Automating procurement is the process of streamlining the entire purchasing cycle, which includes defining material requirements, placing orders to the vendors, receiving materials, and completing vendor payments. Typically, the automating procurement process considers just the step of placing orders. Savings of several magnitudes can be achieved by taking a more holistic approach. The steps in the procurement process need to be addressed and fortunately they are distinct enough that they can be tackled one after another.

The key driver behind automating procurement is the big push in manufacturing to eliminate non-value-added costs in the supply chain. With global competition and shrinking profit margins, manufacturers are looking to procurement as a big cost saver.

Typical manufacturing companies spend between 45 and 80 cents of every dollar of revenue for procuring goods and services, out of which 10 to 30 cents account for indirect goods and services; the rest is for direct. Every few percentage points saved in procurement can boost companies' bottom line. Additionally, streamlining procurement is in line with Just-in-Time and continuous improvements initiatives that are already in process in most manufacturing companies.

The key enablers behind automating procurement is general advancement in technology, rise of advanced enterprise resources planning (ERP) and supply chain management systems, and widespread use of Internet and electronic data interchange technology.

So-called world-class procurement executives spend 27 percent more than their peers on technology, despite the fact that they spend dramatically less on procurement operations overall, according to the Hackett Group, a business process advisory firm. For example, world-class procurement executives allocate 36 percent more of their overall procurement resources to decision support and risk management than typical companies. Technology also enables world-class procurement executives to improve efficiency, helping them reduce their cost per purchase order to $8.54, while typical companies spend 134 percent more. In addition, world-class procurement executives operate with 38 percent fewer staff than typical companies, show significantly improved cycle times, and reduce error rates.

To streamline the procurement process, consider the following steps.

1. Define material requirements: Typically, the advanced planning and scheduling module within ERP systems generates material requirements. These will be in line with customer demands and forecasts placed on the system. Setting up accurate vendor lead times; negotiating long-term contracts and setting up minimum and maximum order sizes; and establishing safety stock levels, days supply, and appropriate planning horizons will lead to accurate quantities of material procured with proper due dates and at the best possible price.

2. Place orders: Make a distinction between direct materials and indirect materials. Direct materials form the majority of procurement dollars. Manufacturers can set up a preferred vendor program where they can reduce the number of vendors they work with to a minimum but have a deeper relationship with each one. The best relationship is with preferred vendors who can work as an extension of the manufacturers while sharing production schedules and making deliveries at the right moment. Supply chain management systems enable information sharing with suppliers.

For indirect materials, the concept of marketplace purchasing is slowly taking hold. There are several auction sites where requirements for indirect materials can be placed. Quotes can be received from several vendors and the one with the best price can be chosen. e-Procurement systems are the enablers.

According to the Aberdeen Group, e-procurement was once the "poster child for the dotcom bust," but not anymore. Now, it's delivering measurable value to enterprises "in the form of reduced material and operating costs, improved compliance, and increased total spend under management." A study from the research firm examined approximately 150 companies, their e-procurement systems and strategies, and the hurdles they have faced with automation.

On average, participating companies are said to have

• Reduced off-contract ("maverick") spending by 64 percent
• Reduced prices by 7.3 percent for spend brought back onto contract
• Reduced requisition-to-order cycles by 66 percent
• Reduced requisition-to-order costs by 58 percent
• Increased total spend under management of procurement group by 20 percent.

Each new dollar saved under management can yield 5 percent to 20 percent cost reductions.

3. Receive materials: The process of receiving material includes updating ERP systems with material receipts. Bar-coding technologies can be extensively used to speed up receipts while improving accuracy. Recently a window treatment manufacturer use advanced ship notice combined with goods receiving notice to receive an entire truckload in seconds while speeding up material movement on the receiving docks all with reduced staff. This can be big savings in labor costs, as well as reduced time taken in making material available for production. Estimates have shown that reduced time at the receiving dock can improve lead time by a day to a day and a half. This can lead to better order fulfillment rates and improved customer service.

4. Vendor payments: The vendor payment step involves matching vendor invoices with original purchase orders with respect to items, quantities, and price before payments can be generated. A typical manufacturer can go through hundreds if not thousands of receipts monthly. This may require several accounts payable (A/P) clerks to process these transactions. Extending the concept of preferred vendors, manufacturers who automate the process of generating vouchers for payments for preferred vendors will then get scheduled payments according to vendor payment terms. The number of A/P staff required to manage the payment process is reduced, and faster turnaround time and better vendor relations are established.

Automating procurement can lead to significant reduction in costs that can lead to increased profit margins. Technology is readily available today to make that a reality. Companies can streamline each step separately and enjoy incremental benefits. Global competition and global sourcing have made this almost a requirement for profitable and sustainable growth.

—Vishnu Raman, CEO, VEITS Group, can be reached at (614) 467-5414
or via e-mail at vraman@veitsgroup.com .