eProcurement

Andreas Meier & Luis Terán

Information Systems Research Group

University of Fribourg

Second International Seminar on eDemocracy and eGovernment. Quito - Ecuador

 Learning Targets

!
!
• How can eProcurement be characterized?

• How does the Seller-Side procurement model looks like?

• What are important components of the Buyer-Side
procurement model?

• Which are the pros and cons of the procurement model
Marketplace?

• What are important functions of Desktop Purchasing?

• How should the public offering process be implemented?

• How could we profit from inverse auctions?
 Definition of eProcurement

• eProcurement is more than ePurchasing

• eProcurement → web-based procurement process

• eProcurement includes

- Search for suppliers

- Contract formulation

- Maintenance of supplier relations

- Operational purchasing task

- After sales services
 Internet-based Procurement Process

• Stages of eProcurement:

Strategic Tactical Operative

Procurement Procurement
SpecificationSpecification
Specification
Procurement
Specification

After Sales
Specification Selection Contract Order Control
Service

• Conditions • Procurement • Qualities • Order • Delivery • Support

• Standards model • Prices • Payment • Quality • Information
• Suppliers • Dates
• Conditions
 Internet-based Procurement Process

• Potentials of Public Offering (Public procurement contracts):

- Acceleration of processes → use of ICT

- Reduction of costs → dynamic pricing mechanisms (e.g. using
inverse auctions)

- Quality improvement → desktop purchasing systems

- Increasing transparency → controlling functions

- Security → Digital signatures, PKI (public key infrastructure)
familiarize himself with different software solutions and navigational aids. Some
suppliers with sell-side solutions provide extensive functions for personalization,
for product configuration, or for compatibility testing. Thus the buyers can es-
tablish rules for the individual customer in the procurement process.
Overview of eProcurement Solutions

Sell-Side Market Model

Buyer A
Supplier e.g., shop systems like
[Link] or
Buyer B [Link]

Buyer A Buy-Side Market Model

Supplier e.g., bulletin board or

desktop purchasing systems
like [Link]
Buyer B

Third-party Market Place

Buyer A Provider Supplier 1
e.g., advertising platforms and
auction platforms like
[Link]
Buyer B Supplier 2

Fig. 3.3: Three fundamental market models for eProcurement

 Component of a Procurement Model

• Electronic catalog of products & services

• Definition of user profiles

• Content management system

- Content

- Search engines

- Basket

- ePayment

- Reports

• Interface to ERP systems → stock, availability or customized
prices.
 Seller-side Procurement Model

Buyers Procurement Transactions Seller

User Management System

Catalog
Reporting

Software Services

User Management

Content Management

Catalog Management

Support Order Process

Transmission Services

Reporting

Software services in the electronic procurement (Seller-Side) by Schubert

 One problem area is the integration of the procurement process into the
buyer’s information system. A possible solution to this, as offered by Dell USA for
its large customers, is the cXML standard
Pros &(XML
Consspecification
of Sell-Sidefor catalog formats,
Solution
see Sect. 3.4). Electronic orders can be sent over the Internet using cXML. The
otherwise open cycle is thus closed.

Advantages Disadvantages

• Configuration of complex products possible • No possibility of automatic product

• No capital outlays for an ordering system comparisons
• Operating costs for maintenance of current • Limited support of the procurement process
product lists and prices do not apply with the buyer
• Short delivery times through direct input of the • Consumer or requesting customer must use a
order into the supplier’s system different information system for each provider
• Can query current availability and prices • Limited integration of the procurement process
into the operational information systems of the
customer

Fig. 3.5: Advantages and disadvantages of sell-side solutions

 Buyer-side Procurement Model

Buyer Procurement Transactions Seller

Catalog
Content Management

Software Services

User Management

Building Shipping Catalog

Support Order Process

Transmission Services

Reporting

Software services in the electronic procurement (Buyer-Side) by Schubert

 “ebusiness” — 2009/2/26 — 17:57 — page 58 — #66

Pros & Cons of Buy-Side Solution

58 3 eProcurement

Advantages Disadvantages

• Procurement process can be organized in a • Complex products are not usually supported
company-specific manner • Advertisements are not planned
• Internal authorization and licensing • Capital outlays for information systems are
procedures are well supported with the procuring company
• Process turn around times can be reduced • Operating costs for content management are
• Stocks can be kept small to be supplied
• Central administration produced by negotiated • Not all suppliers have an electronic product
products catalog
• Elimination of maverick shopping • Suppliers sometimes provide poor-quality
• Consumer/solicitor can operate system product data
themselves • Coordination of the exchange format must be
• System with uniform menu prompting achieved by the procurer and supplier

