Procurement Matters

01 February 2000

The E-Procurement revolution is delivering significant benefits to organisations and the opportunities for the OGC are enormous. Public Service Review reports

Electronic procurement of one kind or another is not an entirely new concept, most major manufacturers have been using electronic date interchange (EDI) systems to streamline their supply chain. However, the real e-procurement revolution is taking place in what is called MRO (maintenance, repair and operating purchases), for example: office services and supplies, computer equipment, replacement parts and equipment maintenance. Recent estimates suggest that these account for up to 60% of expenditure at most companies, and occupy an inordinate amount of purchasing time. E-procurement offers a chance for buyers to automate routine purchasing and so eliminate errors, reduce staff time and gives much improved management information. Suppliers also get similar benefits as well as accessing new customers at a much lower cost than using conventional marketing media.

IBM has been moving all of its procurement, both manufacturing and MRO, to the Internet and it has been reported that its invoice accuracy has improved from 75%-80% two-years ago, to 97% now. Oracle is claiming that it has saved an average of 5% of the purchasing costs of some of its clients, such as Boeing and Hewlett-Packard. At the 1999 Defence Information Capability Conference, it was reported that the MoD was spending £80 (using paper ordering) for computers from Dell, using e-commerce, the cost would fall to £15.

It is estimated that buying goods at a price other than the one centrally negotiated between the company and supplier is rife, and typically results in 15-27% higher prices paid for the goods. Just eliminating this saves companies up to 10% of their spend.

E-procurement provides information about what a company is spending across all of its procurement areas and this information can result in negotiation of better volume discounts. The research company IDC expects uptake of e-procurement to rise from 600,000 users and $147m globally at present, to 250 million users and $5.3bn by 2003; and for savings to top $103bn, or 7.5% of total procurement turnover worldwide by then.

A 'Clicks' business has the ability to reach a large number of potential customers in a way that was not previously possible. Similarly, a buyer can now access a far wider range of suppliers goods and services. The challenge for both, is how the buyer judges the quality of goods and services on offer.

Traditionally, we tend to stick with suppliers we know, those which have been recommended or we select a well known brand. The Internet seller often provides testimonials from other buyers, but it is difficult to assess their reliability or whether in fact they reflect our own measures of quality. Without a true measure of quality, the selection criteria becomes that of cost. Buying on the Internet could therefore become focused on price rather than value for money. In fact, the invisible quality elements, such as convenience, product range, speciality etc, are easily lost. The risk of an e-procurement system is therefore a loss of quality in the search for low cost.

There is a huge e-procurement opportunity for government and this will be facilitated by the restructuring of procurement activity - the Office of Government Commerce (OGC). Alan Milburn announced the formation of the OGC in July 1999. It was officially launched on 1 October 1999 and will come into full operation from April 2000.

The OGC came about as a result of a review by Peter Gershon, the managing director of GEC Marconi, who was invited to review "civil procurement in Central Government in the light of the Government's objectives on efficiency, modernisation and competitiveness in the short and medium term". The Gershon review identified a number of weaknesses in government procurement and the proposals for dealing with these called for the creation of a central procurement organisation. The OGC was born.

On the 21 February the OGC will be moving to new premises in Salisbury Square.