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Business Essays - Procurement Market System

Procurement Market System

Chapter 2 Literature review

Introduction

The goal of this chapter is to summarise the literature on a range of subject areas related to e-procurement, previous and current research. It starts with examining the basics of e-procurement and the many types of e-procurement currently on the market. Further, the huge benefits and limitations of e-procurement system are also examined in detail with the view of understanding the factors which influence organizations in the transition from traditional system to the e-procurement system.

As mentioned earlier, the advent of technology and the internet has completely changed just how business is being conducted as companies are continually seeking means of serving their customers proficiently and effectively to be able to provide sustainable value. E-procurement is such a technological advancement which has allowed organizations to be beneficial in the procurement function.

E-Procurement

To have a understanding about e-procurement, it's important to speak about electronic commerce (e-commerce) and e-business as well. These two are closely related and tend to be used interchangeably. Turban et al. defines both terms the following:

'E-commerce can be an emerging concept that describes the procedure of shopping for, selling, or exchanging products, services and information via computer networks, like the Internet' (2006:4).

'E-business refers to a broader definition of E-commerce, not only the buying and selling of goods and services, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organisation' (2006:4).

E-Procurement can be an important part of e-business. E-business has played a very important role in highlighting the value of procurement as a strategic issue.

Procurement

Procurement is the act of shopping for the goods and services that a company must operate and/or manufacture products (Saunders, 1997:20). The purchasing department of the average company spends a significant part of its income on items ranging from raw materials to services; there has been greater focus on purchasing lately as firms look at ways to lower their operating costs (Coyle et al. , 2003; Chadwick and Rajagopal, 1995). Research by the European Institute of Purchasing Management indicates that 70% of companies purchase external products that comprise 50% of their total costs (FitzGerald, 2000:5).

Purchasing was viewed as essentially a clerical function. It was focused on getting the right quantity and quality of goods to the right place at the right time at a good cost. Lysons and Gillingham state thatthe classic definition of buying can be 'to obtain materials of the right quality in the right quantity from the right sources, sent to the right place at the right time' (2003:5).

Purchasing is currently seen as more of a strategic function that can be used to control bottom-line costs. The attitude has changed in recent years, because of highly publicised cases wherein companies have achieved dramatic operational benefits through revamped purchasing processes.

In addition, increased competition on both domestic and global levels has led many companies to recognise that purchasing can in fact have important strategic functions. Because of this, new strategies are being found in purchasing departments at companies of all size. Therefore, purchasing has become a very integral part of the organisation. The British Chartered Institute of buying (CIPS) has defined purchasing as

'The process undertaken by the organisational unit which, either as a function or as part of a built-in supply chain, is responsible both for procuring supplies of the right quality, quantity, time and price and the management of the suppliers, thereby adding to the competitive features of the enterprise and the achievement of the organization strategy' (Lysons and Gillingham, 2003:8).

It must be understood that however the conditions procurement and purchasing tend to be used interchangeably, they are not the same. Lysons and Farrington states that procurement generally has a wider meaning than purchasing, which implies the acquisition of goods or services in return for monetary or equivalent payment. Alternatively, procurement identifies activities associated with obtaining items from a supplier at all, including borrowing, leasing and even force or pillage (2006:6).

Companies are also seeking to improve purchasing processes as a means of improving client satisfaction. One of the means of bettering the purchase process is by automating the process (Kalakota and Robinson, 1999:235). E-procurement applications are nowadays used widely by organisation as means of automating the procurement activities.

By introducing electronic procurement (e-procurement), many benefits can be realised such as cost savings which can have a direct impact on the customer.

'Advances in e-procurement technologies coupled with complementary technologies such as sourcing and contract management have accelerated the adoption and value of e-procurement' (Aberdeen Group, 2006).

Baily et al. , (1994, cited in Baily et al. 2003:314) suggest that, apart from reducing the paper works and communication times, e-procurement should be directed at improving performance for every of the five rights of buying that are sourcing items as follows:

  • At the Right price
  • Delivered at the proper time
  • Are of the proper quality
  • Of the proper quantity
  • From the proper source

E-procurement has been the subject of significant amounts of research recently. Inefficient and maverick buying habits, redundant business processes are symptoms of poor procurement practices (Kalakota and Robinson, 1999; Aberdeen Group, 2007).

