What are the benefits of applying e-procurement for SAPCO and its suppliers?

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Trends and drivers of change in the automotive industry

Competition in many industries has intensified all over the world in just a few years.
The reasons why this has happened are many. They mostly relate to.
Deregulation in many industries (such as energy supply and airlines).
Intercultural homogenization and the resulting homogenization of customer preferences. The forming of trade regions (GATT, NAFTA, EEC) in some areas in the world; Improved transportation facilities.
The more sophisticated information and communications technology, which has become available. (Weele, 2002:P5).
According to Van Weele (2002), modern information technology would change traditional borders, not only between nations but also between organizations. The predictions indicate that the world increasingly will become one ‘global village’.
Global competition, pricing pressures, and finicky financial markets are forcing organizations to develop new strategies for achieving year over year improvements in productivity and costs. As a result, the ability to control costs and coordinate activities across the supply chain is dramatically emerging as a primary source of competitive differentiation within every industry. (Aberdeen Group, 2001).
In fact, in an environment of global competition, all business, no matter what they produce, will have to embrace and master new and emerging technologies to survive (Ernst & Young, 2001). The survivors of the resulting shakeout should enjoy a concentration of expertise and scale, offering a chance at higher sustainable returns and a restructured competitive set. (PricewaterhouseCoopers, 2004).
Today’s global automotive industry is a troubled sector, beset by structural overcapacity, a global price war and a general inability to return its cost of capital (PricewaterhouseCoopers, n.d.: P5). The growth rate of the European car market is near zero and the world’s most important economy, North America, has been hit massively by the worldwide economic downturn after the end of the dot-com hype and because of 9/11/01. In the 1930s, there were approximately 300 independent car manufacturers; by the end of the 1990s seven independent manufacturers remained.
In the light vehicle market, the five largest manufactures (General Motors, Ford, DaimlerChrysler, Volkswagen, and Toyota) have a market share of about 70 per cent (Klein and Helmut, 2005) .  According to Autofacts (2005), (see Figure 1-3), the car industry is operating with an increasing overcapacity. Vehicle sales in the NAFTA region have decreased and the car market in Western Europe is stagnant. Furthermore, customers demand better service and faster delivery. Market transparency has increased with the advent of the Internet. As demand is volatile, manufacturers are driven to cut costs (e.g. by economies of scale), maximize flexibility and foster customer loyalty. (Klein and Helmut, 2005).

e-Procurement adoption in the automotive industry

The automotive equipment sector is an area of industry that has warmly embraced the use of the new information and communication technologies: “e-procurement” for buying, “e-design” for product development, “e-supply chain” for logistics. These new technologies are now developing rapidly and contribute to reducing costs, improving quality and shortening lead times. Co-design and data transfer systems are becoming the norm and are standardizing along the entire chain: the car makers, the large equipment manufacturers in charge of modules and components, and the other suppliers involved in an automotive project. (e-business Watch, 2005).
PricewaterhouseCoopers (2002) reported that, the existing landscape of the global automotive industry is a minefield of challenging issues. Declines in shareholder return and stock prices, too many e-business and quality management programs, and the lack of integration and standards as a basis for collaboration within the supply chain threaten the very survival of every supplier. OEM over-capacity and developing electronic procurement practices are rapidly spreading the pain of variable cost pricing of new automobiles to every part of the supply chain. e-procurement is here to stay, and it will drive a new period of rationalization.
The electronic capabilities of suppliers increasingly will determine whether they will be able to survive in a specific customer relationship. It is expected that manufacturers will increasingly shun suppliers for future business who do not offer electronic linkages, or who have incompatible information systems. (Weele, 2002:7).

