E-procurement - a key long-term competitive advantage

Optimizing processes at a medium-sized company specialized in parking facility management

The trend towards outsourcing has had a severe detrimental effect on many companies’ real net output ratio. As a result, more and more goods and services are being sourced through third parties. Consequently, in recent years the significance of procurement to business success has risen sharply. Increasingly, this area of the business is becoming pivotal to profit and competitive advantage. The options open to medium-sized companies to leverage this advantage were investigated by Jörg Mayr, as part of his bachelor’s degree at the School of Management and Technology at Steinbeis University Berlin.

The increasingly important role played by the internet is providing companies with modern new procurement options. The targeted use of web-based electronic buying, or e-procurement, saves time and money. The challenges faced in introducing e-procurement at medium-sized companies are fundamentally different to the challenges faced by big companies, however – not least because of the vastly different transaction volumes involved and the smaller scope of cost reduction. So if a medium-sized business does succeed in introducing e-procurement, it can often be a strategic competitive advantage.

As part of his degree project, Jörg Mayr analyzed how a typical medium-sized company in the field of parking facility management can make product and process savings by introducing an optimized, electronic buying process – e-procurement – and the longterm contributions this would make to improving revenues. The company involved had already enjoyed significant success by continuously improving its industry-related business processes. For example, as a result of a comprehensive analysis of general overheads in 2009, a number of new measures were introduced to cut costs. All were aimed at improving long-term revenues. Specifically in procurement, a number of approaches emerged to make buying processes more simple in the future, easier to control, and whenever possible, automated. The procurement process focuses mainly on indirect products/MROs (maintenance, repair and operating products). These are not an integral part of company services. Apart from re-organizing the buying process and process modeling, it was also essential to take investments in related IT systems into account.

There are many ways to improve procurement systems. Most focus on products and the processes. An analysis of processes showed that over 80% of all purchase transactions stem from the procurement of indirect/ MRO products. Existing processes are paper-based, long-winded, prone to errors and thus expensive. Processes are analyzed to ascertain whether the intended use of resources would add value to the company. The process savings expected from a project depend on how completely processes are supported – at every stage of the procurement process – plus the extent to which different kinds of processes are covered. An analysis of products showed that there was a high number of indirect/MRO products as a proportion of total company expenditure: Including plant and investment goods, they accounted for around 8% of total item turnover, the third biggest cost category. Many high-cost investment goods (parking equipment) were acquired outside volume contracts by side-stepping the central purchasing function (“maverick buying”). The port- folio of products needed to provide core services was multifaceted and extremely heterogeneous. A particular feature of parking facilities and equipment in multi-storey car parks is that products are highly specialized and cost-intensive.

This is compounded by a need to make the right parts immediately available for repairs and maintenance, otherwise equipment could stop working, which means losing money. The team ran a product analysis to see if a specific selection of required products (including their suppliers) could optimize costs in this area in the long term.

The analysis showed that the challenges for medium-sized enterprises involved in parking facilities are more of a financial and less of a technical nature. For them, e-procurement solutions have to focus on the buying strategy and be tailored to company needs. Individualization and ongoing updates can ensure a company maintains a strategic edge on its competitors. However, as the economies of scale in medium-sized firms are lower than in a large company, actual outcomes are less marked. There is therefore less leeway to solve problems. Instead, more attention must be paid to planning and implementation. Introducing e-procurement plays an essential role in realizing the corporate strategy in the long term. It also lays a meaningful foundation for further growth.

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