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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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Procurement Fundamentals
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 Fundamentals
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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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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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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Procurement Automation: A Historical Perspective
Electronic Data Interchange: Why Standards ?
Key Point: Number of Protocols increase exponentially with the number of Trading
Partners.
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Procurement Automation: A Historical Perspective
Electronic Data Interchange: Why Standards ?
Standards simplify the whole process of interchanging business
data
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Procurement Automation: A Historical Perspective
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
Procurement Automation: A Historical Perspective
Electronic Data Interchange: What is a Standard ?
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Procurement Automation: A Historical Perspective
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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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
• 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
Procurement Automation
INTERNET based Technologies: Limitations
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Procurement Automation
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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Procurement Automation
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