E Procurement 2006 Paper Award Winner


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E Procurement 2006 Paper Award Winner

  1. 1. SIM 2006 Paper Awards Competition E-PROCUREMENT THROUGH SUPPLY CHAIN INTEGRATION: REACHING OUT TO SMBS Graham R. Smith Sohar Aluminium 111, PC 118 Al Harthy Complex Muscat, Sultanate of Oman Phone: +968-2-466-0578 Mobile: +968-9-281-5137 Email: graham.smith@sohar-aluminium.com Maha Shakir* College of Information Systems Zayed University P O Box 4783 Abu Dhabi, UAE Phone: 971-2-407-9693 Mobile: 971-50-327-2748 Email: maha.shakir@zu.ac.ae Erkan Gulec Mawahib Business Developments P O Box 29337, Abu Dhabi, UAE Phone: +971-2-621-3322 Mobile: +971-50-654-6624 E-mail: erkan.gulec@mbd.ae * Corresponding author E-Procurement through Supply Chain Integration: Reaching Out to SMBs 1 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  2. 2. SIM 2006 Paper Awards Competition E-PROCUREMENT THROUGH SUPPLY CHAIN INTEGRATION: REACHING OUT TO SMBS EXECUTIVE SUMMARY The use of information technology in the integration of business processes has made substantial improvements in both the efficiency and effectiveness of organizations. Yet, many integration attempts continue to stop at the boundary of the organization. One main inhibitor to the electronic extension of the supply chain lies in the incompatibility of business setup between the large organization and the majority of its business partners. While the big business enjoys the sophisticated IT infrastructure that supports many kinds of information integration, manipulation, and reporting, the small to medium business (SMB) partner is using IT only for simple clerical tasks. Until the big business finds a way to extend IT integration capabilities to the majority of its supply chain partners, the huge investments made in internal integration capabilities are not fully realized. This case examines how a large exploration and production company in the Oil and Gas industry, namely Petroleum Development Oman (PDO), managed to electronically integrate its complete supply chain -- including its full vendor1 base -- through e-procurement. We show how the company astutely outsourced both the delivery of the e-procurement solution and the management of the vendor relationship process to a third party. By doing this, the company avoided huge upfront investment and created the capability to support vendors from day one. This experience has significant implications for industry practitioners, highlighting how it is possible for the relatively IT immature SMB type of businesses to successfully adopt e- procurement in a reasonably short period of time. Lessons are drawn to show how big businesses can achieve successful adoption of e-commerce solutions in an environment where both the telecommunications and regulations supporting electronic trading are still developing. KEY WORDS Supply chain integration, e-procurement, outsourcing, small and medium business (SMB), Sultanate of Oman. ACKNOWLEDGEMENT The authors would like acknowledge the organizations featured in this study for their generosity in devoting the time to describe their experiences and responding to many questions in the process. 1 We use the name ‘vendor’ instead of ‘supplier.’ Although the latter is more common in the MIS literature, vendor is the widespread name used to refer to goods and service providers in the practitioner community, particularly in Oman and the surrounding region. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 2 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  3. 3. SIM 2006 Paper Awards Competition INTRODUCTION The use of information technology (IT) in organizations has made a substantial contribution to improvements in both the efficiency of resource management and the effectiveness of streamlining and transforming business processes. Approaching the 21st century, electronic commerce (e-commerce) promised even greater benefits through the use of Internet technologies. This period is widely referred to as the “dot com” boom. Much of these promises were however hype. As a result, the “dot com” doom followed when many of the new electronically-enabled businesses could not deliver and went out of business. The reasons for failure can be broadly summarized into two categories. The first is related to the technology. Technology that was immature, untried, and costly, posed considerable implementation difficulties, especially with the scarcity of IT personnel . The second category is related to the alignment between IT and business as many implementations of technology went through without giving due understanding of business processes involved and the business environment for which the system was to operate within (i.e., what works well in Europe will not always work in the Middle East). Issues, such as the lack of experience in designing new non-traditional digitally enabled