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Value Creation in E - Procurement

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					MSC in Business Performance Management            Author: Anelise Dahlstrom Cascapera
Department of Marketing and Statistics                     Supervisor: Kent T. Nielsen




                  Value Creation in E-Procurement




             Århus School of Business – University of Århus – August 2007
“Education is the most powerful weapon which you can use
                                     to change the world”
                                              Nelson Mandela
Abstract




Abstract
This thesis analyses the value creation in an e-procurement process and uses as case
study a large shipping company who has the procurement group as a global procurement
unit, negotiating agreement in connection with the various Business Units and pooling up
the e-procurement process through the organization.

The sources of value creation in e-business used as a theoretical framework based in
theories of entrepreneurship and strategic management is applied in a practical context
through out the thesis in form of practical examples linking the theory to the practice.




                                                                                           i
Preface




Preface
After six years of education I can feel I already reached a level where I can start applying
my knowledge gained in those years in a practical perspective with more maturity and
confidence. The first steps of my career started in Brazil when I decided to take a Bachelor
in International Trade together with the opportunity to work in the same area at Embraer.
The first four years of my education was combined with practical knowledge, executing
tasks of high responsibility that allowed me to have an expanded knowledge.

My interest for procurement started in 2003 while working at the Strategic Purchasing
Department at Kodak, the fascinating world of e-business and contract negotiations kept
my attention and I had the confirmation of which line I would like to follow.

The opportunity of taking a master degree at Århus School of Business was a big step to
reach the level I always dreamed of. My interest for procurement was confirmed once
more while taking an E-Commerce Legislation elective and my theoretical knowledge was
combined with practice once again when I was accepted to work at the Procurement
Department at A.P Møller – Mærsk December 2006, which helped me maturing both as
professional and as person and made me feel realized to have got my dream job while still
studying and having the opportunity to improve my learning process.

I would like to first of all thank my mother who taught me to be determined and to fight for
my dreams with dignity and wisdom. Who taught me not to give up when everything
seems to be so difficult and cloudy and that sometimes we lose and sometimes we win but
the most important thing is to learn with our mistakes and become a better person. I would
also like to thank to my brother and family who supported me with their love and also
made me hold on in difficult times. Thanks to my friends with whom I shared many
laughter and some tears, which showed me that life can be much better when we are not
alone and to my dear Jacob Severinsen for all the support and advice given in this
important task. Thanks to my colleagues at Mærsk for providing me important contribution
and some practical examples, in special to Camille Klejin for reading this thesis and
aggregating constructive comments into it, and to my managers Brian Nygaard and Jens
Aage Nielsen for their comprehension and the time given to me so I could finish this
thesis. Thanks to my director Henrik Larsen for the opportunity of writing the E-Sourcing
Handbook, this showed me their trust in my knowledge and work. Finally but not least,
thanks to my supervisor Kent Nielsen for helping me keeping my focus in such broad
subject.


Anelise Dahlstrom Cascapera




                                                                                          ii
Table of contents




Table of contents
ABSTRACT                                                                 I
PREFACE                                                                 II
TABLE OF CONTENTS                                                        1
LIST OF ABBREVIATIONS                                                    3
GLOSSARY OF TERMS                                                        4
1 INTRODUCTION                                                           5
  1.1 INTRODUCTION TO THE SUBJECT                                        5
  1.2 PROBLEM STATEMENT                                                  6
  1.3 DELIMITATIONS                                                      7
  1.4 STRUCTURE OF THE THESIS                                            7
2 THEORY OF VALUE CREATION IN E-BUSINESS                                 9
  2.1 DEFINITIONS                                                        9
  2.2 INTRODUCTION TO THE THEORY                                        10
     2.2.1 Value chain framework                                        12
     2.2.2 Creative destruction                                         12
     2.2.3 Resource-based view of the firm                              13
     2.2.4 Strategic networks                                           14
     2.2.5 Transaction cost economics                                   15
  2.3 VALUE CREATION DRIVERS                                            16
     2.3.1 Efficiency                                                   17
     2.3.2 Complementarities                                            18
     2.3.3 Lock-in                                                      19
     2.3.4 Novelty                                                      22
  2.4 THEORY REMARKS                                                    23
3 E-PROCUREMENT                                                         26
  3.1 INTRODUCTION                                                      26
  3.2 DEFINITION                                                        27
  3.3 UNDERSTANDING THE E- PROCUREMENT PROCESS                          27
  3.4 BENEFITS                                                          28
  3.5 BARRIERS AND RISKS OF E-PROCUREMENT                               30
     3.5.1 Legal issues                                                 31
     3.5.2 Resistance to change                                         32
     3.5.3 IT issues                                                    32
     3.5.4 Security of transactions                                     33
  3.7 E-SOURCING                                                        35
     3.7.1 Definition                                                   36
     3.7.2 Process                                                      36
  3.8 E-RF(X) (ELECTRONIC REQUEST FOR INFORMATION/QUOTATION/PROPOSAL)   37
     3.8.1 Definition                                                   38
     3.8.2 E-RFI                                                        39
     3.8.3 E-RFQ                                                        39
     3.8.4 Benefits of an e-RFQ                                         40
     3.8.5 Applicability of an e-RFQ                                    41
  3.9 E-CATALOGUES                                                      41
  3.10 E-AUCTION                                                        43
     3.10.1 Definition                                                  43
     3.10.2 Types of e-auctions                                         43
     3.10.3 Benefits                                                    44
     3.10.4 Supplier feedback                                           45



                                                                        1
Table of contents




     3.10.5 Award decision                             46
  3.11 ONLINE CONTRACTS                                47
     3.11.1 Offer                                      48
     3.11.2 Acceptance                                 48
     3.11.3 On-line Acceptance                         49
  3.12 CHAPTER DISCUSSION                              51
4 LEGAL FACTORS                                        52
  4.1 E-CONTRACT FORMATION                             52
  4.2 DATA PROTECTION                                  53
  4.3 EU DIRECTIVES                                    53
  4.4 CHAPTER DISCUSSION                               55
5 STUDY CASE – MÆRSK MODEL                             56
  5.1 ABOUT A.P. MØLLER – MÆRSK (APMM)                 56
  5.2 ABOUT MÆRSK PROCUREMENT (MPRO)                   57
  5.3 IDENTIFIED NEEDS FOR ADAPTING E-PROCUREMENT      60
  5.4 MÆRSK PROCUREMENT SIX SOURCING STEPS             62
     Step 1 – Establish Scope, Team and Goals          62
     Step 2 - Collect and Analyse Internal Data        63
     Step 3 – Collect and Analyse Supply Market Data   64
     Step 4 – Develop Strategy                         65
     Step 5 – Execute Strategy                         65
     Step 6 – Implementation and Category Management   66
  5.5 THE MÆRSK PROCUREMENT PROCESS                    67
  5.6 E-SOURCING I MPLEMENTATION                       68
     Establish Scope, Team & Goals                     69
     Collect & Analyse Internal Data                   70
     Collect & Analyse Supply Market Data              71
     Execute Strategy                                  72
  5.7 CHAPTER DISCUSSION                               75
6 DISCUSSION AND CONCLUSION                            77
  6.1 RECOMMENDATIONS                                  81
REFERENCES                                             83




                                                       2
Glossary




List of Abbreviations


APMM – A.P. Møller Mærsk Group
CM – Content Management
DE – Document Exchange
DPCP – Decentralized Procurement through a Common Platform
EDI – Electronic Document Interchange
EPS – Electronic Procurement System
E-RFI – Electronic Request for Information
E-RFP – Electronic Request for Proposal
E-RFQ – Electronic Request for Quotation
E-RF(x) – Electronic Request for (Information, Quotation, Proposal)
FA – Frame Agreements
ICT – Information and Communications Technology
MPRO – Mærsk Procurement
PDW – Procurement Data Warehouse
PO – Purchase Order
SSG – Strategic Sourcing Group
US – United States of America




                                                                      3
Glossary




Glossary of Terms


Baseline – An agreed starting point against which project impact will be measured. The
baseline is generally the previous year spend on a good or service. This amount can be
adjusted for several factors such as market development, volume changes, etc.


Benchmarking – An analytical tool used to measure and compare business operations,
functions or processes against best-in-class performers.


Compliance – The degree of usage of an agreement. Compare non-compliance –
sometimes termed maverick buying.


Procurement Data Warehouse – it is a spend data consolidator and tool for monitoring
compliance on new agreements.


Procurement Virtual Community – It is the MPRO’s knowledge portal. It contains
information and tools on procurement activities such as strategic sourcing, category
management, frame agreements and procurement training & education.


Saving – The saving is the financial impact of the sourcing project and is calculated by
comparing the new price to the defined baseline.


TCO model – Total Cost of Ownership, a model summarizing all costs associated with
purchasing, owning and maintaining a particular product or service during a defined period
of time.




                                                                                        4
Chapter 1 – Introduction




1 Introduction


1.1 Introduction to the subject


E-procurement tools have been used by several organizations to purchase direct and
indirect materials for processes such as operations, sales, administration and
maintenance, travel related items (flight tickets and hotel reservations), cleaning
solvents, and transportation services, among others. This procedure allows the
organizations to have a decentralized purchasing decision, in which only the accredited
suppliers can be seen in their purchasing systems, through for example e-catalogues.


One of the tools used within the e-procurement process is the e-RFQ (Electronic
Request for Quotation), where the quotation is requested online in a platform set by the
customer (buyer) in which the form for the quotation is uploaded and the supplier can
only update the information requested. Another tool used in e-procurement is e-auction,
                                                                                                        1
where the number of suppliers can be maximized while the workload is minimized and
through which negotiations can be completed in a short time with great saving
potentials. A study conducted by Cambridge Consultants, a manufacturer with 300
employees offering technical product design and development services to commerce
and industry, identified that through e-procurement the cost of a paper-based order of
£60 was reduced to £10 per order, generating a total saving of £57,000 per year.2


In this paper, I will make an analysis of the value creation in an electronic procurement
process, what changes when you move from traditional procurement to electronic
procurement and what benefits it brings to the companies involved. The analysis will be
based on how things are done in practice at a large Danish shipping company, A.P.
Møller – Mærsk Group, which has the Procurement Group placed as a global Business

1
  As e-auction is based in an electronic platform, it allows buyers to reach as many suppliers as it is needed
with a minimized workload, once the suppliers can be selected in the preparatory phase and with the click of
a button, the invitation to participate in the event is sent out automatically by the system.
2
  The Cambridge Consultants case can be found at Chaffey, Dave. “E-business and E-commerce
Management – Second Edition” – (Chapter 7, pgs. 294 and 295)



                                                                                                             5
Chapter 1 – Introduction




Unit established in 2001. The analysis will be sustained by the theory of “Value Creation
in E-Business” framework, which basically states that value can be created by the ways
in which transactions are enabled. The theory suggests a model of the sources of value
creation in e-business, which depends on four interdependent dimensions: efficiency,
complementarities, lock-in and novelty. This business model describes the design of
transaction content and structure so as to create value through the exploitation of
business opportunities. The theory proposes that a company’s business model is an
important “locus” of innovation and crucial source of value creation for the company
itself, its suppliers, partners and customers.


Before identifying which values are added in an e-procurement process, it is necessary to
understand the definitions of procurement and its phases, also to know how they occur,
what their objectives and processes.


I will start by describing the study used as theory, the e-procurement process and
definitions and will build a case study of how e-procurement is done in a practical context.
This thesis will be finalized with a discussion and conclusion chapters.



1.2 Problem statement


E-procurement simplifies the sourcing and purchasing process in an organization.
However there is still some change resistance towards its implementation and therefore
the importance of identifying whether e-procurement creates value to a procurement
process, how and what are the benefits of changing from traditional procurement process
to electronic procurement.


This thesis intends to answer the main question:

          How does e-procurement create value to traditional procurement process?

An answer the following sub-question will also be provided:

         What changes in the procurement process when it goes online? Is it only a
         web-based system or does it require a new process?


                                                                                          6
Chapter 1 – Introduction




The answers will be based on a theoretical framework and its applicability in a practical
context.



1.3 Delimitations


This thesis will only be based on value creation in the procurement process of private
companies. Due to lack of information of how private companies conduct their e-
procurement process, the analysis will mainly be based at A.P. Møller – Mærsk Group,
where I work since December 2006 at the Mærsk Procurement Group.


This cooperation allowed me to apply the theoretical knowledge gained during my
education in a practical and analytical perspective, which contributed to the analysis and
technical interpretation of the current situation within the procurement environment and to
the application of practical examples.


It is required that the reader possess a practical and technical understanding of
procurement to fully understand the topics. If I had to explain each step of procurement in
full detail, it would result in a enormous paperwork, exceeding the limit and purpose of this
thesis. However I tried to be simple in the explanations and write in a didactic format.



1.4 Structure of the thesis


The thesis starts in Chapter 2 with an overview of the value creation framework. It
introduces the four drivers or sources of value creation in e-business and shows some
examples of each one of them. Chapter 3 contains a broad description of e-procurement; it
ends up with a discussion of value creation, linking to the theoretical framework from
chapter 2. This chapter also intends to answer the sub-question presented at section 1.2.
In chapter 4 the legal factors are illustrated and are linked to the sources of value creation.
Chapter 5 discusses the creation of a study case based in a large private company and
identifies the sources of value creation applied to the study case and built on the



                                                                                              7
Chapter 1 – Introduction




theoretical framework. Finally, chapter 6 answers the main question presented in section
1.2 and finalises this thesis with an overall discussion and conclusion.




                                                                                      8
Chapter 2 – Theory




2 Theory of Value Creation in e-Business


This chapter describes the study made by Raphael Amit and Christoph Zott in 2001 used
as theory in this thesis. It explains how value can be created and identified based on two
theories: entrepreneurship and strategic management.


During this chapter some terms will constantly be used, therefore they need to be
explained for a better understanding of the reader.



2.1 Definitions


Source of value creation and value driver refer to any factor that enhances the total value
created by an e-business, as per Amit and Zott (2001). This value is the sum of all
values that can be appropriated by the participants in e-business transactions.


Virtual markets refer to settings in which business transactions are conducted via open
network based on the fixed and wireless Internet infrastructure. In an electronic
environment new ways of creating value are opened up by the new forms of connecting
buyers and sellers in existing markets (‘re-intermediation’), and by innovative market
mechanisms (reverse auctions) and economic exchanges.