e-Procurement benefits & barriers

The potential benefits and characteristics of e- procurement, especially for indirect goods and services, are described and proved in a huge number of articles and studies.
According to Hoppen et al (2002), the main results are that e-procurement decentralizes operative tasks and centralizes strategic procurement processes. This eliminates the so-called maverick buying and reduces transaction costs (e.g. decreasing process time and media discontinuities or reducing personnel expenditures) and purchasing costs (e.g. through grouping effects and/or a reduction of the number of their suppliers).
However, according to one study on procurement practices in the automotive industry, online procurement has improved efficiency through catalogue systems and auctions. Furthermore, companies realized that new practices introduced together with e-sourcing had positive effects on communication along the supply chain and quality of their purchasing processes, and increased transparency. Contrary to initial expectations, these were more significant benefits than direct material cost reduction or the bundling of purchases. (Croom, 2005).
According to Kalakota and Robinson (2001), e-procurement’s benefits fall into two major categories: efficiency and effectiveness. e-Procurement’s efficiency benefits include lower procurement costs, faster cycle times, reduce maverick or unauthorized buying well organized reporting information, and tighter integration of the procurement functions with key back-office systems. e-Procurement’s effectiveness benefits include in the increased control over the supply chain, proactive management of the key data, and higher-quality purchasing decision within organizations. Nevertheless, not everyone is finding e-procurement to be that simple a shot. In terms of the status of procurement in Croom’s examination of supply chain strategy, less than 40 per cent of respondents saw e-procurement as a strategic issue – i.e. one with a potential to influence competitive advantage. Centralizing the procurement function was seen as desirable, achievable and necessary for e-procurement adoption. Some companies that have taken tentative steps to begin buying over the Internet find themselves struggling against resistance from their suppliers, as well as from their own procurement or engineering departments. In addition, many others are saying they want to get into the game but do not know how to begin. (Andrew, 2001; Croom, 2005) In addition to the technology risks, there are risks associated with the integration of these technologies with existing information systems, with the business models that these technologies impose on supplier-customer relations and with the security and control mechanisms required to insure their appropriate use (Davila, 2002). Ironically although the e-commerce and e-procurement are inherently global, many of its limitations come from the geographic, cultural and organizational limitation of the underlying businesses they serve. (Avery, 2002).

e-Procurement implementation

e-Procurement can take place in an e-marketplace (defined as “marketplaces implemented by use of telematics, which means mechanisms of market-typical exchange of goods and services, which support all phases of the transaction” (Schmidt, 1993) or directly between two organizations and the software automates the purchasing process using Internet technologies. Requisitioners can access the system via a standard browser where they are routed to company approved catalogues either internal or external. (Bu´rca, Fynes and Marshall, 2005).
Enterprise resource planning (ERP) systems and electronic data interchange (EDI) were for a long time the primary source of connecting manufactures and suppliers electronically, most in a bilateral way (Wirtz 2001). EDI-based designs increasingly fail when confronted with globalize networks of partners and customers, because of the variety of different, often industry-specific, business process scenarios and EDI standards. Caused by high implementation and operating costs the integration of small and mid-sized enterprises is difficult. Internet enabled capabilities (e.g. procurement) are discussed as an approach solving these problems. (Hoppen et al, 2002).

Why procurement is important

According to Gadde & Håkansson (1998), there are a number of reasons why purchasing has become more significant and consists of a larger part of the turnover.
The first reason is that purchasing has gradually become more involved in larger parts of the company’s total activity and due to this; the purchasing department’s capacity and competence have great consequences for the efficiency of the company. Purchasing is significant for the company’s profitability because of the large volume that it stands for. (Ibid).
A second reason why purchasing has become more important is that purchases directly influence the result. One cent less spent on purchasing is one cent extra added to the profit. This expression is often confused with the notion that one cent lower price leads to a higher profit. Nothing could be more wrong, due to the indirect cost associated with purchases. The acquired goods or services cannot be seen in isolation, but have to be seen in relation to the function they perform. (Ibid). The third reason for the increased importance of purchasing is the insight that benefits can be made by having deeper and more long-term relationships with a supplier. These potential benefits concern flow of material, flow of information and cooperation in technical development. (Ibid).
A forth reason for the increased importance of purchasing is the increased complexity that purchasing involves. The more society develops, the larger the differentiation becomes and the more specialized units become. The increased specialization has lead to products that are more sophisticated and a more difficult purchasing process. International purchases have also increased which has lead to a number of new difficulties concerning the distance to suppliers, handling currencies and different legislations. (Ibid).
We can conclude by stating that the importance of procurement has gained an increasingly greater importance since organizations have turned their focus to lowering costs and increasing efficiency.

