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Increased competition and pricing pressures are forcing organizations to develop new strategies for achieving continuous improvements in business processes, employee productivity, and cost reduction. Such pressures are prompting "C-level" executives - chief procurement officers, chief financial officers, and chief executive officers - at an increasing number of companies to make procurement and supply chain management strategic initiatives.
The reason for the growing emphasis on procurement is simple: Purchased products and services represent the majority of an organization's costs. Any reductions in procurement costs flow directly to the bottom line. Procurement is also responsible for the design and management of supplier relationships - ones that ultimately determine an organization's overall cost structure and responsiveness. Aberdeen research indicates that emerging Internet-based procurement automation (e-Procurement) and reverse-auction technologies can be highly effective tools for improving business processes, increasing productivity, and reducing costs. e-Procurement automates the business processes and workflow associated with the acquisition and management of non-production ("indirect") goods and services - such as office supplies; computer equipment; and maintenance, repair, and operating (MRO) supplies - which represent a large and poorly controlled expense in most organizations. Aberdeen research finds that early adopters of e-Procurement have realized reductions in prices paid for indirect goods, shortened order-processing cycles, lowered administrative costs, improved inventory management, and reduced off-contract ("maverick") purchasing.
Reverse auction technologies use the low cost and ubiquity of the Internet to create competitive environments for online negotiations between a buyer and multiple sellers. Aberdeen research indicates that reverse auctions can enable buyers to shorten process cycles and negotiate reduced prices for direct and indirect goods. Despite such benefits, these procurement technologies address only a portion of the overall challenge, primarily automating tactical processes and workflow and providing little if any support for strategic sourcing and supply base management activities. To deliver their maximum value, these technologies must be deployed within a larger procurement framework that incorporates product-category expertise and well-defined sourcing, supply base management, and fulfillment strategies. This procurement framework will enable companies to extract cost savings from all aspects of procurement, enabling maximum return on investment (ROI) on their e-Procurement investments in the shortest possible time.
Aberdeen finds that many midsize and large organizations have determined that they lack the capability, tools, and/or internal product and process expertise to effectively and rapidly leverage their investments in e-Procurement and auction technologies. Such factors suggest that access to the full benefits of e-Procurement will require a shift from a pure technology approach to a hybrid services model that blends the tactical benefits of procurement automation with the sourcing, product, and process expertise and capabilities of third-party procurement services.
Aberdeen describes firms that deliver this emerging hybrid of technology and procurement services as procurement service providers (PSP). Under the PSP model, e-Procurement and auction technologies will be integrated with product, sourcing, and supply base management services in order to provide total solutions that address the unique requirements and constraints of individual organizations. This hybrid approach could provide immediate access to leading sourcing strategies and extended capabilities, such as demand aggregation. In such a case, a PSP can aggregate spending across organizations in order to negotiate volume discounts and improved service terms. These full-service procurement solutions will be delivered as hosted, Web-based services, reducing the burdens and costs placed on user organizations and enabling rapid and enhanced ROI.
Simply put, the PSP offers multiple opportunities for transactional, process, and unit cost savings by acting as an extension of a company's existing procurement infrastructure, managing the non-strategic product categories and procurement activities that the organization feels it can improve but lacks the internal expertise or focus to manage these activities effectively.
Aberdeen expects the PSP model to be highly attractive to midsize firms that have neither the resources nor the buying volumes to access the full benefits of e-Procurement. The PSP model should equally appeal to larger organizations that have neither the expertise nor the inclination to dedicate significant sourcing and supply chain management resources to indirect and commodity items. Finally, PSP services could help Web-based marketplaces (e-Markets) achieve a level of transaction volume ("liquidity") and user stickiness that will be required for more rapid and continued success.
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