Strategic Guide to e-Procurement
Identify your Needs
Analyse your spending pattern
The first step in any e-procurement initiative is to analyse your agency’s spending on procurement. The analysis will identify key suppliers and spend categories with potential for e–procurement. By analysing past procurement activities you will gain a detailed picture of your agencies spend profile, an understanding of purchasing patterns, current supply base and the total spend across categories.
A spend analysis is essential to identify:
- what products and services your agency purchases, who in the agency purchases them, and from which supplier
- the value and number of transactions conducted and opportunities to consolidate expenditure to obtain volume discounts and reduce the number of invoices
- products and services that can be standardised (items available for purchase that can be limited to a standard selection)
- total number of transactions and value per supplier (determine whether there is any opportunity to aggregate supply to fewer suppliers)
- piecemeal buying (one-off purchasing outside the agency’s contracted supplier agreements) and the level of compliance with approved contracted suppliers.
The results can also be used to support your business case for e–procurement. For example aggregating supplier contracts can simplify the supplier enablement process by reducing the total number of suppliers and streamlining business processes. Suppliers are not interested in expensive e–procurement connections that deliver little in the way of order volume or commercial benefit. The higher the transaction value and volume for a supplier the more likely it is that e–procurement would be considered.
The data required to perform a spend analysis will usually come from an FMIS or ERP system, using the Accounts Payable System, the General Ledger, and/or a Purchasing system and/or from suppliers. Typically, a 12 month period is used to gather the data as it takes into account any seasonal variations and will provide an accurate picture of your agency’s current purchasing profile.
Spend information can be segmented in a variety of ways in order to understand purchasing patterns, the current supply base and total spend across categories.
Spend information can be segmented by:
- value of spend per category and % of total spend
- volume of transactions – number of purchases and invoices per month
- number of suppliers and number of contracted suppliers
- criticality of product or service and risk of supply
- frequency of sourcing the product or service through going to market
- long-term suppliers versus short-term suppliers.
Spend categories which may be found in a Government purchasing environment include:
By conducting a step by step process for each category, you can obtain a detailed understanding of the key categories; key suppliers; those used sporadically; and potentially key line items that are purchased on a regular basis. Look at existing contracts and determine if there is potential to buy smarter.
Spend information can be classified at the category, supplier and line item level. A spend analysis at the:
- category level identifies spending on each particular category, for example Utilities
- supplier level breaks each category into services within that category, for example breaking Utilities up into Gas and Water suppliers in different states, cities or regions
- line item level breaks each supplier’s data into the services or goods supplied within the category. In the case of Utilities this can be broken into fixed monthly supply charges versus variable usage charges, including peak and off peak charges, as well as maintenance.
A full spend analysis can be a major undertaking, and you may not need to complete a full line item analysis of the entire spend profile to be able to identify which areas of spend would be suitable for enablement with e–procurement technologies.
It may only be necessary to undertake a high level category analysis that provides the initial top 10–20 category spend areas. These can then be broken down into key suppliers and then potentially into key line items.
Prioritise your e–procurement potential
Upon completion of the spend analysis, all categories should be prioritised as to their e‑procurement implementation potential. Identify the categories which are sourced frequently and generate the most number of transactions.
Upon completion of the spend analysis, all categories should be prioritised as to their e–procurement implementation potential
For those categories sourced occasionally, but purchased frequently, the emphasis may be on automating the transactional procurement process through electronic Purchase Orders (POs), catalogues and workflow.
For those categories that are sourced frequently it may be more appropriate to utilise a panel of approved suppliers and then use an electronic sourcing tool to issue Request for Tenders (RFTs) on a regular basis.
The e–procurement strategy developed will depend on the procurement profile of the agency. For example, an agency with a low volume of transactions with suppliers may find it difficult to justify an automated transactional procurement system, but may obtain benefit through using a supplier system. Alternatively, an agency with a high volume of transactions may well be able to construct a robust business case based on automating processes and streamlining the work required to execute the purchasing activity.
Identify the categories best suited to e–procurement
Some spend categories are more suited to online-purchasing and payment than others. For example, stationery and travel suppliers have online purchasing systems that have been used for some years by different government agencies. Once your spend analysis is completed, examine each category against the following criteria to understand if it is an appropriate candidate for e–procurement:
- risk – low risk items are often the first used for e–procurement initiatives
- frequency – e–procurement systems can offer transactional savings for frequently purchased items
- contracted – it is best to use e–procurement where there are established terms and conditions.
To start with online purchasing, choose items where the quantity, price and delivery terms can be specified. Items or services where these factors are not specified
should be looked at in more detail to ascertain their suitability for transition to an e–procurement system. Categories most suited to e–procurement are often best implemented first. Your agency can gain valuable experience by initially piloting a simple e–procurement initiative.
To start online purchasing choose items where the quantity, price and delivery terms can be specified
Identify your e–procurement ready suppliers
Although a category may be suited to e–procurement, it is important to understand whether the supply base is e-enabled. Supplier needs, issues and concerns should be considered to secure their support. Where suppliers already have technology in place it should be easier to implement an e–procurement arrangement.
As part of the spend analysis, it is important to understand which suppliers are ready to undertake e–procurement
Some small and medium, sized businesses (SME’s) are not interested in expensive connections that add to the cost of supply and deliver little in the way of order volume, especially if they are supporting multiple e–procurement systems for various agencies.
With future suppliers e–procurement readiness can be included as part of the tender and evaluation criteria.
With current suppliers determine how long the relationship has been in place, if they are a successful supplier overall, and if the category is going to be tendered in the near future. Do not pursue the path of e–procurement if the supplier is unsuccessful overall, as applying e–procurement in a problem environment will result in e–enabled problems.
You will need to consult with your suppliers to gain an understanding of their capabilities and any concerns they may have. Determine:
- the types of e–procurement capabilities and initiatives the supplier can offer
- what e–procurement activities have been successful and/or cost–effective
- if the suppliers system can integrate with your existing ERP and/or procurement system
- if the initiative with this supplier will result in additional fees or charges.
Identify where savings are possible
At the completion of the spend analysis exercise, you should have a spend profile covering the number of suppliers, volume of spend, number of transactions and frequency of procurement. This information can then be used to identify areas where savings may be possible and processes that can be improved.
For example, improvements and savings could be achieved through:
- minimising leakage by automating the buying process
- consolidating piecemeal purchases into larger, less frequent transactions
- standardising products
- contracting suppliers of frequently used products and services
- aggregating purchases.
Summary of Checkpoints
Identify Agency Spend
- a Identify systems from which you need to gather data
- a Select category level of segmentation
- a Identify high transaction spend categories
- a Document which e–procurement method you might use for these categories
- a Assess suppliers and potential suppliers for e–procurement readiness
- a Store data compiled for future use
- a Ensure new systems categorise data at the point of entry to assist with ongoing spend analysis information
- a It may be possible to specify in contracts with suppliers a requirement to provide spend data over a defined time period
Contact for information on this page: ICT Procurement