World-Class Operational Procurement: Catalogues and Shopping Baskets

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Internet Shopping.jpgPart 2 of a ten-part series that examines key operational aspects
of the so-called "Purchase to Pay" value chain
By Independent Contributor, Peter Alkema - Head: Purchase to Pay at ABSA

Even though Amazon.com is today one of the most recognisable online shopping brands, the concept of doing your shopping over the Internet was very new only 10 years ago.  Indeed, putting purchases into a shopping basket and paying for them when you check out was common practice, something done at real shops, with real purchases and real cash!
"Over the years I have hosted many training sessions and workshops on e-procurement and in these I always ask the audience whether they have bought something over the Internet.  Usually the majority of attendees respond in the affirmative, a cue that I use to explain that "e-procurement" is very similar to this type of shopping and offers a degree of familiarity with systems that most large organisations will have in place for their Purchase to Pay process.  I then explain that catalogues (how they are used and how they work) are an integral part of online purchasing, which is the topic of this article" Peter Alkema, Head of Purchase to Pay at ABSA told SmartProcurement.


Catalogues - The Basics

A 'catalogue' can be defined as a searchable hierarchy of items that can be procured. Taking this further, one can distinguish between three main types of catalogue, namely:
  1. Punch-out Supplier Catalogues: These are hosted externally, but they are seamlessly accessible on the company's procurement system. Given that there may be a different look and feel on the destination catalogue, this can sometimes be problematic if a consistent look and feel needs to be maintained.
  2. Market Supplier Catalogues: Catalogues are aggregated from multiple suppliers, and are therefore weaker on buyer-specific requirements such as Material Group Codes (MGCs).
  3. Internally Hosted Supplier Catalogues: A single, unified catalogue is hosted by the buying organisation. Full integration with the purchasing system ensures a single look and feel as well as being faster over the company network than over the Internet.

"Generally, we find that the third option is most preferred by larger companies" says Alkema. In this specific process the contracted supplier will provide the catalogue product information as flat files to the buying organisation, which is then loaded onto the system through a set process. This data can be supplemented by rich content such as images, multimedia files or any MIME-compatible format. To ensure consistency of data, both in viewing and storing catalogue items, there must be the use of classification standards that will also enable the grouping of similar items across various catalogue scenarios. UNSPSC (United Nations Standard Products & Services Code) is a widely used international standard that most large organisations use to structure their catalogues. Some engineering and production facilities may even need to extend such standards to describe very complex parts.

There are key benefits of using a classification standard such as UNSPSC.  These include:
  • One-dimensional codes such as EAN and bar codes were not designed to support product discovery and spend analysis as they incorporate no hierarchy, while proper product classification systems allow product comparisons among different vendors as well as rolling up transaction-line items.
  • As a universal taxonomy of products and services, the hierarchy allows searches to "drill-down" among a vast group of items.
  • Changes in the marketplace as well as new products and services are administered quickly and inexpensively.

Bearing this in mind there will be a need for organisational support in terms of catalogue maintenance and loading processes. Typically, this will consist of an administrator who physically executes the technical upload of the catalogue data onto the system, as well as one or more business users that verify the data, such as prices. While suppliers will be contractually limited to specified price increases, it is not wise for raw data from the suppliers to be loaded directly onto the system. Mismatches between catalogue prices and invoice prices can cause costly rework. There may even be a cleansing process as part of the catalogue creation and uploading. Electronic catalogues drive greater efficiencies in the purchasing process as well as supporting downstream Management Information (MI) and reporting requirements. Accurate product selection is also ensured, thereby dramatically reducing product purchasing cycle times.

In addition to this, careful thought will need to go into the design of the purchasing process where catalogues are used as an integral part. Problems can exist between the creation of a shopping cart and its approval if there are price changes for items which are in the unapproved shopping carts. This can either be managed centrally and by effective organisational design of roles and responsibilities, or programmatic designs can automate this.


Purchase Orders and the Purchase To Pay Process

As with any system, the adoption of new technologies is a function of change management, training and skill development in an organisation. Becoming familiar with online catalogues will drive out benefits in a number of ways. A purchase order process can cost an organisation hundreds of Rands per transaction, and it is cost-effective to reduce the ratio of shopping carts to purchase orders. At a large financial institution, where SAP is in place to support the Purchase to Pay process, some interesting figures are available.

Shopping Carts and Purchase Orders.pngComparing the number of shopping carts in the period Jan-Apr 2007 with the same period in 2008, shows there has been a marked improvement in how the catalogues can be used to consolidate purchasing requirements.  Effectively, an increasing number of purchase orders in 2008 have been created from proportionately less and less shopping carts. In March, a declining number of shopping carts actually produced an increasing number of purchase orders. This means that users are becoming more and more familiar with the online catalogues and are able to plan more requirements into less purchasing transactions which cost less for the organisation. The overall increase in purchase orders for Jan-Apr 2008 is very positive, indicating that more and more purchasing activity is being driven through the Purchase to Pay channel. Compared with the same period in the previous year, there is a 26,4% increase in the total number of purchase orders. The spike in purchasing activity in November 2007 was because the financial year-end is in December, and purchases were hurriedly done across the board as the budgeting cycle was coming to an end.

In conclusion, the design, implementation and maintenance of catalogues on a company's purchasing system must be done with full alignment to the company's purchasing policies and procedures. As an integral part of the "Purchase to Pay" value chain, we have considered a number of key topics in this instalment that should be considered by the business owner. The next article will deal with the requisition and approval process.

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