Cover Story

e-procurement matures

Transparency, cost-cutting and access to a wider supplier base are the key reasons that are driving organisations to look at e-procurement tools, finds Megha Banduni.

Six years ago, the Government of Andhra Pradesh (GoAP) created a benchmark of sorts by becoming the first among public sector organisations to adopt an e-procurement solution. The GoAP set up an e-procurement solution linking government departments, agencies and local bodies with their vendors.

The main objective of this e-procurement initiative was to reduce the time and cost of doing business, realise better value for money spent, standardise the procurement process across government departments and agencies, increase buying power through demand aggregation, provide a one-stop shop for all procurements and allow equal opportunity to all vendors. Most importantly, the GoAP wanted to bring transparency in all these areas.

Prior to the implementation, the entire process of tendering was manual. That had deficiencies such as discrimination and delay in issue of tender schedules to suppliers, cartel formation to suppress competition, maintenance of tender boxes at multiple locations, tampering of tender files, delays in finalisation of tenders, human interface at every stage and lack of transparency.

The whole process would take anything from four to five months. But after the implementation, the time span has reduced to just 35 to 40 days on an average. For projects below Rs 50 lakh the time taken is just about one to two weeks.

K Bikshapathi, Project Manager, Department of IT, GoAP says, “Since we have automated all the processes, we not only save time but have cut down on leakage of information, and chances of favouritism. Besides in a government office the need to adhere to hierarchy lengthens processes but now that has been taken care of.”

The GoAP deployed C1 India’s Public Private Partnership model wherein the private partner would bring expertise in technology, invest upfront in setting up the exchange and recover the costs by charging user departments for completed transactions.

Says Kalyan Chakradhar Reddy, Head, Strategic Accounts, C1 India, “During 2005-2006, nearly 90 percent of all procurement by the GoAP worth $4 billion was carried out through e-procurement .”

Thus, the implementation aptly showcases the scope and relevance of e-procurement in India.

Core of B2B

Rohan Ajila, CEO, Indiamarkets says, “According to a recent study by eStatsIndia.com, the Indian e-commerce market (B2C and B2B combined) is about Rs 4,100 crore. The B2B portion of this is expected to grow at a CAGR of 52.63 percent touching Rs 13,550 crore by 2009-end. The e-procurement sector in particular is expected to grow the fastest at a CAGR of 50.93 percent touching Rs 12,100 crore by 2009-end.”

"e-procurement is a subset of spend management which consists of four areas—spend analysis and process analysis, sourcing strategy, procurement compliance and supplier management" - T Sivakumar Group Director, Asia-South Ariba

Though e-procurement has not been much talked about in India there are ample cases of it being used by both the public and the private sector. T Sivakumar, Group Director, Asia-South, Ariba says, “In 2001-2002, companies started experiencing pressure due to a slowdown in the economy. They couldn’t manage topline growth. CEOs started focussing on production and cost reduction. They became dependent on the Chief Procurement Officer and hence spend management developed as a concept.”

He adds, “e-procurement is a subset of spend management which consists of four areas—spend analysis and process analysis, sourcing strategy, procurement compliance and supplier management.”

If done correctly online procurement has its advantages. That said users and vendors need to understand that it is not just about Web-enabled tools.

Ajila explains, “e-procurement is not limited to purchase and sales of supplies and services over the Internet. A properly implemented e-procurement system can connect companies and their business processes directly with suppliers while managing all interactions between them.”

The presence of top vendors such as Ariba, Oracle, SAP, Indiamarkets and Wipro Infotech suggests that the e-procurement story has just begun.

Growing adoption

With Indian companies looking to attract FDI the focus has shifted to the manufacturing segment. Companies in textiles, steel, automotive and other manufacturing sectors need to automate their processes and render them transparent if they want to compete with global parties. This is where e-procurement tools and solutions come into play.

Sivakumar feels that the adoption level is high but only among industry leaders. However, it is slowly penetrating in the SMB sector. “We have 70 percent marketshare in India, the reason being we provide complete spend management to our customers unlike other vendors which offer few tools for either auction, spend analysis, procurement or supply management,” he adds.

Today every company wants to ensure that the acquisition, payment and management of materials, goods and services is done accurately and in tune with the ongoing business requirements at the lowest possible cost. e-procurement serves this purpose by making the purchasing process easy and transparent to widely dispersed buyers of goods and services.

According to Sivarama Krishnan, Executive Director, PricewaterhouseCoopers, “Since e-procurement brings about transparency, the ability to negotiate improves, resulting in price reduction. Also aggregation helps improve distribution and in fixing the right floor pricing.”

