Electronic Data Interchange Essay
Businesses are increasingly seeing a growing importance of the upstream side of their supply chains. According to several statistics material spend is almost 70% of a company’s revenue which increases the importance of a business’ purchasing and procurement department. Further, with the increasing trend in outsourcing, the importance of efficient and effective procurement has become unprecedented. E-procurement has become the buzzword for such efficiency in procurement which is, to be simply defined, buying and selling goods of goods and services between businesses .
E-procurement can take several forms ranging from online catalogues, and online marketplaces, to highly sophisticated softwares utilizing Electronic Data Interchange. Such online interaction with the suppliers makes it easy to negotiate with the suppliers and helps the firms achieve the lowest possible price for their supplies. While the company saves an enormous amount of money on material spend, it also saves money on labor costs as e-procurement softwares automates the procurement cycle. There are different categories of e-procurement.
The major types include: • Web-based Enterprise Resource Planning (ERP) which involves purchasing using web technology. ERP softwares establishes communication between various different business operations. ERP helps automates a variety of business processes and by increasing visibility throughout the organization, enables
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Instead, an ERP package integrates several different functions of a business and ties them together. • E-sourcing – This type involves looking for suppliers and identifying the ones that offer the highest value. It solicits suppliers to register on the e-procurement website and electronically integrates the chosen suppliers with the company’s network. E-sourcing needs to be done very carefully as the locations and certain other aspects of the supplier would have a great impact on a company’s cost structure, quality of products which in turn impacts a company’s bottom line.
• E-tendering – is basically the second step after purchase requisition in a traditional procurement cycle. This deals with sending out Request for Quotes/Prices and/or certain other information such as brochures or catalogues out to potential suppliers and receiving their responses over the internet. Michael Lamoureux who has spent almost six years working on supply chain and sourcing applications defines e-procurement as an electronic implementation of the whole procurement cycle starting with the purchase requisition and ending with the payment for the purchased goods and services.
He claims that e-procurement not only automates the non strategic transactional activities and saves time, but also increases the visibility of purchases taking place within the organization which in turn makes it easier to manage them. When deciding to implement an e-procurement solution, there are three types of solutions that can be adopted: 1. Supplier-centric solutions – This type of solution is operated and managed by the suppliers themselves. It is the cheapest for a buying company to implement; however, it greatly constrains the choice and variety available for the buyer to that supplier.
Further, it puts the buying company at a disadvantage because the bargaining power is held by the supplier as it is the supplier who owns and controls the procurement process in this type of a solution. Inherently, the supplier performance reports are also likely to be biased and unreliable. Apart from that, essential business information of legal value, would be stored on the supplier’s computers. 2. Buyer-centric solutions – This solution is embedded in the purchasing infrastructure of the buying company and is created and controlled by the buyer.
While this solution extends great control over the procurement cycle to the buyer, it is the most expensive for the buyer to install and would require the buying company to commit significant amount of resources to manage such a solution. Nevertheless, such a solution is the most preferred for a purchasing company that does significant amount of purchasing to justify such an investment, according Deepak Shikarpur, executive director at the computer society of India. Further, it prevents essential and sensitive business information from getting out of the company’s secure systems.
This solution also provides a more reliable performance reporting analysis of suppliers as well as the management. A major pitfall of this type of solution is that it often fails to attract an adequate number of major suppliers as suppliers see themselves at loss in such a situation. Suppliers see it as a way for purchasing companies to cut their costs by taking away profit margins of the suppliers. 3. Third-party solutions – In this case, the company outsources the procurement function to a third party with a competitive advantage owing to their huge buyer and supplier base.
Under this solution, a third party acts as an intermediary between buyers and sellers and works to protect the interest of both the buyers and the sellers. This solution is the most apt to provide group purchasing discounts. The drawbacks of such a solution are that the possibility of developing long term supplier relationships are eliminated or greatly reduced. Also, the security concerns over sensitive buyer information being stored away from the company’s computers remain and may pose a threat. This solution is most appropriate for standard low value items for which a large number of suppliers are available.