This Little Company Went to the E-Market.

E-procurement in Canada may still be in its infancy, but it's destined to mature quickly

While it's tempting to ignore much of the "e"-related news hype, the fact remains that business-to-business buying and selling is moving to the Internet because it's the cheapest, most efficient

E-procurement is one example of bow the Internet has revolutionized the way businesses interact. While e-procurement promises bottom-line results, it is still a topic that raises many questions and misconceptions, and a lot of skepticism.

What is e-procurement?

E-procurement is the use of electronic technology for the buying and selling of goods. The term can refer to a range of solutions, including online ordering via electronic data interchange (EDI) and other technologies. It also encompasses auctions on the Internet and e-marketplaces, such as the Global Trading Web, Transora and the Worldwide Retail Exchange.

Although Canadian e-procurement adoption lags behind the U.S. by about a year, e-procurement for indirect goods is rapidly growing among companies in Canada. For example, office products supplier Grand & Toy Ltd. offers e-procurement to its 200,000 business customers in Canada based on customer demand for this capability. Indirect goods procurement is very attractive because of the potential for a dramatic return-on-investment (ROI). According to research from the Tempe, Ariz.-based Center for Advanced Purchasing Studies, on average, 35% of a company's spending is on indirect goods, so it offers the greatest opportunity for savings. In fact, a 5% reduction in purchase costs can result in a 50% increase in profit margin.

Who should consider using it

E-procurement tends to provide greatest value to companies that need to gain control over business processes, reduce costs and enhance financial performance. New online e-procurement solutions are bringing together business communities to conduct commerce, facilitate collaboration and share content. These solutions have the potential to reduce product and process costs while driving revenue through a suite of Internet applications and services.

Any company looking to achieve or enhance its competitive edge, take advantage of sales opportunities and overcome channel and process inefficiencies should consider e-procurement as a possible solution. Companies implementing e-procurement can re-engineer the logistics of buyer and supplier relationships and integrate e-procurement data with internal business systems. Previously inaccurate, expensive and time-consuming manual processes become streamlined, thus decreasing costs and improving profitability.

Why it's growing

There are four primary business drivers for the proliferation of e-procurement: the high cost of channel inefficiencies, marketplace competition, opportunities to generate revenue and the need to improve business processes.

Channel inefficiencies are expensive. Companies have made great strides in improving efficiencies within an enterprise; however, challenges still exist in creating efficiencies with business partners and throughout the value chain. By providing the opportunity for real-time information and data exchange, e-procurement can help companies better manage their channel relationships. This, in turn, results in greater pricing control, fewer order-processing errors and increased negotiating clout.

Today's marketplace is more competitive than ever. Because of the Internet, an enterprise that formerly worried about one or two rivals around the corner must now worry about multiple rivals around the globe. So, competition from global and dot-com companies is driving enterprises to seek new business partners and find faster, more efficient ways to work with existing partners.

Every company must seek revenue-generating opportunities. E-procurement opens new markets. It also gives companies more exposure within their industries and within multiple geographic regions.

Early success stories regarding proven business process improvements are leading the way for more sophisticated forms of trade and collaboration over the Internet. A recent Boston, Mass.-based Aberdeen Group study on the benefits of automated procurement found that they include the following a five to 15% drop in product costs; a 70% decrease in process costs; an average cost of $30 US to process an order electronically, compared with an average of $107 US to process an order from initialization through fulfillment using a non-electronic solution; and a 70% reduction in cycle times.

What's involved

Internet-based public and private e-marketplaces are relatively new, but the practice of purchasing via electronic technology is not. Electronic data interchange (EDI) in some form has been around for over 25 years, and today more than a quarter of a million businesses exchange tens of millions of transactions per day via EDI.

As Canadian companies set new e-business goals and establish e-procurement strategies, they're looking for ways of leveraging their e-business investments and ways of going beyond traditional EDI transactions. They're turning to more advanced methodologies such as collaborative planning, forecasting and replenishment (CPFR) and supply-chain optimization. And they're increasingly interested in taking advantage of the power of the Internet.