Fig. 3.7: Advantages and disadvantages of buy-side solutions

consumer can deposit his purchase order request over the intranet, the cost center
 Marketplace Procurement Model

• Operated by an intermediary (infomediary or information

broker)

• Infomediary → responsible for multi-supplier catalog and for
catalog integration

• Offers product descriptions and comparisons

• Reduces the search expenditures of market participants

• Infomediary carries out the business transactions while
preserving anonymity
 Marketplace Procurement Model

Infomediary Seller
Buyers Procurement Transactions Procurement Transactions Sellers

User Administration
Catalog
Reporting Content Management

Software Services

Comparison of Tenders

User Management

Building Shipping Catalog

Support Order Process

Transmission Services

Reporting

Software services in the electronic procurement (Marketplace Procurement)

 “ebusiness” — 2009/2/26 — 17:57 — page 60 — #68
Pros & Cons of Market Place Solution

60 3 eProcurement

Advantages Disadvantages

• Reduction of search time • Lacking integration into the ERP systems of

• Representation of current and detailed market the procuring company
offerings • Intermediaries usually cover only a narrow
• Efficient transactions product range in sufficient depth
• Comparability of different offers • Frequently a large company can negotiate
• Anonymous procurement opportunity directly with the provider/manufacturer for
• Bundling of supply and demand in order to better prices
achieve better conditions • Classified directories are frequently not
upto-date

Fig. 3.9: Advantages and disadvantages of marketplaces

quality and liquidity with sufficient specialization. This also explains the greater
overall success of vertically organized intermediaries compared to horizontally
established platform operators.
 Catalog Management

• A catalog lists eProducts and eServices

• Detailed information about functions, quality, and prices can be
obtained

• Catalog Management offers services for maintaing the catalog

• Classification criteria help to search and select products and
services

• Very often a multi-supplier catalog (multi-sourcing product
catalog or MSPC) is necessary
 Catalog Integration

• The product catalog is the core of all eProcurement market

solutions (Sell-Side, Buy-Side, Marketplace)

• Suppliers, intermediaries and purchaser have different
requirements

• different contracting parties have negotiated different prices

• eventually, purchasers have different quality requirements (e.g.
governmental institutions, local public offices, citizens)

• A meta structure is needed to merge different catalogs
 possibly have different requirements regarding the catalog, the degree of detail,
and the prices.
Different catalogs can be brought together if they have a uniform meta-
structure. This facilitates hierarchical searches through product hierarchies and
Standard
enables Product and Service Code SPSC
different providers.
One metastructure that is suitable for a horizontal marketplace and covers SP
both products and services is the Standard Product and Service Code (SPSC)
from Dun & Bradstreet (also see the current development of the United Nations
standards derived from the SPSC on the web site [Link]
The SPSC is a classification scheme which leads to a well-defined classification of
• The marketplace eProcurment solution asks for integrating
goods and services. It was first published in 1996, and is now used by American
Express, Mastercard and Visa, among others.
different catalogs

The SPSC is a hierarchical set of numbers involving five standard classification Hi
levels. Each classification number consists of ten digits which, if required, can str
• A meta structure to merge
be supplemented by different
an additionalcatalogs
two digits. is SPSC
These
are divided into
ten digits SP

• It is derived from the service code of ‘Dun & Bradstreet’

three-, four-, six-, eight-, and ten-digit groups which gradually specify the item
in question. Figure 3.10 shows an example of the use of SPSC numbers.