Croom and Johnston (2003) argues that e-procurement is not merely an addition of technological aspects to traditional procurement but thus, mirror the procurement process through the provision of two discrete, but connected infrastructures, internal processing (corporate intranet) and external communication processing (internet based plat form).

The growing need for e-procurement was highlighted by research which report that that around 90% of companies said that they planned to implement an electronic management system within the next five years, with the majority identifying cost benefits as their main aim (Tranmit, 1998 cited in Bocij et al. , 1999:263).

Previous research

In last 50 years lot of research have been conducted in the field of procurement and the many factors associated with the field of procurement. It has been due to increasing awareness and acceptance that procurement is an integral strategic function of any organisation.

However, research in e-procurement are relatively fewer compared to that on procurement because e-procurement applications have been used widely only since the last decade. Early research on e-procurement considered it an integral part of e-business and were very generic in nature and the focus of such researches were broadly on e-business than e-procurement.

For example, Wu et al. (2003) studied how e-business adoption impacts business performance by using a survey of telecommunications, semiconductor, and equipment manufacturing sectors. They analyzed four business processes: internal and external communication, internal administration, order-taking and procurement. They claim that during the study, online order taking and e-procurement were at low levels of adoption.

According to the results, neither online order taking nor e-procurement significantly influenced any performance measures. However, they found that e-business adoption in communications has a confident impact on all four performance measures and adoption in internal administration impacts on customer satisfaction and relationship development. Overall results indicated that the advantages of e-business should be studied independently in relation to different business processes.

Subramani (2004) examined the way the suppliers benefit from information technology use in supply chain relationships by having a survey of suppliers to a selected manufacturer. The maker has a proprietary system like e-procurement system through which suppliers get a selection of reports about sales, product forecasts, and inventory alerts. Additionally, suppliers get access to field-service records for their products.

The research results indicate that suppliers can benefit by taking part in supply chain management initiatives of network leaders. The research identified that suppliers need to deploy relationship specific business processes. However, Subramani (2004) does not provide detailed information or findings in regards to what the operative and strategic benefits for the procurement businesses is to the firm and the suppliers.

Puschmann and Alt (2005) studied how companies use e-procurement systems and what benefits they bring along to the supply chain management. They studied the e-procurement practices in five multinational companies that are believed to be successful case examples. The analysis indicates that successful implementation depends on critical analysis of current procurement practices and realignment and reorganisation of processes, cooperation with suppliers, careful content and catalogue management, and integration of e-procurement and back-end systems to attain operational efficiency.

This research has determined and highlighted a lot of factors which is often considered the critical success factors for the implementation of e-procurement applications. The results discovered that e-procurement is a non-technical issue. More effort is allocated to organisational than on technical issues.

One of the key issues that have not been addressed in this research is the type of companies selected for the study. This research has only considered large multi-national companies as is feasible participants in the research process. One of the primary questions that arise here is - what role does the firm size play in successful e-procurement application in the supply chains. You will find many small and medium size companies operating which have successfully implemented e-procurement applications in their respective supply chains.

By size of the business we mean both range of employees and the annual turnover. Within this research only companies with both large turnover and large numbers of employees are included. However, this will not give a clear picture of the full industry, which constitutes small, medium and large size companies. Therefore, this research mainly addresses the e-procurement practises adopted by the top multi-national companies.

Nevertheless, this might be due to the fact that success of e-procurement applications can be compared only with firms of similar size. However, it would be interesting to recognize when there is any relationship between your size of the firm and the adoption of e-procurement applications.

Patterson et al. (2003) states that 'larger organizations not only have access to greater financial resources, but are also better positioned to assume the risk of investing in various technologies also to take good thing about the advantage of economies of scale from adoption'. (cited in Pearcy and Giunipero, 2008).

A research conducted by Wang et al. in 2004 (cited in Pearcy and Giunipero, 2008) hypothesised that firm size impacts which type of e-procurement application is adopted. Specifically, this hypothesis was supported by the study data and was established that firm size is positively related to the implementation of e-procurement.

