1 The Procurement Conundrum… Outsourcing Strategic sourcing EDI Internet Technologies Cost Control SCM Automation Negotiations Extended ERP’s e-Auctions

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The Procurement Conundrum…

Outsourcing

Strategic

sourcing

EDI

Internet

Technologies

Cost Control

SCM

Automation

Negotiations

ExtendedERP’s

e-Auctions

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

• Is technology going to Is technology going to change the way industry change the way industry operates ?operates ?

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Electronic ProcurementElectronic Procurementbyby

Chandrashekar T SChandrashekar T SElectronic Enterprises LaboratoryElectronic Enterprises Laboratory

Department of Computer Science and AutomationDepartment of Computer Science and AutomationIndian Institute of Science, BangaloreIndian Institute of Science, Bangalore

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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

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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,

data interchange standards,

decision technologies.

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The Procurement Landscape

Direct Materials(x)

Indirect Materials(y)

Services(z)

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

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Procurement Process – A Birds Eye View

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Procurement Process – A Detailed View

Buyer

Requestor

GO

Requestor (Crib Analyst)

Creates PA Obtain Financial

Approval for PA

Buyer Receives Hardcopy PA after nightly

batch

BuyerCode

Correct?

Item existson a Blanket

Order?

Buyer Sends RFQ to Suppliers (via

e-mail, fax, phone, or EDI)

Suppliers respond to RFQ (via e-

mail, fax, phone, or EDI)

Buyer Re-Assigns PA to correct Buyer

in system

Buyer Notifies APA to issue PO against

Blanket

Buyer Analyzes RFQ Responses

Buyer Makes Sourcing

Recommendation

PR Total>50,000?

Obtain Purchasing Mgr.

Or Sourcing Board Approval

Pricing Approved?

Buyer IssuesSpot Buy

Purchase Order

Hardcopies of Quote and PO

Filed

x

Yes No

No Yes

NoYes

Auto-Replenish

Generates PA

Add Item to Existing

Or New Blanket?

Buyer adds Item to Blanket

Order/Issues New Blanket

Yes

No

No

Yes•50000-250000 – Commodity Mgr. Approval•>250000 – Director Approval•>1million – Sourcing Board

Buyer Receives RFQ Response

from Supplier(s)

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Part 2Part 2Procurement MechanismsProcurement Mechanisms

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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:

Input Rule:Only rotary motion; no lateral motion.Bidding rules

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.

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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.

• Multiple attributes.

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Procurement Mechanisms

Issues to consider

Pro

du

ct

Att

rib

ute

s

System Attributes

Single item, Single attribute

Multi item, single attributeSingle item, configurableattributes

Businessconstraints

Costcomplement

arities

Capacityconstraints

Single item, multi attribute

Multi item, multi attribute

Multi item, configurable attributes

Incr

easi

ng com

plexi

ty

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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

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Automated Procurement Mechanisms

Elements of an effective procurement platform:

Negotiation

Collaboration

Project Management

Knowledge Management

Document Management

Analytics

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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

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Part 3Part 3Procurement AutomationProcurement Automation

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Procurement Automation: A Historical Perspective

Electronic Data Interchange – First Steps to Automation:

Computer System &

Applications

Telecommunicationaccess - modem

Translation

Software

Interchange

Standards

Value Added

Networks

Trading Partners

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Electronic Data Interchange: Why Standards ?

Key Point: Number of Protocols increase exponentially with the number of Trading

Partners.

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Electronic Data Interchange: Why Standards ?

Standards simplify the whole process of interchanging business

data

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Electronic Data Interchange: How many Standards ?

Electronic Data Interchange for Administration Commerce and Trade

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The Agreed Representation of Information (what items and how they are individually structured and put together) to be sent from one computer to another.

Data Elements Words

Segments Sentences

Messages Documents

Syntax Grammar


Electronic Data Interchange: What is a Standard ?

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Electronic Data Interchange: The Message Structure?

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Procurement Automation

Electronic 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

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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

• Centralisation of Administration effort

• Management of changes is easier.

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Web - EDI Ecosystem as it Develops

Daimler Benz

UNIX

ACTIS

Delphi

UNIX

ACTIS

CEAT

UNIX

ACTIS

Bosch

Ford


INTERNET based Technologies: Limitations

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INTERNET based Technologies: Limitations

Web - EDI Ecosystem as it Develops

UNIX

ACTIS

Daimler Benz

Delphi CEAT

ACTIS

Bosch

UNIX

ACTIS

Ford

A Complex Maze of Interchanges leading to Complex Business Process Conventions

Also No Application Integration is Possible

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INTERNET based Technologies:

Is There a Solution ?

Yes

XML (eXtensible Markup Language)

Over to VKV ….

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Thank You !

Conclusion

To probe further:

http://www.edifact.org

http://www.uncefact.org

http://www.monkeyweb.com

http://www.xml-edi.org

http://www.ediint.org

http://www.vcm.tatamotors.co.in

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