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Procurement and ERP: Part 1 – The Background

In this three part series, we will cover the history of procurement and ERP technologies and some key considerations as organizations define their strategy for the next 5-10 years.

Part 1 – The Background of Procurement and ERP

Executive Summary

  • While ERP and Procurement technologies look to address several of the same issues, their approaches to doing so can vary drastically.
  • When evaluating ERP procurement modules, user adoption and system modification/maintenance need to be considered.
  • As procurement is seen more as a strategic component of the business, the needs of today must be met while planning for future market disruption.

The Background

I began my career in enterprise software in 1997 with a reseller of ERP software. At this point, ERP was a new technology, a replacement for MRP (Material Resource Planning) systems. ERP was billed as the culmination of all the business needs into one integrated software package. Systems provided core accounting, material planning, inventory management, and other business-critical functionality. However, as ERP systems gained customers, something interesting happened.

As customers began to utilize all the new functionality that ERP had to offer, they quickly identified gaps that existed in their respective industries. Manufacturing companies began to move from MRP to newer planning methodologies such as Advanced Planning, Kanban, etc. Organizations with huge warehouses needed functionality to better plan their pick/pack/ship processes. Manufacturing companies looked for solutions to better manage their complex supply chains.

Procurement and ERP – Some key Considerations

The mid-90’s also brought about another innovation that was taking place within supply chain – the evolution from purchasing to strategic sourcing and procurement –  and the need to better manage indirect goods and services, similarly to direct goods in supply chain, was just as true for procurement. Around 1998, eProcurement solutions were introduced to the market. The idea of curbing “Maverick Spend” was a game-changer to many organizations.  Executives saw the need to better control their spending, which led to a hard-dollar savings that counted towards the bottom-line and positively impacting EBITDA. The business case for autonomous technology in procurement was born.

Systems and solutions like FreeMarkets, Ariba, Zycus, AquireX, Emptoris, and JAGGAER (formerly SciQuest) hit the market and the industry grew like wildfire. This growth was not ignored by ERP firms. Over the past 20 years, they have attempted to add, or acquire, procurement functionality to force into their traditional offerings. They developed a wide breadth of functionality to appease their customers across many of the verticals. But they lacked depth, and just as we saw with the initial ERP functions, businesses still actively look to new trends and innovations to gain a competitive advantage. With ERP roadmaps lagging the best-in-breed technologies, ERP customers embarking on procurement transformation quickly ran into two issues:

  • maintaining a competitive advantage
  • driving user adoption

These two issues have often intersected. Users are constantly requesting enhanced features that they have seen elsewhere in the market, or at a previous employer. The development of these features adds more complexity to the end-user experience, driving the adoption down. This is especially true of the end-users, who need to utilize the system to request new suppliers, contracts, or items, and who must initiate their purchase requests from the ERP for the corporation to realize the expected benefits. When advising a company during their digital transformation journey, I often ask the customer two key questions:

  1. How many employees will need to utilize the system, and of these, how many are currently using the ERP system daily? When these two numbers are wide apart, there is a significant risk of adoption, and we factor this into our business case.
  2. Do you see procurement as a strategic initiative? If procurement is merely a function of the business, then the need to keep up with continuous innovation is less. However, if Procurement is seen as a way to gain a competitive advantage, then the higher costs of maintaining and improving the ERP must be factored into the business case.

So, what does all of this mean for your business? Using the procurement functionality available in your ERP is not necessarily the wrong choice, especially within a budget-conscious, less mature procurement organization. In our coming series, we will look at some of the key considerations, that should be evaluated before making that decision, including:

  • Flexibility to adapt to daily supply chain changes, and scalability to grow with the business
  • The impact your procurement technology choice has on your supply base, and how this affects your collaboration, communication, and overall relationship
  • User adoption of key business stakeholders, including Buyers, Category Managers, Supply Chain Managers, as well as key Executives

As we face ever-increasing global competition in our markets, the go-forward decision on procurement technology strategy must be made considering today’s needs, and tomorrow’s goals.