Value refers to the total value created in e-business transactions regardless of whether it
is the firm, the customer, or any other participant in the transaction who appropriates that
value.


Business model is the description of the content, structure, and governance of
transactions designed so as to create value through the exploitation of business
opportunities.




                                                                                          9
Chapter 2 – Theory




Transaction content refers to the goods or information that is being exchanged, and to the
resources and capabilities that are required to enable the exchange.


Transaction structure refers to the parties that participate in the exchange and the ways in
which these parties are linked. The choice of transaction structure influences the flexibility,
adaptability, and scalability of the actual transactions.


Transaction governance refers to the ways in which flows of information, resources, and
goods are controlled by the relevant parties.


Novel refers to something of a new kind, different from anything seen or known before.


E-business refers to any business conducted using electronic media, making some or all
of its revenue via Internet technology.


E-commerce refers to the act of buying and/or selling goods or services over the Internet.



2.2 Introduction to the theory


E-business has the great potential of generating new wealth, mostly through
entrepreneurial start-ups and corporate ventures. It is also transforming the rules of
competition for established businesses in unprecedented ways. Therefore e-business
has attracted the attention of scholars in the fields of entrepreneurship and strategic
management since the “advent of e-business presents a strong case for the confluence
                                                            3
of the entrepreneurship and strategy research streams”. . Yet, there is currently a lack of
academic research on e-business. The literature to date has neither articulated the
central issues related to this new phenomenon, nor has developed a theory that
captures the unique features of virtual markets.




3
Amit and Zott (2001)



                                                                                            10
Chapter 2 – Theory




This chapter touches upon the potential of value creation present in virtual markets, and
explores the sources of value creation in entrepreneurship and strategic management
literatures. It is sustained by five theoretical variables, which is shown in Figure 1 below.




                                                     Value
                                                    creation in
                                                    e-business
                             Value chain




                                                                                          Transaction cost
                                                                         network theory
                                                         based view of
                            framework



                                           destruction

                                                         Ressource -
                                           Creative




                                                                                          economics
                                                                         Strategic
                                                         the firm




                        Figure 1. Value creation theoretical sustainability



Amit and Zott (2001) identify four interrelated value drivers of e-business: novelty, lock-
in, complementarities, and efficiency. It is observed that value creation in e-business
goes beyond the value that can be realized through the configuration of the value chain,
the formation of strategic networks among firms, or the exploitation of firm-specific core
competencies. A business model is proposed as a unifying unit of analysis that
captures the value creation arising from multiple sources. It states that no single
entrepreneurship or strategic management theory can fully explain the value creation
potential of e-business; however each of the theories offers an important insight into
one aspect of value creation in e-business, therefore the unification of the important
aspects of each one of them.


Before explaining about the four dimensions identified, a brief theoretical perspective in
value chain analysis, creative destruction, the resource-based view of the firm, strategic
network theory and transactional cost economics need to be mentioned for a complete
understanding of how the four value drivers have been identified.




                                                                                                             11
Chapter 2 – Theory




2.2.1 Value chain framework


Amit and Zott (2001) stated that value chain framework analyses value creation at the
firm level. Value chain analysis identifies the activities of the firm and then studies the
economic implications of those activities. It includes four steps:
    1. Defining the strategic business unit;
    2. Identifying critical activities;
    3. Defining products, and
    4. Determining the value of an activity.


Value chain framework explores the primary activities, which have a direct impact on
value creation, and support activities, which affect value only through their impact on the
                                              4
performance of the primary activities. Value can be created by differentiation along every
step of the value chain, through activities resulting in products and services that lower
buyers’ costs or raise buyers’ performance.


Value creation opportunities in virtual markets may result from new combinations of
information, physical products and services, innovative configurations of transactions,
and reconfiguration and integration of resources, capabilities, roles and relationships
among suppliers, partners and customers.



2.2.2 Creative destruction


As per Amit and Zott (2001), Schumpeter (1934) pioneered the theory of economic
development and new value creation through the process of technological change and
innovation. He identified several sources of innovation including the introduction of new
goods or new production methods, the creation of new markets, the discovery of new
supply sources, and the reorganization of industries.



4
  Primary activities involve creation of physical products and include inbound logistics, operations, outbound
logistics, marketing and sales, and services.



                                                                                                            12
Chapter 2 – Theory




Creative destruction emphasizes the importance of technology and considers novel
combinations of resources as the foundations of new products and production
methods, leading to the transformation of markets and industries, and consequently to
economic development.
                                                                           Practical example

 When procurement goes online, it reaches markets that would not be reached
 otherwise; companies interact in a smoother and faster way and speed up the cycle time
 to execute tasks and run projects.


Virtual markets broaden the notion of innovation since they influence firm and industry
boundaries, involve new exchange mechanisms and unique transaction methods
(rather than merely new products, or production processes), and bring new forms of
collaborations among firms.



2.2.3 Resource-based view of the firm


The resource-based view of the firm, which builds on creative destruction’s perspective
on value creation, views the firm as a bundle of resources and capabilities. It states that
uniquely combining a set of complementary and specialized resources and capabilities
may lead to value creation.


A firm’s resources and capabilities are valuable if they reduce the firm’s costs or
increase its revenues compared to what would have been the case if the firm did not
possess those resources. Examples of such value-creation processes are product
development, strategic decision-making, alliance formation, knowledge creation, and
capabilities transfer.                                                     Practical example

 A trucking e-sourcing conducted in South Africa in May 2007 improved the analysis time
 of supplier’s bids from one week to half day and enhanced the decision making process.
 By possessing the e-procurement resources, Mærsk Procurement was able to focus on
 strategic activities and decide which suppliers could be invited for next negotiations
 round within a work day, this was possible through the analytical tools provided by
 Procuri making it simple, faster and easier to analyse.


                                                                                          13
Chapter 2 – Theory




The virtual markets clearly opens up new sources of value creation since relational
capabilities and new complementarities among a firm’s resources and capabilities can
be exploited (between online and offline capabilities). The prospect of value preservation
or sustainability is an important incentive for value creation.



2.2.4 Strategic networks


Strategic networks are stable inter-organizational ties which are strategically important
to involved firms. They may take the form of strategic alliances, joint ventures, long-term
buyer-suppliers partnerships, among others.


Traditionally, networks theorists with a background in sociology or organizational theory
have focused on the implications of network structure for value creation. The size of the
network and the heterogeneity of its ties have been speculated to have a positive effect
on the availability of valuable information to the participants within that network.


The network perspective is clearly relevant for understanding wealth creation in e-
business because of the importance of networks of firms, suppliers, customers, and
other partners in the virtual market space. Virtual markets with their world wide reach,
connectivity, and low cost information processing power, open entirely new possibilities
for value creation through the structuring of transactions in novel ways.
                                                                              Practical example

 An example could be given by the interaction suppliers and buyers have during an e-
 procurement process. By a common platform suppliers can clarify eventually doubts
 they might have regarding the process and the answer is immediately posted back to all
 participant suppliers, creating a forum with important information for the overall result of
 the process.




                                                                                             14
Chapter 2 – Theory




2.2.5 Transaction cost economics


Amit and Zott (2001) suggest that “a transaction occurs when a good or service is
transferred across a technologically separable interface. One stage of processing or
assembly activity terminates, and another begins”.


Transaction costs include the costs of planning, adapting, executing, and monitoring
task completion. Transaction cost economics identifies transaction efficiency as a major
source of value, as enhanced efficiency reduces costs. It suggests that value creation
can derive from the minimization of uncertainty, complexity, information asymmetry, and
small-numbers bargaining conditions. Moreover, reputation, trust, and transactional
experience can lower the cost of peculiar exchanges between firms.
                                                                         Practical example

 The same example from previous topic could be given in this case as well. By this
 common e-procurement platform, buyers can monitor the development of each supplier
 in any phase of the process. As each transaction the suppliers execute is recorded in
 the system, the time spent by buyers in monitoring suppliers is reduced and can easily
 be check through a report the system generates. The electronic platform is an error-free
 tool, allowing a clear process and thus building trust between suppliers and buyers and
 between the stakeholders in a sourcing project.



One of the main effects of transacting over the Internet, or in any highly networked
environment, is the reduction in transaction costs it brings. Transaction costs include
the time spent by managers and employees searching for customers and suppliers,
communicating with counterparts in other companies regarding transaction details, the
costs of travel, physical space for meetings, and processing paper documents, as well
as the costs of production and inventory management.
                                                                         Practical example

 Another example of transaction cost reduction is the Mærsk Conferencing Services
 implemented by Mærsk Procurement and Group IT in June 2007, the spend with travel
 costs and accommodation for four people is $1400 and can be reduced in 96% by
 utilising the web/audio-conference services.



                                                                                        15
Chapter 2 – Theory




The transaction costs theory also focuses on cost minimisations by single parties and
neglects the interdependence between exchange parties and the opportunities for joint
value maximisation that this presents.



2.3 Value creation drivers


Each theoretical framework discussed above makes valuable suggestions about
possible sources of value creation. The multitude of value drivers suggested raises the
question of precisely which sources of value are particularly important in e-business,
and whether unique value drivers can be identified in a context of e-business.


Figure 2 describes the four sources of value creation in e-business that emerged from the
study by Raphael Amit and Christoph Zott (2001). Their theory assumes the total value
created as the sum of the values appropriated by each party involved in a transaction and
suggests that the presence of these value drivers, which are anchored in the received
entrepreneurship and strategic management theory, enhances the value-creation potential
of e-business.




                        Figure 2: Sources of value creation in e-business




                                                                                      16
Chapter 2 – Theory




2.3.1 Efficiency


Amit and Zott (2001) point to transaction efficiency as one of the primary value drivers for
e-business.


This finding, which is consistent with transaction costs theory, suggests that transaction
efficiency increases when the costs per transaction decrease. Therefore, the greater the
transaction efficiency gains that are enabled by a particular e-business, the lower the costs
and hence the more valuable it will be. One is by reducing information asymmetries
between buyers and sellers through the supply of up-to-date and comprehensive
information. The speed and facility with which information can be transmitted via the
Internet makes this approach convenient and easy.
                                                                            Practical example

 Taking it to e-procurement, an example could be the e-procurement platform, as
 mentioned earlier; it allows information flow between buyers and suppliers in almost no
 time.


Improved information can also reduce customers’ search and bargaining costs, as well as
opportunistic behavior. The opportunistic behavior could be for example, the maverick buy,
in which someone with purchaser rights in the company buys items way above the
contracted price and from a non-accredited supplier. The use of e-catalogues enhances
compliance with existing frame agreements and diminishes situations as maverick buy. By
leveraging the cheap interconnectivity of virtual markets, e-businesses further enhance
transaction efficiency by enabling faster and more informed decision making. They also
provide greater selection at lower costs by reducing distribution costs, streamlining
inventory management, simplifying transactions, which reduce the likelihood of mistakes,
allowing individual customers to benefit from scale economies through demand
aggregation and bulk purchasing, streamlining the supply chain, and speeding up
transaction processing and order fulfillment, benefiting both vendors and customers.
Vendors in this case, benefit from participating in an error-free process and higher volume
through a global frame agreement, meaning that for example, the purchase of computers
and laptops in the entire organization would be purchased from IBM.



                                                                                           17
Chapter 2 – Theory




According to Amit and Zott (2001) using an online auction instead of an offline format for
trading cars between businesses halves transaction costs. Marketing and sales costs,
transaction-processing costs, and communication costs can also be reduced in an efficient
e-business, and the firm’s value-creating potential can be enhanced through scalability, for
example by increasing the number of transactions that flow through the e-business
platform.



2.3.2 Complementarities


Complementarities are present whenever having a vast number of goods together
provides more value than the total value of having each of the goods separately.


In the strategy literature, Amit and Zott (2001) have discussed the importance of providing
complementary outputs to customers. They state that “a player is your complementor if
customers value your product more when they have the other player’s product than when
they have your product alone”. Resource-based view theory also highlights the role of
complementarities among strategic assets as a source of value creation; and network
theory highlights the importance of complementarities among the participants in the
network.


Complementarities can be expected to increase value by enabling revenue increases. The
data analysis suggests that e-businesses leverage this potential for value creation by
offering a number of complementary products and services to their customers. These
complementary goods may be vertical complementarities such as after sales services or
horizontal complementarities such as one-stop shopping. They are often directly related to
a core transaction enabled by the firm.




                                                                                         18
Chapter 2 – Theory




                                                                           Practical example

 An example of those complementarities would be an e-procurement solution web site,
 Procuri, which grants its customers analytical tools to better and easily analyse the
 outcomes of and e-sourcing. These services enhance the value of the core products, e-
 procurement platform, and make it convenient for users to comply with the platform by
 having available tools such as Scorecard analysis and report and automatic supplier
 ranking.



E-businesses may also create value by capitalising on complementarities among activities
such as supply-chain integration, and complementarities among technologies such as
linking the analytical technology of one business with the Internet communication
technology of another, as shown in the example above, thereby unleashing hidden value.



2.3.3 Lock-in


The value-creating potential of an e-business is enhanced by the extent to which
customers are motivated to engage in repeated transactions, increasing transaction
volume, and by the extent to which strategic partners have incentives to maintain and
improve their associations, increasing both the willingness to pay of customers and lower
opportunity costs for firms. These value-creating attributes of an e-business can be
achieved through lock-in.


Lock-in prevents the migration of customers and strategic partners to competitors, creating
value in a number of ways. Lock-in is manifested as switching costs, which are anchored
by the transaction cost framework, and as network externalities, which has its roots in
network theory.


It should also be noted that, as resource-based value theory suggests, a firm’s strategic
assets, such as its brand name, and buyer-seller trust, both contribute to lock-in. The
study reveals several ways in which customer retention can be enhanced.




                                                                                          19
Chapter 2 – Theory




First, loyalty programs rewarding repeat customers with special bonuses can be
established. Second, firms can develop dominant design proprietary standards for
business processes, products, and services, such as the Amazon’s patented shopping
cart. Third, firms can establish trustful relationships with customers, for example, by
offering them transaction safety and reliability guaranteed by independent and highly
credible third parties.


