E-PROCUREMENT
1.0 Introduction
1.1 Procurement of services, materials and assets is a common activity in the daily lives of individuals, organizations, governments & its agencies and also the corporate world. Procurements by individuals are generally of lower values as they normally use best practices, consciously or unconsciously, in all their procurements as they use their own monies and resources and are accountable only to themselves to ensure that best cost-effective and cost-efficient methods are utilized. Consequently there is no necessity for written prescribed procedures and controls for personal procurements.
1.2 The value of procurements by governments and its agencies and also the corporate sector can be of high values where the amounts can be in millions and in some cases of procurement of capital items such as defense hardware where the cost can be in billions. As it involves procurement on behalf of others it is important that the professionals responsible for procurement be honest and trustworthy in discharging their duties. Consequently there is need for comprehensive and relevant procedures, internal controls and monitoring to ensure that the procurements are cost-effective and cost-efficient.
2.0 Procurement Method
2.1 The main method of procurement used throughout the world has generally been the system where printed form was the main medium to support the basis of transactions. This method involved procedures that required substantial administrative and accounting activities resulting in higher costs. Further the paper based procurement system also was time consuming and longer periods of completing the procurements that commenced from inception to final deliveries. These administrative, accounting and time costs escalated substantially in tandem with the variety and quantities of procurements.
2.2 Government and corporate leaders instituted several methods to reduce the administrative and accounting costs and also reduce the delivery periods and holding of large inventories. Some of the solutions instituted were single contracts where the various user departments would inform the procurement department of the annual requirements of the items who would then arrange for a centralized contract under which the rates were fixed. The user departments would then place direct orders for the items without having to go through the procurement process resulting in avoiding administrative costs. This centralized contracts system was suitable for items that have standardized specifications and widely used such as office supplies.
2.3 Another solution instituted was the implementation of J-I-T concept of procurement where deliveries dates were specified to be based on need of the items. This method enabled better management of the inventories as the holding of large quantities was avoided without having an adverse effect on the operations.
3.0 E-Procurement
3.1 The innovations had limited success, benefits and savings as the quantities of paper documentation and human resource input continued to increase due to expansion of operations of the organizations. The rising cost of paper and labor costs provided further impetus for the need to reduce the cost of these two aspects without any substantial reduction in internal controls. The advent of computerization and transmission of information electronically was seen as a solution to reduce these administrative and accounting costs as it connected the buyers directly to the sellers. Consequently the usage of electronic method of procurement which is commonly referred to as e-procurement has been promoted by leaders in governments and the corporate sectors as a cost-effective and cost-efficient method of procurement that promises substantial reduction in costs thereby resulting in economies that can lead to enhanced competitiveness which can be translated into profits.
3.2 Providers of e-procurement systems [known as web based electronic procurement solutions] promise that reduction in administrative and accounting costs can be effected in several ways when compared to the traditional paper based system. Some of the economies affected would include the following aspects:
[a] Purchase price of services and goods;
[b] Administrative & accounting costs of procurement;
[c] Shortened delivery periods and acquisition cycles;
[d] Effective Inventory Management especially minimizing levels of inventory;
[e] Direct ordering and receipt of the procurement;
[f] Reduction in procurement frequencies.
3.3 The quantum of savings in procurement costs would vary depending on the type of industry as the savings are dependent on the variety of items and quantities to be procured. It has been proven that savings achieved for manufacturing sector have been estimated to be 30% to 35% whereas for service based industries the quantum of savings can be about 60%. It is evident that maximum benefits are derived from items that have standardized specifications/standards such as items that can be purchased off-shelf, large quantities and multiple location users. The providers of electronic procurement solutions have gone one step further in advising and recommending that e-procurement functions be outsourced.
3.4 The quantum of savings to the buyers may be minimal in cases of procurements that are not standard types or only of individual types. In such cases the cost of paper documentation may also be transferred to the vendors resulting in increased rates.
4.0 Cost comparison
4.1 The most important justification that should be given serious attention is to compare the cost of the e-procurement solution with the existing paper based system Organizations should ascertain the cost of the existing procurement paper based system with all the current available improvements. The cost of the existing paper based system should form the bench mark against which the cost of the e-procurement solution should be compared.
