- Discuss the various sources of procurement information systems.
- Understand the benefits of technology in procurement.
- Recognize the role of procurement in the enterprise resource planning (ERP) process.
What do you know about procurement information systems?
Flip the cards and match the description to its corresponding image.
Procurement professionals have a challenging job with many tasks to do daily. Managing purchase requisitions, quotations, inventory levels, negotiations, pricing, invoices, and suppliers requires a lot of expertise, time, and organization. Computer systems and the internet can help streamline the purchasing process. These systems assist in ensuring all the parts are at the right place at the right time. Computer systems and the internet can help procurement professionals become more efficient by making the purchasing process smoother allowing procurement professionals to focus on other areas.
Enterprise Resource Planning (ERP) Systems
Enterprise Resource Planning (ERP) systems are computer systems that focus primarily on an organization’s internal operations. These internal operations can include purchasing, accounting, materials management, sales and distribution, inventory and warehouse management, production planning, project management, human resources. ERP Systems automate and integrate these functions and processes. The procurement module of various ERP systems makes purchasing easier by automating the following: issuing purchase requisitions, sourcing supply of goods or services, issuing quotations to suppliers, selecting suppliers, issuing purchase orders, receiving goods into inventory, invoice verification, and sending payments to vendors. ERP systems also provide accurate real-time data and improved visibility across all functions allowing decisions to be made quickly.
ERPs help companies better manage their purchase orders by automating creating tracking numbers, filing orders, checking inventory, making a purchase history, and coordinating with suppliers. ERPs also help optimize relationships with suppliers by creating robust suppliers databases, streamlining communications, and making relationships more transparent through better information sharing. ERPs also help procurement professionals save time through streamlining and automating purchasing tasks and making you more efficient. (Mulvenna, n.d.)
SAP, Oracle, and Microsoft offer ERP systems with procurement capabilities. They are the largest ERP software providers and can be very expensive. There are hundreds of other ERP systems available that can be smaller and less expensive. Some ERP solutions are industry-specific. Software Advice’s Procurement Software comparison describes various procurement software solutions and reviews. There are disadvantages to using ERP systems for procurement. The extensive costs, effort, and time required to implement ERP systems are not always justified. Training employees on the new system can cost a lot and take a lot of time. ERPs are inflexible; customization is usually complex and costly with ERP systems. ERP systems are frequently upgraded, and implementing these upgrades can be costly and time-consuming.
E-procurement is a way of using Enterprise Resource Planning (ERP) systems and the Internet to allow businesses to purchase goods and services in an easier, faster, and less-expensive way. The overall goal is to streamline the purchasing process so businesses can focus more management time on earning revenue and serving customers. With e-procurement, purchases are easier to track because they are completed using ERP systems and the Internet. The company’s managers can easily see who made which purchases without waiting to receive a monthly revolving credit statement. Furthermore, many companies incorporate product specifications into their e-procurement systems. Buyers also save time by not leaving their desks or making phone calls to suppliers to place orders. Suppliers receive orders almost immediately, so they can fulfill and ship them much faster than traditional procurement methods. Using the ERP systems and Internet for procurement also makes it possible to research suppliers’ information and compare product and service offerings. Various software applications can be used for e-procurement. According to the content team at EPIQ (2021), e-procurement applications provide tools that let businesses organize and compare supplier information more effectively.
- ERP: Enterprise resource planning (ERP) is a computer-based application that automates business processes. Examples include procurement, accounting, manufacturing, supply chain, sales, marketing, and human resources (HR).
- ERP Process: Planning Process (independent requirements + purchase requisition) to the Procurement Process (purchase orders sourcing + tracking) to the Production Process (planned orders + raw materials) to the Sales Process (marketing + pricing).