To the extent that customers develop trust in an e-business company through such
measures, they are more likely to remain loyal to the site rather than switch to a
competitor. The data suggest that e-businesses enhance lock-in by enabling customers to
customize products, services, or information to their individual needs in a variety of ways.
This mechanism exhibits the interesting property that the more the customer interacts with
the system, the more accurate the matching results become. Customers then have high
incentives to use the system, creating a positive feedback loop5. More important for the
discussion of e-business, however, is the idea that increasing returns and positive
feedback may derive from network effects.


Virtual markets also enable e-business firms to create virtual communities that bond
participants to a particular e-business. Such communities enable frequent interactions on
a wide range of topics and thereby create loyalty and enhance transaction frequency.


Given the enormous reach of virtual markets, e-business firms often connect numerous
parties that participate in commercial transactions. They can be considered as network
generators. Networks may exhibit externalities in that the production or consumption
activities of one party connected to the network have an effect on the production or utility
functions of other participants in the network. This effect is not transmitted through the
price mechanism. In the context of e-business, network externalities are present when the
value created for customers increases with the size of the customer base. In an auction
setting, the complementary components of the network would be the buyers and sellers
where the total value created is a direct function of the network size.



5
    Amit and Zott, 2001



                                                                                         20
Chapter 2 – Theory




Efficiency and complementarities as sources of value creation can also be helpful in
encouraging lock-in. The efficiency features and complementary product and service
offerings of an e-business may serve to attract and retain customers and partners. The
higher the relative benefits offered to these parties, the higher their incentives to stick with
or join the network established by the e-business. The increasing return properties
inherent to network effects then magnify the relative benefits offered, triggering positive
feedback dynamics. Conversely, when an e-business creates lock-in, this can also have
positive effects on its efficiency and on the degree to which it provides for
complementarities. For example, many auction sites enable buyers to rate sellers. This
feature increases buyers’ trust in the fairness of transactions and therefore improves
stickiness. Moreover, a strong potential for lock-in provides an incentive for high-profile
partners to contribute complementary products and services because of the promise of
high-volume business.


There are important relationships between lock-in, efficiency, and complementarities as
sources of value creation. The potential value of an e-business depends on the combined
effects of all these value drivers.
                                                                               Practical example
 To summarize this driver with an example related to this thesis, consider Procuri, which
 as mentioned before is an e-procurement solution provider, Procuri allows its customers
 to suggest changes into the system to fit into its customer’s realities and shape the
 platform according to customer’s requirements and needs. Some of the suggestions are
 so relevant for the effectiveness of the platform that they are implemented in a general
 basis, and for particular modifications, only a single platform is modified. What happens
 with Procuri is that the overall function and tools are shared among its customers.
 However each customer has its ‘own’ Procuri platform, with special requirement to fit
 that specific company. For example, at Mærsk, when a supplier is invited to an e-
 sourcing project, he receives an invitation with access to the Procuri platform, though it
 shows the Mærsk logo in it, showing that this is the Mærsk e-procurement platform,
 developed and maintained by Procuri. The same happens with Kodak, IBM, among
 others. This interaction between Procuri and its customers creates a huge network, with
 discussion forums and improvement suggestions; the overall outcome is the continuous
 improvement of the platform, making it even more effective and error-free.


                                                                                              21
Chapter 2 – Theory




2.3.4 Novelty


The value creation potential of innovations has been articulated by Amit and Zott (2001).
While the introduction of new products or services, new methods of production,
distribution, or marketing, or the tapping of new markets have been the traditional sources
of value creation through innovations, the study reveals that e-businesses also innovate in
the ways they do business, meaning by the way transactions are structured.


                                                                           Practical example

 For example, Mærsk Procurement introduced the purchase of flight tickets and hotel
 reservations through Buyer’s Compass, anyone in APMM that needs to book tickets and
 hotel rooms can easily make it through an e-catalogue integrated with Buyer’s Compass.
 This e-catalogue shows prices negotiated by Mærsk Procurement and only accredited
 suppliers are listed. They create value by connecting previously unconnected parties,
 eliminating inefficiencies in the buying and selling processes through adopting innovative
 transaction methods, capturing latent consumer needs, such as flight ticket purchasing
 from the convenience of your office without arguments about the price or agreement with
 a travel agency, and by creating entirely new markets such as auction for more than 100
 hotel chains.


The unique characteristics of virtual markets such as the removal of geographical and
physical constraints, possible reversal of information flows from customers to vendors; and
other novel information bundling and channelling techniques, makes the possibilities for
innovation seem endless. For example, e-business firms can identify and incorporate
valuable new complementary products and services into their bundle of offerings in novel
ways.




                                                                                          22
Chapter 2 – Theory




2.4 Theory remarks


Novelty and lock-in are linked in two important ways. First, e-business innovators have an
advantage in attracting and retaining customers, especially in conjunction with a strong
brand. Second, being first to market is an essential prerequisite to being successful in
markets that are characterized by increasing returns. First movers are in a good position to
initiate the positive feedback dynamics that derive from network externalities, and to
achieve a critical mass of suppliers and/or customers before others do. Novelty is also
linked with complementarities. The main innovation of some e-businesses resides in their
complementary elements, such as the resources and capabilities they combine.


Finally, there is also an important relationship between novelty and efficiency. Certain
efficiency features of e-businesses may be due to novel assets that can be created and
exploited in the context of virtual markets.


The theory mentions that value creation strikes at the heart of the strategic management
and entrepreneurship fields, as it is an essential prerequisite for value appropriation.
However, the theoretical lenses that are commonly used in the fields of strategic
management and entrepreneurship for viewing and explaining wealth creation emphasize
distinct sources of value, which each of the identified sources of value creation commands
equal attention.


Amit and Zott (2001) suggest that no single theoretical framework discussed above should
be given priority over the others when examining the value creation potential of e-
businesses and that the interdependence of the sources of value and to the locus of value
creation in e-business is very important.


As seen at section 2.3, the presence of each value driver can enhance the effectiveness of
any other driver. This gives even more weight to an improved integration of the various
theories of value creation in order to yield a more complete picture of the functioning of e-
businesses and capture the various sources of value creation.




                                                                                          23
Chapter 2 – Theory




In the value chain framework, it is the firm’s activities; in creative destruction theory of
economic development, it is the firm; in resource-based view theory, it is the resources
and capabilities that constitute the firm; in strategic network theory, it is the network of
firms; and in transaction cost economics, it is the transaction that is both the unit of
analysis and the presumed locus of value creation. The use of any of these theoretical
frameworks alone would result in some crucial aspects of value creation in e-business
either being ignored or not being given due importance.


Based on theory’s analysis of the sources of value creation in e-business, it is proposed a
business model as a unit of analysis. The business-model construct proposed is believed
to be useful because it “explains and predicts an empirical phenomenon, which is the
value creation in e-business, which is not fully explained or predicted by conceptual
frameworks already in existence”6. The business model construct builds on ideas based
on the main theoretical frameworks of strategic management and entrepreneurship
research. First, it is consistent with creative destruction idea that innovation is an act of
‘creative destruction.’ In the context of the business model, innovation refers not only to
products, production processes, distribution channels, and markets, but also to exchange
mechanisms and transaction architectures. Innovative business models such as the ones
adopted by Priceline.com, with its patented ‘name your own price’ exchange mechanism,
have the potential to break existing industry structures and thereby setting a serious threat
to incumbents. Second, the notion of the business model draws on arguments that are
central to the value chain framework.


A business model does not follow the flow of a product from creation to sale, but describes
the steps that are performed in order to complete transactions. It is worth emphasizing that
customers can play a critical role in value creation, for an example, as lead users. They
may work with the firm to better assess their needs, acting as beta sites before the product
is released to a larger customer base. In fact, by electronically supplying information in
real time, customers can even ‘co-create value’, as vendors can better tailor their offerings
to the customer.



6
    Amit and Zott (2001)



                                                                                          24
Chapter 2 – Theory




Note that each business model is centred, being its main reference point. This is why the
theory can refer to a particular business model as ‘firm x’s business model’. However, the
business model as a unit of analysis has a wider scope than does the firm, since it
encompasses the capabilities of multiple firms in multiple industries.


The theory proposes that its definition of a business model is applicable to firms doing
business in virtual markets as well as to those on more conventional businesses. With the
theoretical foundations of the business model construct anchored in the value chain
framework, creative destruction, the resource-based view of the firm, strategic network
theory and the transaction perspective, a definition of the value that is created through a
business model can be given. In doing so, total value created can be expressed as “the
sum of the values appropriated by each party”7, which can be extended by stating that the
total value created through a business model equals the sum of the values appropriated
by all the participants in a business model, over all transactions that the business model
enables.


In summary, the theory suggests that value is created by the way in which transactions are
enabled. In e-businesses in particular, enabling such transactions requires a network of
capabilities drawn from multiple stakeholders including customers, suppliers, and
complementors. The examples given during this chapter illustrate some of the value
creation drivers identified during this thesis.


The following chapters will give an in depth analysis of how the value creation is applied in
a practical context and some of the examples mentioned will be explained with more
detail.




7
    Amit and Zott (2001)



                                                                                          25
Chapter 3 – E-Procurement




3 E-Procurement


In this chapter I will define and describe the procurement process, its benefits and risks
and what are the phases involved. It is in here that I will answer the sub-question:


      What changes in the procurement process when it goes online? Is it only a
      web-based system or does it require a new process?



3.1 Introduction


Procurement refers to all activities involved with obtaining items from a supplier, which
includes purchasing and inbound logistics such as transportation, goods-in and
warehousing before the item is used. It has not traditionally been a significant topic for
management study in comparison with other areas such as marketing, operations and
strategy. The concept of e-business has, however, highlighted its importance as a
strategic issue since introducing electronic procurement can achieve significant savings
and other benefits which directly impact upon the customer.


E-procurement is not a new process and there have been several attempts to automate
the process of procurement for the buyer using electronic procurement systems (EPS),
workflow systems and links with suppliers through EDI. These attempts can be referred to
as the first-generation of e-procurement, they included online entry, authorisation and
placing of orders using a combination of data entry forms, scanned documents and e-
mails based workflow.


As per Dave Chaffey (2002), the perceived importance of e-procurement was highlighted
by a Tranmit plc (1999) report8 which showed that around 90 per cent of companies said
they planned to implement an electronic procurement system within the next five years,
with the majority of them identifying cost savings as their primary goal.


8
    E-business and E-commerce Management – Second Edition. Chaffey, Dave. Pg. 288



                                                                                       26
Chapter 3 – E-Procurement




3.2 Definition


E-procurement is the term used to describe the use of electronic methods, typically over
the Internet to conduct transactions in a Business to Business environment. The process
of e-procurement covers every stage of purchasing, from the identification of a
requirement, through the bidding process, to the payment and potentially the contract and
supplier management. 9



3.3 Understanding the e-procurement process


It is fundamental to understand that electronic procurement is not a strategy itself but the
use of electronic means to carry out the procurement process.


Through the e-procurement process, companies have the possibility to aggregate
spending corporate-wide and take advantage of the purchasing agreements. Procurement
activities can be grouped and defined in three different ways: indirect procurement, direct
procurement and sourcing.


Indirect procurement involves selecting, buying and managing supplies for running the day
to day of the company. Direct procurement may sometimes be called supply chain
management and involves buying goods and organising activities to manufacture finished
products, or products related to the core business of the company. Sourcing is the process
of determining long-term demand requirements in goods or services, finding sources to
fulfil those requirements, selecting suppliers to provide the requirements, negotiating the
purchase agreements and managing the suppliers' subsequent performance, can apply to
both indirect and direct procurement. It involves a four phase model: information,
negotiation, settlement, and after sales.10




9
  EIC (Euro Info Centre) – Curran, Elaine. Bernert, Andrea. Wiegand, Anke. Electronic Procurement in the
public sector – Factsheet on latest developments in e-procurement in the EU and its Member States.
10
   Barriers to e-procurement - ITcon Vol. 12 (2007), Edie et al.



                                                                                                           27
Chapter 3 – E-Procurement




Before e-procurement started, organizational procurement process had remained similar
for many years. The paper-based purchasing process involved the end-user of an item
selecting the item by conducting a search and then filling in a paper requisition form that
was sent to a buyer in the purchasing department, which originally caused delays in the
process due to manager’s authorisation waiting time. After the authorisation, the buyer
filled in an order form that was dispatched to the supplier. After the delivery of the item
purchased, the item and the delivery note were reconciled with the order form and an
invoice to be submitted to accounts payable department. Usually this whole process had a
cycle time of five and a half days. By applying e-procurement this process can be
optimised and the cycle time reduced to one and a half day. The process is changed in the
buyer involvement, which is not required and by using the web as a searching tool makes
it easier to find products than by using traditional catalogues. Though it is important to
emphasise that this cycle time is for new item instead of a repeat buy for which searching
would not be required. The overall result is large savings in time and expenses.



3.4 Benefits


Through e-procurement, the buyer achieves the target set out during the sourcing project
which leads to lower transaction and processing costs and increases efficiency, for
example greater speed in procuring services and goods and reduced spending due to
increased choice and competition.


The private sector is often highlighted as the forerunner when it comes to adoption of new
technologies and new methods of work. However, in the procurement field, including e-
procurement, the public sector is probably well ahead of the private sector, such as
auctioning transportation services, medical supplies and equipments for hospitals, among
others.11


There are several ways that the private sector can benefit from the public sector’s e-
procurement experiences as the needs of the public authorities are not much different


11
     How can the private sector benefit from the public sector e-procurement experiences? H.Lindskog (2004)



                                                                                                         28
Chapter 3 – E-Procurement




from the needs of private enterprises and in many cases the results of this work and
standards could be used for Business to Business (B2B) e-procurement, through practices
such as benchmarking.


Business-to-Business e-commerce has transformed the buying habits of the private
sector, with companies of all sizes adjusting their strategic thinking to quicken turnaround
times, and reduce costs, increase transparency and objective, keep inventory just-in-time,
track orders, replenish consumables, anticipate the next requirement, upgrade systems
and plan maintenance.


When e-procurement is combined with process reengineering it can greatly reduce
transactional costs. In the traditional procurement process, there is a large freight of
documents such as requisition, purchase order and invoice which gets prepared and
transported within an organization and across organizations, administrative effort put into
preparing these documents can be greatly reduced via e-procurement. There is a high
cost involved in printing these documents and in transporting them both within and across
an organization; the average of transaction cost in large organization is estimated in
US$250.00 per transaction.