SPSC Number Description

511 Paper and office supplies

5112 ... Office supplies

5112 04 ... Computer and copier supplies

5112 04 05 ... Printing supplies

5112 04 05 01 ... Toner cartridges

Fig. 3.10: Example showing some Standard Product and Service Code (SPSC)
numbers
 Exchanging Product Information

• XML-based (eXtensible Markup Language) document formats

are necessary for exchanging information about products and
services

• In Europe, the BMEcat standard (German Bundesamt für
Materialwirtschaft & Einkauf) is heavily used

• The exchange formats offers the integration of pictures,
graphics, technical descriptions, video recordings besides
formatted data (article number, short description, price and
others)
product data Logistik (BME). The catalog documents allow for the integration of multime-
dia product data such as pictures, graphics, technical representations, or video
recordings. The header of a catalog document in the BMEcat format is given in
Fig. 3.11. Structure of BMEcat Format

Supplier

Header SupplierName
<<multiple>> SupplierID
Control SupplierAddress : Address
Catalog SupplierMIMEInfo : MIMEInfo
<<multiple>> Agreement
Buyer
Supplier
GeneratorInfo
Buyer

BuyerID
BuyerName
BuyerAddress : Address

Address
Catalog Agreement
Street
CatalogID AgreementID Name
CatalogVersion AgreementStartDate : Date Name2
GenerationDate : Date AgreementEndDate : Date ZipCode
<<multiple>> Territory Street2
CatalogName ZipCode2
Currency : Currencies City
MIMERoot Country
<<multiple>> PriceFlag : Boolean Postoffice
Language URL
Phone
E-Mail
Contact
FAX
AddressRemarks

Fig. 3.11: Header of a catalog document in the BMEcat format

 Desktop Purchasing

- A Desktop Purchasing System is a web-based information system

- It implements the decentralized procurement of MRO
(Maintenance, Repair, Operating) goods trough electronic
solutions

- Content of catalogs are provided by suppliers

- Desktop Purchasing Systems may be integrated with ERP systems
ce to Incoming goods and postage are handled by the DPS, and (depending upon
tems the depth of integration) are updated directly in the corresponding ERP sys-
tem. After the commodity has been examined and the date noted, statistics
Service
are compiled, and (if necessary) Categories
complaints are attendedfor
to. DTP Systems
This means that
the procuring company always has up-to-date information on the quality of the
supplier. Typical examples of MRO goods (products and services) are listed in
Fig. 3.13.

Products Services

• Ppre-configured computer • Travel services

• PDAs and mobile devices • Training courses
• Software • Advertising services
• Magazines and newspapers • Consultation and hotline
• Books • Financial services
• Office furniture and office equipment • Cafeteria
• Vehicles • Copying service
• Work clothes and work equipment • Courier service
• Advertising material • Parking lot reservation
• Maintenance material • Light entertainment programs
• Office supplies • Cultural programs
• etc. • etc.

Fig. 3.13: Service categories for desktop purchasing systems

riety DPS can greatly relieve the burden placed on the logistics and purchasing de-
MRO partments of companies. Different services, from the workplace layout and office
 Desktop Purchasing Systems

Basic Functions of Desktop Purchasing Systems

Identification of supplier Ordering Process and Handling Receipt and Checking of Goods

• Online search on Internet • Support of ordering process • Automatic booking

• Reversed Marketing • Authorization procedure • Electronic complaints management
• Use of software agents • Transfer of order • ePayment
• Electronic Catalogs • Status information about ordering • Vendor evaluation
• Online tendering and auctions process (suppliers' side))
• Direct selection by software system • Online tracking of ordering
processing
 Example: The Ariba ORMS

The Ariba ORMS (Operating Resource Management System) from Ariba

Technologies Inc. is the best know Desktop Purchasing System.

It runs on a company’s intranet and consists of:

• a high-performance search engine

• and a workflow management system

!
Ariba has

• specific procurement regulations for each company

• and can do the booking of the ordered products

!
The Ariba customer pays

• a subscription fee for software adaptations

• and for hotline services

The maintenance of the supplier catalogue is handled by the suppliers, the
demanders or by a third party.
vices, the requirements of the procurement as well as the approval rules for each
procurement company are established and recorded. The ordering itself is sup-
ported by software, as both settlement and payment arrangements are recorded.
eProcurement Service Providers
User Interface and Web Browser