Procurement and the Value Chain

Harvard Business School professor Michael E. Porter, who describes the value chain as a tool for ascertaining a company’s competitive advantage, popularized the concept of the value chain (SAP R/3, 1999). Value chain is a well-established concept for considering key activities that an organization can demonstrate or manage with the intention of adding value for the customer as products and services move from conception to delivery to the customer. (Chaffey, 2004) According to porter, every firm can be understood as a collection of activities that range from the design, marketing, delivery, and support of a product. The value chain breaks these activities down to strategically relevant categories  »in order to understand the behavior of cost and the existing and potential sources of differentiation ». By so considering each activity within a company in terms of the value chain, a firm can isolate potential sources of its competitive advantage. (SAP R/3, 1999) Every industry player has a value chain, which in some parts may have some connections with others. Porter states that, suppliers have value chains that provide the purchased inputs to the firm’s chain; channels have value chains through which the firm’s product or service passes; buyers have value chains in which the firm’s product or service is employed (Porter, 1985: P22). In the value chain context, an internal value chain within the boundaries of an organization and an external value chain where partners perform activities can be identified. (Chaffey, 2004)
The value chain in figure 2.1 is composed of value activities and a margin, which is achieved by these activities. Value activities can be divided into physically and technically groups of activities (Weele, 2002:P8). Michael Porter considers every firm basically as a collection of primary and supporting value activities that are performed to design, produce, market, deliver to the buyer and its support after sale and support products that are valuable for customers. (SAP R/3, 1999; Weele, 2002).

Impact of e-Procurement on procurement work

During the last year or so there has been a shift in the attitude towards e-procurement and e-business as well. The hype has to some extent subsided, and companies are becoming more aware and demanding a solid business case before jumping on the e-something bandwagon. The Internet is not a miracle cure for poorly functioning purchasing organizations (Van Weele, 2002, P: 181).
Expectations were great at the end of the 20TH centaury but nowadays it seems as though the harvesting did not fully materialize. Many of the anticipated benefits came mainly from improving operational efficiency, and also from reduced input costs. The follow- up studies that have been done indicate that savings from increased operational efficiency were very hard to find. Instead, the rationale for implementing e-procurement solutions has shifted towards compliance, increasing leverage, etc (John, 2001: 27). Another example tells the same story; ROI has been hard to measure and the e-procurement initiative had been seen as an infrastructure project and as an enabler for business (Arminas, 2001). Even if some of the operational benefits did not materialize, information technology is a significant enabler and will continue to be for purchasing to take a more integrative and strategic role (Mentzer, 2001:232; Essig and Arnold, 2001:48), and also for promoting overall corporate success. (Ellram and Zsidisin, 2002).
It has also been realized that e-procurement alone generates savings or added value, but in order to reap the full potential of e-procurement it must be harmonized with the sourcing strategy. Too often have e-procurement applications been set to handle low– value indirect items, certainly saving process costs, but the full potential is believed to reside with direct material in conjunction with efficient and effective sourcing strategies. (Balchin, 2001).
E-procurement impact on procurement performance has not fully materialized as expected. There are however important and promising features of e-procurement, such as improved information sharing capabilities increased connectivity, and efficiency improvements that should not be overlooked.
E- procurement solutions come in a variety of types and configurations to fit the needs of virtually any business. Today’s challenging economy has put increased pressure on businesses to improve productivity and reduce costs. Many organizations are finding that an effective way to accomplish this is to change the role of their purchasing departments instead of focusing on operational, transaction-oriented services, empowering purchasing staff to strategically manage the entire purchasing process.
An e-procurement solution play a fundamental role in transition of procurement to e-procurement by streamlining the buying process and providing the information needed to make more intelligent purchasing decisions. An effectively implemented e-procurement solution can: (Cisco Systems, 2002).
Reduce paperwork and redundant effort, improving productivity and lowering the cost of the purchasing process.
Enable companies to locate suppliers with the best prices and quality and help streamline negotiations and contracting.
Take full advantage of an enterprise’s buying power by enabling it to qualify for volume discounts and ensuring purchases are made through preferred suppliers.
Streamline and automate purchasing through critical suppliers, enabling more timely and accurate order fulfillment.
Table 2-3 illustrates the impact e-procurement is having on enterprise compliance and spend management initiatives. Performance improvements recorded map very closely to Aberdeen’s previous benchmarks, indicating that e-procurement is consistently delivering on its initial value proposition.