                                                                             Practical example

   The transaction cost of $250.00 is due to manual handling and transportation of the
   invoices within the organization, due to issuing of a check or payment in connection to
   this invoice, for example. Though what makes this number appear large as it does is the
   unconformity of invoices, either because it shows wrong prices, quantities or there is no
   PO in connection with it. Through a purchasing system, the unconformities are
   minimised once this system is connected to the frame agreements (e-catalogue),
   showing the quantity agreed and the correct price. Once systems are matched and
   conform, the items are shipped and once delivery is conformed the integrated financial
   system issues the payment. This procedure is known as ‘Reverse Billing’ or ‘Buyer’s
   Invoice’, the actual supplier invoice is irrelevant for the payment and completion of this
   process as it was automated 100% automated and the quantity is diminished from the
   open PO the buyer has in its purchasing system.




                                                                                          29
Chapter 3 – E-Procurement




When e-procurement is done, efficiency is obtained not just via reduced printing and
transportation costs, but also via reduced process cycle time. E-procurement also tends to
change the role of buyers in the purchasing department. By removing administrative tasks
such as placing orders and reconciling deliveries and invoices with purchase orders,
buyers can spend more time on value-adding activities. Such activities might include
spending more time with key suppliers to improve product delivery and costs or analysis
and control of purchasing behaviour, which can be named as contract management.


Another benefit of e-procurement is to obtain high quality data on purchasing activities,
such as what has been bought, when, from which supplier and how much. Equipped with
this data, companies are well positioned to negotiate better frame agreements with
suppliers, to consolidate spend and reduce sub optimization.




                                                                                  Practical example

     A practical example of how companies can benefit from managing high quality data is
     the Procurement Data Warehouse of Mærsk Procurement, where information regarding
     all current suppliers, spend figures and frame agreements are available company wide
     and is a great advantage to start a sourcing project knowing that the information
     necessary to identify spend and possible savings are available and are accurate.



E-procurement also enhances transparency and accountability in the purchasing process,
making it a secure and transparent process by limiting maverick buying12, which is a great
advantage for both procuring and procured companies.



3.5 Barriers and Risks of e-procurement


Though e-procurement has a lot of benefits to the organizations involved, in both parties
(buyer and supplier), there are some issues to be acknowledged and taken care of.


12
     Maverick buying is when items are order unnecessarily or with high prices.



                                                                                                 30
Chapter 3 – E-Procurement




As per Edie et al (2007), identified some of the greatest risks related to products and
services procured through e-procurement in the construction field; they are in order of
importance: supplier relationships, technology and legal control, cost/benefit concern,
organizational skills and culture. The legal, technical and organisational barriers that may
result from procurement online are one of the greatest challenges for policy makers.13


Despite the proven benefits of using electronic means in procurement, Edie et al (2007)
showed that only 48% of respondents indicated that they were able to conduct e-
commerce effectively. This might be an indication that those barriers are really impacting
the good results and benefits for the implementation of e-procurement.


The barriers identified in the European study have been found in any type of procurement,
having some of them slightly modified from segment to segment. However, it is
fundamental to the development of strategies for improvement to have those barriers and
risks identified. They are shortly explained in the following sections.



3.5.1 Legal issues


Edie et al (2007) also stated that Information and Communications Technology (ICT)14 is
improving communication in the construction sector. On the negative side it also showed
that only 26% of respondents agreed that ICT was acceptable as admissible written proof
during construction. Only 17% thought that it was acceptable as a written notice. This
questions the legal validity of electronic information exchange and must be considered as
a barrier to the implementation of an e-procurement system.


Legal difficulties are one of the main barriers to e-procurement, such as lack of specific
legal regulation, different national approaches and validity, enforceability and evidentiary
problems. The legal boundaries of e-procurement are mentioned in a chapter later on.


13
     Barriers to e-procurement - ITcon Vol. 12 (2007), Edie et al.
14
     The term IT was broaden to include electronic communication, called in a simple form as ICT.



                                                                                                    31
Chapter 3 – E-Procurement




3.5.2 Resistance to change


Resistance to change, lack of a widely accepted solution and lack of leadership, which are
cultural issues, are highlighted as barriers by Edie et al (2007) in the USA. These produce
a slowdown in adoption of e-procurement and result in a failure to reach many of the
perceived benefits. Therefore a cultural change needs to take place prior to adoption of an
e-procurement system. However, with the pressures on companies, other competing
initiatives have taken priority in many occasions. According to Edie et al (2007), there was
a study conducted in Singapore which showed that this was the largest barrier in that
country with 60% of the respondents under the impression that other initiatives were of
more importance than e-procurement. This point towards the need for cultural change,
which brought by top management support can successfully implement e-procurement.

                                                                            Practical example

 An example would be the introduction of e-sourcing at the Fuel market in the US. With
 the important task of implementing e-procurement in a fuel project within the US, Mærsk
 Procurement faces resistance to change from its own stakeholders, meaning that the BU
 in the US is not confident with the outcomes an e-sourcing provides. Mærsk
 Procurement created a test e-sourcing to show its BU, a trucking company, the benefits
 and time enhanced by running an e-sourcing. The test is scheduled to go live by the end
 of August 2007 with all the stakeholders of this specific project involved and playing both
 suppliers’ and buyers’ sides to understand the overall benefit for both parties. Despite
 this resistance to change from the BU, Mærsk Procurement is confident the BU will
 understand and accept the e-sourcing in another successful project.



3.5.3 IT issues


As per Edie et al (2007) some companies have a problem in acquiring the right platform to
carry out e-procurement. The reason might be due to high costs involved in installing the
proper IT system to have all the benefits of e-procurement process.




                                                                                           32
Chapter 3 – E-Procurement




Although most of Northern Ireland contractors stated that they have the necessary
equipment to carry out e-procurement and that the cost of IT is not a problem and the
problem lie in know-how of the system.


Lack of IT system to conduct e-procurement can be easily solved by investing in this area
either by joint investment or financing and training key users to gain expertise. The capital
invested would easily be returned by the benefits e-procurement provides to the company,
which benefits have been previously covered.


The lack of e-procurement knowledge can occur when the company has an older
generation of employees that are change resistant regarding IT related issues, relying on
traditional forms and means of procurement, which can be solved by training employees
and by creating a knowledge sharing centre to spread the IT concept of e-procurement
through the organization or key personnel.



3.5.4 Security of transactions


Security is a major concern when working on the internet. Edie et al (2007) state “The
World Wide Web leaks such as a sieve. Data transmitted on it can be garbled, can
reassemble wrongly at the other end, or can display only partially because of incompatible
software”.


Many of the banks although acknowledging these problems, have set systems into place
to mitigate them. An example is the Bank for International Settlements (BIS) who state that
their security “should include establishing appropriate authorisation privileges and
authentication measures, logical and physical access controls, adequate infrastructure
security to maintain appropriate boundaries and restrictions on both internal and external
user activities and data integrity of transactions, records and information”. It should not be
different than the security structure for e-procurement platforms.




                                                                                           33
Chapter 3 – E-Procurement




3.6 Phases


This section uses a model for procurement process extracted from the case study
company, A.P. Møller – Mæersk Group; where the four phase model by Edie et al (2007)
has been broaden to six phase model.


Figure 3 below shows the dynamism of a procurement process. It is worth noting that the
steps don’t follow a chronological order, meaning that they can be done even when a
previous step is not finished yet.


Steps 1 to 3 analyse internal and external data. It is imperative that the company knows
who they are, where they stand for and how they spend. What the market demands are,
what the options and alternatives are before approaching this market with a strategy,
these steps are often carried out simultaneously.


Steps 4 and 5 plan and execute the strategy towards the market. The steps are cyclic,
indicating that the strategy often needs to be reviewed after it has been executed.


Step 6 is the continuous improvement and management of the results achieved during the
previous steps. After the conclusion of this step, the project is hand over to the
organization that manages this contract (in case it is done by a global procurement group
working closely to the Business Unit).




                                                                                      34
Chapter 3 – E-Procurement




                               Figure 3. Six Steps of e-procurement



It is important to notice that this model includes Category Management under step 6; this
is applicable to Procurement Project Organization that hands over to the Business Unit. In
other organization models it is recommended to change this to Contract and Supplier
Management.



3.7 E-Sourcing


E-sourcing is a new area, and there are naturally many concerns from both suppliers and
stakeholders. Some concerns origins in myths and misunderstandings about the
applicability of e-sourcing, such as ‘e-sourcing is all about lowering prices’, ‘e-sourcing is
unfair to suppliers’, ‘e-sourcing makes it difficult to win new business’, ’e-sourcing
eliminates buyer-supplier relationships’, among others.


Even though concerns and resistance in the initial phase of an e-sourcing is natural and
expected, experience from e-sourcing projects conducted at Mærsk Procurement show
that suppliers actually understand the value of the process – during and after completion.




                                                                                           35
Chapter 3 – E-Procurement




Some of the comments received from suppliers afterwards are:15


                 •   It is time saving – negotiations take hours, not days or weeks (e-auction);
                 •   It provides added transparency to the negotiation process;
                 •   It gives a good indication of the market situation;
                 •   When factoring is added to an e-auction focus is shifted to non-pricing
                     criteria and Total Cost of Ownership;
                 •   It is an easy-to-use standard interface;
                 •   With log-in codes it provides the ability to participate from anywhere in the
                     world.

                                                                                         Theory application

     Applying this to the theoretical framework from chapter 1, the novelty of running a new
     process combined with the trust gained through a more transparent process in lock-in
     and the efficiency by reducing negotiations time is a practical example of value creation
     and the interaction of each driver.



3.7.1 Definition


E-sourcing is one of the procurement activities which can be defined by “the process of
determining long-term demand requirements in goods or services, finding sources to fulfil
those requirements through a faster and more efficient way, selecting suppliers to provide
the requirements, negotiating the purchase agreements through a web-based platform and
managing the suppliers' subsequent performance”16.



3.7.2 Process


E-sourcing is not only a web-based platform which supports some of the steps in the
sourcing process. The value of having an e-platform is added through a more

15
     Suppliers’ feedback received during and after e-sourcing projects at Mærsk Procurement.
16
     Handbook for Strategic Sourcing – Mærsk Procurement



                                                                                                         36
Chapter 3 – E-Procurement




standardized, globally accessible and structured process, which can be facilitated by some
tools for spend analysis, aggregate demand, define requirements, discover suppliers,
negotiate (through RFQ and/or reverse auctions), and evaluate suppliers. It enhances the
transparency and fairness of the sourcing process as the suppliers involved have access
to the same information at the same time.


The main objectives for adopting the e-sourcing is to save time through information
transfer, improve productivity with template re-use (available at the online platform as the
user simply inputs the information necessary for the current project), the transparency
issue is fully enabled through monitoring and reporting tools, unified measurements of key
performance indicators are ensured and followed up on sourcing goals in equal terms, the
savings can be increased by strong functionality with scenario building possibilities and
through e-auction with direct competition.


E-sourcing is the single greatest opportunity to impact the Total Cost of Ownership,
quality, and performance of a supply chain. Enterprises of all sizes and industries are
rushing to develop e-sourcing competence and secure the optimal mix of suppliers to
ensure supply, mitigate risks, reduce costs, and capitalize on emerging markets.



3.8 E-RF(x) (Electronic Request for Information/Quotation/Proposal)


A RF(x) process allows the decision making process to be determined by a variety of
attributes, involving not only price, but quality, lead time, contract terms, supplier
reputation, incumbent switching costs, among others. Consequently, e-marketplaces are
currently being developed to partially automate the RF(x) process by creating an e-RF(x)
platform, an example would be Procuri.com which provides online platforms and tools to
automate the sourcing process and add value through the novelty driver.




                                                                                         37
Chapter 3 – E-Procurement




Although the market for online Business-to-Business auctions is big (estimated at $746
billion in 2004 by Beil and Wein (2003)17, the price-only auctions that dominate the current
e-commerce landscape is still decided by the range of products that can be auctioned over
the Internet, meaning that in order to run an e-auction, the products need to be specified.


Depending on the composer preferences and goals, RF(x) processes can be less or more
structured than auctions. Changing the scoring rule during the course of a traditional
auction would be perceived as unfair, this practice is not uncommon in RF(x) processes.
The scoring rule may be changed throughout the course of an RF(x) process for a variety
of reasons, for example if the buyer learns from supplier presentations that the importance
of certain attributes has been misestimated. Therefore, several commercial e-RF(x)
software packages allow changes in the scoring rule throughout the course of the process.
Not only can the scoring rule change over time, but neither the suppliers’ bids nor the
buyer’s scoring rule needs to be binding. Nonetheless, the RF(x) process maintains a
certain degree of structure, so the buyer can control the information to be answered by the
suppliers, according to his needs and strategy.


The following sections define e-RF(x) and describe each one of the components and their
benefit and applicability.



3.8.1 Definition


An e-RF(x) can either be an e-Request for Information (RFI), e-Request for Quotation
(RFQ) or e-Request for Proposal (RFP) and is basically an electronic and web based
method for qualifying and receiving quotes from suppliers.




17
  An inverse-optimization-based auction mechanism to support a multiattribute RFQ process – Beil, Damian
R. Wein, Lawrence M. (2003)



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Chapter 3 – E-Procurement




3.8.2 E-RFI


Some of the main functionalities of the e-RFI are to:
   • Create questionnaires and questions and allow online supplier responses;
   • Assign weights and scoring criteria at the question and questionnaire level;
   • Response formats may be text, numerical, Boolean, multiple choice, or
       attachments;
   • Automated scoring option and manual scoring for text based responses;
   • Reuse existing questions and templates and export score sheet to MS Excel;
   • Review responses as the supplier inputs them for instant feedback possibilities;
   • Track suppliers progress during the whole process.


When constructing a RFI generally the following should be considered:
   • Specify overall and detailed technical questions. It is important to focus on the
       project you are working with and what would be relevant for the award decision;
   • Consider answer options, as for example yes/no, drop down boxes, text. For most
       effective use of the autoscoring functionalities, strive at having as many closed
       questions as possible;
   • What kind of data it should be important to be received from the suppliers in order
       to better structure the questionnaire.