Another factor which should be considered while evaluating successful e-procurement application is the supplier cooperation aspect. Since, the suppliers are a vital part of the supply chain, implementation of e-procurement will definitely have an impact directly or indirectly with the suppliers (Fitzgerald, 2000:79-80). The successful e-procurement application can assist firms in supplier coordination, cooperation or integration.

But sometimes during the e-procurement application, suppliers might become less cooperative because they view this e-procurement application as a way for the buyer to extract price reductions, often to the detriment of their own income. For instance, research completed by Pearcy et al. in 2004 (cited in Pearcy and Giunipero, 2008) found under certain circumstances, the utilization of on-line reverse auctions was significantly related to too little supplier cooperation in advice about designing processes that reduce cost, cycle time, and time to advertise. Therefore, success of e-procurement also involves successful supplier management.

The supplier perspective also warrants investigation because they're a vital part of the supply chain of the organisation. Consequently, the success of the e-procurement implementation often is determined by this aspect.

The findings of Puschmann and Alt (2005) that e-procurement implementation is a non-technical issue, will form the primary premise on which my research will be built. My research will built on the critical success factors identified by Puschmann and Alt (2005) and make use of it as a framework of drivers and barriers for change, for my research to be able to research which of these factors identified will be impacting the implementation of e-procurement in the organisation of my study. Therefore, I intend to identify via a case study research method, which of the factors discovered through previous research will be impacting e-procurement implementation in the context of my research case or organisation.

E-Procurement Models

There are usually three types of eProcurement applications - buy-side desktop requisitioning, buy-side centralised procurement management and sell-side applications (Kalakota and Robinson, 1999:244).

Buy-side e-procurement is the most frequent, and is also a buyer centric model in which a buyer connects to his / her suppliers. It helps the customer streamline procedures and enhance productivity through reduced amount of paper flow, electronic transmission of data and automatic purchasing processes.

The system streamlines the complete procurement process from point of need to payment and delivery of goods. The system leverages existing application investments, linking the buyers directly with the suppliers on the internet and delivering product availability and customised pricing right to the desktop (Kalakota and Robinson, 1999:246).

There are two types of buy-side e-procurement systems - Buy-side desktop requisitioning and buy-side centralised procurement management.

Buy-side desktop requisitioning software allows employees to buy online while the company maintains approval routing and purchasing process. By connecting the corporate intranet to the supplier's web-based commerce sites, buy-side software routes employee purchase requests internally before turning them directly into orders (Kalakota and Robinson, 1999:246).

Buy-side centralised procurement allows procurement managers and professional buyers to control the procedure, analyse transactional data and perform supplier management (Kalakota and Robinson, 1999:246).

Sell-side e-procurement is a seller-centric model that helps sellers implement and maintain Web-based commerce and storefronts. In this model, an individual supplier may reach many buyers, and the seller can market directly to end consumers, capture and manage online orders, and improve customer relationships by offering cost-effective customer support. These applications often include tools for creating and maintaining electronic product catalogues, as well as transactional support for order entry from customers.

Benefits of E-procurement

Eakin (2003) has defined the advantages of e-procurement under three main categories as follows:

  • Hard benefits - that happen to be directly measurable and must improve direct share holder value such as price savings and process cost reductions.

2) Soft benefits - these can be called indirect benefits and can be difficult to quantify accurately but can be good indicators of progress. Examples include individual time freed up through better processes.

3) Intangibles - they are not directly measurable in financial terms. Soft benefits must not be misclassified as intangibles due to the fact measurement may become more difficult. Intangibles include:

Cultural change - which involves recognition of strategic sourcing as a longer-term market differentiator, end-user attitude shift, and use of implementing world wide user processes.

E-platform - which sees e-procurement as a step towards value adding structures

Financial approval for all spending - ability to ensure that spending meets organisation standards

High visibility of supplier performance -" live" feedback from end-user to buyers

Eakin (2006) further defines the huge benefits under five main categories:

1 Transactional benefits

E-procurement permits payments to be done online. Typically, a web based transacting tool is employed where items are selected from pre-sourced catalogs and submitted for electronic approval. There exists then a connect to the trunk end ERP system for entry, payment of invoices, and collation of management information. Huge time savings and efficiencies are realised consequently of electronic processing due to:

Global automated processes incorporating best practice and eliminating unnecessary activities

E-enabled relationships with suppliers which speeds procurement cycle times and facilitates supplier performance improvements

Greater data accuracy which minimises ordering inaccuracies and provides the essential foundation for management through measurement and analysis.

