CHAPTER ONE

Introduction

Supply chain management (SCM), as per the definition and description of the Council of Supply Chain Management Professionals (CSCMP 2010),  is to encompass the management of  the overall planning and controlling of all processes, which are involved in operations management, logistics, information technology, procurement, transportation, conversion and distribution throughout a supply chain. In other words, supply chain management is involved in managing coordination and collaboration between business related partners, which includes suppliers, third-party service providers, intermediaries, and clients. In essence, supply chain management is utilized to integrate managing supply and demand within enterprises in order to satisfy and fulfil the requirements of end users or customers. Supply chain management ensures to focus on streamlining supply side business activities including the flow of products, services and information aiming to maximize the customer value and, in the meantime, achieve competitive advantages in the marketplace (Investopedia 2014). Procurement (CSCMP 2010) is at the upstream end of the supply chain, but this cannot be seen as processes that only happen in the supply side of the supply chain since the supply chain is seen as a single entity. Like any dynamic system each and every component of the supply chain plays a role in keeping the system balanced and running smoothly.

Thus, all components of the supply chain needs to be coordinated to one another so the objective of the system can be accomplished. Supply chain management's main objective is to ensure that the system is going towards the goals being hard or soft in nature. Hard objectives are the goals that can be measured including quality, speed and cost. Soft objective are the ones need complicated analyses to measure them. They are confidence and security. It seems needless to state the complexity of managing the supply chain.

With today´s volatile condition of demand, products short life cycle, proliferation of new products and new brands, products costs skyrocketing and competition increasing among the organizations in all industries, success, development and survival basically depends upon effective utilization of procurement approaches and strategies. In the era of internet and information communication technology, most of the companies enjoy the benefits of online procurement and utilizing it efficiently and effectively; on the other hand, some companies still rely on traditional procurement processes and techniques in spite of the fact that a number of studies have already proved the potentials and advantages of e-procurement. As per the studies by Aberdeen Group (2001), e-procurement helps companies enabling them to decentralize their operational procurement processes and centralize their strategic procurement processes as a consequence of extreme transparency in the supply chain which is definitely provided by e-procurement.

Business to business (B2B) e-commerce has become the central focus of organizations to doing business efficiently and effectively, in which e-procurement is working as a central and main function and has been getting popular since the advent of information technology. It is strongly believed if every transaction is done well and properly using B2B e-commerce, it can contribute an organization to save enormous costs and improve productivity. When it comes to e-procurement, it is the most essential portion of the development in the arena of B2B ecommerce. In addition, e-procurement has the capability to restructure the organization´s purchasing approaches and methods fundamentally. E-procurement is dominating; however, still some companies purchase only their office materials online (Neef 2001).

According to Christopher (2000), companies have been provided with entirely new business models since the internet and intranet first emerged which enables and allow organizations to collaborate externally with their most important suppliers at the same time by internally managing their demand proactively. Apart from internal winners that are the buyers, suppliers can also benefit a great deal and are ready to accept this business model of e-procurement. Suppliers can benefit through increased sales volume by providing e-catalogs, reduce sale costs by redefining the role of their salespersons, and reduce operating costs by minimizing the costs of reworking error prone manual orders, improve demand insight by making better forecasts about buyer´s demand, and last but not least, improve customer relationships by making a team network, being able to reduce overall procurement costs and strengthen their long-term relationships. The main point shall be noted that all these can be achieved through improved and strong information sharing allowed by e-commerce technologies. Thus, sharing volume of real-time and transparent information would be considered a powerful sourcing tool.

Life seems to have a different view with e-procurement that means any employee can access to a user-friendly point, and browse through the online catalogues of the organization´s approved suppliers from the comfort of their desk. Neef (2001) writes in his book that products, parts and items can be identified by models, names or features and the search results prioritize how accurately products match the company´s requirements in addition to providing directly the comparison of the products and items between suppliers and the discount can be calculated right away very easily and simply. A company can find out about availability, delivery lead time, and payments as well as doing the payments electronically. The external B2B processes are obviously improved by e-procurement systems and, therefore, eprocurement is, first, considered to be a matter of strategy and then information technology. E-procurement can not only pave the way for reducing costs associated with purchasing but also it will contribute in bringing manufacturing  and distribution firms closer allowing them to become extended enterprise, in which supply chain moves towards becoming a constant and uninterrupted process which results in extending from buying organization to selling partner suppliers.