It is important to consider attributing weight and value for questions and identifying
preferred answers.



3.8.3 E-RFQ


Some of the main functionalities of the e-RFQ are:
   • Collect price and qualitative information at the line item level;
   • Allow item price to be a customized formula of multiple bid fields (develop Total
       Cost of Ownership);




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Chapter 3 – E-Procurement




   • Support online and offline bidding;
   • Allow selective supplier invitation at the RF(x) (RFQ/e-auction);
   • Easy to reuse/edit existing RFQ templates;
   • Develop RFQ’s in Excel and upload them into the system;
   • Monitor supplier bidding in real time.


When constructing an e-RFQ is important to keep in mind some aspects such as:
   • Consider an overall structure, as for example base components, configurations,
       options. How can it be most structured and effectively built up according to lot and
       item structure;
   • What can the suppliers quote on – how far should the costs be broken down to
       keep it in a supplier-friendly format. It is important when defining the cost
       breakdown options to keep the focus on the project, and ask the following:
             What do I want to use this outcome for?
             Will it be relevant to the analysis process?
             How can it be used?
       If the cost breakdown is overdone, suppliers might leave a lot of blanks and
       consolidating fields themselves, which is also the reason why the previous
       questions should be asked.
   • It is essential to specify what is wanted and needed on each item asked supplier to
       quote on to get an “apple to apple” comparison.


An e-RFP is a combination of the e-RFI and e-RFQ module.



3.8.4 Benefits of an e-RFQ


Some of the main benefits of using an e-RFQ instead of the normal tender process are
that instead of managing various mail and folders, the sourcing tool can be used as a
central data repository, bringing some advantages to the users such as:




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Chapter 3 – E-Procurement




             •   Easy world wide data collection and project management secures a
                 common standardized format;
             •   Data re-usability and templates are available downstream in the process;
             •   Market intelligence is built up for each commodity group that is sourced;
             •   Cross-functional collaboration is easier between key people due to the
                 web-based format;
             •   Advanced data analysis and scenario capabilities.



3.8.5 Applicability of an e-RFQ


An RFQ is suitable for most sourcing projects but there are a couple of situations where it
is particularly beneficial:


             •   The price structure is complex but is able to be defined;
             •   The number of suppliers is substantial;
             •   The buyer is under time pressure;
             •   Stakeholders are geographically spread.


The only situation where it should be reconsidered using an e-RFQ is if the
products/services sourced are not easily specified/quantified.



3.9 E-Catalogues


An e-catalogue is an online presentation of information on products and services that are
offered and sold by an organisation.


Many businesses offer a range of products or services, often with various options and
models. Typically, these have been presented in a printed brochure or catalogue. The
Internet provides advantages over the printed brochure by making a catalogue available to
everyone, any time of the day or night, anywhere in the world.




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The benefit of e-catalogues are reduced marketing cost without printing expenses and
distribution costs, improves customer service level with instant catalogue availability and
updated information, time and cost reduction in maintaining an updated and accurate
product catalogue, improved access to product catalogues by standardising and providing
multiple search criteria to be easily found, can be coupled with online payment system
encouraging sales and assisting cash-flow.


One of the negative aspects of e-catalogues is if the business has a large range of
products or services that change prices or availability often, then the e-catalogue requires
a sophisticated website solution which can have a high cost to establish and maintain.
For a company to have full benefits of having an e-catalogue, it is necessary to coordinate
its customer and product databases, stock and inventory systems and financial systems to
ensure that they are integrated into a common platform to optimise the process.


The functionality of e-catalogues through a procurement point of view is slightly different, it
is mainly used to purchase indirect materials for processes such as operations, sales,
maintenance and administration, items such as office supplies, computer/communication
equipment, cleaning solvents, office furniture, travel related items and transportation
services are most likely to be found in an e-catalogue managed by the procurement group
of a company. Such systems allow organizations to distribute purchasing decisions to
people across the organization. Moreover, automated links to suppliers allow buyers to
reduce the paperwork and overhead associated with the buying process and shorten the
purchasing cycle. Only those suppliers connected to a buyer’s e-procurement system are
visible to the buyer. The systems catalogues contain generalized product and service
database fields rather than catalogues based on product and service specific to product
types. A main limitation of e-procurement systems is that they are closed and cannot
support automated searches and comparisons across all suppliers, which secure the
process and frame agreements negotiated by the strategic sourcing group at the time the
project ran.




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3.10 E-Auction



3.10.1 Definition


According to EU Directive 2004/17 Article 1(6), e-auction is defined by “a repetitive
process involving an electronic device for the presentation of new prices, revised
downwards, and/or new values concerning certain elements of tenders, which occurs
after an initial full evaluation of the tenders, enabling them to be ranked using automatic
evaluation methods. Consequently, certain service contracts and certain works contracts
having as their subject-matter intellectual performances, such as the design of works,
may not be the object of electronic auctions.”


Electronic commerce enables stronger relationships between buyers and suppliers and
new ways of buying from existing suppliers.18


E-auctions are a more efficient and transparent way of doing business as part of a full
procurement process. It means that the time spent to carry out competitive negotiations
is reduced. The purpose of e-auction is to identify the best possible price for a set
                                                                  19
quality; online competition allows bidders to underbid the bids of their competitors.



3.10.2 Types of e-auctions


There are three different types of e-auctions, which are:


Reverse e-auction: This is the most common e-auction type where the buyer controls the
market because the item is offered by “x” number of suppliers. The price offered by the
suppliers continues to decrease until a reasonable market price is set. The basic idea of a
reverse auction is that a sufficient supply exists and suppliers’ profit margin is sufficient to
18
   Pucihar, Andreja. Gricar, Joze. Environmental Factors Defining E-Marketplace Adoption: Case of Large
Organizations in Slovenia. 2005
19
   The underbid is used for reverse e-auctions, which is a new trend in the procurement sector. At the time of
the conclusion of the reverse e-auction, the winner is the supplier who has the lowest price for quality.



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Chapter 3 – E-Procurement




offer reduced prices. The normal downwards auction is generally the most effective
auction type in a competitive normal market.


Forward e-auction: is when the supplier offers a product to numerous buyers, this is the
most common type of auction, where the supply and demand sets the price and the
supplier controls the market because a product is being offered to “x” number of buyers.
The price offered by the buyer continues to increase until a reasonable price is met. This
can be used for discount rates, sales etc.


Transformation/factoring e-auction: Simply an auction where weighting is included. You
transform the submitted bids with either a multiplier or an adder (e.g. switching costs etc.)


Auctions are usually used in sectors in which bids can easily be evaluated, considering
the aspects of prices, delivery time, specifications, in competitive markets, in cases with
ample supply and/or in mature markets.



3.10.3 Benefits


One of the main benefits of using an e-auction is the time saving compared to running
normal negotiations. E-auctions created a shift in power and resources, shown in Figure 4
below. The module illustrates that the negotiations take hours instead of days/weeks.




                                                        B

                            S       S               S       S

                       S        B       S       S               S   B: Buyer
                                                                    S: Suppliers
                            S       S               S       S
                      Traditional Negotiation       E-auction


                            Figure 4 – Power Game Shift




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Chapter 3 – E-Procurement




Another essential factor is that you have the opportunity to invite more suppliers into the
sourcing project since the number of suppliers does not cause the equivalent extra amount
of work as illustrated in Figure 5 below.




                               Traditional
                                Sourcing
                                                              eSourcing


           Supplier                 8                             20               eRFI
           Qualification
                                    4                             15


            Initial                 4                             15
            negotiations                                                      eRFP/eRFQ
            (RFP/Q)                 2                             10


                                    2                             10
            Final                                                         eAuction or multi
            negotiations                                                  round eRFP/eRFQ
                                    1                             1


                            Figure 5 – Improved competition



This factor combined with the direct competition an e-auction facilitates, creates potential
larger savings than would be achieved through traditional negotiations.



3.10.4 Supplier feedback


For every e-auction conducted, it is quite important that the buyer considers what kind of
feedback will be given to the suppliers during the process. Some of the parameters that
can be used are:


   •   Lowest price bidding, no rank feedback: This is a good strategy when the buyer has
       a very competitive field with few suppliers.
   •   Rank bidding, no price feedback: An effective strategy when the prices are
       scattered and the buyer does not want to scare suppliers off.
   •   Best/not best: When the rank is shown, the buyer needs to be aware that the
       number of participating suppliers might be obvious to them. So, for instance if the
       event only has 3 suppliers the best/not best feedback might be a better solution.


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Chapter 3 – E-Procurement




The above mentioned parameters can be varied and combined in a numerous ways, all
depending on the number of suppliers, variation in prices and the particular market.

3.10.5 Award decision


A decision the buyer needs to take prior to the e-auction is how he/she wants to award the
suppliers after the event, what the strategies and goals are and so on. There are some
options to be considered:


Supplier qualification: The e-auction is used to shortlist the supplier base. Suitable for
situations where there are, for example, 10 suppliers for the auction but the strategy is to
reduce this number to 3, these will be the three suppliers the buying company will continue
to further negotiations, and when more than one supplier is needed.

                                                                              Practical example

 An example of this type of award decision would be a Fuel Sourcing in the US; the initial
 number of suppliers (truck stops/fueling stations) is 11, the objective of the sourcing is to
 end-up with a maximum of 3 suppliers per region in the US. The auction is conducted to
 identify which are the 3 remaining suppliers that can be invited to further negotiations,
 where the first best, second best and third best suppliers will be identified within the
 coverage region.



Supplier negotiation: this awarding decision is for when the buying company wants to
conduct an e-auction for the final price negotiation and that further evaluation will be
conducted afterwards. It is suitable when the sourcing group needs further approval from
stakeholders and can not commit to taking the winner.

                                                                               Practical example

   An example to this situation would be e-auction for business fleet (corporate vehicles),
   the e-auction is conducted to identify the best supplier to the specification provided. After
   negotiations, the buying company needs to get approval or further details on the
   contracting product.



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Chapter 3 – E-Procurement




Winner takes all: this is normally the auction type that gives the most competition and the
most price reductions, which can be applicable to all sourcing projects. This is the type of
awarding that generates better savings because the buying company is compromising the
volume to the participating suppliers.

                                                                                Practical example

 An example would be e-auction for marketing services conducted by Kodak in 2003. The
 buying company conducts an e-auction to identify who will be the supplier to print out
 one million marketing banners that will stand in photo related stores for the next
 marketing campaign.



There are some other parameters to consider when conducting and structuring an e-
auction. For instance what the starting prices should be, should the items be split by lot,
should the buyer have a reserved price, and so on. Generally these decisions need to be
based on the particular market, suppliers and strategy conducted prior to the auction.



3.11 Online contracts


Before we consider the particularities of the online environment, we must take a step back
and examine contractual formation in the offline environment which is the background
against the relevant rules for contract making that have now been applied to the online
environment.


In the traditional environment, it has long been clear when a contract had been concluded.
It is when both parties put their signature in a physical document which sets out the
agreed terms and conditions. It is true that a contract may be concluded orally but if either
party subsequently denies the existence of the contract, there are often enormous
evidential problems in establishing that the agreement actually did come into place.


As we consider the impact of the Internet on the contractual process, we need to consider
the legal components which enable a contract to come into existence. They are:
consideration, the intention to create legal relations, offer and acceptance.


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Chapter 3 – E-Procurement




The concept of consideration means that each party should derive something beneficial
from the transaction, I offer a friend to buy my house so I can move for an apartment and
my friend is looking for a similar house in that neighbourhood to buy it, both of us are
getting our needs fulfilled with this transaction. The second component is the intention to
create legal relations, which is usually understood to exist by virtue of the fact that the
parties are in negotiations. The last two components are offer and acceptance, which will
be explained in a more detailed way at the next two sections. 20



3.11.1 Offer


An offer is made when one party proposes to another that it can buy a particular item on
particular terms, including the precise nature of the item, the price to be paid, the delivery
terms, payment conditions and general applicable terms and conditions such as law.



3.11.2 Acceptance


Imagine the following situation, A offers B to sell him his car for USD10,000 plus delivery
costs of USD250. Assume that this offer is acceptable to B; the question is how B can
accept this offer?


Through the traditional method, this would usually be achieved by both parties signing a
document containing these and other relevant terms or, possibly by an exchange of
correspondence, once a contract is also a correspondence. The moment of acceptance
would generally determine not only the time the contract was entered into but also, if
nothing contrary were stated in the terms of the contract, the nationality of the laws that
would apply to the contract and the jurisdiction that would be the appropriate forum in
which any disputes would be decided.




20
     http://www.weblaw.co.uk/art_contract_online.php



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Chapter 3 – E-Procurement




This can become very important if the 2 parties are in different countries with different
legal systems. Most contracts avoid the risk by expressly stating the choice of law and
jurisdiction.



3.11.3 On-line Acceptance


With the advent of the online environment, the law of contract has not altered; rather it has
had to apply the existing concepts to a new medium. There are two mainstream ways of
concluding a contract online, via e-mail and through a website.


Exchanging contracts via e-mail is similar to the exchange of physical correspondence. As
long as the email of acceptance does not vary the terms set out in the email of offer, a
contract will be concluded by the second email. However, questions can arise as to when
the acceptance is valid. This is especially so when there is a limited supply. For example,
what happens if a computer company has a total of 5 PCs to sell and sends out emails to
all of its clients on 2nd January notifying them of the PCs and their price? If 6 of the
company's customers send emails of acceptance on 3rd January, which customer loses
out? In the offline environment to cover the equivalent situation, the first letter to be posted
is the one which is deemed to be the successful acceptance even if it happens to arrive on
the desk of the offeror after the other letter has already arrived. In the online environment,
it has not yet been unequivocally determined as to what constitutes the equivalent of
posting in a letter box - is it the moment of transmission of the email, the moment it arrives
in the addressee's inbox or the moment that the addressee opens that email.


The particular circumstances will usually dictate the answer. To avoid doubt, the company
should specify in its terms and conditions how, in the event of competing emails of
acceptance, it will determine which email has been deemed to arrive first.


To conclude a valid online contract on the legal basis, the company must ensure that the
terms and conditions:


    •   Are clearly displayed on the website or integrated into the exchange of emails;


                                                                                             49
Chapter 3 – E-Procurement




    •   Have been adapted properly to the online environment - certain changes are
        necessary to reflect legislation which only applies to online transactions;


    •   Clearly set out whether the site constitutes an offer or invitation to treat;


    •   States what will constitute valid acceptance.