2 Compliance benefits

In many organisations issues of compliance and maverick spending are very significant and require attention. This usually because employees aren't usually aware of the arrangements that are in place rather than the fact that they want to disregard the laid down processes and procedures. E-procurement has a means of addressing this through tools such as catologs and standard order processing and approval catalogs. Compliance will be performed due to:

A straightforward and quick requisitioning-to-payment process including a user friendly interface and pre-sources catalogs tailored to the requirements of the average person user.

A straightforward and quick strategic sourcing process with standard procurement processes and tools as well as easy to get at information.

The e-procurement system, really the only purchasing mechanism available.

3 Management Information benefits

The reality key information such as cost center and commodity codes is hard coded against an individual drastically reduces coding errors and provides highly detailed and easy to get at data. This is very important in maximising the benefits associated with strategic sourcing. A successful e-procurement implementation will provide high quality, detailed management information and can negate the need for data warehousing or resource heavy data mining.

4. Price benefits

The ability to persuade your suppliers that you will be using e-procurement as an instrument to ensure end users do honour their contract status will enhance ability to negotiate down prices through :

Greater improved capture and for that reason reliability of spending information

Increased confidence that spending volumes can be guaranteed from increased compliance with system, thus allowing volume price breaks and discounts to be performed.

5 Payment benefits

The successful procedure of the first four benefits permits electronic payment of invoices. This includes the capability to better control the business cash flow and manage the efficient payment of the suppliers due to more streamlined procurement processes providing more timely and accurate information to the accounts payable department.

Potential benefits include reduced manpower (a hard benefit only when improvements lead to head count reduction) and reduced spending on postage and stationery. When it comes to negotiations, procurement can guarantee the supplier a certain degree of prompt payment which was not possible prior to e-procurement. In fact, e-invoicing benefits tend to be under-assessed and ignored.

Transition from Traditional procurement to E-Procurement

In the highly competitive modern business environment, the role of systems management running a business organisation and competitiveness is constantly on the demand increasing attention and redefinition. Out of this standpoint, the integration of effective, efficient, and cohesive procurement systems actively reduced the resource allocation in this particular sphere of business management. E-procurement represents a much broader category than the act of buying alone, integrating information and communication technologies (ICT's) to streamline a broad range of administrative features that are optioned over online channels (Croom and Brandon-Jones, 2004).

By realigning procurement practices for an automated and user-defined online system, purchasing teams are reallocated to more comprehensive administrative duties which directly influence the efficiency of overall business operations. Overall the emphasized benefits of e-procurement add a reduction in administrative responsibilities, improved organisational efficiency, and a decrease in transaction costs (Garicano and Kaplan, 2001; Garrido et al. , 2008).

Yet when undertaking a competitive stance on e-procurement implementation, the actual pitfalls and systematic frailties often overwhelm and stifle front-running innovations, thus limiting a firm's appropriation of new resources and efficiencies. Competitive commerce depends on innovative systems and enhanced knowledge capital; through the orchestration of e-procurement systems, multiple service providers can be electronically linked, thereby realigning activity sequences within the business model (Leymann, 2002).

It is through the redefinition of daily operations that corporations substantiate their change initiatives and successfully reap the benefits of enhanced value structures and competitiveness. In 2002, Attaran and Attaran figured of 5, 000 surveyed firms, only 8-10 percent utilised a functioning e-procurement system. By 2003, over 85 percent of firms in the McKinsey Company study were actively sourcing software components to implement an automated procurement processes (Hensley et al. , 2003).

Given this data, companies throughout the world are recognising that modernisation integrates electronic procurement channels, thereby minimising geographic areas and enhancing market exposure. Enhancing successful operations through active systems management allows a company to dynamically control its transaction cost basis and as time passes, reduce the effect of negligent purchasing and material limitations.

