Procurement Conundrum…

? • How do I solve my
procurement problem using
technology ?

• Is technology going to
change the way industry
operates ?
Negotiations
Co
st

Outsourcing
C

gic
on

SCM r ate
St
t ro

u r cing
l

Automation so
s
c tion
Extended u
e-A
In ch
te n

ERP’s
Te

rn ol

EDI
et og

1
ie
s
Electronic Procurement
by
Chandrashekar T S
Electronic Enterprises Laboratory
Department of Computer Science and Automation
Indian Institute of Science, Bangalore

2
Topics of Discussion

 Part 1: Procurement Fundamentals

 Business and Technology Drivers
 Scope of Procurement
 Procurement Processes
 Part 2: Procurement Mechanisms
 Overview
 Pointers to more resources
 Part 3: Procurement Automation
 Introduction and challenges
 Conclusion
3
Procurement Fundamentals

Business & Technology Drivers

• Businesses spend over $20 trillion on

external goods and services annually.

• Continuous competitive cost

pressures in a weak global
economy.

• INTERNET - Cheap communications

medium.

• Maturity of complementary
technologies – Software agents, 4
Procurement Fundamentals

The Procurement Landscape

Direct Materials
(x)

Indirect Materials
(y)

Services
(z)

x + y + z >= 60% of cost of car !! A huge opportunity

5
Procurement Fundamentals

Procurement Process – A Birds Eye View

6
Procurement Fundamentals

Procurement Process – A Detailed View

Requestor
(Crib Analyst)
Creates PA
Obtain
GO Financial
Approval for
Auto- PA
Requestor Replenish
Generates PA

Buyer Receives Buyer Item exists No Buyer Sends RFQ Suppliers respond Buyer Receives
Yes
Hardcopy PA to Suppliers (via to RFQ (via e- RFQ Response
Code on a Blanket
after nightly e-mail, fax, mail, fax, phone, from Supplier(s)
Correct? Order?
batch phone, or EDI) or EDI)
No Yes
Buyer Re- Buyer Notifies APA
Buyer Assigns PA to to issue PO against
correct Buyer
in system
Blanket
No
x
Buyer Makes Obtain Hardcopies of
Yes
Buyer Analyzes PR Total Purchasing Mgr. Pricing Quote and PO
Sourcing
RFQ Responses >50,000? Or Sourcing Approved? Filed
Recommendation
Board Approval No
Yes
No
Buyer Issues Add Item Yes Buyer adds
•50000-250000 – Commodity Mgr. Approval
Spot Buy to Existing Item to Blanket
•>250000 – Director Approval
Or New Blanket? Order/Issues
•>1million – Sourcing Board Purchase Order 7
New Blanket
 Part 2
Procurement Mechanism

8
Procurement Mechanisms

What is an economic mechanism ?

“An economic mechanism is concerned with
the design of rules of interaction for economic
transactions which will in principle yield some
desired outcome”. e.g. Auctions.
An analogy with a physical mechanism:
Output Rule:
Shaft speed determined by gear ratio.
Winner determination rule; payment rules

Interaction Rule:
Gear ratio; contact angle, etc.
Attributes to be considered, scoring rules,
and information revelation rules.
Input Rule:
Only rotary motion; no lateral motion.
Bidding rules 9
Auction Mechanisms: A Preview

• Four basic mechanisms to choose from:

• English: First price, ascending auction.

• Dutch: First price, descending auction.

• Sealed Bid: First price, single round auction.

• Vickrey: Second price, ascending auction.

• Complications arise because of:

• Logistical and capacity concerns.

• Cost curves (volume discounts, overtime costs,

etc.).

• Exposure, aggregation, and exclusion constraints.