The following chapter gives a brief insight of the EU regulations towards e-procurement,
the reason for it not being extensive is that it would change the focus and purpose of this
thesis, once it is not intended to be a legal material but has a commercial and strategic
purpose.




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Chapter 3 – E-Procurement




3.12 Chapter Discussion


By changing the procurement process to an automated electronic version of it creates
value as per novelty. This enhances the efficiency driver once the cycle time is speed up,
transaction costs are reduced and the costs for searching for new suppliers and markets
are also minimised, making the overall procurement process simpler, thus efficient. The
opportunity of reaching new suppliers and having access to new markets (from the
suppliers’ side) by the unlimited geographical reach the Internet provides enhances the
value creation through novelty.


When suppliers understand the value of e-procurement and state that “it provides added
transparency to the negotiation process”, they are actually confirming the value creation
through lock-in and building a relationship based in trust and feeling that they were treated
with respect, fairness and were given the proper importance.


Through the interaction between online and offline activities the e-platform provides,
improves the decision making process as the focus of the buyer can be directed to
strategic issues and the decision can be reached in a more efficient time, impacting in the
overall result of the process and creating value through complementarities.


It is possible to see the interaction and impact each driver has with another, which is very
beneficial for the value creation in e-procurement.


Next chapter briefly explains the legal factors involved in e-procurement and how does it
create value to procurement process.




                                                                                          51
Chapter 4 – Legal Factors




4 Legal factors


It is inevitable to mention online contract or contract in general without briefly touching
upon the legal aspects of e-procurement. Even though this is not the main topic of this
thesis, the legal factor plays an important role in procurement transactions, therefore its
importance of having a separate chapter.


Legal factors on e-commerce naturally vary from country to country, however the
European legislation is arguably the most advanced in the world. There are mainly eight
legal issues to be considered by e-commerce managers according to Dave Chaffey
(2002); however I will just describe the ones that are applicable to e-procurement in a
Business-to-Business base, also to be in accordance with the following chapter which
studies the value creation in e-procurement in a Danish shipping company.



4.1 E-contract formation


The contract formed between a buyer and a seller on a web site will need to be subject
to the laws of a particular country. In Europe, many laws are specified at the European
Union level, but are interpreted differently in different countries. This raises the issue of
which law applies – is it that for the buyer, for example located in Denmark or the seller,
whose site is based in France? There were some attempts in 2002 by the EU to adopt
the ‘country of origin principle’, which states that the law for the contract will be that
where the seller is located.


Dave Chaffey (2002) suggests that terms and conditions should be developed to refer to
issues such as timing of delivery, jurisdiction and damage or loss conditions.




                                                                                          52
Chapter 4 – Legal Factors




4.2 Data protection


Data     protection      applies     to    all   processing        of   customer/supplier          or   potential
customer/supplier data by a company, whether it is collected via Internet or offline.


There are eight enforceable principles of good practice that EU companies must comply
to; it states that data must be:
     •   fairly and lawfully processed;
     •   processed for limited purposes;
     •   adequate, relevant and not excessive;
     •   accurate;
     •   not kept longer than necessary;
     •   processed in accordance with the data subject’s right;
     •   secure;
     •   not transferred to countries without adequate protection.



4.3 EU Directives


There are two different fields of legislation which are relevant for e-procurement. One is
the legislation for public procurement, setting the rules for traditional procurement
process and for e-procurement. The other field is the influence of e-commerce
                                      21
legislation on e-procurement.


For the public procurement aspects, the following Directives set the guidelines:


     •   Directive 2004/18/EC of the European Parliament and of the Council of 31 March
         2004 on the coordination of procedures for the award of public works contracts,
         public supply contracts and public service contracts, OJ L 134 of 30 April 2004;



21
  EIC (Euro Info Centre) – Curran, Elaine. Bernert, Andrea. Wiegand, Anke. Electronic Procurement in the public
sector – Factsheet on latest developments in e-procurement in the EU and its Member States.



                                                                                                                  53
Chapter 4 – Legal Factors




   •   Directive 2004/17/EC of the European Parliament and of the Council of 31 March
       2004 coordinating the procurement procedures of entities operating in the water,
       energy, transport and postal services sectors, OJ L 134 of 30 April 2004.


The dynamic purchasing systems, e-auctions and other electronic procurement
systems are introduced in those Directives.


For the field of e-commerce, the following Directives set the guidelines:


              •   Directive 2000/31/EC of the European Parliament and of the Council of 8
                  June 2000 on certain legal aspects of information society services, in
                  particular e-commerce, in the Internal Market OJ 178/1 of 17.7.2000 (E-
                  commerce Directive );
              •   Directive 1999/93/EC of the European Parliament and of the Council of 13
                  December 1999 on a Community framework for electronic signatures OJ L
                  13/12 19.1.2000 (Electronic Signatures Directive);
              •   Directive 95/46/EC of the European Parliament and of the Council of 24
                  October 1995 on the protection of individuals with regard to the
                  processing of personal data and on the free movement of such data
                  Official Journal L 281 , 23/11/1995 p. 0031 – 0050 (Data protection
                  Directive);
              •   Directive 2001/29/EC of the European Parliament and of the Council of
                  22 May 2001 on the harmonisation of certain aspects of copyright and
                  related rights in the information society Official Journal L 167 ,
                  22/06/2001 P. 0010 – 0019 (Copyright Directive)


It is important for the development of the procurement process that the legal aspects are
covered and protected by being compliance with the legislation.


The Directives mentioned above set the guidelines for how those subjects should be
treated and interpreted.




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Chapter 4 – Legal Factors




4.4 Chapter Discussion


Linking this chapter to the theoretical framework, we can identify that the legal factors
mainly build trust (lock-in) and improve the efficiency. The trust in a legal aspect is built
up when both parties electronically ‘sign-off’ the contract and are legally bound by the
implications of non-conformity of such contract. It also builds trust once it means that
supplier and buyer are agreeing in a possible long term relationship, which implicates
in the efficiency driver, once both parties will work together to optimize the process and
jointly reduce costs and errors.
                                                        Practical example and theory application

 An example of the value creation of this relationship is when a trucking company and a
 shipping company make an agreement for the transportation of containers in Turkey. By
 signing-off the contract the shipping company agrees in providing enough containers to
 be transported and become a partner from the trucking company by suggesting routing
 optimization after a thorough analysis and by the creation of in-land depots for the
 storage of empty containers. The trucking company agrees to provide an effective
 container transportation services and to implement ‘triangulation’ (the container goes
 from A to B, through C; instead of A to C and C to B) and by this creating value through
 yet another driver, novelty and improving efficiency, while building the trust through lock-
 in.


Next chapter describes the e-procurement process in a practical context and explains the
identified needs of the organization used as a case study in change from traditional
procurement to e-procurement.




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Chapter 5 – Study Case – Mærsk Model




5 Study Case – Mærsk model


In the previous chapters I went through the definitions of e-procurement and e-sourcing,
legal factors and explained how the value creation in e-business can be identified, based
on theories of entrepreneurship and strategic management. Following the same line, I will
describe an e-sourcing case study and show how the value creation is performed in
practice at the company studied, A. P. Møller – Mærsk (APMM). In this chapter I will only
explain how the value creation of e-procurement is enhanced in a practice basis; the
conclusion will be conducted in a following chapter.


This chapter is based on A.P. Møller – Mærsk Group. It starts with a brief profile of the
A.P. Møller – Mærsk Group and Mærsk Procurement. Some key figures are included and
a basic description of the global activities of the Group, as well as the activities of Mærsk
Procurement is also provided.



5.1 About A.P. Møller – Mærsk (APMM)


The A.P. Møller – Mærsk Group is the result of a merger between two Danish companies.
One of them, Aktieselskabet Dampskibselskabet Svendborg was established in 1904 by
Mr. A.P. Møller and his father, Captain Peter Mærsk Møller. Eight years later, Mr. A.P.
Møller established Dampskibselskabet af 1912, Aktieselskab because he did not always
agree with the board members of Aktieselskabet Dampskibselskabet Svendborg.


In 2003, the two companies merged under the name of A.P. Møller – Mærsk A/S. The A.P.
Møller – Mærsk Group is a conglomerate and has many business activities. The business
activities of the Group can be divided in:


             •   container shipping and related activities;
             •   tankers, offshore and other shipping activities;
             •   oil and gas activities;
             •   retail activity;


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Chapter 5 – Study Case – Mærsk Model




             •   Shipyards and other related industrial activities.


The container shipping and related activities include container services, agency activities,
and logistics and terminal activities under the brand names of Mærsk Line, Mærsk
Logistics, Safmarine, Norfolk Line and APM Terminals, referred to as “Business Units”
during the next sections.


Currently (2006) the A.P. Møller – Mærsk Group has more than 80,000 employees and
offices in more than 125 countries. Net revenue (2005) was 34,843 million USD.


The vision of the company is “We create opportunities in global commerce” and its mission
is “We shall fulfil our vision by:


             •   Truly understanding our clients and their business;
             •   Offering second-to-none transportation solutions;
             •   Being profitable and delivering sustainable, profitable growth;
             •   Continuously reducing costs and increasing efficiency;
             •   Offering our colleagues personal growth and a motivating place to work;
             •   Being innovative;
             •   Being good corporate citizens.”



5.2 About Mærsk Procurement (MPRO)


The Group Procurement was established in 2001 as a global procurement area for the
companies belonging to APMM.


Mærsk Procurement organises and pools the vast range of procurement activities
conducted by A.P. Møller companies and Business Units with thousands of suppliers from
around the world.


All companies and business units in the APMM Group are active participants in Mærsk
Procurement and thus make up a considerable volume. By pooling organisational


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Chapter 5 – Study Case – Mærsk Model




purchases, Mærsk Procurement get access to vast purchasing opportunities in a diverse
range of business areas.


The General Rules for Group Procurement participation establishes mutual general
standards of behaviour for APMM companies involved in A.P. Møller – Mærsk
Procurement, ensuring compliance to and utilisation of purchasing frame agreements
negotiated by Buyer's Compass (Procurement Data Warehouse) and APMM companies.
Developing and promoting cross-group purchasing initiatives and sourcing strategies,
which provide APMM companies with added value; and supporting the development and
execution of professional purchasing practises within the group.


A Strategic Sourcing Group (SSG) acts under a SSG Charter that describes the purpose
of the SSG, who is participating, target of savings, any reservations, commercial criteria
and milestones. Participating companies (Business Units) give input and sign-off the SSG
Charter prior entering the SSG, and is bound by whether established goals are met or not.
A SSG at establishment or renegotiations of an agreement gives each participating APMM
Company the possibility to define commercial success criteria.


In principle, APMM Company respects and agrees to comply to and use any purchasing
agreement reached by the SSG if an overall APMM saving based on the Total Cost of
Ownership principle is obtained. All parties shall in terms of volume and business support
comply with the agreements negotiated by the SSG on behalf of the APMM.


Mærsk Procurement's vision is to become a leading edge procurement organisation which
shall provide continued profitable growth and benefit the bottom line of the entire A.P.
Møller – Mærsk Group.


Mærsk Procurement will pursue the vision by means of significant cost reductions using
sophisticated procurement methods and cross-functional coordination.


The mission of Mærsk Procurement is to continuously improve sourcing methods and
tools to the benefit of the entire A.P. Møller – Mærsk Group, among others by offering:



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   •   Coordination and Consolidation
Coordination across the Group to consolidate and optimise global procurement by central
negotiation and direct sourcing from manufacturers. Negotiations are realised through
MPRO with the involvement of the BU owning the sourcing project.


Pooling of volume with fewer suppliers thus consolidating spends from Group companies
and business units to maximise purchasing power. When you centralise the purchasers
within few suppliers you can get higher savings due to the volume contracted, which helps
when the frame agreements are globally or regionally, once more than one company of
the Group / BU is involved in the purchase.


   •   Cross functional co-operation
Conduct cross functional workshops in the A.P. Moller - Maersk Group, in which, with
involvement of suppliers ensure continuous focus on cost saving ideas. This cooperation
enhances the procurement cost leadership and ideas of how to improve a process in order
to get savings are created once you have more than one area involve, I.E. sales,
operations, marketing, production, procurement, etc.


   •   Total cost savings
Total Cost of Ownership (TCO) principle: The purchase price often makes up only a part of
a purchase. The TCO principle ensures optimal value to group companies. It is analysed
the costs of owning and maintaining a particular product or service during a defined period
of time and the decision of keeping the ownership or hiring a third party who owns this
product or service can be achieved.


   •   Process optimisation
Rationalise and restructure existing processes in order to optimise logistics throughout the
inbound supply chain.


   •   Enhance knowledge sharing




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To facilitate procurement networks across the Group. Operate a knowledge platform
(Buyer's Compass), which enhances knowledge sharing and eases the exchange of ‘best
practises’ between the companies. Enhance the competencies of the purchasing
organisations, and to train and educate purchasers within strategic procurement
knowledge areas.


The general vision of Mærsk Procurement is to reduce expenditures and cost for
procurement of goods and services for the A.P. Møller Group.



5.3 Identified needs for adapting e-procurement


The aim of negotiating a Frame Agreement (FA) in A. P. Møller – Mærsk Group whether
done centrally or by the individual Business Units - is to achieve cost reductions within the
A. P. Møller – Mærsk Group. Generally Mærsk Procurement is negotiating global and
regional frame agreements, whereas the Business Units are negotiating primarily local
frame agreements.


However, overlap between the various FAs (global, regional and local) exists; the FAs are
not always used, or only partly used, which results in low compliance towards many of the
FAs. This means that the Business Units have difficulties in achieving the total savings
and volumes which have been negotiated.


To receive the potential that procurement can give to a company and to support
procurement efficiency Mærsk Procurement has identified the need for:


             •   A common platform – one platform for mandatory FA repository and e-
                 catalogues;
             •   Integration between the platform and the local procurement systems, e.g.
                 the local procurement systems will be fed with up-to-date FAs, supplier
                 and product information.




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Thus, to support Mærsk Procurement vision, the Decentralised Procurement through a
Common Platform (DPCP) concept has been developed covering the entire APMM Group.