Table of contents :

1. Introduction
1-1. Background
1-1-1. The importance of automotive industry in the world and Iran
1-1-2. Trends and drivers of change in the automotive industry
1-1-3. Role and Importance of procurement
1-1-4. The Internet & e-business
1-2. Problem Area
1-2-1. e-procurement
1-2-2. e-procurement adoption in the automotive industry
1-2-3. e-procurement benefits & barriers
1-2-4. e-procurement implementation
1-2-5. e-procurement interludes
1-3. Aim of Study and research questions
1-4. Delimitations
1-5. Outline
2. Literature review
2-1. Procurement
2-1-1. General procurement issues and definitions
2-1-2. The importance of procurement
2-1-3. Why procurement is important
2-1-4. Procurement and the Value Chain
2-1-5. Purchasing, Procurement & supply chain management
2-1-6. Direct and Indirect Procurement
2-1-7. Purchasing methods
2-1-8. Purchasing & Procurement functions
2-1-9. Purchasing & procurement process and activities
2-2. e-Procurement
2-2-1. General e-procurement issue and definitions
2-2-2. Impact of e-procurement on procurement work
2-2-3. e-business, e-commerce & e-procurement
2-2-4. e-procurement definition
2-2-5. e-procurement benefits
2-2-6. e-Procurement barriers
2-2-7. e-procurement models
2-2-8. e-procurement Systems & Applications
2-2-9. e-procurement process
2-2-10. e-technologies in Supply chain management
2-2-11. e-procurement and Supply chain management
2-2-12. e-technologies in the automotive industry
2-2-13. e-procurement adoption
3. Conceptualization and frame of reference
3-1. Conceptualization
3-2. Frame of reference
4. Methodology
4-1. Research Purpose
4-2. Research approach
4-3. Research strategy
4-4. Sample selection
4-5. Data collection method
4-6. Data analysis
4-7. Quality standards
5. Empirical Data
5-1. SAPCO
5-1-1. Systems & Computer Department
5-1-1-1. Software management section
5-1-1-2. ERP Project
5-1-2. Planning Division
5-1-2-1. Planning Department
5-1-2-2. Logistic Department
5-1-3. Manufacturing Division
5-1-3-1. Trim Department
5-1-3-2. Polymer Department
5-1-4. Commercial Division
5-1-4-1. Domestic production purchasing department
5-1-5 Financial and Economic Division
5-1-5-1. Parts purchasing and contracts accounting
5-1-5-2. Specialized commercial department
5-2. Suppliers
5-2-1. MehrcamPars Co.
5-2-2. Mehvarsazan Iran Khodro Co.
5-2-3. Sanden Iranian Co.
5-2-4. Shetab Kar Co.
5-2-5. Majmooe Sazi Tous (MST) Co.
6. Data Analysis
6-1. RQ1: How e-procurement is being used for acquisition of parts and components between SAPCO and its suppliers?
6-1-1. SAPCO within Case
6-1-1-1. e-Procurement model
6-1-1-2. e-Procurement system
6-1-1-3. e-Procurement process
6-1-1-4. e-Procurement Applications in SAPCO
6-1-2. SAPCO and Its Suppliers-Cross Case
6-1-2-1. e-Procurement model
6-1-2-2. e-Procurement system
6-1-2-3. e-Procurement process
6-1-2-4. e-Procurement Applications in SAPCO
6-2. RQ2: What are the benefits of applying e-procurement for SAPCO and its suppliers?
6-2-1. SAPCO within Case
6-2-2. Suppliers within Case
6-2-3. SAPCO and Its Suppliers-Cross Case
6-3. RQ3: What are the barriers of applying e-procurement for SAPCO and its suppliers?
6-3-1. SAPCO within Case
6-3-2. Suppliers within Case
6-3-3. SAPCO and Its Suppliers-Cross Case
7. Finding, Conclusions and Implications
7-1. Findings and Conclusions
7-2. Implications for Management
7-3. Further Research

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