Essentially this transition must certainly be a form of process management, one where flexible and scalable applications are associated with competitive procedures and business strategy, thereby reorienting the organization structure to the marketplace (Harris, 2002).

Transition from traditional procurement systems into online methods may also be rejected at the purchaser level, a direct result of several growth debilitating variables. Organisational change, according to Chan and Swatman (1998) is indicative of temporal allowance, allowing integration of revised systems over a protracted time frame. Many firms will rapidly evolve systems to meet industry demand without proper preparation and pragmatism, undermining their organisational realignment and creating system-wide complications.

As traditional procurement relies highly on the relationships and long standing commitments with supplier firms, the abandoning of human control is oftentimes a direct hindrance to e-system implementation, requiring a gradual transition and participation. Implementing an e-procurement scheme in a traditionally saturated model often entails systems redefinition that can result in instability and structural collapse of the supply chain (Puschmann and Alt, 2005).

In order to appropriately integrate an electric methodology, Peleg et al. (2002) discovered a three scope strategy including strategic long term partnerships with suppliers, online supplier sourcing, and integration of e-linked secondary suppliers through online channels.

Whereas companies once competing within the original model leveraged their supplier partnerships and relational contracts as modes of gaining competitive edge, the new way to obtain knowledge capital and leverage able resources exudes from online interactivity and e-commerce. Price negotiation and logistical expectations were previously negotiated over the phone or face to face with suppliers, establishing a company understanding of procedures, and enabling a permanent commitment to evolve from the human capital support structure.

Oftentimes trust variables challenge the transition from traditional systems to e-procurement methods, as companies are likely to resist the comprehensive information capital which is exposed through the web procurement systems (Carter et al. , 2004). This reorganisation of knowledge capital into a strategic opportunity mostly evades the initial evolutions of participating firms, triggering both buyer and supplier to feel uninformed regarding product choices and pricing measures (Pearcy et al. in 2004, cited in Pearcy and Giunipero, 2008).

As the division between buyer and supplier is constantly on the widen, the tendency to adapt buying schemes to exploit lower prices from a widening amount of competition will also contribute to supplier extended trust (Rohm et al. , 2004). Expanding the breadth of purchasing operations, firms will mostly reject long-term commitments to supplier partners for the price basis of competitive offerings. Whereas relationship capital would once detract from such disagreement, in the modern global market, electronic capital is rapidly replacing the historic systems of past generations.

Within the competitive business scheme, the assumption of know-how and expansion of e-systems is constantly on the evade many firms, inhibiting expansion and limiting their scope market penetration. Possibly the most significant blockade to adoption of e-procurement systems has been the reluctance of organizations to change successful business processes in order to meet technological and distributional demands (Day et al. , 2003).

Such recognition becomes necessary to the reorganisation around market defining procedures, instead of those business businesses which restrain and undercut broader marketization. Considering that studies have demonstrated a insufficient system integration or available technology is the main cause of e-procurement hindrance, the rejection of evolving such capabilities inherently undermines innovation efforts (Angeles and Nath, 2007).

Transitory firms must option the advances which the market generates for his or her benefit, meeting consumer and supplier demand structures through strategic realignment of processes and increased market awareness. Integration of e-procurement systems within the scope of logistics management substantially reduces lead times for product reception, increases the permanent pricing basis in both shipping and material costs, and will be offering a direct-to-consumer approach that is unparalleled in historic business models.

Benefits and Pitfalls

There is a wide breadth of benefits and pitfalls which can occur when implementing e-procurement methodology; however, nearly all system failures arise from a rejection of technological advancement and broader market opportunities. The meritorious nature of expanding procurement practices to exploit material costs and availability can't be rejected, however, and continues to enhance the redirection of transitory firms.

Essentially, e-procurement integrates order systems enabling an individual to automate purchasing transactions, realigning operational duties to alternate focuses including logistics, payment, and inventory and catalog management (Rajkumar, 2001). Given the demanding nature of competitive markets, making additional resources without substantial overhaul is a significant benefit for corporations, enabling the redirection of principle actors towards functions which better support overall business operations.