In the history of procurement, at one time, traditionally procurement was carried out by visiting a store and then following the procedures for placing an order or by looking through catalogues and making a phone call. The process of procurement traditionally involved manual procedures and in some point, handling procurement transactions went through slower systemic processes (Hawking et al. 2004). The traditional procurement processes are the basis for the introduction of e-procurement to the system in stages advised by scholar of the field. Along with the emergence of internet, companies started turning their procurement activities towards internet since they found out that it would benefit them a great deal if all procurement processes are carried out correctly and properly. According to Shaw and Subramaniam (2002), e- Procurement played a vital role in business to business B2B e-commerce. Online based business to business e-commerce improves integration and inter-organizational coordination leading to cost savings in terms of transactions and great opportunities for competitive sourcing for organizations purchasing products and services. E-procurement is not only a strategic player in the value chain but also is a driver in extending supply chain networks (Hawking & Stein 2004).

Switching to and adopting online based procurement or e-procurement can promise any organization a great deal of benefits and advantages ranging from administrative costs or overheads, quality, and convenient and cost effective purchasing processes to delivery time streamlining the sharing of necessary information, making it easier to keep track of purchasing budgets and incoming deliveries and helping business organizations to save more money. Industries, business organizations and of course governmental organizations and agencies have been constantly showing great interests in adopting e-procurement since researchers and analysts believe that adoption and utilization of online based procurement result in saving costs  and efficiency in purchasing processes. Cost effectiveness, transparency and visibility across all procurement processes, streamlined purchasing procedures, and better internal and external relations are the main drivers for organizations to adopt and implement e-procurement.

1.1 Background

Initially, this would be of importance to understand what procurement, in fact, is.

Procurement can probably be defined in so many different ways; however, every definition might have something in common in general. Procurement is a comprehensive function which involves activities and processes for the purpose of attaining or acquiring products and services. In addition, procurement activities can cover up establishing fundamental requirements, negotiation of contracts, and sourcing activities including market research and supplier evaluation as well as purchasing activities required for the purpose of placing an order and receiving goods and services. The main goal of procurement is to receive the right product or service at the right and predefined time, at the specified location, with the right quality and at the right price carrying out the entire process of purchasing efficiently and effectively (Enporion 2005).

Since the emergence and development of internet in the 1990s, along with increasing global competitive pressure, supply chain management professionals, researchers, academics and organizations have been continually looking for different possible ways and approaches to minimize costs associated with procurement, sourcing and supplies, increase efficiency, and of course to reduce lead time as much as possible. In order to tackle all the above-mentioned challenges to some extent, organizations and firms have strong tendency in utilizing eprocurement strategy in an attempt to their all key business processes linked with procurement (Aberdeen Group 2005).  The process of e-procurement (Podlogar 2006) from the beginning starts, via internet based protocol, facilitated with the function of creating requisition, approving and managing the purchase order, and accounting or financial process. When procurement takes place online, it can reach marketplaces that cannot be reached with traditional procurement systems. Organizations communicate, transact and interact smoothly and faster being enable to speed up the cycle time in order to perform tasks and run projects properly.

When it comes to the definition of e-procurement, e-procurement (Insight 2014) stands for electronic procurement, which means electronic methods and ways of conducting business transactions, including purchasing, customer´s invoice, payments etc. with the development of internet, companies now focus more on advertising and selling their products and services via internet online, which can be reached to millions of customers worldwide very easily and cost effectively.

By taking into account the holistic and tangible advantages, aspects and efficiency of eprocurement, organizations and government sectors in many countries(CIPS) tended to start adoption of e-procurement along with the introduction and development of electronic data interchange (EDI) and it has been increasingly improving and being adopted since internet  and world wide web came into being. EDI did a great job in allowing customers to send orders and receive invoices from the suppliers via secure networks as well as letting them exchange and synchronize files related to products, services, specifications, prices and helpful information concerning the customer and supplier´s trading practices and whereabouts.

 Most of the leading enterprises are (Aberdeen Group 2005) utilizing of e-procurement and are improving the expansion of their e-procurement systems. E-procurement technology and also some other sophisticated technologies in the area of e-procurement and electronic transactions are giving procurement managers and professionals this capability and opportunity to turn into real supply managers. Today the role of procurement is shifting from cost reduction to value creation within the supply chain for the organization.

The development of information technology, in terms of internet, resulted in remarkable changes for enterprise supply chain strategies and practices over the last several years back.  Fraser Johanson and Robert Klassen (2005) states that e-procurement and its core role in supply chain management revolutionized in helping business to business practices and enhancing the flow of information along the supply chain network.