4.2 A realistic estimate of computing the quantum of savings should be based in total cost comparison of the two systems. The following aspects that should be taken into account in ascertaining the total costs of the e-procurement system:
[a] Capital cost involved in acquiring the solution and its working/useful life,
[b] Manpower costs for operations and maintenance;
[c] Periodical upgrading and replacing the solution including data transfer costs;
[d] Security measures to ensure secrecy and prevention of corruption of data [By virus attacks/hackers or losses through theft or errors];
4.3 It must be remembered that the cost of IT professionals is much higher due to their high demand and market forces. Also installed systems may become obsolete in short times due to new innovations that are designed and brought to the market in short times. In some cases the new systems may not be compatible with the installed system resulting in higher costs to benefit from the new systems.
5.0 E-Procurement Planning
5.1 Organizations planning the introduction of e-procurement systems normally have three main objectives:
[a] Reduce Costs
[b] Have relevant processes
[c] Create Supplier Relationships
5.2 The following main aspects that should be considered would be:
[a] Controls
[i] Buy or manufacture justification
[ii] Avoid emergency purchases
[iii] Financial controls pertaining to approvals
[b] Process Efficiencies
[i] Establish long term mutually beneficial relationships with vendors
[ii] Effective inventory management
[iii] Minimize duration of deliveries
[iv] Well defined business policies, processes and procedures that are understood
[v] IT system efficiently integrates with other systems within the organization
[vi] Information for negotiations for future procurements
[vii] Know own strength and its usage when negotiating procurement terms
[viii] Availability of procurement related information on 24 hours 7days basis
[ix] Downloading of information on need basis which involves minimal costs
[d] Vendor Management
[i] Data base of vendors
[ii] Evaluation of vendor abilities/capabilities prior to inclusion in database
[iii] Design and standardize contractual terms and conditions
[iv] Minimize number of vendors for strategic and mutual advantages
[v] Work and partner with approved vendors for mutual benefits
[vi] Ensure prompt payments to vendors with settlement without invoices
[e] Evaluation of internal policies, procedures and internal controls on a regular basis to ensure effective performance of procurement.
5.3 Substantial cost savings may be achieved in efficiencies in requisitioning of goods and business-to-business [B2B] aspects that result in reduction of times and administrative costs. The reduced administrative procedures and time required to process the procurements can provide the procurement professionals more time for optimizing the supplier sources and agreement terms, conditions and rates.
6.0 Responsibilities and Functions of Procurement Professionals
6.1 Procurement professionals are entrusted with the below mentioned main activities and responsibilities:
[a] Selecting items to be procured
This is generally made on the basis of on-line catalogues that are provided and managed by suppliers. It may be necessary do download the catalogue and make copies for distribution to other relevant officials for their expert input before decision is made to procure the item. Selected items are normally required to be purchased as detailed in the catalogues without any changes to the specifications. Buyers thus must ensure that the item will satisfy their requirements. The major administrative/accounting costs savings will arise only in cases of repeat orders to replenish inventories of approved items such as office supplies, spare parts, etc.
[b] Placing orders
Procurement professionals must study the details as provided in the online catalogue prior to decision on the selected item and issue of a purchase order. This is to ensure that wrong items are not ordered as rejects/replacements are normally not allowed. In some cases where replacements are permitted the administrative and associated costs for replacement are borne by the buyer. As orders are placed electronically by e-mail even a typing error may result in major financial losses. As payments may be required to made upfront it is of utmost importance that there are no errors in the order placing process,
[c] Sending orders
Sending of orders is generally executed by phone calls with follow-up by e-mail of the purchase order on the company’s approved format. Copies of the e-mail placed orders are also copied to the user departments who can then plan their usage. This results in savings in time, paper, fax, storage and other administrative costs.
[d] Receiving orders
Receiving of items is acknowledged via e-mail and the information loaded in the buyers system automatically electronically. The information is then simultaneously integrated in all the relevant systems. On satisfactory confirmation of orders, receipts, acknowledgement, the system will automatically arrange the settlement of the invoices. Payment for items purchased through e-procurement may be made by automatic transfer of funds or by credit card.
7.0 Fraudulent Opportunities/Possibilities
7.1 It should be remembered that like the paper based system the e-procurement solution is also created, operated, maintained and controlled by individuals. As the procedures, internal controls and monitoring are important under the paper based system, these aspects are equally important in the e-procurement solutions. Further due to its technical nature that is not fully understood by the organizations’ senior management there is excessive dependence on the IT professionals. Further as all the transactions are in the computerized paperless form the data can be stolen, transferred to unauthorized persons, corrupted and deleted within seconds and from long distances with use of laptops and other wireless means. This could result in fraudulent transactions that may not be identified promptly and retrieval of information or restructuring of documentation can be an expensive and almost impossible task.