business models and the inability of the business to handle the extra demand imposed by e-business, caused many of these problems2. Following the burst of the “dot com” bubble, many businesses were reluctant to get into the e-commerce bandwagon as they realized that they needed to establish sound IT infrastructures. Consequently, huge investments were put into enterprise resource planning (ERP) systems. Because ERP systems are so tightly integrated, using standard business processes, standard language, and terminology allowed for the first time many different business functions to communicate to each other. This assisted in the removal of much inefficiency in business processes by eliminating duplicate work and maximizing the effective utilization of resources. Much of this integration work stopped however at the boundary of the organization. The goal for many businesses post the ERP era is to extend system boundaries beyond the enterprise to both vendors and customers. Hence, a spree of implementation of customer relationship management (CRM) and supply chain management (SCM) systems, electronic marketplaces, and enterprise portals followed3. Implementation of these systems comes with their own challenges. By connecting the different types of business processes and IT infrastructures across companies that more often than usual operate in different environments poses a major challenge. The challenge facing the PDO was how to connect some 3,000 vendors, large, medium or small, into the company’s supply chain from local, regional, and international trading communities in less than six months. Today, Oman is one of the most electronically enabled trading communities in one of the smallest economies. This case specifically focuses on this issue: How a large purchaser of goods and 2 Wise, R. and Morrison, D. "Beyond the Exchange: The Future of B2B," Harvard Business Review (78:6), 2000, pp. 86-96. 3 Daniel, E.M. and White, A. "The Future of Inter-Organisational System Linkages: Findings of an International Delphi Study," European Journal of Information Systems (14:2), 2005, pp. 188-203. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 3 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  4. 4. SIM 2006 Paper Awards Competition services successfully overcame the challenge by electronically extending its supply chain to reap the benefits of its business system investment in SAP -- a first tier ERP system. We begin with introducing the business environment in which the PDO operates highlighting common business practices and challenges. We then introduce the PDO case showing how the company as a big buyer was successful in reaching out to the thousands of its SMB vendors. This success was made possible through the smart choice of the outsourced e-procurement model that facilitated adoption among vendors, many of which can be classified as inexperienced users of IT. We compare the alternative e-procurements models the that PDO considered and highlight the benefits and drawbacks of these models in the context of the business environment at the time. Later we explore in detail the e-procurement operations through a review of the exchange hub operated by OTN, a start-up electronic document exchange provider of whom PDO was and remains a major customer. We further demonstrate the simplicity of the delivery model that provides only 20% of e-procurement functionality, yet satisfies 80% of business needs. Finally, we draw lessons to highlight how IT success can stem from solutions that are simple yet difficult to envisage. We believe that in this case success is a result of a careful understanding of technology, supply chain processes, and local business knowledge. When each of the three elements are equally addressed in the design of the e-procurement solution, probability for failure is significantly reduced. OMAN: BACKGROUND AND CHALLENGES The Sultanate of Oman (or Oman) is a Middle Eastern country that lies at the eastern corner of the Arabian Peninsula, between Yemen, Saudi Arabia, and United Arab Emirates with borders on both, the Gulf of Oman and the Arabian Gulf4. The country that has a strategic location on the Strait of Hormuz -- a vital transit point for crude oil -- has a population of around three million people who live on 12,460 sq km of land (refer to Figure 1 for the map of Oman). Oman is a member of both the Arab League as well as the Gulf Corporation Council (GCC). The Arab League is an association of countries whose peoples are mainly Arabic speaking -- approximately 300 million people who live on 5.25 million square miles5. The association was established in 1945 with the objectives of strengthening ties among member countries -- currently 22 countries -- and coordinating their policies. The GCC was founded in 1981 with the aim of promoting coordination between the neighboring oil-rich countries of Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates, and Sultanate of Oman6. 