1.2 Objectives

Obviously, e-procurement enables and facilitates business organizations, including nongovernmental and governmental organizations, to source and follow the purchasing processes in a very simplified manner from the comfort of offices sitting at their desks. Furthermore, it is the matter of fact that one of the most essential and significant parts of supply chain management is information communication technology (ICT), which contributed hugely in terms of simplifying business transactions and the flow of information within the supply chain networks.

Everyone might know that the rapidly increasing competition in the marketplace and also constant economic condition changes have been making industries and organizations to  look for and implement new technologies and strategies in order to maintain competitiveness and survive during the time of turbulences in the marketplace. Eaton (2003) believes that any organization which have not adopted and implemented latest technology at the right time would obviously risk losing both customers and suppliers. Economic environment affects the mindset about competitive advantages and also the requirements for costs and overhead reduction business organizations to change their business strategies and way of conducting business operations.

It is strongly believed that e-procurement solutions and implementing the principles of eprocurement can contribute plenty of benefits and advantages to an organization of different size based on their requirements. These benefits and advantages can be achieved if everything, related to e-procurement adoption and implementation, works well according to the expectations and pre-arranged plans. Nevertheless, many challenges, issues, and doubts still stand on the way, some public and private organizations, and companies around the world are showing skepticism whether e-procurement can create value and minimize procurement overheads.

Therefore, the objective of this bachelor thesis report is to elaborate on the importance of eprocurement in today´s rapidly growing technological era by taking into account whether organizations and firms really require adopting and implementing e-procurement systems and solutions. Subsequently, this paper covers and provides with comprehensive and solid information on how e-procurement contributes in creating value to the procurement processes and what advantages and benefits e-procurement can promise an organization when shifting from traditional procurement to e-procurement. Additionally, this thesis aims to describe how e-procurement plays a vital role in reducing costs associated with procurement and purchasing processes through the entire supply chain.

Furthermore, this paper draws the framework of the procurement in the supply chain and shows the implication of electronic technology enabler replaces the paper-based activities so as to see if the implication of electronic procurement has any effect on the system moneywise, in addition to aiming to pinpoint how e-procurement has affected the supply chain in a competitive market environment in general and how it contributes to creating value and reducing procurement overheads in particular  throughout the supply chain networks.

1.3 Problem statements

Simplifying the sourcing and procurement processes in any organization is a question that is asked and raised by any company or scholar within the field of industry and technology.  Scholars and researchers have been working hard to find out any alternative for the purpose of utilizing and achieving the most profit out of purchasing procedures and procurement process. Some companies might not know or have doubt if e-procurement can possibly create value to procurement process or what benefits and achievements can be obtained when adopting and switching from traditional procurement to e-procurement.

Thus, this bachelor thesis aims to answer the following main questions:

1.  What are the reasons for adopting and implementing e-procurement systems?

2.  How does e-procurement reduce costs and create value in the supply chain?

The above questions have been covered and answered based on theoretical research, literatures review and perusal of the different articles, books, and journals from different scholars in order to provide detailed and reliable information.

1.4 Delimitations

This thesis report is elaborating the importance of adopting e-procurement, so the research and studies which were done have theoretical background or basis. Inasmuch as we had no access to the companies and organizations how they conduct and implement e-procurement and what advantages and disadvantages the use of e-procurement has, we preferred to review and study different available literatures and, therefore, this thesis has theoretical foundation. We had keen interests in conducting our research and studies at one of the existing companies to illustrate, analyze, and interpret the real picture of the e- procurement to the readers; however, unfortunately, lack of cooperation from the companies could not allow us to achieve this goal. Therefore, the analysis and information are based on the literature review. Thus, the scope of our studies in this thesis report mainly covers the following areas related to eprocurement:

•      Procurement and its principles

•      segmentation of the supply base

•      e-procurement in supply chain

•      e-procurement forms and life cycle

•      required e-procurement technology 

•      e-procurement adoption and implementation

•      cost reduction and value creation with e-procurement

Supply chain management (SCM) and logistics are broad and comprehensive fields of study since this thesis report mainly focuses on e-procurement, we did not go deep into supply chain management and its different areas. Nonetheless, concise and comprehensive information is given about SCM.

In addition, when it comes to illustration of the precise percentages in cost reductions and Cost Benefits, B2G, B2C and also Revenue Benefits, future studies could definitely reveal more detailed information.

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