E-Procurement and Electronic Purchasing
E-procurement is an Internet process used to make the procurement of goods and services easier, faster, and less expensive for businesses. The overall goal is to streamline the purchasing process so that businesses can focus more management time on earning revenue and serving customers. According to the Content Team at EPIQ (2021), e-procurement does not work for all items purchased by firms. For instance, items of strategic importance to firms, such as custom-designed engines for a package transportation vehicle, are typically not purchased using e-procurement. However, many noncritical items like stationery are well-suited to be purchased using these types of systems.
(Note. This section contains material from Operations Management, Chapter 5.2 Supply Chain Procurement, by Saylor Academy and is licensed under a Creative Commons Attribution 4.0 International License. Download and access this book for free at https://pressbooks.nscc.ca/operationsmanagement2/)
Technology is changing the way businesses buy things. Through e-purchasing (or e-procurement), companies use the Internet to interact with suppliers. The process is similar to the one you’d use to find a consumer good—say, a forty-two-inch LCD high-definition TV—over the Internet. You might start by browsing the Web sites of TV manufacturers, such as Sony or Samsung, or electronics retailers, such as Best Buy. To gather comparative prices, you might go to a comparison-shopping Web site, such as Amazon.com, the world’s largest online retailer. You might even consider placing a bid on eBay, an online marketplace where sellers and buyers come together to do business through auctions. Once you’ve decided where to buy your TV, you’d complete your transaction online, even paying for it electronically.
If you were a purchasing manager using the Internet to buy parts and supplies, you’d follow basically the same process. You’d identify potential suppliers by going directly to private Web sites maintained by individual suppliers or to public Web sites that collect information on numerous suppliers. You could do your shopping through online catalogues, or you might participate in an online marketplace by indicating the type and quantity of materials you need and letting suppliers bid on prices. “Some of these e-marketplaces are quite large. Covisint, for example, which was started by automakers to coordinate online transactions in the auto industry, is used by more than two hundred and fifty thousand suppliers in the auto industry, as well as suppliers in the health care field” (Jingzhi, 2007). Finally, just as you paid for your TV electronically, you could use a system called electronic data interchange (EDI) to process your transactions and transmit all your purchasing documents.
The Internet provides an additional benefit to purchasing managers by helping them communicate with suppliers and potential suppliers. They can use the Internet to give suppliers specifications for parts and supplies, encourage them to bid on future materials needs, alert them to changes in requirements, and give them instructions on doing business with their employers. Using the Internet for business purchasing cuts the costs of purchased products, saves administrative costs related to transactions and it’s faster for procurement and fosters better communications.
Electronic Data Interchange (EDI)
EDI involves a computer-to-computer exchange of information. It can be used to support transactions between buyers and sellers, allowing for greater efficiencies and streamlined communication. This, in turn, can lead to less time and money dedicated to the procurement process. Long-term purchase agreements can reduce transaction costs by eliminating the need for time-consuming renewals of purchases. In addition, when buyers and suppliers agree on contract terms, material-releasing responsibility can shift to users in many cases. This means that end-users arrange directly with suppliers for products required to be delivered without involving procurement at all. Ideally, material releasing is accomplished electronically instead of manually, which saves time and money (Monczka et al., 2005).
Computer-to-computer exchange of information replaces paper-based exchanges of mail, faxes, and emails. This helps reduce costs, increases processing speed, reduces errors, and improves relationships with suppliers. EDI documents can flow to the appropriate application on the receiver’s computer such as the Order Management System and processing can begin immediately. For example, if a buyer issues a purchase order EDI can facilitate the purchase order going directly into the suppliers’ internal order management system, eliminating the supplier having to enter the order into the internal systems (Open Text, 2021).
EDI documents must be in a standard format so that the computer will be able to read and understand the documents. The standard format and version are agreed upon by the two businesses exchanging data. EDI standards that are commonly used are ANSI, EDIFACT, TRADACOMS, and ebXML (Open Text, 2021).
EDI software is needed to translate the EDI format so the data can be used by their internal applications and it also translates the company-specific data information into EDI standard form for transmission (Open Text, 2021).
