e-Procurement strategies for small businesses

The new e-procurement paradigm
Both buyers and sellers need to adapt

iProceed.com's simplified depiction of conventional purchasing management processes

Let me talk about a food company that I will call X in this story. It uses bottles, cans, and films for packaging its range of food products, for example, potato chips, ketchup, soups, etc. Company X purchases packaging materials from several manufacturers and distributors and most of them are typically much smaller than company X itself. It employs an army of purchasing agents in its procurement department to accomplish this mammoth task, and this is not always seamless. Some of the jobs that the purchasing folks perform are requisitioning, research, qualification, receiving quotes, writing purchase orders, tracking supplier performance, certifying, negotiating and even fire-fighting (when goods do not show up as promised). I have tried to depict the traditional procurement model on top right.

Well, here is some good news (for large companies) and some bad news (for the small companies). The good news is that a lot of these painful tasks can now be automated, transferred to other agencies (e.g. exchanges, e-marketplaces, etc.), outsourced to the suppliers or eliminated altogether, as many large companies have already done so through creative use of purchasing software solutions (sometimes referred as electronic procurement or e-procurement) and information technology (e.g. ERP to ERP connectivity or ERP to hub connectivity). Take a look at the more sophisticated process using IT. The bad news for a small company is that if you do not have the right systems in place to join this network, you are at a disadvantage, and your business with this customer may be under threat. Information technology has empowered the department of purchasing at Company X to the point that not only can it eliminate some of the aforementioned inefficient business processes, but it can also start integrating its supply chain with those of its customers and suppliers. (Related link: Supply chain management for small and medium sized businesses)

The fragmented nature of the small business sector means that there are still many businesses that have not integrated sophisticated tools into their business processes. This has created many inefficiencies in the value chain that can potentially be eliminated by making small investments, one at a time. From my research, economics is forcing Company X and its peers to manufacture the absolute minimum number of core products and outsource or offshore (Related link: Impact of offshoring on American economy) everything else. This is making their supply chains not only extremely complex but also a key driver of profitability, especially for such companies as X, which use a wide variety of diverse components and materials.

iProceed.com's simplified depiction of electronic purchasing management processes Suggestions for sellers

For sellers of undifferentiated products or commodities, the emerging e-procurement systems present new challenges. The need for your products is not going away, but you will have to become smarter about doing business. You will have to keep pace with your customers and also stay ahead of your competitors in incorporating these new processes in your business model. Here are a few suggestions:

While transactions will be automated in the near future, certain supply chain management tasks can never be automated. Your customers will still value your input on how they can reduce 'their' costs using 'your' products. And let me add that this: m solution-oriented approach is likely to insulate you somewhat from offshore competition. (Related link: Benchmark to understand global competitors)
These market developments will naturally result in some consolidation. Big fish will gobble up good, small fish that do not have the resources to make capital investments in IT. In the meantime, you should start thinking about partnering with other suppliers to your customers to collaborate on raising your customer’s supply chain efficiencies.
Conduct a manufacturing cost assessment for your products, and if you think that you are not among the top five lowest cost producers in your peer group, then think seriously about either reengineering (if that can lower your costs) or discontinue manufacturing and start outsourcing/offshoring that product yourself.

Suggestions for buyers

If you are a buyer, your traditional, narrow responsibility to procure materials in a cost-effective manner is about to disappear. Your role is about to change dramatically and here are suggestions to prepare yourself:

Develop a short-list of those suppliers that meet your standards for being part of your supply chain. Very soon you will be responsible for not only purchasing but also for driving profitability of your enterprise through effective supply chain management.
While you might still play golf with your suppliers, your purchasing decisions will largely be facilitated by decision support tools that would consider a larger number of variables from across the whole enterprise. Your role will, thus, become more strategic and less operational.
Your day-to-day responsibility will be more analytical and cross-functional. You will have to think about 'what needs to be procured at the targeted profitability' rather than specifications and price. A vast majority of these decisions will probably not require your intervention, and you will have to step in only to determine which supplier can fulfill your needs in terms of functionality required and targeted contribution to profitability of your enterprise.

Internet commerce for a packaging company

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