Because it offers the promise of real-time transaction processing, network-centric application hosting, simple browser-based user interfaces, and standards such as file transfer protocol (FTP) and extensible markup language (XML), the Internet has received much attention. In the area of e-procurement, this attention has been focused on business-to-business (B2B) Internet exchanges and, more recently, on industry-based mega-exchanges, such as Transora in consumer packaged goods, Covisant in automotive, Exostar in aerospace, Pantellos in energy, and Worldwide Retail Exchange in retail.

But these exchanges and mega-exchanges will not replace traditional EDI -- at least not in the foreseeable future. EDI is a deeply rooted technology, implemented widely and integrated into companies' core business processes. It has proven to be a secure and reliable means of exchanging business information to support the most critical supply-chain activities. XML-based marketplaces are generally not, at present, a viable alternative to the traditional EDI Value-Added Network (VAN). Instead, companies' traditional EDI programs can be expected to co-exist with the new Internet marketplaces for years to come.

At the same time, the e-marketplaces have much to offer: network-centric applications, real-time collaboration between multiple business partners, and centralized and standardized content. Consequently, the new e-procurement solutions providers are looking to the veterans of the electronic B2B world for their experience in building participation and liquidity in electronic marketplaces. Traditional players such as EDI VANs are teaming up with new e-marketplace providers, and/or are providing e-marketplaces of their own. The result is XML-to-EDI bridging solutions that connect users to the new e-procurement marketplaces and link disparate portals around the world, providing buyers with greater purchasing power and giving suppliers a global audience.

The benefits and challenges

In general, e-procurement allows enterprises to better manage channel relationships and overcome inherent channel and process inefficiencies while taking full advantage of the real-time information and data exchange that the Internet delivers. More specifically, companies with e-procurement programs in place find that they can easily compare prices, check inventory levels and transmit purchase orders in real time. They are able to decrease off-contract buying and reduce cycle times. And they experience increased compliance with negotiated contracts as they boost their overall operating efficiencies.

The most valuable e-procurement solution will enable a company to meet what are perhaps the two biggest challenges of e-procurement: integrating business processes for maximum efficiency and evolving with technology.

A major challenge is that few companies using e-procurement seem to understand the importance of integration. Only a seamless combination of e-procurement applications, back-end systems and internal business applications can deliver maximum value to the enterprise in terms of improved efficiencies and lower costs. The best e-procurement solutions vendor will offer integration capabilities that help the company build a bridge between existing legacy systems and their new Internet applications.

A second key challenge involves the need for the enterprise to evolve along the e-procurement continuum. To achieve this, a company should align its e-procurement strategy with its corporate business goals. In addition, it should seek to establish a roadmap into new Internet technologies. If it lacks the knowledge and expertise to do this on its own (and many do), the enterprise should turn to an external experienced and knowledgeable source for help.

E-procurement in Canada may still be in its infancy, but it is destined to mature quickly. Multiple paths to e-procurement exist, ranging from traditional EDI to membership in public or private e-marketplaces and mega-marketplaces. Regardless of which path it elects to follow, the wise company will pay close attention as e-procurement evolves, and will find ways to use it to its best competitive and strategic advantage.

Michelle Murray (Michelle_Murray@stercomm.com) is the marketing manager at Sterling Commerce (Canada), Inc., a provider of e-business solutions for businesses of all sizes.

Reducing Spending

The TO Bank Financial Group recently launched its internal e-procurement project, TD Deals, as part of its strategic sourcing mandate. By using TD Marketsite technology, the bank expects to reduce its annual indirect spending of $1.3 billion by approximately 10%. These savings will come from aggregating suppliers, managing off-contract spending, and automation. With virtually every employee who purchases goods and services having access to the system, TD will continue to expand its e-business focus.