The DPCP mission is to support continuous savings on group procurement spend through:
   •   Increased compliance towards Group procurement frame agreements (global,
       regional and local) and policies;
   •   Increased procurement transparency, overview and statistics for suppliers, frame
       agreements, products, etc.


The DPCP project consists of three elements:


             •   Content Management (CM): Frame Agreement covers the process from
                 the registration of Frame Agreements (contracts) in the common Frame
                 Agreement     Repository   (hosted    in   Buyer’s   Compass     in   Mærsk
                 Procurement), to supplier integration and handling of electronic catalogues
                 (e-catalogue). The CM will provide: - User-friendly direct access to up-to-
                 date supplier, product and price information. - Improved tool to extract FA,
                 supplier and product information and statistic.


             •   E-Buy: a procurement system which automates standardises and
                 optimises the operational procurement processes. The e-Buy functionality
                 will be provided to the Business Units that have no procurement system or
                 need optimization of the local procurement system.


             •   Document Exchange (DE): a tool for electronic exchange of business
                 documents (orders, invoices, etc.). The DE tool will route electronically and
                 thus optimise the documents exchange between APMM Business Units
                 and their suppliers and automatically update the order status in the local
                 procurement system.




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5.4 Mærsk Procurement Six Sourcing Steps


At APMM sourcing is an essential activity of the Mærsk Procurement – Sourcing Group
which needs to be planned and some basic though important steps need to be followed.
The company elaborated a guideline for all the steps that should be considered during a
sourcing project, the steps are known as Mærsk Procurement Six Sourcing Steps and can
be illustrated by Figure 6 and following explanation of the steps.




Source: Handbook for Strategic Sourcing
Figure 6. Mærsk Procurement Six Sourcing Steps




Step 1 – Establish Scope, Team and Goals


The sourcing project starts-up by establishing scope, team and goals, securing a good
project start. It is mainly focused in identifying the stakeholders, ensuring people and
entities with interests in the project are involved.




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Forming the team, assigning roles and responsibilities is also important for the smooth
operation of the project group, not forgetting to define resources to carry out sourcing work
and to agree on a code of conduct.


Equally important is to formally start the project by introducing its participants and
establishing a common goal, evaluate whether external expertise is necessary, so the right
level of manpower is dedicated to the strategic group in order to deliver results.


It is necessary to formally agree within the strategic sourcing group on the scope, savings
target and the schedule of the project.


Finally the step one focus on creating a project plan, which is basically to manage the
progress of the project, and to ensure efficient work in the project group towards clear
goals by developing and communicating goals.



Step 2 - Collect and Analyse Internal Data


This step focuses in understanding stakeholders expectations in order to ensure the
results of the sourcing project are in line with the strategy of the business unit. It is in this
phase that data such as spend, volume and inventory should be gathered to create a
baseline22, it is also here that savings and improvement areas should be identified and the
spend should be established and segmented, and the volumes forecasted to define the
areas of priority actions.


To ensure that potential suppliers quote for the correct goods and services, the
specifications must be collected and reviewed. The same should be done with the
contracts, so the current practices, prices and other terms and conditions can be
evaluated and used further on in the process in order to optimise the new contract from
operational, commercial, technical and legal perspectives.


22
  Baseline is an agreed starting point against which a project will be measured. The baseline is generally the
previous year spend on a good or service. This amount can be adjusted for several factors such as market
development, volume changes, etc.



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It is fundamental for the project development that the groups involved, Strategic Sourcing
Group, Finance and stakeholders come up with an agreement about the baseline in the
early stage of the process, so the project impact can be correctly measured.


It is important to identify and optimise the sum of all costs and value of owing an asset or
buying a service, therefore a TCO/TVO model should be created to identify key cost
drivers, identify and evaluate savings ideas and select the suppliers.


The last but not least important in this step is to have an internal idea generation session,
to generate and capture ideas for cost savings and value creation.



Step 3 – Collect and Analyse Supply Market Data


This is step is focused on analysing the supply market, in order to decide on a suitable
sourcing strategy and to identify the best potential suppliers for fulfilling the needs of the
strategic sourcing group and provide knowledge to be used in the negotiations.


To ensure a comprehensive coverage of all possible suppliers that can fulfil the
requirements identified previously it is important to identify the supply base.


It is also here that the strategic group will have to prepare and issue the RFI so the
competencies identified in the supply base can be validated and more information about
the supply market can be gathered, the supplier base will be qualified and ranked in order
to assess the relative advantages and disadvantages of suppliers identified based on input
provided by them.


The final stage would be to prepare the suppliers profile by collecting all non-price related
facts as input for supplier selection and posterior negotiation.




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Step 4 – Develop Strategy


It is in this step that strategy, practices and tactics will be defined by evaluating current
sourcing strategy and incorporating it into future strategy.


The sourcing group will have to map current strategies and practices, review industry best
practice to bridge any gap between the company practice and the industry best practice,
specify the method they will use to reach defined goals and establish the criteria to be
used for supplier selection, and finally refine the strategy and gain consensus that it is the
optimal strategy by communicating it with the Steering Committee.



Step 5 – Execute Strategy


On Step Five, all the information collected and strategy defined should be put into practice.


Here, the Sourcing Group will prepare and issue the RFQ/RFP23, the suppliers will be
allowed to fulfil an electronic document with necessary information identified previously.


Once all the suppliers, or the majority of them, have responded the RFQ/RFP the strategic
group will evaluate and rank them to assess the costs and benefits associated with each
suppliers offer and to select suppliers for clarifications, workshops, and negotiations.


The next step is to conduct supplier workshops, so both suppliers and the strategic group
can discuss creative ways of improving TCO/TVO in the purchasing process in a non-
confrontational atmosphere. This is probably the most important element of the sourcing
process as it enables suppliers to contribute with their expertise.


Even though the strategy has been identified and defined in the previous step, it is
important that the sourcing group review the sourcing strategy and update it if necessary,
keep the team aligned and achieve consensus with management prior to negotiations.

23
     RFQ – Request for Quotation; RFP – Request for Proposal



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The suppliers who fulfil the requirements of the sourcing group and agree on terms and
conditions for the contract will be selected for negotiations. The product of these
negotiations will be formalised in a contract of supply for goods or services and the project
impact will have to be measured to ensure that the value created by the strategic sourcing
group is correctly reported and acknowledged by the Business Unit.


This step also includes a “hand-over package” to the Business Unit, which is an
agreement on activities to be carried out after the sourcing is completed and assign
responsible people to each activity and what is the impact of those activities.


It is very important that all Strategic Sourcing Group members are debriefed and aligned
on the project they participated in and to ensure a continued development of the sourcing
progress by arranging lessons learned sessions.



Step 6 – Implementation and Category Management


This is the post-contract phase, showing that the sourcing activities and procurement
responsibilities does not end with the signing of the new contract.


It is important for the company to ensure implementation of the new agreement and that all
stakeholders are informed about purpose and details of the new contract and the
preference of the supplier.


The Category Manager will have to develop a product catalogue and sales kit to capture
value of the momentum and immediately upon signing the contract help awarded suppliers
to develop activities that secure user-friendliness, acceptance and compliance. This can
be done by collecting acceptance, expertise and know-how from users in order to improve
performance and quality of the supplier or product.




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One of the tasks performed by the category manager is to manage supplier relationships,
to motivate and constantly improve supplier’s performance and TCO, and to ensure
optimised handling of the different suppliers in the portfolio.



5.5 The Mærsk procurement process


It is important to note that the steps explained in section 5.4 have certain degree of
freedom and the outcome of an e-procurement implementation does not depend
exclusively on the Strategic Sourcing Steps. Each project is unique due to factors such as
product, company and personal involvement, market circumstances and geographical
location.


At Mærsk Procurement there is a noticeable interaction among the different departments
involved at the Procurement Process, such as Finance and Implementation.


The interaction with the Implementation Group is regarding the important role they play, in
ensuring that commitments made to suppliers justifying competitive agreements are met.
Implementation includes the following sub-sections that interact with Strategic Sourcing:


    •   Marketing: Promotes the use of frame agreements made by strategic sourcing
        projects;
    •   Virtual Procurement Community: The procurement portal including strategic tools,
        updates on sourcing projects, information on the sourcing process and overview of
        the categories handled by Mærsk Procurement;
    •   Training and Education: Education in Mærsk Procurement products is imperative to
        support compliance; the Procurement Academy includes courses on procurement
        fundamentals, relationship management, sourcing techniques and concepts,
        advanced negotiation, procurement financials and cost analysis, among others.
        The courses are intended for purchasing and procurement related personnel, with
        the objective of lifting the competence level of procurement in the organization;
    •   IT: Procurement Data Warehouse (PDW) is a source of spend data and tool for
        monitoring compliance on new agreements. The PDW combined with DPCP


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       administrate e-catalogues and enhance compliance of Frame Agreements and
       procurement systems.


The role played by the Procurement Finance Group is ensuring that baselines and savings
are correctly measured and reported in correspondence with the company principles.


For a new potential project to be qualified and approved, the Procurement Group works
closely to the Business Unit (owner of the project) in analysing the spend databases and
any other information sources as inspiration. This process concludes in the creation of a
business case, a report including the total spend, scope of the project, initial hypothesis of
achievable savings, a preliminary Total Cost of Ownership model, a catalogue with initial
savings ideas, the project plan and finally the recommendation of whether or not to run a
Strategic Sourcing Group.



5.6 E-Sourcing Implementation


The steps involved in e-sourcing are not different than other purchases. The event should
be well-planned and the buying process (sourcing, sending RFQ, conducting negotiations,
etc.) is the same.


At Mærsk Procurement, the e-sourcing was created in a successful attempt to optimize the
procurement activities and meet both mission and vision requirements as a first class
procurement organization.


Figure 7 below shows in which steps of the procurement process the e-sourcing tools can
be applied through the adopted platform Procuri and how it is done in practice in each one
of the steps, explained in section 5.4.




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                                                       Collect &
      Establish                   Collect &                                                                                Implement &
                                                        Analyse                 Develop                 Execute
   Scope, Team &                   Analyse                                                                                    Manage
                                                        Supply                  Strategy                Strategy
        Goals                   Internal Data                                                                                Category
                                                      Market Data



 • Identify               • Understand            • Perform supply     • Map current          • Prepare & issue          • Implement and
   stakeholders             stakeholder             market analysis      strategies &           RFP/RFQ                    communicate
 • Form team, assign        expectations          • Identify supply      practices            • Evaluate & rank            new
   roles &                • Collect spend,          base               • Review industry        RFP/RFQ responses          agreement(s)
   responsibilities         volume & inventory    • Prepare & issue      best practice        • Make & review            • Develop product
 • Hold internal kick -     data                    RFI                • Develop sourcing       supplier short -list       catalogue and
   off meeting            • Establish spend and   • Qualify & rank       strategy & tactics   • Conduct supplier           sales kit
 • Evaluate need for        volume forecasts        supplier base      • Establish criteria     workshops                • Manage internal
   external expertise     • Collect and review    • Prepare supplier     for supplier         • Review / update            relationships
 • Confirm scope,           specifications          profiles             selection              sourcing strategy        • Manage supplier
   savings target &       • Collect & review                           • Communicate          • Discuss strategy with      relationships
   schedule                 contracts                                    strategy               management
 • Develop &              • Create baseline                                                   • Conduct negotiations
   communicate goals      • Build TCO/TVO                                                     • Prepare and sign
 • Create project plan      model                                                               contracts
                          • Hold internal idea                                                • Measure project
                            generation session                                                  impact
                                                                                              • Prepare hand -over
                                                                                                package
                                                                                              • De-brief all suppliers
                                                                                              • Hold lessons learned


 Figure 7 – E-sourcing usability




Establish Scope, Team & Goals


Activities in which E-sourcing can be implemented:
                   Form Teams, assign roles and responsibilities
                   Confirm scope, savings target and schedule
                   Create project plan



Form Teams, assign roles and responsibilities


Purpose: to facilitate the information flow among stakeholders and project members
involved.


Through an e-sourcing tool, all participants involved in the project have access to the
information flow, which contributes to reduction in transaction costs while making it already
at an internal level a transparent process.




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Confirm scope, savings target and schedule


Purpose: to establish a widely supported savings target through the usage of internal
surveys.


The e-sourcing platform can make the important initial information of a sourcing project
available to everyone related to the project, such as the scope, visible savings target and
prepare the schedule for each activity involved in it.

Create project plan


Purpose: to manage the project process.


The management of an e-sourcing process can be facilitated by making use of the e-
sourcing platform, which helps in keeping an updated project plan by demanding less time
from the Strategic Sourcing Group than the traditional procurement method. Once all the
participants have access to the platform and it is possible to identify who is responsible
and what is the schedule for each activity.



Collect & Analyse Internal Data


Activities in which e-sourcing can be implemented:
             Collect and review specifications
             Create baseline



Collect and review specifications


Purpose: to enhance the information collection process.


The e-sourcing platform helps to gather all necessary specifications from stakeholders,
which could also include current suppliers, through an internal RFI where the structure for



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cost break down, specification and any other relevant information for the RFQ could be
identified.



Create baseline


Purpose: To ensure agreement between SSG, MPRO Finance and stakeholders at an
early stage in the sourcing process on the starting point from which the project impact
should be measured.


The e-platform improves the creation and divulgation process of the baseline and
diminishes the time spent in this activity, the participant SSG members and MPRO
Finance agrees on the figures updated in the system.



Collect & Analyse Supply Market Data


Activities in which e-sourcing can be implemented:
              Prepare and issue RFI
              Qualify and rank suppliers



Prepare and issue RFI


Purpose: to validate the competencies of the suppliers identified in the supply base search
and gather more information about the supply market.


The process of creating and issuing the e-RFI is simplified through the e-sourcing
platform. By the use of templates such as cover letter, draft of a standard contract,
supplier guide to the process, among others, the time spent in this phase is minimised and
the focus of the buyer can be directed to another strategic task. The platform
scores/evaluates suppliers according to the criteria established by the buyer, enhancing
the time necessary to spend in the analysis and interpretation of the responses.



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Qualify and rank suppliers


Purpose: to assess the relative advantages and disadvantages of suppliers identified
based on input provided by them.


