E-procurement pays its own way

Strategic sourcing and e-procurement transform purchasing in DeKalb County, Ga.

Employees in DeKalb County, Ga., switched from paper-based purchasing to e-procurement two years ago, enabling the county to reduce its back-office expenses while shrinking the time between ordering and receiving paper clips and computers from weeks to less than a day for some items.

The county, part of metropolitan Atlanta, managed for many years with antiquated purchasing procedures. Requisition employees filled out paper forms. Officials issued purchase orders to vendors via fax. Filled orders arrived at a county warehouse, and employees typically waited for days to receive items from the warehouse. At that time, the county depended on a 22-yearold mainframe accounting system.

Poor contracting coordination further strained the county’s procurement efforts. County departments often struck deals independently of one another, hampering the government’s ability to save money through economies of scale.

“We were a manual purchasing system,” said Richard Stogner, the county’s administrator.

But the county broke with its purchasing past in 2004 when it began to install Oracle’s E-Business Suite of financial and procurement applications. Oracle’s procurement module replaced pen-and-paper requisitions. The county was finally able to integrate its purchasing operations with back-office financial systems that handled accounts payable. Hubspan, a company that offers business-to-business integration as a software service, linked DeKalb’s new procurement application to the electronic catalogs and order entry systems of the county’s major suppliers.

DeKalb expects the $8 million system to pay for itself by June, in keeping with the county’s three-year return-on-investment benchmark. Eliminating overlapping contracts and closing its warehouse operations are among the factors enabling DeKalb to achieve that ROI. In addition to avoiding costs that it incurred in the past, the county is receiving its orders faster.

Andrew Bartolini, research director of global supply management research at the Aberdeen Group, said organizations such as DeKalb are the beneficiaries of vastly improved e-procurement applications. He said the technology, overhyped in the late 1990s, has since come into its own.

“These days, the applications that are generally available from providers actually do what they say they will do and deliver compelling results,” Bartolini said.

How e-procurement works
The purchasing process begins when a DeKalb employee asks a requisition preparer to place an order. About 240 requisition preparers are distributed throughout the county’s departments, said Mike Ajhar, senior consultant in the county. The people who prepare requisitions use Oracle’s procurement module to begin the ordering process.

The procurement module has a secure punch-out application — the application punches through firewalls — which lets requisition preparers view electronic catalogs of the county’s main suppliers. The catalogs are tailored to reflect the contract terms that county officials negotiated with the suppliers. A requisition preparer clicks on a Web link to view a particular catalog.

DeKalb’s main suppliers include Office Depot, CDW and Dell. CDW is the county’s software and printer supplier. Dell supplies its hardware. The county’s Office Depot catalog omits hardware and software supplies to prevent employees from buying those items from Office Depot.

“That gives integrity to the contracts we negotiate on behalf of the county,” Ajhar said.

The county can also order from the electronic catalogs of these suppliers:
  • Command Uniforms for law enforcement uniforms.
  • Fisher Scientific for laboratory measuring and testing equipment.
  • Grainger for power tools.
  • Johnson Industries for automotive repair parts.
  • North American Fire Equipment for firefighting gear.
In April, DeKalb plans to add catalogs from E.R. Partridge, which supplies work uniforms, and Lashley Tractor Sales, which sells heavy equipment parts.

After they punch out to a catalog, requisition preparers encounter the familiar sights of e-commerce: items available for purchase and a shopping cart in which to place them. However, the checkout process is different from the typical consumer checkout on Amazon.com, for example. The software extracts order information from the catalog — line item number, product description, quantity and price — and transfers it to the Oracle procurement system, Ajhar said.

The requisition preparer uses that information to complete the order before it moves through the approval process. Smaller purchases might require a single signoff, whereas big-ticket items might be routed through an approval chain to the director of a department. Oracle’s punch-out application rounds up approved requisitions every 30 minutes and converts them to purchase orders, which it sends to Hubspan.

“They take our purchase order information…and map it directly to the order entry system of the punch-out trading partner,” Ajhar said.

Tim Ratliff, senior director of marketing at Hubspan, said the company’s hosted integration software periodically receives files from DeKalb containing multiple purchase orders. The files arrive in an Extensible Markup Language format proprietary to the county. Hubspan creates individual purchase orders, translates the orders into an appropriate format for the receiver, and sends the orders using the receiver’s preferred transport protocol, Ratliff said. Office Depot, for example, receives purchase orders in commerce XML format via HTTPS.

“We are brokering the way in which messages are sent and received,” Ratliff said. After the order hits a supplier’s order entry system, the electronic purchasing application generates a pick ticket and an invoice. The pick ticket tells the supplier’s warehouse what to pack and ship.

