Integrated supply and e-procurement: strategy 
and tactics for reducing your total cost of procurement

by Peter Provenzano

Purchasing professionals have been using elements of e-procurement and integrated supply for years. However, their combined effect has the potential for even more significant impact. By teaming these two concepts to address the inefficiencies that exist within purchasing, the total cost of procurement is dramatically reduced. This is especially true in the area of indirect, or MRO (maintenance, repair and operations) procurement. 

Since little attention has been paid to the strategies and procedures of indirect materials purchasing, it may be high time for integrated supply and e-procurement. Integrated supply can address the purchasing strategy while e-procurement streamlines purchasing procedures. By tackling both the strategic and tactical sides of the purchasing equation, this combination has what it takes to bear the test of time.

Integrated supply: sealing the strategy
Every good plan starts with a solid strategy. The same is true for an indirect materials purchasing plan. There are several factors that influence the formulation of this strategy. 

Indirect (MRO) materials are mostly repetitive, generic and high transaction items with low unit cost. In fact, purchasing agents can spend as much as 80 percent of their time sourcing and purchasing these items that may only account for 20 percent of the overall budget. To further complicate the MRO purchase process, approximately 60 percent of the orders are spot buys, which require researching sources of supply, evaluating the alternatives and making the final purchase.

The indirect purchasing process usually involves a large number of buyers, sometimes every employee within an organization. MRO materials cover a wide range of products making it time-consuming and costly for suppliers to market. These factors make MRO purchasing inherently different from direct materials purchasing for both buyers and suppliers. Enter integrated supply.

Integrated supply seeks to optimize the purchasing process for both the buyer and the supplier. The expenses involved with marketing, stocking and purchasing MRO products are high. In an integrated supply relationship, both the buyer and supplier reduce these expenses through fewer, yet closer relationships.

Consider this: an organization can pay as much as $3,500 annually to maintain just one supplier relationship. Since MRO materials cover a wide range of products, hundreds of supplier relationships are in place. If an organization were to maintain just 500 suppliers (a gross underestimation for most companies), the expense to simply maintain those relationships would be $1.75 million. 

This does not take into account the costs associated with locating new sources of supply and establishing new supply relationships. By reducing the number of suppliers for MRO products, integrated supply reduces the expense and hassle associated with maintaining, controlling and evaluating supplier performance. The trickle down affect of fewer suppliers also impacts the accounting process. With fewer invoices to wade through, controlling, tracking and reporting MRO spends are much simpler undertakings.

The benefits for suppliers are equally attractive. MRO items are usually low unit costs, making it difficult to earn a significant return while weathering the ups and downs of market and competitive conditions. With integrated supply, the supplier can remove some of the uncertainty from the sales cycle. 

In exchange for a stable and more predictable relationship, the supplier accepts the responsibility to provide a broad range of products to the buyer. Sometimes an integrated supplier will offer to manage a client’s inventory levels on-site, further freeing up staff for more strategic issues.

The partnership mentality between buyers and suppliers in an integrated supply arrangement affects the very nature of the relationship. 

Suppliers who were once hesitant to dedicate any additional time or service to clients make frequent site visits for training and technical support. Buyers no longer waste time shopping for the lowest cost alternative, but take advantage of the additional service and reliability of their chosen supplier. Inventory levels and logistics response times are reduced through a system of constant communication and cooperation. Buyers and suppliers work together to optimize the benefits of the integrated supply relationship for both parties, improving processes, quality and ultimately costs. These benefits all hit on the strategic end of the purchasing process.

E-procurement: creating tactical efficiencies
Integrated supply handles the who and what of the purchasing strategy. E-Procurement picks up on the how for purchasing procedures.

How most organizations purchase indirect materials now is a cumbersome and paper-laden process. While attention has been paid to the benefits e-procurement can have on direct materials purchasing, the immense benefits for indirect materials purchasing have been largely ignored. 

Applying these emerging technologies to the MRO buying process could have a remarkable impact and result in huge savings.

Internet technologies have been automating processes in a variety of industries for years. At its very foundation, the Internet improves communication. The enhanced gathering and dissemination of information between buyers and suppliers improves the speed and quality of the communication process. This reduces, if not practically eliminates the tactical inefficiencies of the indirect purchasing process.

