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Experts outline strategies for e-procurement software ROI

Software suites that integrate e-sourcing with supplier performance and contract management work best, but only if procurement is first on-board with business goals.

Whether they’re using e-sourcing software to save money on pencils or line up high-performance transmissions for...

the year’s hottest convertible, manufacturers can take proven steps to boost the return on investment of their e-procurement software, according to analysts.

Business alignment, stakeholder buy-in and effective training are the cornerstones of success, according to Mickey North Rizza, a Gartner Inc. research director who wrote a five-part series on sourcing excellence based on interviews with 70 chief financial officers and chief purchasing officers.

North Rizza found that companies had long used the basic e-sourcing tools of requests for proposals and auctions to cut sourcing costs and cycle times by up to 20%. Yet most were still giving away another 30% by misaligning their procurement organizations and technologies with their businesses. Many weren’t using more advanced strategic-sourcing tools like spend analytics and supplier performance management, and most hadn’t even thought of collaborating with suppliers to find further savings.

North Rizza advises manufacturers to start with a clear idea of their business objective -- whether it is bringing stakeholders together, improving usability or analyzing purchases faster -- before implementing the technology.

“As they bring new users on, what’s the end game they’re trying to get to?” she said. “Is all of that helping me provide value, and what does that value look like? For some people, it’s just price.”

Opportunities in strategic sourcing

Somd vendors and analysts limit their definition of e-procurement software (sometimes called “e-purchasing”) to transactional steps like invoicing and payment, while e-sourcing software handles the planning and collaborative aspects of working with suppliers. But the categories are blurring, with “e-procurement” increasingly used as an umbrella term.

The most sophisticated software applies analytics both to purchases (“spend,” in procurement parlance) and suppliers to help manufacturers optimize sourcing decisions, and contract lifecycle management to ensure compliance. Increasingly, all three come bundled in suites, a minority of which specialize in services procurement or integrate directly with product lifecycle management (PLM).

Owning a complement of suites, each dedicated to a vital link in the supply chain, can provide valuable controls to manufacturers, especially those that outsource production, said Kevin Keegan, a director at PRTM, a management consulting firm with U.S. headquarters in Washington, D.C. There might be one suite for purchasing, another for spare-parts planning, and a third for optimizing parts inventory, all from different vendors.

 “We see more and more [manufacturers] buy into the integrated suite sales model,” Keegan said. “People want a single tool source to manage the risk of purchasing, warranty obligations and turns of the inventory they are obligated to own.”

Additional gains are possible by integrating PLM and e-sourcing, which lets manufacturers and suppliers collaborate around a common bill of materials, Keegan said. The information helps engineers optimize designs around available parts, and tells them when parts have become obsolete if a design is later reused. Engineers can also use the system to check the field-failure data of parts, and spot over-reliance on unique parts that are at risk of failing into short supply. All this integration depends, however, on the OEM and contract manufacturer having compatible software, and companies are often challenged to set up a sustainable process for maintaining data accuracy, Keegan said.

Nevertheless, many of the tricks for improving ROI aren’t based on technology, though it plays a supporting role.

“An advanced technique we have seen is to award service contracts like field repair for a half-year at a time in competitive markets, and to split the award between two players where the one meeting service agreements at the best price wins the difference,” Keegan said.

For example, the manufacturer would award 40% to each contract, with the better of the two suppliers getting the extra 20% of volume. “Either can get the extra 10% volume in the semiannual rebid,” he said.  The IT department must then make sure the e-procurement software awards the work according to the agreed-upon split. 

“Another advanced technique is to bundle new-build and spare-part pricing,” Keegan added.  “This typically lowers the cost of spares,” he said, by helping manufacturers get above minimum-order thresholds or qualify for volume discounts. Another technique is to negotiate price and supply availability together, which provides some protection if a part goes on allocation or is otherwise available in lower supplies than the manufacturer needs.

Keegan said that before buying e-procurement software, manufacturers should  define their business requirements and identify the network of OEM partners they need to integrate into their procurement process, including parts suppliers, third-party logistics providers (3PLs), and contract manufacturers. Then they should address the resulting requirements for data access, security and latency, and map out which e-procurement suites can meet those needs without customization. “This ensures the IT is set up efficiently and also typically helps to ‘future proof’ the system as the business grows and changes,” Keegan said.

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