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Can you justify the investment in an e-procurement solution? And does this include an analysis of the type of solution which will make the most significant impact on your organisation’s bottom line? What you need is to develop a business case for e-procurement. This could include building three business cases:
Miraculum has found that companies often have an initial focus on one of these three ‘types’ of business cases. Companies usually want a specific problem solved such as poor requisitioning workflow, or poor purchasing performance, to name a few. However the development of other business case benefits should not be ignored. There are, for example, additional opportunities that could come out of a partnership with a technology partner such as Miraculum. For these reasons, each business case must be able to stand alone and pass the criteria of return or payback period. Then it should be combined with the other business cases to examine the potential of multiplying the business benefit to the company. So what are the key issues and assumptions that must be taken in preparation for building a business case? Basic research and filtering of data The usual starting point involves taking extracts from accounts payable. This is often a difficult process because there are often multiple systems within corporate subsidiaries and different categorisation of master record inventory files. A database of purchasing spend by date, supplier, good category, description, account allocation can usually only be formed after a data clean-up, de-duplication and standardisation process has occurred. Miraculum can perform this service where required. However, these difficulties should not stop the justification process. Miraculum has often used extracts from account information and extrapolated for other areas of the business. Basic assumptions regarding purchasing efficiencies Miraculum has found that purchasing officers usually have a reasonable idea of the time-savings that could be obtained. Estimates are then developed of the cost saving that could be obtained with an automated procurement tool. Best and worst cases are developed. These typically range between 1% and 4% of annual indirect spend. Assumptions regarding spend categories and suppliers On-contract spend and maverick spend is examined, and assumptions are then made regarding what potential on-contract spend could be if there was greater control over requisitioning and purchasing (via a tool). A survey of suppliers is undertaken to understand the extent of additional discounts if preferred suppliers received larger volumes of business. This step is not as difficult as it sounds as Miraculum has an ongoing supplier outreach programme, giving us an idea of the levels of benefit obtainable. Given
these issues, which of these business case angles would you require to
justify an investment in an e-procurement solution?
It is reported that purchasing through consortiums saved US corporates about 13.4 %, which yielded an average annual savings of about $2.3 million for each member. Comparing this to the average annual cost of $300,000, and using a liberal interpretation, this results in an average return on "investment" of 767%! Overview There are many components in the arsenal of strategies and tactics employed by forward thinking procurement managers. One of these is aggregated purchasing - the arrangement in which several participants pool their purchasing in order to attain better deals with suppliers for common purchases. The concept is not new. Large corporations have been doing this for years. Each division in the corporate agrees to abide by the standard and then a deal is entered into with a supplier based on the expected volumes. This usually yields much better pricing and service from the supplier. By using a B2B exchange, this concept can be simply extended to accommodate buyers from different organizations. They can all then benefit from better terms than would have been obtained individually. The proof is in the eating But does
this theoretical opportunity translate into reality? How much is aggregated
purchasing going to save?
So What is the BOTTOM LINE ? The survey reported that the mean total annual cost to run these consortiums was about $300,000. The average dollar volume of the items purchased by the reporting firms through these consortiums was about $15 million through about three suppliers with whom they have purchase agreements for slightly more than two years. Purchasing through their consortiums saved them about 13.4 %, which yielded an average annual savings of about $2.3 million for each member. Comparing this to the average annual cost of $300,000, and using a liberal interpretation, this results in an average return on "investment" of 767%! Conclusion According to this CAPS study, the financial benefits of aggregated purchasing are dramatic. The result of participation in a purchasing consortium is a solid return on investment. The reality of an e-procurement system is that it simplifies the attainment of desired savings by providing the tools and structure to rapidly implement consortium purchasing. And a 767% return is not too shabby!
Miraculum is proud to welcome new members to the community. First
Data
"OSEC
is proud to be a member of the supplier community on Miraculum Xchange. The
benefits of B2B e-procurement will compliment our passionate drive for
professionalism and service excellence."
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