Redirecting activities towards logistical management alone drastically enhances responsiveness and proactive techniques of supply chain maximization. Overall, the benefits associated with e-procurement systems far outweigh the actual pitfalls or resource allocation through the implementation process, enhancing firm market exposure and streamlining efficiency measures throughout the organization structure.

There is a duality within e-procurement systems, that whenever leveraged from a business model standpoint, offers multivariate enhancements over a long term operational spectrum. Croom (2000) highlighted that e-procurement systems offer benefits, activated through both strategic and operational developments, adding to the entire market competitiveness of organisation. Redefining a corporation's systems to integrate e-procurement benefits, however, is oftentimes difficult and a collaborative methodology including substantial participation from key corporate actors is essential to ensure its multi-segment patternization.

Garrido et al. (2008) determined that expanded procurement capabilities, and an enhancement of internet intensity within the scope of business procedures will often lead to more diverse organisational actors, thereby potentiating accountability yet detracting from communication effectiveness and participant expertise.

In order to malign such pitfalls, organisational management teams must recognize variables which detract from the cohesive structure of procurement systems, realigning participants in a well-designed pattern that enhances chains of communication. Inefficiencies in such systems can arise as an offshoot of broadened businesses and evolving responsibilities; therefore, e-procurement can only just generate substantial benefit for a corporation when all participants are symbiotic functioning.

The nature of such technology revolves around an enhanced market exposure, the one that connects primary and secondary supplier sources for the utmost cost and material benefits over a long-term business plan. In e-procurement, Muffatto and Payaro (2004) recognized an enhanced competiveness which enhances order accuracy, consumer attentiveness, and intra and extra-firm communication practices.

Perhaps the most important variable for reducing systematic collapses and operational down time, the merits of e-procurement systems are substantial and broadly distributed across the business spectrum. Firms can ensure that their materials arrive in time for production, that products are completed and shipped to consumers in a timely fashion, and this pitfalls are navigated through direct communication and feedback.

This proactive methodology utilizes technology as a resource, enabling the integrated nature of procurement processes to stay a commoditization of processes, and putting emphasis on firm operations and alternate priorities. Essentially, e-procurement redirects purchasers towards strategy increased responsibilities, including business partner management and sourcing (Gunasekaran and Ngai, 2008). Firms can actively manage their external partnerships and improve their long term cost basis through improved market awareness and redirection of procurement practices to more competitive supplier partners.

In spite of the multiple great things about e-procurement systems, much like any business design enhancement, there are potential pitfalls and frailties in a untested system such that many transitory organizations will reject its integration because of their realization. As underscored by Hawking et al. (2004) in their Australian research, pitfalls to e-procurement systems can include security risks, limited supplier integration, technological cost basis, educational requirements and training, and a detracted supplier relationship focus.

Perhaps the most influential of all such variables, the rejection of broader educational requirements and technological expertise is oftentimes a hindrance to firm evolution. Similarly, the up-front resource allocation for system implementation is oftentimes cost prohibitive and undermines the long-term great things about e-procurement processes.

Firms must utilize market partners and supplier principles as a way of business development, leveraging permanent relationships to collaborate on systems development and integration. Throughout the joint initiative, companies will communicate in a more effective and indiscreet manner, improving systems operations after they are fully composite with logistical expectations.

Essentially, nearly all pitfalls within the e-procurement method arise from systems limitations or critical intra-firm trust variables Research demonstrates that within the e-procurement system, requests for quotes or proposals are generally not handled in an accessible format as would human contact and negotiation, thereby limiting the responsiveness of the electronic system as well as reducing the cost benefits to the purchaser (Benslimane, 2007).

The nature of procurement in complex industries is formed by an integration of mutually supportive systems; however, when accessing proprietary data such as sales and inventory, separation is often needed to protect long term business objectives. Therefore, proprietor businesses will oftentimes guard their profit data and competitive variables in an attempt to waylay the opportunistic compulsions of somebody firm.

Benslimane (2007) also figured many suppliers do not give you a complete range of procurement services and instead opt for online catalog and reference materials while relying on personal services for sales and distribution. These limitations prevent the efficient maximization of e-procurement systems, thereby boosting a propensity to reject and intensive failure protocol within the purchasing firm.

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