The order entry integration reduces errors because a data entry clerk no longer has to type in data from a faxed order, Ajhar said. Similarly, the county can avoid re-entering invoice data into its financial management system. DeKalb, working with Hubspan, recently completed an automated link that transfers invoices from suppliers, such as Office Depot, directly into the county’s accounts payable system.

When a supplier ships an order, a receiving transaction is triggered through the Oracle procurement application. Oracle’s account payable application then matches the receiving transaction to the purchase order and the invoice. If a match is made, the application cuts a check for the supplier.

Business impact
DeKalb’s automated procurement processing produces savings besides those it obtained from closing its warehouse operations. For example, the system provides purchasing information that helped the county establish a strategic sourcing strategy and negotiate lower prices with suppliers.

“We are able to use our size and volume and leverage to our advantage,” Ajhar said. “In the past, we really didn’t have that capability.” County departments “were doing their own thing” in procurement, Ajhar said, a practice that led to duplicative contracting. The county at one point dealt with 17 different copier suppliers and copier models. DeKalb now uses Xerox as its single copier supplier.

Using strategic sourcing and its automated requisition process, the county has been able to save about $750,000 on copiers in several years as old leases expired, Ajhar said.

Sources of savings
Most organizations expect to save money when they automate their purchasing operations. E-procurement systems, such as DeKalb’s, help them gain better control of their spending by aggregating the spending of different groups in the organization, Bartolini said.

Other savings come from being able to use suppliers’ warehousing capabilities rather than maintaining a local warehouse. Stogner said e-procurement let the county close its warehouse and save about $240,000 — mostly in annualized labor costs — in the process.

Some e-procurement benefits can be measured in terms of time saved on routine tasks. Procurement employees spend that extra time soliciting competitive bids and negotiating for items that they don’t buy from online catalogs, Ajhar said.

The compressed purchasing cycle, meanwhile, is a boon for employees who need to replenish office supplies and other items. Under the old system, deliveries could take a week or longer. Office Depot catalog orders submitted by 3 p.m. arrive the next morning, Ajhar said.

The e-procurement approach has dramatically improved purchasing efficiency, “especially as it relates to high-volume products,” Ajhar said.

Success factors
Organizations seeking a return on their investment in e-procurement often need some help getting there. Bartolini said organizations must have a strong executive champion of e-procurement, and they must be willing to spend money on employee training.

“Having clear executive sponsorship is the one factor that has the highest correlation to overall success,” Bartolini said. “Training becomes a very important part of this process when you look at deploying this solution across your entire organization.”

DeKalb’s executive champion was Vernon Jones, the county’s chief executive officer. Jones made technology adoption a priority, Stogner said.

Jones’ leadership was critical in securing the necessary funding for implementing the financial management system and automated procurement system, he said.

Ajhar said training is also an important part of e-procurement. Most of DeKalb’s requisition preparers lacked computer experience because they had worked in an office that used a pen-and-paper procurement system.

“We really had to start from scratch with them in terms of training,” he said. But that’s hardly surprising, given DeKalb’s leap from paper to e-procurement.
Penn has a 10-year history of savings from e-procurementThe University of Pennsylvania says its e-procurement system produced $88.7 million in savings during its first decade of use. In July 2006, the university launched a four-year cost containment initiative to capture an additional $50 million in savings.

Penn’s e-procurement system is comprised of BEN Financials, an Oracle financial management application that includes a purchasing module, and Penn Marketplace, which has online catalogs from 170 suppliers. The institution conducts 72 percent of its purchasing transactions through the online marketplace.

The concentration of buying activity through a relatively small number of preferred supplier contracts encourages suppliers to offer discounts in anticipation of volume purchases. Such consolidation has contributed to documented savings, said Ralph Maier, director of purchasing services at the university.

From July 1996, when the university introduced e-procurement, to June 2006, those savings totaled nearly $89 million. Now Penn looks to build on that success with the new cost containment initiative.

A major objective of e-procurement was to eliminate maverick buying, or those purchases that employees made on their own, bypassing the purchasing department. Before e-procurement, only 38 percent of Penn’s purchasing went through the purchasing department. This year that figure will be 80 percent to 85 percent, Maier said.

Faculty members and the university benefit from e-procurement. In the days of paper-based procurement, people could expect to wait 18 days on average for supplies to arrive. E-procurement reduced that cycle to less than one day.

E-procurement has transformed Penn’s Purchasing Services from a tactical to a strategic organization, Maier said.

“Purchasing was viewed as a bureaucratic necessity, and now it’s viewed as one of the top strategic administrative departments in the university and one that adds significant ROI on an annual basis,” he added.

— John Moore

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