Another case in point on the efficacy of e-procurement is that of Mahindra and Mahindra. The company was looking for an electronic platform that would seamlessly connect it with its suppliers. Initially, they were using a home-grown portal, which was used for displaying relevant data offline from the company’s back-end SAP R/3 system. Soon the company realised that it needed a better way of collaborating with its suppliers and in 2003 it went ahead and deployed SAP Supplier Relationship Management, which linked 16 purchasing organisations and integrated nine back-end SAP R/3 systems with the SAP Supplier Self-Service (SAP SUS) application.

SAP SUS in return created a portal for end-to-end procurement and the integration with multiple SAP R/3 systems is achieved through the open exchange infrastructure of SAP’s NetWeaver platform. M&M is now using an intuitive portal with single-sign-on, to source its direct materials—components and systems. It plans to extend the scope of the portal to include indirect materials (tools) and services (facility repair and maintenance).

In order to simplify its procurement process, Air India has also automated the process with Oracle’s advanced supply chain management solution. The airline has rolled out a module of Oracle ERP. IBM Global Services was involved as a pre-bidding consultant. The implementation was undertaken by Satyam. The project costed Rs 5 crore and it took 10 months to complete.

Are we there yet

Although e-procurement has been accepted by the large enterprise segment penetration is limited to the manufacturing, automotive and government sectors.

Alok Shende, Director, ICT Practice, Frost and Sullivan says, “It will take two more years for the Indian market to get ready for it and get real value from these solutions. However it’s happening in a big way in the government sector because of the benefits that it confers like transparency, cost-saving and e-tendering. Also, the manufacturing sector is adopting e-procurement in a big way, because it is the largest buyer of finished and semi-finished goods. Still, awareness levels need to be raised and for this education is required.”

Agrees Krishnan, “Of all the e-procurement happening in our country, 20 percent is in the government sector. At least five to seven state governments in India have already gone live and many are in the process of implementing e-procurement solutions. Apart from the government, railways and engineering are also seriously considering e-procurement.”

Says Sivakumar, “Companies are looking at e-procurement as a cost-effective solution but the problem is that they are using these tools in bits and pieces. The time has come for them to realise that deploying a comprehensive e-procurement solution will help them reap greater benefits.”

Early adoption of this technology in the automotive segment has been prompted by the complexities inherent in this business. “The components in an automobile are sourced from across the globe. Hence, it is imperative for the automotive sector to adopt best practices to ensure a responsive supply chain,” says Anurag Srivastava, Vice-president, Consulting Services, Wipro Infotech.

Solutions available

Ariba remains a front runner with wins in Tata Motors, Dabur, ICICI Lombard and SRL Ranbaxy. Tata Motors saved Rs 400 crore thanks to its e-procurement rollout in 2000. Dabur which commenced e-procurement in 2002 has saved about Rs 70 crore.

Jude Magima, Executive VP, Supply Management, Dabur elaborates, “We have benefitted in terms of achieving transparency and cost reduction in a big way. It has helped align procurement with best practices. 65 percent of the total spending moves through e-procurement and overall we have achieved five to seven percent savings.”

Today an organisation has various options to e-enable its procurement process. It can employ external consultants to deploy licenced software, develop the software in-house, get a customised application developed and deployed by an external vendor, and use an Application Service Provider or on-demand model.

Oracle has a solution called iProcurement that provides a Web-based shopping system which allows employees to create, manage, and track their orders while the purchasing department retains central control.

Explains Ajila, “We have an on-demand application service and ASP model. On-demand application services are externally hosted and managed by an organisation. In the case of ASPs, the host company deploys the application for each user and charges the customer a long-term maintenance fee.”

Srivastava recommends that companies deploy the tools such as Dynamic Pricing Engine, an online negotiation tool, using which the buyer and suppliers can negotiate online. Procurement Intranet is a Web-based solution used to automate the procure-to-pay process for indirect procurement. The solution offers the facility to manage content, either by suppliers, buyers or a third party service provider. Cost Modelling Analysis is another tool available in the market.

“The Cost Modelling and Analysis tool encompasses the functions of different tools such as costing, negotiation, knowledge sharing and capture, analysis, forecasting and reporting. As a result this tool effectively explores areas of cost reduction, best costing methods and the ideal manufacturing process,” explains Srivastava.

The future roadmap

Ajila feels that with companies like Godrej, Maruti, Crompton Greaves and UB doing a large part of their purchase online, other companies would also adopt the technology.

Sivakumar remarks, “In the future, e-procurement will be value-driven. It will be looked upon as a consolidated strategic tool that will give high RoI. It is not just about technology, a vendor should also provide category, geographical and industry expertise.”