Essay: Procurement and Supplier Management: Potential

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[. . .] The organization should develop a fraud response plan and should carefully check out any potential suppliers to ensure that their manufacturers are adhering to all pertinent laws and regulations. It is important to make sure the supplier has the capacity required as well.

V. E-Procurement

E-procurement or B2B (business-to-business) is "grounded in the strategic leveraging of both tangible/intangible assets for successful implementation and execution of electronic trade, resulting in significant financial benefits for firms." (Smith and Flanegin, 2004, p.176) Phillips and Piotrowicz (2006) reports that the procurement process "has traditionally involved slow manual procedures and even slower systematic processes for handling procurement transactions. E-procurement has had an increasingly important role in business-to-business commerce." (p.4) Web-enabled B2B e-commerce is reported to be such that "enhances inter-organizational coordination resulting in transaction cost savings and competitive sourcing opportunities for the buyer organization." (Phillips and Piotrowicz, 2006, p.4)

It is important that supply managers understands the effect of technology and that they gain in their competencies toward business e-procurement. (Phillips and Piotrowicz, 2006. paraphrased) Inter-organizational systems including electronic data interchange (EDI) and internet-based extranets serve to enable "new types of collaborative alliances between separate trading partners. These new relationship could change from hierarchical to market. Understanding how to best leverage the benefits from these IT-enabled alliances may mean the difference between industry dominance and industry exit." (Phillips and Piotrowicz, 2006, p.5) The use of e-commerce solutions and their effect on procurement-related processes are reported by companies to result in the benefits shown in the following table labeled Figure 1.

Figure 1 - Benefits from E-Procurement Processes

Cost Reduction

Croom and Johnston (2003); Davila et al. (2003); Lin and Hseih (2000), Radovilsky and Hedge (2004) Subramaniam and Shaw (2002)

Reduction in Purchasing Cycle/Order Time

Davila et al. 2003, Lin and Hsieh 2000,

Radovilsky and Hedge (2004)

Reduction in Number of Suppliers

Davila, et al. (2003)

Increase in the number of products supplied by main suppliers

Muffatto and Payaro (2004)

Inventory savings

Subramaniam and Shaw 2002

Reduction of purchasing prices

Davila et al. (2003)

Source: Phillips and Piotrowicz (2006)

Smith and Flanegin report that strategic leveraging of e-procurement and Enterprise Resource Planning (ERP) has "…become a major target for such productivity gains, if properly integrated into existing systems. In 2001, North America occupied 66% of the ERP market, Europe took 22%, and the whole of Asia was 9%. As more and more companies strive to gain a competitive advantage, e-procurement and ERP implementation are the strategies of choice. (2004, p. 178) The primary elements of an automatic identification system in e-procurement technologies include: (1) the physical object; (2) code; (3) reader; (4) computer hardware; (5) software; (6) display or printer; and (7) personnel. (Smith and Flanegin, 2004, p.179) This type of technology makes the processes of procurement transparent and reduces the possibility of fraud and increases the level of trust between suppliers and buyers.

The work of Kwon (2004) reports on factors that affect the level of trust and commitment in supply chain relationships and states Trust is a critical factor fostering commitment among supply chain partners. The presence of trust improves measurably the chance of successful supply chain performance. A lack of trust among supply chain partners often results in inefficient and ineffective performance as the transaction costs (verification, inspections and certifications of their trading partners) mount." (p. 4) Kwon additionally states "Successful supply chain performance is based on a high level of trust and a strong commitment among supply chain partners. Effective supply chain planning based on shared information and trust among partners is an essential requirement for successful supply chain management." (2004, p.5) According to Kwon (2004), "A lack of trust among trading partners often creates a condition where every transaction has to be scrutinized and verified, thereby increasing the transaction costs to an unacceptably high level. Productivity is lost and efficiency and effectiveness, cornerstones of supply chain goals, will be compromised. Creating value-added activities with such partners becomes almost impossible and the supply chain tools used to improve efficiency, effectiveness and productivity (such as vendor managed inventory (VMI), cross-docking (CD), and collaborative forecasting, planning and replenishment (CFPR)) eventually become ineffective." (p.5) The outcome of trust is the belief of the firm that the other company will "perform actions that will result in positive outcomes for the firm as well as not take unexpected actions that result in negative outcomes." (Kwon, 2004, p.6) The work of Kwon relates the factors affecting the level of trust and commitment in supply chain relationships and states that they include those shown in the following illustration in figure 4.

Figure 4-0 Factors That Affect Level of Trust and Commitment in Supply Chain Relationships

Source: Kwon (2004)

The items used for measure in the study reported by Kwon (2004) include those shown in the following table labeled Figure 3.

Figure 3 -- Items Used in Measuring Trust and Commitment

Source: Kwon (2004)

The study reported by Kwon (2004) states implications for implementation of trust-building blocks and specifically that simple information sharing "may not be enough to overcome barriers and suspicion inherent in the information-sharing process. It is posited that enjoyment of the full benefits of supply chain collaboration (efficiency, effectiveness, and profit sharing) requires each partner to willingly provide, within the collaborative framework, critical information needed for effective management of the supply chain. This information may include, but not be limited to, operational data (utilization rate, productivity goals, production and distribution systems), financial data (activity costs, cost of goods sold per unit, return on capital, carrier cost-and-profit structure), forecasting data (volume, product and market strategy), and supply chain data (cost and value-added propositions." (p.14) Kwon states that supply chain management makes a requirement of the knowledge of "relationship-building skills. Supply chain integration is often regarded as a long-term strategic process and relationship management is one critical skill needed for the new breed of decision makers." (2004, p.15)

Summary and Conclusion

This study has demonstrated that clear lines of communication, safeguards to prevent fraud and corruption, and high levels of trust among suppliers and buyers are all critical elements in strategic supply chain procurement practices. When there is a high level of trust among suppliers and purchasers, the supply chain is more likely to be optimized and productivity and profitability is likely to be much higher. As noted in this study trust has as its outcome the understanding o the part of the firm that the other party to the transaction will perform actions that result in positive benefits to the firm and that no actions will be taken that will result in negative outcomes. Benefits to the e-procurement process have been noted in this study to include reduction in costs, reduction in purchasing cycle order time, reduction in the number of suppliers needed, increases in the number of products supplied by the primary suppliers, inventory savings and reduction of purchasing prices. Fraud and corruption can be prevented through examining poor or nonexistent recordkeeping, higher prices and lower quality goods, excessive entertaining of procurement staff by suppliers, deviations in communications between procurement staff and suppliers, the requirement of extended period of notice by procurement staff prior to an audit and inexperienced buyers who are dealing with overbearing suppliers. Monitoring for fraud and corruption in the purchasing process include checking for out of hours transactions, matching of employee and vendor details, short-term changes to employee or supplier accounts, inappropriate authority to transact deals, conflicts of interest, and EFT Transactions conducted without the prior required approval. Finally, factors that affect the level of trust and commitment in supply chain relationships include asset specificity, behavioral uncertainty, information sharing, perceived satisfaction, partner's reputation and perceived conflict.


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