eProcurement – 5 factors for winning in purchasing

Indirect procurement is often given only low priority. But it is precisely the unfavorable relationship between price and process costs that actually forces us to exploit all available savings potential here. And there are several of these along the process chain.

In Germany in particular, small and medium-sized enterprises are a mainstay of the economy. Even apart from the “hidden champions” who successfully hold their own against large corporations on the world market, many small and medium-sized companies have fought their way to a sustainable position with good ideas and extensive know-how. This also includes knowing suppliers and primary products precisely in order to achieve the best possible results in terms of quality and price.

However, while the strategic focus is on A and, if necessary, B parts, indirect requirements are often given only secondary priority. C-parts or even services are usually classified as neither strategically nor cost-wise relevant, but on closer inspection this can quickly prove to be a mistake.

Process costs – the expenditure multiplier

At first glance, it is of course more relevant for a metalworking company to negotiate good prices for the steel it purchases than to optimize the prices for hand soap, printer paper or lubricating greases, which only account for a fraction of the total purchasing volume. However, if you only look at the purchase price, you only see a portion of the costs incurred throughout the procurement process.

These costs do not scale with the purchase price, but with the manual effort. If you compare the purchase of several tons of steel for thousands of euros with the procurement of notepads, ballpoint pens and envelopes, in the worst case the latter is even more time-consuming and therefore more costly. In general, it is assumed for C-parts that only 20 percent of the costs are attributable to the purchase price, but 80 percent to the costs of the procurement process.

In other words, the costs for a manual ordering process are so high that ten erasers for 20 cents each then cost the company not two, but quickly a low three-digit amount. Across the entire range of C-parts, this adds up to a hefty sum each year – which in the end can help determine whether a company can survive the increasingly fierce price war and still remain profitable. It is therefore particularly worthwhile to take a close look at process costs in the area of indirect requirements.

Complex processes – high costs

The procurement process is roughly divided into five steps:

1. Requisition
2. Supplier selection
3. Purchase order
4. Goods receipt
5. Invoice verification

In a company that has not yet digitized its procurement process, the specialist department makes a request to the purchasing department. This department uses catalogs or lists to determine the possible suppliers, draws up an order, which often still has to be checked and approved, and then triggers the order. When the ordered products arrive at the goods receiving department, the actual recipient must be located there, and the associated invoice is checked and transferred. This extensive need for coordination and communication leads to a large amount of time spent in the departments involved and to correspondingly high process costs.

In prospering companies, purchasing departments reach capacity limits with increasing order processes. Strategic tasks have to be neglected – which in turn has a negative impact on procurement efficiency. But what is the alternative?

Efficiency through digitization

With an eProcurement system, the individual process steps can be significantly simplified, thus saving costs. This already starts with the order: Using online catalogs, the specialist department can generate the order and the purchase order independently, so that the purchasing department is relieved of this part of the tasks. And this self-service is usually much more effective for the purchaser as well. Individual approval processes can be carried out paperlessly via the application and thus accelerated.

However, digitization does not mean mapping the conventional manual processes 1:1 in IT – it also enables completely different processes. Unlike the traditional process, in which what is to be purchased and where is not checked until shortly before the order is placed, with eProcurement it is already determined when the system is set up which products are to be included in the online catalog, which suppliers are available and, under certain circumstances, which products or product groups a specialist department or individual user is allowed to access at all. In this way, requirements can be bundled onto defined system partners, resulting in higher volumes there, which in turn lead to better purchasing conditions.

This pre-selection of products and suppliers, combined with clearly defined authorizations, reduces the effort required to check an order to a minimum. It is even possible to automatically release order placement within certain limits, or to trigger ordering processes based on specifications if, for example, specified stock quantity thresholds are not met. This ensures that demand is met quickly and reliably and that there are no disruptions to operations because an order was placed too late.

Post goods receipt and invoice

However, end-to-end electronic processing does not end when the order is triggered. When the goods are delivered, the recipient can be quickly identified at goods receipt via the digital assignment of orders and informed directly – whether within the eProcurement system or via other digital channels, for example by message in Microsoft Teams or simply by SMS. Once again, this offers the opportunity to automate processes in order to reduce manual effort and speed up processing.

The transfer of all relevant data relating to the order – from the customer to the actual order to delivery data and the electronic invoice – to the enterprise resource planning system creates a further efficiency gain. If the ERP system, for example SAP, proALPHA or Infor, is supplied with all the necessary information from the eProcurement system via an interface, the time and effort required for checks and processing is also reduced in the accounting department.

At the same time, this creates the basis for taking the coverage of indirect requirements into account in the strategic management of the company. This is because current, reliable data on consumption, source of supply and order volume are now available, which can serve as a basis for management decisions.

Investment pays off

When it comes to naming the concrete advantages for digitizing indirect procurement, these are first and foremost cost and time benefits through more efficient processes. In addition, however, the strategic starting position of the company is also improved – both in the purchasing department itself and in management.

The fact that digitization of procurement is worthwhile can be demonstrated by companies on the basis of savings potential calculations. Between 4 to 12 parameters are usually used for these calculations. Here are the 4 most important parameters for these calculations (example from Simple System):

1. Annual purchasing volume
2. Number of annual orders
3. Agreed cash discounts
4. Rate of cash discount utilization

The process costs for a non-digital purchasing process vary greatly depending on the company, industry and degree of digitization. According to various sources (Gerberich Consulting / Leipzig University of Applied Sciences, HTWK Leipzig for short), they are generally between 95 euros and 160 euros. At simple system, we base our calculations on a value of 120 euros per order. On this basis, the savings potential is shown in euros and usually also as a percentage.

Thus, in the first step, one gets a better feeling of how high the savings potential is in the company. It should be noted that the strategic advantages gained are not yet taken into account in this calculation.

Christian Obeser

Effiziente Beschaffung neu gedacht: Vom ROI zum ROP (Return on Procurement) lautet das Motto von Christian Obeser. Als Head of Product Management von simple system unterstützt er Unternehmen bei der Digitalisierung ihrer Supply-Chain-Prozesse. Christian Obeser verfügt über 20 Jahre Berufserfahrung im Bereich E-Business und Beratung zur Prozessoptimierung in der indirekten Beschaffung.