Request and Ordering Services

Purchase Order Requests Approval Rules Orders
• Ordering criteria • Position involved • Status of order
• Advertisements • Authorization categories • Posting
• Status information • Control authority • Settlement
• Pricing framework • Recording • Receipt of goods

Request Rules Orders

Catalog Services, Content Management & Sourcing

Search Sourcing Configuration
• Supplier search • Prioritization • Modification
• Product search • Availability • Assembly

Multisupplier
Catalog

Administration for eProcurement

Procurement Policy User Profiles Supplier Profiles
• Procurement rules • User specification • Supplier specification
• Reporting • Payment • Delivery
arrangements arrangements

Multisupplier
catalog

Network Infrastructure and Security Layer

Fig. 3.14: eProcurement service provider (according to Dolmetsch)

 Public Offering via Internet

• Publication → specification of services, conditions and deadlines

• Registration → registration of participants

• Grant → applicants receive tender documentation (using PKI)

• Submission → provider submits offer

• Assessment → evaluation of offer

• Processing → decision-making (clarifications are conducted if
needed)

• Supplement → best offer is granted. Participants are notified.
 Public Offering via Internet

Publication Registration Grant Submission Assessment Processing Awarding

• Tending • Registration • Assessment • Preparation of • Study • Orientation • Awarding of

• Scope of work • Certification • Delivery of offers • Assessment • Negotiation contracts
• Deadlines • Application granting • Signing • Selection • Decission- • Notification
documents • Submission making • Settlement

Software services for public offering

 Conducting Auctions

• Goals:

- Lead a dynamic price negotiation

- Decrease costs

• Types of auctions:

- English auction (starts with a minimum price and bidders augment
price)

- Japanese auction (like English auction but augmentation of the
price is done by the system)

- Dutch auction (starts with a high price which falls down
steadily ...)

- Reverse auction (in a forward auction, buyers compete to get a
product or service; in a reverse auction, sellers compete to obtain
the business)
 Tendering Process with Auctions

Tendering Process

Request for
Publication Checking Negotiation Awarding
Opening

• Publication of • Registration • Checking of • Negotiation • Awarding of

auction • Certification offers • Decission- contracts
• Process and • Orientation of making • Notification
Deadlines bidders • Settlement

Submission Assessment

Sub-process is carried
• Modalities • Opening out by auctions house
• Dates • Implementation or authority
• Regulations • Completion

Auction Process
 Case Swiss Federal Railways

is the national railway company of Switzerland

• in German: Schweizerische Bundes-Bahnen (SBB)

• in French: Chemins de Fer Fédéraux suisses (CFF)

• in Italian: Ferrovie Federali Svizzere (FFS)

copyright SBB CFF FFS
• in Romansh:Viafiers Federalas Svizras

Since 1999 it’s a special stock

corporation with all shares held by
the Confederatio Helvetica
(Switzerland)
 Inverse Auctions
The centralized procurement agency of SBB CFF FFS is responsible

to organize inverse auctions periodically:

• first, interesting companies must pass a quality check for getting

a ticket for bidding

• the bidders do not know how many competing parties are
involved

• the bidders are informed about their own rank, but not about
the highest offer in the auction

• the bidders have to underbid their own bid by at least 0.5%

• the base time period is 30 min

• if someone bids in the last 5 min of the period, the auction is
prolonged for another 5 min

• the maximum prolongation is 180 min
 Inverse Auction for Working Dresses
• seven suppliers offered prices for working dresses (contract volume
CHF 300’000)

• result: the auction ended with over 10% price reduction compared to
the best starting bid
 Inverse Auction for Services

• six suppliers offered prices for a service (contract volume CHF 1.5 million)

• auction ended with an improvement of about 40% compared with the best
starting bid (and 100% compared with the highest starting bid)
 Lessons Learned

• the bidders should get to know the bidding platform

• the bidders should be allowed to raise questions about the
bidding process before the actual date

• it is necessary to organize a test auction with fictional prices

• for privacy policy reasons, no names of the bidders or other
information should be published

• inverse auctions facilitate transparent price negotiations

• in most cases bidders participated actively and Federal Swiss
Railway could profit from the inverse auction

• however, not every inverse auction must end by a lower
procurement price