10
Procurement Mechanisms

Issues to consider
Multi item,
configurable
attributes
Product Attributes
Multi item,
t y
multi
e xi
attribute
Multi item,
p l
single
om
attribute
Single item, c
configurabl
ing
as
e
attributes
Single item,
c re
multi
attribute
In
Single item,
Single
attribute
Cost
Business complement Capacity
constraints arities constraints

System Attributes
11
Design criteria for automated auctions

• Economic criteria
• Efficient mechanisms v/s optimal mechanisms
• Incentive compatibility
• Budget balance
• Solution equilibrium

• Computational criteria
• At the agents level
• Strategic complexity
• Valuation complexity

• At the mechanism level

• Winner determination complexity
• Communication complexity
12
Automated Procurement Mechanisms

ements of an effective procurement platform:

 Negotiation

 Collaboration

 Project Management

 Knowledge Management

 Document Management

 Analytics

13
Automated Procurement Mechanisms

To probe further:
http://lcm.csa.iisc.ernet.in
http://www.market-design.com
http://task.stanford.edu
http://www.cs.huji.ac.il/~mosheb
http://www.cs.huji.ac.il/~noam
http://www.cs.huji.ac.il/~lehmann
http://www.cs.brown.edu/people/amygreen
http://www.sims.berkeley.edu/resources
http://www.robotics.stanford.edu/resources
http://kasbah.media.mit.edu
http://auction.eecs.umich.edu
http://ecommerce.media.mit.edu
http://www.media.mit.edu/
http://www.ibm.com/iac 14
 Part 3
Procurement Automation

15
rocurement Automation: A Historical Perspective

ectronic Data Interchange – First Steps to Automation:

Trading
Partners
Interchan
ge
Standards

Value
Added
Networks
Translatio
n
Software

Telecommunication Computer System

access - modem &
Applications
16
rocurement Automation: A Historical Perspective

lectronic Data Interchange: Why Standards ?

Key Point: Number of Protocols increase

exponentially with the number of Trading
Partners. 17
rocurement Automation: A Historical Perspective

lectronic Data Interchange: Why Standards ?

Standards simplify the whole

process of interchanging business
data 18
rocurement Automation: A Historical Perspective

ectronic Data Interchange: How many Standards ?

ectronic Data Interchange for Administration Commerce and Trad

19
rocurement Automation: A Historical Perspective

ectronic Data Interchange: What is a Standard ?

The Agreed
Data Elements Words
Representation
of Information
Segments Sentences
(what items
and how they
Messages Documents
are individually
structured and
put together) Syntax Grammar
to be sent from
one computer
to another. 20
rocurement Automation: A Historical Perspective

ectronic Data Interchange: The Message Structure?

21
Procurement Automation

lectronic Data Interchange: Consequences

• Industry wide standards
• Formalized process flows
• Open standards
• Secure and legal interchanges
• Available tools and service providers
• Proven business benefits

• Version control
• Implementation Mechanics
• Maintaining and Updating the Standards
• Cost of Implementation, steep on-ramp
• Change Management difficult because of
distributed maps and translation software
22
 Procurement Automation

Alternatives to EDI: INTERNET based Technologies

• No software installation required at the

supplier
• only the Internet browser

• Easy and quick connection possible

• Hub determines the information contents

• Pre-entry of fixed data possible

• No Data transmission charges - Only Internet

access costs
• No translator costs 23
Procurement Automation

INTERNET based Technologies: Limitations

Web - EDI Ecosystem as it Develops

Daimler Benz
Ford

A
C
T
I
UNIX
S

Bosch
A
C
T
I
UNIX
S

A
C
CEAT
T
I
UNIX
S

Delphi

24
Procurement Automation

INTERNET based Technologies: Limitations

Web - EDI Ecosystem as it Develops

A Complex Maze of Interchanges leading to

ACTIS
ACTIS

Complex Business Process Conventions UNIX

UNIX

Daimler Benz
Ford
Also No Application Integration is Possible
ACTI
S

Bosch

Delphi CEAT

25
Procurement Automation

INTERNET based Technologies:

Is There a Solution ?
Yes

XML (eXtensible Markup Language)

Over to VKV ….
26
Conclusion

To probe further:
http://www.edifact.org
http://www.uncefact.org
http://www.monkeyweb.com
http://www.xml-edi.org Thank You !
http://www.ediint.org
http://www.vcm.tatamotors.co.in

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