Part 1 of a 3-Part Series:
Why Shifting to eProcurement Makes Sense
By: Wanda L. McArn
Senior Manager, Grainger Consulting Services
Looking for ways to reduce operating costs? Need better tracking and data about your overall purchasing habits? Maybe it’s time to consider shifting to an eProcurement platform for purchasing. Digital purchasing solutions continue to gain acceptance, especially among companies who want to use data to inform strategic decisions on MRO (maintenance, repair and operations) purchasing, or buying indirect materials, which includes everything from spare parts, industrial supplies and cleaning supplies to office supplies and business services.
The findings in a UPS study on industrial buying dynamics found 66% of the MRO buyers in their study purchased through distributor websites. Among that group, 53% spent more than half their budgets via digital channels.1 Industry estimates also suggest that in the next 4 years, 40% of MRO business will be transacted online confirming more customers are making the shift to e-commerce including mobile purchasing. Therefore, it is imperative that supply chain and operations professionals collaborate to get ahead of the trend and explore eProcurement options including mobile capability to drive costs out of their organizations.
In addition to transacting on supplier websites, companies are investing in purchasing platforms like SAP, Oracle, and Ariba to achieve:2
- Streamlined procurement processes
- Lower transaction costs by eliminating manual, paper-based procurement
- Elimination of multiple and redundant systems
- Greater compliance with suppliers and contracts to increase consolidation and drive product standardization
B2B eProcurement, the business-to-business purchase and sale of supplies and services over the Internet, provides a complete solution to automate sourcing and procurement functions. eProcurement transaction components include:
- Search and shopping experience
- Requisition and approval process
- Order submission
- Order acknowledgment/confirmation
- Invoice transmission
- Invoice payment
Robust eProcurement solutions allow companies to shop and order electronically with their suppliers through their internal purchasing system. These systems can be B2B Marketplace software (Ariba, SciQuest, Coupa) or ERPs (Oracle, SAP, JD Edwards).
Once customers invest in their own eProcurement software solution and partner with suppliers to integrate their purchasing, significant savings can be achieved once deployed across the organization.
The benefits of e-commerce integration to an organization include:
- Reducing or completely eliminating paper-based processes
- Supplier consolidation to drive contract compliance
- Increased visibility and control across the entire procure-to-pay process
- Ability to analyze spend at both the category and item level
The ROI on any e-commerce platform is directly proportionate to the number of employees using the solution and quantity of transactions placed with preferred or contracted suppliers. As companies invest in mobile technology to accommodate their staff working throughout their facilities, there is a greater need to provide easy access to these purchasing systems including mobile options to realize the anticipated ROI.
Based on studies by Grainger Consulting Services, organizations can see significant cost savings from integrating with suppliers through their eProcurement systems. Our studies show the average cost of an MRO purchase order is $75 and this cost can be reduced by as much as 50% through process automation.
In addition to Grainger Consulting Service’s findings, The Aberdeen Group found the average requisition to order cost prior to using an eProcurement system was $63.20 and dropped to $32.28 after a digital solution was implemented. The study also found that on average, companies spend $20.30 for each paperbased invoice, while that same invoice dropped to $12.60 in electronic format.2 These figures are supported by studies conducted by Global Healthcare Exchange (GHX), Deloitte and Oracle who estimate savings of 10-80% depending on which portion of the procure-to-pay process are automated.
Calculating the ROI of eProcurement
Below is an example of the estimated yearly costs of manual, paper-based transactions. For our purposes, a transaction is the entire cycle of product research and selection, approvals, ordering, receiving products and invoices. Costs are associated with employee time spent locating the desired product, verifying and comparing prices, confirming product specs, selecting a vendor, establishing terms, receiving the products and paying the invoices. Let’s assume a customer has 6000 transactions annually:
Cost of Manual Transaction
By fully leveraging their ePro system including supplier websites to automate the procure-to-pay process, we have seen the costs for those transactions drop to ~ $37.50.
Cost of Automated Transaction
In this example, the estimated annual transaction cost savings of $225,000 are realized by decreased shopping and order entry time, reduced mailing costs, elimination of paper invoices and reduced errors and rework. Considering the large number of low dollar transactions associated with indirect materials, there is a tremendous opportunity for cost reduction.
Companies will also gain visibility into their spending habits and determine ways to improve purchasing. Most importantly, they will gain time - time they can put back into managing their business, completing more work orders and potentially reallocating resources to work on other tasks beneficial to the business.
Next Up: Part 2 Understanding the eProcurement Cycle details the different phases of the procurement cycle. Having a full understanding of your own procurement cycle is an important step toward evaluating the best possible eprocurement solution based on your company’s unique purchasing process.
1, 2. UPS Industrial Buying Dynamics Study-Evolution of the distributor value proposition, June 2015
3. Aberdeen Group “Best Practices in E-Procurement: Reducing Costs in Increasing Value through Online Value”, December 2005
Wanda L. McArn is a Senior Manager with Grainger Consulting Services and has held a number of positions during her ten years on the team. She leads a team of Consulting Managers focused on the healthcare segment. She has a Bachelor of Science Degree in Industrial Relations with a Minor in Economics from the University of North Carolina at Chapel Hill. In addition, she is certified in Lean Six Sigma, Talent Management & Succession Planning; is a member of the Association of Healthcare Executives and member of the National Sales Network.