That includes the actual cost of the goods and services, the internal operational costs of obtaining them, and the costs that occur when there is a delay in delivery, less than expected quality, or when any form of liability is passed from a supplier to the organisation.
Though easily stated, meeting this objective is really quite a challenge when you consider the wide range of goods and services your organisation purchases over the course of a year, and when you consider the range of people throughout your organisation and supplier base who are involved.
But it’s a challenge well worth attacking because the return is so great. Many organisations in all types of businesses as well as the Public Sector have successfully addressed this challenge with amazing results.
How to create savings
Every organisation in the world has opportunities to create savings by reducing these costs. The savings are created through:
- Prevention of unnecessary purchases
- Better matching of what is purchased to actual needs
- Lower prices for what is purchased
- Reduced administrative costs for buying and payment processes
- Reduced occurrences of erroneous payments, late charges or lost early payment discounts
- Reduced occurrences of supply disruptions and supplier problems that create unnecessary operational costs
This combination of savings can only be obtained on a predictable basis for purchases meeting the following criteria:
- Made with proper purchase authorisation
- Made with suppliers that were properly sourced and managed
- Paid with correct pricing and terms
- Processed quickly and efficiently organisation-wide
In addition, for proper financial management, those purchases should be:
- Clearly visible to both operational and financial management
- Properly coded for both financial allocation and purchase category
Purchases meeting all of these criteria can be considered ‘Spend Under Management’ – i.e. spend that has been made within the organisation’s Spend Control framework and therefore spend that captures maximum savings.
Business processes involved
There are two important business processes that must operate together to achieve truly effective Spend Control:
Think of these two processes as the ‘ying & yang’ of Spend Control. The Source-to-Contract process creates savings opportunities by finding good suppliers and establishing advantageous agreements against which the organisation can then buy. Functions within this business process include sourcing, supplier management, contract management and supplier catalogue management. This process is performed by procurement professionals and cross-functional category teams working collaboratively with stakeholders across
the organisation to match goods and services sources of supply to the needs of the business.
The Purchase-to-Pay process captures actual savings by leading employees to place purchases for what they need using those advantageous supplier agreements. Purchases are therefore made at lower prices and with suppliers that present less risk. Ideally, employees still have the opportunity to shop for the best fit to their needs, but always with priority given to established suppliers and agreements. Functions within this business process include purchase request, authorisation, invoice processing and payment authorisation.
Spend Control involves a high percentage of people across your organisation, as well as a number of people outside your organisation. This includes:
- Procurement professionals and category teams
- Accounts Payable (AP) personnel
- Every manager that has responsibility for a budget
- Every employee that needs to buy goods or contract for services in order to do their jobs
- Your suppliers; both large and small
Procurement and AP personnel will use various aspects of the eProcurement system on a daily basis.
Operational managers will use the eProcurement system to view purchase requests against budgets and cost pipelines, and to approve or reject requests.
Employees from across the organisation will interact with the eProcurement system to request or directly buy the things they need to do their jobs. Some will use the system frequently; others only occasionally.
Suppliers will interact directly with your eProcurement system through a web-based supplier portal. As with employees, some will do so frequently, but most will do so only occasionally.
The main building blocks of an eProcurement system are:
- Information management and access
- Workflow and business rules
- Guided processes
- Secure web access – both inside and outside your IT firewall
Information management and access
An eProcurement system to support Spend Control business processes is built around management of, and access to, base information. Most of that information is probably not currently held in your ERP system, such as the details about supplier qualifications, supplier contracts, RFx documents and related supplier responses, and supplier catalogues. Transactions involve details of purchase requests, purchase orders and invoices – mainly during the time before they are recorded within ERP. Basic information like supplier IDs and G/L account codes are shared between ERP and eProcurement, but most of the information in eProcurement is additive.
Workflow and business rules
Unlike your core business systems that are focused on maintaining base information and recording the fact that something happened, eProcurement processes are much more about facilitating the flow of activity among employees, managers, Procurement professionals, Accounts Payable personnel and suppliers. For that reason, most of eProcurement is based on automated workflow that uses various user-defined business rules like approval thresholds and routings; and on generation of alerts for time-based activities like contract reviews. Highly flexible, easy to configure workflows and business rules are very important in eProcurement.
Because employee adoption of an organisation’s eProcurement system is so important to the Spend Control process, and because many employees will be ‘non-expert’ users that interact with the system only occasionally, it is very important that the functions they use are extremely intuitive, fast and easy. They can’t rely on in-depth training classes and they can’t take much time away from the employee’s actual job. The system must efficiently and correctly ‘guide’ employees through processes such as self-service buying (e.g. selecting items in a shopping cart), requests for expert assistance (e.g. help with buying a new laptop computer), simple supplier quote requests (e.g. selecting temporary employee services), or detail RFx requirement definitions (e.g. for a capital equipment purchase or IT service contract).
In Part 2, we’ll explore more, including the keys to success, how eProcurement impact your financial/ERP system and how to avoid getting tangled up in a long, expensive project.