Binding data: in e-procurement, the programs transfer contracts and other legally-binding documents. Appropriate measures are needed to ensure that both sides can be sure that commitments are being kept. In some cases, for example, a password may suffice to provide a binding confirmation, in other cases a legally binding digital signature will be required.