7.2 Thus absence of any paper trail or documentation may not provide the essential evidence to take action against the fraudsters. The electronic documentation does not have the signatures of the parties involved nevertheless it has been ruled in UK that the unsigned documentations can be accepted as evidence in a court of law but it is appropriate that legal advice be obtained in other countries.
7.3 The information pertaining to procurement is available to all prospective providers of goods and services. This promotes competitiveness among service/goods providers resulting in best terms and rates for the items to be procured. Another important advantage is the promotion of transparency that can result in accountability and avoidance/minimizing of corrupt practices and fraudulent incidents.
7.4 Fraudulent opportunities can be created at all stages of procurement beginning with the initial stage of designing the e-procurement software or purchasing an existing system available subject to modification to the buyer’s needs and subsequent stages of selection of vendor, installation, operations and post-installation maintenance. Decision makers must equip themselves with relevant knowledge to ensure that they understand the implications of the recommended software during its operation but also after it is implemented. In addition where the software is custom built for the client the copyright ownership should be retained by the client with sole user rights.
8.0 Conclusion
8.1 Some important common aspects pertaining to procurement methods that should be studied and substantiated have been provided in this article. However each user should prepare its own list of aspects that would vary from industry to industry and then make an informed decision to reap full benefits. It should be remembered that the cost of reverting back to existing system that already functions efficiently can be financially costly if the e-procurement solution is implemented and subsequently deemed to be not beneficial.
8.2 Government and industry leaders should realize that the e-procurement solution providers will only emphasize the many benefits that can accrue from their solutions and other services and it is substantially true. However procurement professionals and their employers should be aware that substantial benefits and cost savings can also be achieved through the manual system if the principles and methods recommended for use under the e-procurement system are also applied to the manual system. Thus users should do their own studies to ascertain the benefits and the extent of savings that can be accrued from the existing manual system before deciding to invest substantial sums in adoption and implementation of the of the e-procurement solution.
8.3 Both systems of procurement whether based on paper or electronic systems have their own advantages and disadvantages. E-Procurement solution is beneficial in cases where the specifications are consistent, the quantities are large, and deliveries are over long periods and to multiple locations. In both cases their success is dependent on the quality of its management, policies, procedures, accuracy and relevancy of information, effective monitoring, periodical reviews/revisions to ensure that latest innovations to be incorporated in the existing procurement system are compatible with existing operations and integrated with the existing systems within the organizations other systems.
8.4 As is common in all activities, periodical status reports should be prepared also of the e-procurement transactions. The contents should be reviewed in depth and intelligently to ascertain trends and any signs that may appear to be not consistent with best practices and may indicate cost-inefficiencies and absence of effectiveness. Purchases should also be made using the manual system as a test on periodical basis to ensure that the projected economies continue to be achieved. Investigations should be initiated where appropriate promptly to minimize any possible adverse effects of frauds.
8.5 Government and industry leaders should always be aware that any activity that involves humans who are trusted with others moneys and have control to manage it will always be tempted to defraud and procurement is no exception. Thus it is important that appropriate policies, procedures, internal controls and monitoring are implemented and affected on a continuous basis to ensure that fraudulent opportunities/possibilities are prevented or minimized by early detection and appropriate action in cases of any frauds. However, it may be noted that it is generally more difficult to prove frauds due to the expertise of the persons involved, speed of fraud and absence of acceptable evidence. Further in some cases when a fraud is proved the penalties imposed are generally ineffective and may not have the desired deterrent effect on the perpetuators. Finally enforcement authorities may also not have the required resources to investigate the few reports that they receive from those defrauded due to reasons best known to themselves but the main reason is ‘losing face’ within their fraternities.
E-PROCUREMNT
NOT A SOLUTION FOR ALL PURCHASES,
SHOULD BE SCRUTINIZED FOR BENEFITS BEFORE IMPLEMENTATION
SHOULD BE MONITORED & REVIEWED REGULARLY
FOR MAXIMUM BENEFITS
BLIND ACCEPTANCE IS INVITATION TO FINANCIAL DISASTER
GSK/June 2007
E-mail: gursharan38@gmail.com sharwant38@yahoo.com
The opinions, beliefs and viewpoints expressed by the various authors and forum participants on this web site do not necessarily reflect the opinions, beliefs and viewpoints of AuditNet®