4.2. E-Procurement

4.2.1. Introduction

In its broadest sense, e-procurement involves electronic data transfers to support operational, tactical and strategic procurement. E-procurement has therefore been around for much longer than the term itself which first came into usage after the establishment of the internet in the 1990s. From the 1960s until the mid 1990s, e-procurement primarily took the form of electronic data interchange (EDI). Nowadays, e-procurement is often supported by internet technologies and is becoming more prevalent. The historic context is demonstrated in the chart below:

Those involved in the procurement function need to understand the e-procurement concepts and tools to provide input into their development, use, evaluation and refinement as a means of improving procurement efficiency and effectiveness.

Procurement officers and managers can make a contribution to decisions about investments in, and configuration and use of e-procurement tools by:

  • having a general understanding of the various e-procurement applications

  • identifying the procurement processes that are effectively supported by e-procurement

  • understanding the sources of benefit of e-procurement

  • identifying the risks associated with the adoption of e-procurement

  • contributing to the development of e-procurement tools through identifying scope for e-commerce supported process improvement.

4.2.2. E-procurement tools and applications

Some e-procurement tools and applications include:

  • electronic systems to support traditional procurement

  • EDI (electronic data interchange)

  • ERP systems

  • internet as a support or complement to traditional procurement

  • electronic mail (e-mail)

  • web enabled EDI

  • extensible markup language (XML)

  • world wide web (www)

  • internet tools and platforms that replace traditional procurement

Electronic systems to support traditional procurement

These include mainframes and personal computers (PC), Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP).

EDI (Electronic Data Interchange)

EDI is an application whereby electronic messages can be exchanged between computer programs of two separate organizations.  Some features of EDI include:

  • Messages are exchanged in groups, known as batches.

  • Messages can automatically be sent, transmitted and stored between computers without retyping or keying data.

  • EDI has to be implemented by each pair of organizations (sender and receiver) who wish to use it. This means that the implementation costs of EDI are relatively high.

  • EDI is mostly used where the messages exchanged concern such matters as orders, confirmations, transport information and invoicing.

  • EDI traditionally runs on so-called, “Value Added Networks”, which are closed networks (unlike open networks like the Internet).

ERP systems

ERP systems are management information systems that integrate and automate many of the business practices associated with the operations of a company or organization. ERP systems typically handle the manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting for a company or organization. ERPs aid in the control of many business activities, like sales, delivery, billing, production, procurement, inventory management, and human resources management.

Internet as a support or complement to traditional procurement

There are various types of internet based applications that serve different purposes. Some well-known applications that use the internet are described below:

Electronic mail (e-mail)

Email is an Internet based application through which electronic messages are exchanged between people.

Web enabled EDI

web enabled Edi is like traditional EDI (see above), but run on the Internet; also known as EDI-INT.

Extensible Markup Language (XML)

XML is used to allow for the easy interchange of documents on the World Wide Web.

World Wide Web (WWW)

The WWW is a major service on the Internet. The World Wide Web is made up of "Web servers" that store and disseminate "Web pages," which are "rich" documents that contain text, graphics, animations and videos to anyone with an Internet connection.

The figure below illustrates the categories of electronic communication exchange between people and computers.  

Internet tools and platforms that replace traditional procurement

Some internet tools and platforms that replace traditional procurement include:

  • E-sourcing

  • E-tendering

  • E- auctioning

  • E-ordering and web-based ERP

  • E-information

E-sourcing

E-sourcing supports the specification phase; it can be used to pre-qualify suppliers and also identifies suppliers that can be used in the selection phase. For suppliers the benefit is: “marketing” and for the buying organizations the benefit is facilitating the sourcing of suppliers. The UN Global Market Place (UNGM www.ungm.org) is an example of an E-sourcing tool.

E-tendering

E-tendering supports the selection stage and acts as a communication platform between the procuring organization and suppliers. It covers the complete tendering process from REOI via ITB/RFP to contracting, usually including support for the analysis and assessment activities; it does not include closing the deal with a supplier but facilitates a large part of the tactical procurement process. It results in equal treatment of suppliers; transparent selection process; reduction in (legal) errors; clear audit trial; more efficiency in the tactical procurement process and improved time management of tendering procedures. Some UN organizations such as UNDP-IAPSO and UNHCR have used E-tendering in the formulation of long-term agreements for vehicles, tents, motorcycles and pharmaceuticals through an in-house developed tendering portal.

E-auctioning

E-auctioning supports the contract stage. It enables the closing of a deal with a supplier if parties agree on price. They operate with an upward or downward price mechanism e.g. e-auctioning with upward price mechanism for the selling organization and e-reverse auctioning with a downward price mechanism for the buying organization. They can be made in accordance with traditional ITB/RFP. They are internet based using open or closed systems.

E-ordering and web-based ERP

E-ordering and web-based ERP is the process of creating and approving procurement requisitions, placing purchase orders, as well as receiving goods and services ordered, by using software systems based on the Internet.

System

Usually used…

E-ordering

  • For indirect (facility) goods and services.

  • By all employees of an organization.

  • For ad-hoc ordering.

Web-based ERP

  • For direct (product related) goods and services.

  • By a procurement department.

  • For planned ordering.

