E-Procurement

How Does E-procurement Enhance Strategic Performance?

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Introduction

The procurement process has shown slow traditional and manual procedures and even slower systematic processes for handling procurement transactions. E-procurement has had an important role in B2B commerce. Web-enabled E-commerce has motivated inter-organizational coordination which has resulted in transaction cost savings and competitive sourcing opportunities (for buyer organization). Nevertheless, despite the proliferation of the theories and practices dedicated towards procurement, most of the contributors of such theories deliver only the partial solution to such behaviors and rules.

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“If E-procurement is to obtain a strategic effect rather than an operational level of influence within the organizational hierarchy, consideration needs to be given to as how actors can be strategically, operationally and technologically integrated.”

Relation between E-procurement and performance

A paradigm shift has been observed in the way firms interact with their suppliers since the advent of E-business. Apparently, continuous improvements in internet technology provide an opportunity to make procurement for goods and services more transparent, easy and efficient. As organizations seek to enhance market efficiencies, six forms of E-procurement applications have been noted: E-sourcing, E-informing, E-tendering, E-reverse auctions, E-MRO and web based enterprise resource planning.

This is to be noted that over the last decade, E-procurement has emerged out to be as a major component in the Supply Chain Management field. This would not be exaggeration that at its most basic level, E-procurement has changed the way businesses buy and purchase goods. At the strategic level, it is anticipated that E-procurement will free the purchasing resources from transaction processes to strategic resourcing activities.

However in many commercial organizations the business case for E-procurement is predicted on being able to deliver a variety of benefits including lower prices, lower transactional costs, better compliance, speedier delivery etc.

“In one of their recent empirical studies, Carr and Pearson (1999) confirmed that strategic purchasing has a positive impact on company’s financial performance.”

E-commerce tools provide the opportunity to enhance two major elements of procurement process: Communication aspects; and Transaction aspects. Surveys have confirmed that E-commerce platforms and IT solutions have had an influence on procurement related processes. Such as:

  • Cost reduction
  • Reduction in purchasing cycle
  • Reduction in number of suppliers
  • Increase in number of products supplied by main suppliers
  • Inventory savings
  • Increase in internal customer service levels.

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Carl and Pearson (1999) in their paper reported the links between supplier-buyers’ relationship and firms’ financial performance which mentioned that firms may achieve competitive advantage for long-term relationships rather than merely short-term relationships.

Strategic Performance Measurement:

Evans (2004) asserts the design of effective performance measurement system including the selection of appropriate measures and results is central to aligning an organizations’ operation with strategic direction.

Companies have started to increasingly use Strategic Performance Measurement Systems (SPMS) to implement the right strategy and drive performance improvements. Strategic performance measurement is nothing but a set of casually linked non-financial and financial objectives and goals designed to align managers’ actions with the firms’ strategy. This concept evolved out of the need for the fusion of strategic planning with performance measurement.

Nevertheless, despite of new frameworks emerging, that extend organizational perspectives beyond traditional financial measures, many organizations still fail to identify, analyse or act on the non-financial measures (Ittner and Larcker 2003).

Proponents of strategic performance measurement defines two general approaches: Measurement diversity and Contingency approach. Measurement diversity enhances the economic performance since the managers place emphasis on a broad set of financial and non-financial performance measures. A contingency approach can also improve the economic performance as measurement gap between the firms’ strategic priorities and measurement practices are minimized.

As per the study done by Chenhall (2005), it observes three information components that describe integrated SPMS. First, the extent to which formal SPMS provide the information linking operations to goals and strategies and to link activities across sub units. Also, various measures were linked with a customer and supplier bit of the SPMS.

E-procurement Strategy

Some researchers have found positive changes in relationships as a result of E-procurement, but in other cases new technology could be seen as the source of additional risk for suppliers. Major issues such as transparency and lack of trust between companies have been observed. Bartezzaghi and Ronchi (2003) stated that E-procurement impregnation can lead to a destruction of established collaboration, which further leads to loss of flexibility and reliability, as a result of changes in procurement strategies.

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Rajkumar (2001) proposed critical success factors like E-procurement strategy definition, procurement process reengineering, key stake holders’ involvement, focus on product segments etc.

Strategic Typology

The strategy literature is stuffed with typologies, research methodologies, thesis and theories on the strategy performance relationship. In such unsettled external environment, along with the market competition and more discerning customers, it is a necessity for the organizations that they constantly keep re-appraising their competitive actions. Based on the field studies conducted in four different industries (health care, textbook publishing food processing and electronics), Miles and Snow (1978) postulated the existence of relationship across the perspective of strategies: prospectors, analyzers, defenders and reactors. Prospectors are characterized by being highly innovative and bringing new changes to their industries. Defenders find and seek for niche areas in the stable product domains with the overall emphasis on efficiency. Analyzers are caught between a prospector and a defender strategy. Reactors tend to be out-performed by prospectors, defenders, and analyzers as they lack a consistent strategy to react to environmental pressures as they arise.

“The contrast in the E-procurement implementation patterns have been observed with some companies identified as aggressive adopters and others with “wait and see” strategy (Davila et al. 2003).”

Having gone through the impact of E-commerce alignment on organizational profitability through 12 companies, Kearns (2005) concluded that the most profitable companies belonged to the analyzers and prospectors group. Three analyzers and one company with a defender characteristic had great E-commerce strategic alignment with high ROI. Reactors were having the minimum profits.

Strategic IT Capability

It is important to understand the costs and benefits if the development of strategic capabilities requires deliberate and sustained investment of managerial and financial resources. Strategic capabilities are defined as the complex bundles of accumulated knowledge and skills that encourages firms to coordinate activities and make use of their assets.

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An organizations ability to apply and use its capabilities in the form of knowledge resource to execute important activities is viewed as a source of competitive advantage. Capabilities in IT help the organization diffuse marketing information effectively across the entire relevant functional areas that it can explore and exploit to direct the new development plan.Growth in organization’s level of strategic IT capability, will have a positive impact on the e-procurement-strategic performance relationship.

Organizational Alignment

In this era, internet equipped B2B E-procurement encourage inter-organizational coordination which results in transaction cost savings and competitive sourcing opportunities for the buyer firm. Despite of high demand and supply-side economics, E-procurement is capable of supporting increased and more complex coordination. Unstructured, intense and complex purchases involve higher level of coordination and needs more human interaction within the organization itself and as well as with the business partners.

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Firms are investing significant amounts in their E-businesses and IT; yet some managers remain not-so-clear about how to adapt the new strategies and processes for their organizations. Advancement in procurement technologies create the opportunities for new forms of works such as collapsing boundaries between suppliers and customers make it imperative for management to identify the key processes and attributes required to get a competitive advantage.

Conclusion

Creation of connecting dots between a strategic performance system and E-procurement give the possibility to measure and analyze as well the E-procurement benefits not only on an operation level but also to observe the E-procurement impact on strategic performance. In the scenario where a void between operational and strategic managerial level exists, companies might achieve operational E-procurement benefits for short term but the effect on overall performance might be negative.

Links between operational and strategic performance levels play an important role in reflecting the impact of E-procurement on strategic performance. A strategic performance measurement system indicates tangential costs which may occur due to some E-procurement operational decisions or strategy. Strategic performance includes metrics and factors related to the customer needs and satisfaction along with the inclusion of customer perspective into the procurement process. Alignment helps companies to successfully implement the advantages of E-procurement technology and in return achieve a strategic advantage in the operating market.

“An increase in level of organizational alignment will positively affect the E-procurement-strategic performance relationships.”

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