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Defining The Business Value Of Technology
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November 20, 2000 |
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E-Procurement: Problems Behind The Promise
Companies find the applications limited, integration troublesome, and managing catalogs difficult. Is it worth it?
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ormel Foods Corp. was supposed to be a signature account for Oracle's E-business software. The $3.4 billion maker of Spam, Stagg chili, and other processed foods embarked in March on an implementation of Oracle iProcurement, an Internet-enabled purchasing suite, to let many of its 12,000 employees buy goods, services, and, eventually, materials needed on the production line from approved suppliers via a Web browser. The Austin, Minn., company expected the new Web system to save millions in administrative costs and capture detailed data on its purchasing activity and suppliers' performance. That knowledge would let Hormel streamline its supply chain and negotiate better deals with preferred partners, yielding greater cost savings.
But nine months later, those objectives are much further out of reach than Hormel had bargained for. Finding the Oracle software ill-suited to its purchasing requirements, last summer the company delayed a planned rollout to 500 employees at 50 U.S. locations. The project remains in pilot mode with just 15 users at eight sites, and deployment to all Hormel employees has been pushed back until the end of next year. "I'm disappointed in this project," says Don Nelson, Hormel's director of purchasing.
Leading E-procurement software providers such as Ariba, Commerce One, and Clarus, along with business-management consultants, have aggressively pushed the concept of Web-enabled procurement into the corporate mainstream, promising operational efficiencies of the kind sought by Hormel. They've also pitched E-procurement as a ticket to the E-business world, as the technical infrastructure needed to participate in online trading exchanges. Indeed, the worldwide market for indirect procurement applications grew 67% last year, according to AMR Research, reaching $259 million in sales. AMR projects 130% growth this year to $583 million in sales.
But many companies sign on for E-procurement without anticipating the long road ahead. They dive into projects only to learn that E-procurement applications are limited in the types and scope of purchasing activity they address. Managing electronic catalogs with thousands of products, providing employees with the right mix of products and adequate information about them, and making it easy to search for items can also be tricky, requiring additional tools and threatening the efficiencies promised by moving purchasing to the Web. And integrat-ing E-procurement applications with existing business systems, such as accounting and human-resources apps, can be more complex than planned, but it's necessary to enable automated approval and accounting procedures.
A company's work isn't done once the software is deployed. For many businesses undertaking E-procurement projects, deployment is just part of a much larger business-process-redesign project. It may take years to fully realize benefits that can be achieved only through the transformation of company policies, processes, and behavior that are made possible by--or required by--the applications. Reworking fundamental business processes and enforcing new procedures may require more user training and consulting than expected.
Sound familiar? It may turn out that E-procurement deployments resemble the challenge-filled enterprise resource planning implementations of the 1990s more than anyone would like. It's important for companies to realize both the risks and the rewards when they enter into such deployments.
At Hormel, problems began to surface when the company realized that Oracle iProcurement 4 was unable to handle the way the company accounts for packaging and maintenance supplies. Instead of using an accounting method that charges a specific department or project at the time of purchase, Hormel holds these supplies in inventory and charges the various business units as they use them. Version 5 of iProcurement, which became available in May, includes support for inventory items. Hormel is testing the new release, which also features an improved user interface and is able to split purchase orders among multiple cost centers and integrate with Oracle trading exchanges.
Hormel's project has also been hampered by suppliers' providing inaccurate product data for its electronic catalogs. Hormel had enlisted Requisite Technology Inc., a catalog-management vendor, to aggregate and format data and make it easy for users to search catalogs. But in trial runs with its first supplier, US Office Products Co., Hormel found that product descriptions were incomplete and showed inaccurate unit measures. In one instance, an employee received 12 dozen binder-type paper clips instead of just 12. Hormel is working with both Requisite and US Office Products to resolve the problems. And Requisite says it now gives suppliers a content-management tool to create their own catalogs, rather than trying to create them itself. However, the glitches have delayed until December Hormel's plans to add five product catalogs.
"At this point, since we have such a small group using the catalog and [because there are] limited items, we haven't seen the impact we would like" from these E-procurement efforts, says Matt Swigerd, E-procurement project manager at Hormel.
Despite the complications, Hormel isn't canning the project. It's still eager for the promised benefits of E-procurement. Analysts estimate that by using Web-based requisitioning systems to aggregate the buying power of their business units, companies can realize 5% to 15% savings on office and operational supplies in six to 18 months of launching an initiative. The savings come primarily from volume discounts and ensuring that employees buy supplies only from vendors with whom the company has negotiated discounts, as well as from reduced administrative work, whittling the cost of processing each purchase order from as high as $150 to $25 or less, says AMR Research. The promise of such gains, companies say, makes it worthwhile to spend $3 million to $4 million at the high end for Ariba Inc. or Commerce One Inc. software or $100,000 for a suite from Remedy Corp. or RightWorks Corp.
When E-procurement works smoothly, it can provide real benefits (see sidebar story, "In A Perfect E-Procurement World"). But that doesn't always happen. Two of the biggest obstacles--with the potential to diminish the return-on-investment figures quoted by analysts--are creating and maintaining product data electronically and enabling suppliers to support electronic transactions. To eliminate the administrative overhead involved in purchasing, both suppliers and buyers must be able to send and receive purchase orders, invoices, and receipts electronically. It also helps if suppliers can provide electronic catalogs in the formats required by their customers, reflecting custom pricing, product selection, and special contractual agreements, and send updates on a regular basis.
The complexity of these tasks has hampered the progress and effectiveness of many E-procurement projects. Ariba, Commerce One, Clarus, and Metiom have built-in support for a process known as "punch-out," "round-trip," or "tap-out" that enables a supplier with a commerce-enabled Web storefront to let customers browse and order directly from its site while automatically routing the order through their E-procurement systems. Few suppliers have created these sophisticated interconnections, however. "It's a glacial process to get all of a company's suppliers on board," says Laurie Orlov, a Forrester Research analyst.
Illustration by Kerri Smith
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