E-informing

E-informing is not directly associated with a stage in the procurement process; it is the process of gathering and distributing procurement information both from and to internal and external parties using Internet technology.

4.2.3. E-procurement in the procurement cycle

The figure below shows the six forms of e-procurement plotted in the procurement process

Each of these forms can be explained as follows:

  • E-sourcing supports the specification phase; it identifies suppliers that can be used in the selection phase.

  • E-tendering supports the selection phase; it facilitates the REOI and ITB/RFP activities, usually including support for the analysis and assessment activities.

  • E-reverse auctioning supports the contract phase; it enables closing a deal with a supplier;

  • E-ordering and web-based ERP is the process of creating and approving procurement requisitions, placing purchase orders, as well as receiving goods and services ordered, by using a software system based on the Internet.

  • E-informing is not directly associated with a phase in the procurement process; it is the process of gathering and distributing procurement information both from and to internal and external parties using Internet technology.

4.2.4. E-procurement strategy – costs, benefits and risks

Business cases aimed at adopting or enhancing e-procurement tools are often prepared by information technology and/or finance specialists. However, some of the most successful e-procurement implementations have been driven by those who best understand the procurement processes and outcomes to be achieved. Because of their understanding and proximity to procurement processes, those involved in the procurement function have a key role to play in identifying and assessing the costs and benefits of e-procurement tools and in providing input into how existing tools may be enhanced.

The following costs and benefits as identified by de Boer, Harink et al. (2002), can be influenced by e-procurement:

  • The cost of expenditure on goods/services related directly to the production/service delivery.

  • The cost of non-production of goods and services.

  • The cost of operational procurement activities – e.g., requisitioning, ordering, expediting and administrative support.

  • The cost of tactical procurement activities – e.g., formulating specifications, selecting suppliers, negotiating with suppliers, contracting, disposals etc.

  • The costs of strategic procurement activities – e.g., spend analysis, transaction analysis, market analysis, planning, developing procurement policies etc.

  • Internal benefits arising from investments in particular inter-organizational relationships.

  • The contribution of investments in particular inter-organizational relationships to revenues.

These costs and benefits should be assessed in relation to each e-procurement tool. While it is usually assumed that e-procurement will automatically deliver benefits, the actual benefits will depend on many factors including: cost of required investment, ability to convert associated savings to cash, nature of the procurement process being automated, particular supply market and the extent to which the organization supports its implementation.

Benefits

Particular benefits of e-procurement in the public sector are thought to include greater transparency in procurement through electronic publishing of tender notices and contract awards. This in turn is likely to enhance accountability and reduce the instances of corruption.

When developing a business case for adopting or enhancing an e-procurement tool, it is important to assess the baseline benefits and costs associated with the process or processes to be automated in order to understand the probable outcomes of e-procurement adoption or enhancement. In essence, it is important to understand what will change and how it will change when an e-procurement tool is implemented.

Risks

The implementation of e-procurement tools carries certain risks. One of the primary risks is missing opportunities to implement strategies that improve procurement management without the need for investment in e-procurement. This is because many of the benefits ascribed to e-procurement may be achieved simply by improving procurement practice. For example, it is often said that e-procurement reduces “maverick buying”. However, other measures, including the implementation of corporate buying strategies that offer value for money, do not need electronic tools.

Another risk is over-investment in e-procurement tools that do not deliver the expected benefits. This risk arises when there has been inadequate evaluation of the implications of the adoption or enhancement of e-procurement tools. The risk that users will not accept an e-procurement tool is another common risk. This risk often arises where users have not been adequately consulted about the adoption or enhancement of particular tools.

On the supply side, there is a risk that suppliers will not cooperate with the use of e-procurement tools. For example, some suppliers are sufficiently powerful to insist on the use of paper-based systems. Others may not have access to affordable internet based technology that would give them access to the e-procurement tools of purchasers. In markets that are already competitive with low profit margins, suppliers may choose not to participate in e-reverse auctions.

Normal methods of risk assessment and management (see Unit 4.1 Risk Management) should be applied during the development of business cases for e-procurement development or enhancement.

4.2.5. Legal aspects of e-procurement

The accepted legal framework guiding e-procurement is the UNCITRAL Model Law on Electronic Commerce which states:

“In the context of contract formation, unless otherwise agreed by the parties, an offer and the acceptance of an offer may be expressed by means of data messages.”

“Where a data message is used in the formation of a contract, that contract should not be denied validity or enforceability on the sole ground that a data message was used for that purpose.”

Good practice in the UN system adopts this approach, for example, the UN revised FRR take into account the feasibility of electronic contracting. As per UN Financial Rule 105.18 (b) which states:

“The requirement for written procurement contracts shall not be interpreted to restrict the use of any electronic means of data interchange. Before any electronic means of data interchange is used, the Under-Secretary General for Management shall ensure that the electronic data interchange system is capable of ensuring authentication and confidentiality of the information”.

In the UN Secretariat, this authority has been delegated to the UN controller, who determines whether in a particular case, electronic contracting may be possible, for example by an electronic exchange of information without the need to issue a traditional purchase order. Electronic contracting may only be agreed with a supplier in specific cases where prior written authorisation has been obtained.

In adopting or adapting any e-procurement systems, the practical issues around these legal aspects need to be taken into consideration during the planning and implementation stages.