The platform enables a Scorecard analysis and ranks the supplier automatically according
to the ranking criteria and buyer’s preferences set in the beginning of the project.



Execute Strategy


Activities in which e-sourcing can be implemented:
             Prepare and issue RFP/RFQ (e-auction)
             Evaluate and rank RFP/RFQ
             Measure project impact
             Lessons learned



Prepare and issue RFP/RFQ (e-auction)


Purpose: to request a quotation or proposal to supply goods and services to fulfil the
specific needs identified in the previous phases, through an online platform.


Creating an e-RFQ follows the same principles as the ones mentioned for the e-RFI, the
buyer can use templates to facilitate the process or simply upload an Excel sheet into the
platform. It enhances transparency and fairness of the process as all the suppliers receive
the e-RFQ at the same time and have access to the same information, thus questions the
suppliers might have can be shared through all participants while keeping the anonymity of
suppliers.




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The e-RFQ can be more beneficial than the normal tender process because the e-
sourcing tool can be used as a central data repository, diminishing the managing of
several mails and folders, which contributes to the:
   •   On-line data collection and project management, securing a common standardized
       format
   •   Data re-usability and templates are available downstream in the process
   •   Market intelligence is built up for each commodity group that is sourced
   •   Cross-functional collaboration is easier between key people due to the web-based
       format
   •   Advanced data analysis and scenario capabilities


Due to the re-usability and advanced analysis capabilities cycle times tend to be
shortened. As shown in Figure 8 below.


                                           Wave 1



                                                 Wave 2


                              Figure 8 – Shortened cycle time



The e-sourcing platform is able to both run an e-RFQ and an e-auction (in various
formats). The use of both tools can be incorporated if the buyer sees relevance in that, the
difference between running an e-auction and an e-RFQ is that in e-auction it is possible to
only ‘negotiate’ one item, such as the delivery terms, payment conditions or price, while in
the e-RFQ buyer and supplier can agree or disagree on basically everything, resulting in a
contract sign off or in another negotiation round.



E-auctions


It is important to notice that an e-auction is not suitable for all sourcing projects, there are
a couple of factors to consider when deciding whether or not to conduct an e-auction. E-
auctions are generally suitable if:




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   •   There is a competitive supplier field (+3 suppliers);
   •   Situations where it is possible to have precise specifications;
   •   Not very strategic products.


However it does not mean that it is limited to non-critical items, leverage items can be
used as well.


In MPRO we have only had experience with reverse or transformation e-auctions.



Evaluate and rank RFP/RFQ


Purpose: to create a single database containing all offers received, find out the best choice
according to the strategy established.


Another benefit of running an e-sourcing project is that the analysis after the RF(x) (RFQ,
e-auction or both) can be facilitated by the creation of multiple scenarios; variables change
to identify the best possible outcome and to rank suppliers for future negotiations.



Measure project impact


Purpose: to ensure that value created by the SSG is correctly reported and acknowledged
by BU’s.


Through the e-platform, participating members in the SSG have access to project detailed
information such as the baseline, total spend for previous year, estimated savings and
reached savings.




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Lessons learned


Purpose: to ensure that all SSG members are debriefed and aligned on the project they
participated in, also to ensure a continued development of the sourcing process.


The templates for creating a lessons learned presentation is uploaded in the system, the
SSG identify what could have been done differently, what was the successful point of that
process and what they could consider as a ‘needs to improve’ issue. The platform works
as a central repository for important information regarding the sourcing project and the link
with the lessons learned presentation can be sent to all SSG members, spreading the
knowledge sharing through a common platform.



5.7 Chapter discussion


Mærsk created a new process when Mærsk Procurement was established in 2001 and
pooled volumes for the entire organization. By this action, it is possible to already identify
two drivers of value creation: novelty and efficiency.


Through the creation of the Procurement Data Warehouse, MPRO created value as per
lock-in and stakeholders had the opportunity to be part of a procurement virtual community
through procurement related discussion forums, suggestions and information sharing.


The creation of a common platform and the local procurement systems per se created
value through all the four drivers of value creation identified in the theoretical framework:


Novelty: by the introduction of a new transactional structure for procurement related
activities.


Lock-in: by the customization of the e-procurement process, trust among stakeholders by
the knowledge sharing (people tend to trust what they know) and the creation of a positive
network externalities through the knowledge sharing (including suppliers, that through the



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e-sourcing platform they can interact with buyers and aggregate great value to the process
once suppliers have the opportunity to share their experiences with e-procurement) and
discussion forums.


Complementarities: by the integration of different technology; the products (frame
agreements) purchasing related personnel can access through the platform and by the
impact e-procurement cause in offline activities, such as improved decision-making
process.


Efficiency: once transactional costs are diminished, the searching time is improved as
important information is obtained from one single source, the e-platform, and the overall
simplicity of the process.


Next chapter discusses in a more detailed way the sources of value creation in e-
procurement, and introduces the value creation framework figure with the identified drivers
from this chapter.




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Chapter 6 – Discussion and conclusion




6 Discussion and Conclusion


This chapter intends to answer the main question of the thesis:


   How does e-procurement create value to traditional procurement process?


It also intends to confirm the theory and prove that it can be applied in a practical context,
meaning that value can be created when switching from traditional procurement to e-
procurement.


However, this chapter intends to solely analyse the value creation in e-procurement for the
buying company. It would have been necessary to spend more time with suppliers to make
an in depth analysis of the value creation for each phase of their process.


It was shown in previous chapters how the procurement process is enhanced and
optimized by the use of an e-platform, it was also shown which are the drivers for value
creation in e-business, the main purpose of this chapter is to create a link between the four
drivers suggested by the theory presented with the implementation of an e-procurement
process in practice.


The theory suggests that there are four potential sources of value creation, namely
efficiency, complementarities, lock-in and novelty. Figure 9 below illustrates the factors,
identified in the case study chapter 5, which create value to e-procurement.




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Chapter 6 – Discussion and conclusion




                                                  •   Procurement Data Warehouse (PDW)
                                                  •   e-RFI/RFQ/RFP




   • Strategic                                                        •Procuri
   activities                                                         •Procurement Virtual
   focus                                                              Community (PVC)




                              •   DPCP
                              •   MPRO Area Package
                          Figure 9. Sources of value creation in e-procurement



I will start the analysis by taking the novelty driver, which according to the theory states
that an e-business innovates in the way they do business, by changing the structure of
transactions.


MPRO identified the need to create a common platform for mandatory frame agreements
repository and e-catalogues named Procurement Data Warehouse (PDW), the reason is
that this platform creates value to the procurement process once it enhances compliance
with negotiated frame agreements and diminishes the overlap between the different FAs,
whether it is local, regional or a global one. The procurement process was innovated by
the introduction of the PDW through an e-catalogue, allowing all Business Units to have
access to the contracts negotiated worldwide and its related documents. The overall result
is the total savings each Business Unit can benefit from, meaning that once they use the
frame agreements placed in the procurement platform it helps them reaching the volume
pre negotiated by MPRO, and consequently the discounts.


Another innovative action from MPRO was the introduction of e-RFI, e-RFQ and e-RFP.
The novelty goes with the change in the process from a traditional RFI, RFQ and RFP,
where it can take several weeks to be concluded with high costs for transferring
documents back and forth, to the electronic version of each one of them, improving




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process time and structure. Through e-sourcing, the value can be created according to the
theory where it states that through the advent of electronic markets there is a removal of
geographical and physical constraints, quick flow of information between buyers and
suppliers and increased transparency in the overall process. Another proof of value
creation of e-procurement through the adoption of e-RFI, e-RFQ and e-RFP is that the
number of suppliers a buyer can reach by sending out these electronic documents is
highly increased when compared to the traditional process and the main gain in that is the
amount of work necessary for it to be done. In the online case the workload is the same for
100 suppliers or for 3 suppliers, hence reaching a higher number of suppliers optimizes
the outcome by the wide selection available.


Moving on to the next value creation driver, lock in, we can get from the case study that
value can be created by the adoption of Procuri, an electronic platform which carries out
some of the sourcing activities, increasing the transparency and improving cycle time of
the overall process, also benefiting the SSG to focus on strategic activities instead of pure
operational issues. Procuri is a web-based system that allows MPRO to adapt it according
to its needs and improve tools in the system in order to keep up the compliance and to
make it fit to the e-sourcing structure of the Group. It also increases compliance of the
SSG when it provides templates and analytical tools for the buyers, once it motivates them
to use the system and run an e-sourcing instead the traditional sourcing project. The value
creation in this case is proved to be true in both aspects: MPRO towards Procuri by being
able to adapt the system to attend its needs; and the SSG by being able to improve their
time with tools provided by system.


Another example of value-creation involving lock-in in the case study is the creation of a
Procurement Virtual Community (PVC), allowing interaction between all resources
involved in a sourcing project, knowledge sharing, and improvement suggestions from
anyone who participated in a sourcing project before. The PVC is integrated with the PDW
so all the organization can have access to the frame agreements, functioning as an e-
catalogue. Besides, by combining the two drivers of value creation, lock in and novelty,
with the PDW and the PVC, the theory is also proven when it states that these two drivers
are importantly linked. In the case study MPRO had the innovative e-platform for frame



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Chapter 6 – Discussion and conclusion




agreements developed and it was linked with the lock-in driver of the PVC, which initiated
a network for positive feedback, suggestions for improvement and knowledge sharing
within the procurement personnel community.


The next driver, complementarities, states that an e-business should offer a number of
complementary products or services to leverage the potential of value creation, an
example could be the DPCP from the case study. The DPCP has two main uses: the e-
sourcing version which allows suppliers to participate in the e-sourcing process and bid for
contracts online, and the e-catalogue version which mirror the frame agreements and is
integrated with the various A.P. Møller – Mærsk Group purchasing systems, ensuring
compliance and transparency.


Still in the complementarities driver, MPRO developed together with some Business Units
a MPRO Area Package, which is a ‘how to derive optimal value from the procurement
process in APMM’ binder that is hand in to the Business Unit after completion of the
sourcing project. The purpose of the Area Package is to assist BU’s to obtain an overview
of the processes, tools, training and templates available to assist their organization to run
smaller projects and drive for end to end cost leadership. The Business Unit after being
part of the SSG and a sourcing project will be able to give continuity to the post-project
phase and make sure the process is implemented in accordance to the criteria identified
by the SSG. Also, it is made so if the Business Unit decides at some point to run another
sourcing project, they will be able to do most of it by following the Area Package and by
the experience and knowledge gained in working close to MPRO in a previous project.
This MPRO Area Package together with the DPCP creates the value in e-procurement
and enhances compliance with the procurement process and its electronic structure.


Moving to the last value creation driver, efficiency, it was shown during this thesis how the
procurement process gains efficiency and reduces transaction costs by implementing its
electronic version. MPRO had a great insight when decided to create the procurement e-
platforms and the PVC as it not only improved process transparency and compliance but
efficiency as well, once strategic activities prevailed by the time saved during the e-
sourcing project. Besides, all employees in the Group have access to the PVC and can



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Chapter 6 – Discussion and conclusion




share their knowledge and information about procurement process in the organization,
they have access to the current projects being done within the company and encourages
Business Units to think procurement wise and focus on values such as Total Cost of
Ownership and in finding ways to improve their process and consequently their costs.
Through the procurement e-platform employees worldwide have the opportunity to
understand what procurement does and what the impacts of an e-sourcing project are.
Another important value creation aspect is that with the implemented e-catalogue, buyers
can find a list of suppliers and with one click order the material they need, instead of
looking for different suppliers, negotiating prices and delivery. Anyone who needs to book
a hotel and flight tickets can use the same system and make the purchase through
approved suppliers and negotiated prices, increasing compliance and ensuring the
savings aggregated with the contract previously negotiated. Through the adoption of
Procuri as the e-sourcing platform, the SSG is able to focus on strategic activities once all
the templates for workshops, RFI, FRQ and many other are uploaded in the system,
saving a huge amount of time.


It was able to see how these drivers are linked among themselves and by this connection
providing an expressive impact in the value creation of e-procurement. The adoption of
only one driver would not reach the same benefits as it does with the four of them
combined, especially because when one driver of value creation is applied, it automatically
links or enhances the other driver of value creation, and so on.



6.1 Recommendations


Though the e-procurement process is implemented in almost all procurement activities as
shown in figure 7 (chapter 5), there is still some areas to be improved. It is important that
the value creation of e-procurement is spread and emphasised that it is not only a web
based platform and that it implicates in some beneficial changes to the procurement
process. Companies still face the change resistance towards e-procurement as shown by
the example in section 3.5.2; this resistance can only be changed by showing the benefits
a company can gain with the new process, if the resistance is in the suppliers side, the
same approach should be used and a training meeting should be added. Through the


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Chapter 6 – Discussion and conclusion




knowledge suppliers can gain by knowing how the e-procurement platform works and the
benefits they will have in participating in an online process might be very beneficial for the
overall outcome and the suppliers will feel more comfortable for being part of a clear,
error-free and transparent process.


Another way of enhancing e-procurement is through virtual communities such as the one
implemented by Mærsk, so more people get to know what exactly e-procurement is and
how they can get started and the potential large savings the organization can achieve.


A further study in another organization would also be recommended to compare the
transition from procurement to e-procurement in another practical context; however I
believe that the value creation drivers would be applied in a similar format, once the e-
procurement is somehow standardised among private companies through benchmarking.




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References




References


Amit and Zott (2001) – Value Creation in E-business


Chaffey, Dave (2002) – “E-business and E-commerce Management – Second Edition”


Curran, Elaine. Bernert, Andrea. Wiegand, Anke – Electronic Procurement in the public
sector – Factsheet on latest developments in e-procurement in the EU and its Member
States.


Edie et al. (2007) – Barriers to e-procurement – Itcon Vol. 12


H.Lindskog (2004) – How can the private sector benefit from the public sector e-
procurement experiences?


Mærsk Procurement – Handbook for Strategic Sourcing


Beil, Damian R. Wein, Lawrence M. (2003) – An inverse-optimization-based auction
mechanism to support a multiattribute RFQ process


Pucihar, Andreja. Gricar, Joze (2005) – Environmental Factors Defining E-Marketplace
Adoption: Case of Large Organizations in Slovenia


http://www.weblaw.co.uk/art_contract_online.php




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