To see various Electronic Data Interchange (EDI) software available and reviews on the various products visit Best Electronic Data Interchange (EDI) Software.
Electronic catalogues provide a user-friendly way of accessing information about a supplier’s products and services. The chief benefit of using electronic catalogues is their low-cost search capability; if users order directly from these catalogues, cycle times and ordering costs can also be reduced. Pricing is often included as part of the catalogue and is referred to as a published price list. Procuring organizations with higher buying volumes may be offered a percentage discount on the rates from the published price list.
Automation of Bidding
At many firms, entire bid processes have been automated. Bid packages and specifications are made available online from which bidders submit their bids and proposals, and the bid openings and awards are communicated electronically. Cycle-time reductions and other cost savings can be significant if the automated process is efficient.
In online auction situations, potential sources are also prequalified and invited to participate in the online bidding. The auction, or event, is set for a specific date and time, much like the deadline and bid opening deadlines of offline processes. An auction’s success depends largely on the quality of bid specifications and the ability of procurement professionals and processes to prequalify suppliers. In an online environment, bidders can see the actual bid amounts but not who is involved in the bidding.
Implications of Technology in Procurement
There are many benefits of technology for the procurement professional. These benefits include making smarter and more informed decisions, providing faster response times, cost reduction through minimizing errors, the ability to keep track of spending, reduced transaction times, and increased productivity. Technology also allows people to work and access information 24/7, flexible work schedules, and opportunities to work remotely.
However, with every advancement, there come challenges. One of these challenges is the need to still have people critically evaluate the data to make decisions. People with skills and experience are still needed to investigate, analyze and evaluate suppliers. People are still needed to negotiate, strategize and plan. Although the transactional side is streamlined, skilled people are still needed to analyze and make the final decision. Another challenge with technology is that it makes workers available 24/7. This creates challenges revolving around work-life balance.
An organization with a functional structure is divided based on functional areas, such as IT, finance, marketing, or procurement. Functional departmentalization arguably allows for greater operational efficiency because employees with shared skills and knowledge are grouped by function. A disadvantage of this type of structure is that the different functional groups may not communicate, potentially decreasing flexibility and innovation. A recent trend aimed at combating this disadvantage is using teams that cross traditional departmental lines. ERP allowed companies to incorporate all departments and functions company-wide on a single system. The benefits of ERP are substantial; however, it must be noted that high training, maintenance, and initial start-up costs are too high.
Content Team. (2021, October 29). E-Procurement systems. EPIQ. https://www.epiqtech.com/E-Procurement-Systems.htm.
LINCS in Supply Chain Management Consortium. (2017, March). Supply management and procurement certification track. Version: v2.26. https://www.skillscommons.org/bitstream/handle/taaccct/14294/LINCS%20Supply%20Management%20and%20Procurement%20Content.pdf?sequence=1&isAllowed=y.
McWilliams, A. (2015). Corporate social responsibility. Strategic Management, 12:1–4. https://doi.org/10.1002/9781118785317.weom120001
Monczka, D., Trent, R., & Handfield, R. (2005). Purchasing and supply chain management (3rd ed.). New York, NY: McGraw-Hill.
Mulvenna, A. (n.d.) How to use an ERP to improve your purchasing processes. Genius ERP. https://www.geniuserp.com/blog/how-to-use-an-erp-to-improve-your-purchasing-processes
Open Text. (2021). What is EDI (Electronics Data Interchange)? EDI Basics. https://www.edibasics.com/what-is-edi/
Saylor Academy. (n.d.). Operations Management. Pressbooks. https://pressbooks.nscc.ca/operationsmanagement2/
Creative Commons Attributions
This chapter contains material adapted from Chapter 5.2 Supply Chain Procurement, Operations Management, by Saylor Academy and is licensed under a Creative Commons Attribution 4.0 International License.
This chapter contains material adapted from Supply Management and Procurement Certification Track. LINCS in Supply Chain Management Consortium. March 2017. Version: v2.26. www.LINCSeducation.org.