At the very heart of the nature, the Internet is a cost effective way to facilitate the MRO purchasing process. Since the solutions are Web-based, there are no large up-front costs like those associated with software solutions. Most online solutions are hosted and maintained by the solution provider, freeing up your technology staff. Finally, with an online solution, lengthy implementation times are almost eliminated. These factors allow your organization to see an almost immediate impact.

Online catalogs and ordering capabilities simplify the searching and ordering process for MRO items. By using advanced searching capabilities, most buyers can quickly and easily locate and purchase the items they need. 

Submitting orders electronically reduces the risk of human error or misplacement while creating a record of the transaction for future reference. Some online solutions offer clients the opportunity to create custom catalogs for the items they purchase on a regular basis, reducing the shopping time. Custom catalogs can also be created for certain processes such as routine machine maintenance or stockroom management.

Most organizations have business procedures that require an approval hierarchy and standard workflows for purchasing. However, many of these procedures are paper-based and not well standardized throughout the organization.

While central controls are ideal to consolidate and leverage an organization’s MRO spend, the paper-based nature of the procedure makes the time-lag and hassle unreasonable, especially for organizations with multiple locations.

The Internet addresses this issue and allows for decentralized purchasing with centralized controls. With an online e-procurement solution, the standard system is easy and accessible to all locations within an organization. With approval hierarchies and workflows built to mirror organizational requirements, the need for a paper process is completely eliminated. 

The capability of e-procurement solutions to replicate business procedures electronically allows each location or end user to both locate the items required and route the request through the necessary approvals simultaneously. By allowing end-users to locate and purchase the items they need, the purchasing staff has more time for strategic issues.

E-procurement solutions also serve as a valuable data aggregate. Historically, most MRO purchasing data was only available through accounts payable histories. E-procurement options offer the capability to track more detailed information. 

Aggregated data is accessible, but more specific purchasing information by organization, location, end-user or commodity group is available. By having access to this information, decision-makers can better control and predict necessary inventory levels, material requirements and buying patterns.

The efficiencies created by e-procurement address the tactical side of purchasing. With the convenience of the Internet, online ordering, approval hierarchies and a valuable data aggregate, e-procurement gets at the very heart of MRO materials purchasing inefficiencies. Using the Internet to facilitate the process makes the solution accessible, manageable and useful throughout the organization.

Getting the best of both
There is little doubt that integrated supply and e-procurement yield some noteworthy benefits independently. However, their combined impact addresses both the strategic and tactical sides of the purchasing equation.

Finding a supplier with the purchasing knowledge and expertise as well as the e-procurement technology is key to getting the best of both worlds.

E-procurement technology is readily available. Despite all the glamour and glitz surrounding the various technology and software providers, they are vastly the same. The basic functionality of approval hierarchies, workflows, online ordering, custom catalogs and data aggregation are represented in most solutions. 

The services associated with those solutions vary dramatically. Some offer purchasing and sourcing professionals with the product and technical knowledge necessary to become your sole source for all MRO items like an integrated supplier, where others simply serve as an online portal to an existing supplier base. Finding a provider with technology alone will only satisfy a small portion of your needs.

To get the most dramatic impact on your total cost of procurement, you should find a solution provider with experience in all facets of the purchasing process including sourcing, materials management and logistics. They must also have the technical capability to provide their services online with e-procurement technology including master and custom catalogs, approval hierarchies and reporting capabilities. By finding a solution that offers the services of integrated supply as well as e-procurement technology, you will have an ideal partner for radically improving your MRO purchasing plan.

Peter Provenzano is President and CCEO of Rockford, Ill.-based SupplyCore. A graduate of University of Arizona, Peter has been involved in several entrepreneurial and technology-related ventures. He joined Pro Technical Products Inc., the predecessor company to SupplyCore, in 1997, where he worked in purchasing, operations and sales prior to becoming CEO. Peter has supported numerous service organizations and currently serves on the board of directors of the Rockford Area Chamber of Commerce and Firstar Bank in the Rockford region. Peter frequently facilitates workshops and serves as a guest speaker for industry organizations and events such as the National Association of Purchasing Managers (NAPM) and the International Quality and Productivity Center (IQPC).

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