4 For more information about Oman, refer to: CIA "The World Factbook," Central Intelligence Agency (CIA), June 13, 2006. Retrieved June, 2006, from http://www.cia.gov/cia/publications/factbook/print/mu.html. 5 For more information on the Arab League, refer to: BBC "Profile: Arab League," BBC, March 10, 2006. Retrieved June, 2006, from http://news.bbc.co.uk/1/hi/world/middle_east/country_profiles/1550797.stm#facts. 6 For more information on GCC Countries, refer to: Sheikh Mohammed "GCC Countries," Sheikh Mohammed, 2005. Retrieved June, 2006, from http://www.sheikhmohammed.co.ae/english/history/history_arabia.asp. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 4 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  5. 5. SIM 2006 Paper Awards Competition The land terrain of Oman is a combination of a central desert plain and rugged mountains in the north and south. Historically Omanis were seafarers and commodity traders who traveled to the Indian Ocean, East Africa, and the Arabian Gulf bringing series of migrations to the region. Until the discovery of oil in 1964, the country was economically dependent on agriculture and fishing. Figure 1: Map of Oman Source: The World Fact Book: Map of Oman, http://www.cia.gov/cia/publications/factbook/geos/mu.html#Geo Due to the increasing oil prices at the onset of the new millennium, the GCC region is experiencing an exponential growth as huge revenues are invested in diverse mega million dollar projects. The main restriction to this growth lies in the scarcity of human resources. This is due to two main reasons. The first is the relatively small percentage of local population in comparison to existing development opportunities. The second is the shortage of skills among locals. The latter, which is currently being addressed through a heavy emphasis on education in all areas (e.g., schools, higher colleges of technology, universities, professional development, training, etc.) still needs more time to be resolved when younger generations come into play. As a result, human capital is imported and the percentage of the expatriate workforce varies across GCC countries with Oman considered one of the best in terms of its workforce localization or Omanization7. On an annual basis, a comparison of the 7 According to Oman’s Statistical Year book 2005, the percentage of expatriate labor force in Oman is around 50% distributed in the private sector (83%) and government (18%). The Sultanate of Oman is planning to improve omanization in both private and government sectors from 17% and 82% in 2005, to 75% and 95% in 2020, respectively. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 5 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  6. 6. SIM 2006 Paper Awards Competition percentage of Omanis and expatriates demonstrates an incremental but continuous rise in the employment of locals. The large population of the expatriate community has both its advantages and disadvantages. While it brings a wealth of skills to fast track development, a significant amount of knowledge is lost when expatriates return home. To stabilize the workforce and ensure work continuity, skilled jobs are refilled through generous tax- free salaries and employment packages. Labor or handyman type jobs are mainly filled from South East Asian countries that attract a huge pool of labor, considering the high rate of unemployment in their home countries. For these reasons, a key responsibility for many governments in this region is to engage local enterprises in the development of the economy where appropriate and feasible. THE PDO STORY PDO8 is in the business of exploration, production, development, storage and transportation of hydrocarbons in the Sultanate of Oman. Although oil exploration in Oman started as early as 1937, when Oman’s Sultan Said bin Taimur granted a 75- year concession to the Iraq Petroleum Company (IPC), oil was not discovered until 1963. On behalf of the IPC, exploration and production operations were run by PDO which had five shareholders: Royal Dutch Shell Group 23.75%, Anglo-Persian Company (now, British Petroleum Company) 23.75%, Compagnie Française des Pétroles (a predecessor of today’s TotalFina-Elf) 23.75%, Near East Development Company (a subsidiary of today’s ExxonMobil) 23.75%, and Partex 5%. Exploration in Oman was not an easy job because of the hostile desert environment, mountainous inland, and the political unrest. All were major deterrents to the successful discovery of oil in 1962 when some shareholders had already given up. The first export of Omani oil, which consisted of 543,800 barrels of oil valued at $1.42 a barrel, took place on 27 July 1967. Around the mid 1970s the Government of Oman acquired a 60% shareholding in the PDO bringing foreign interest to its current percentages of 34% for Shell, 4% for Total and 2% for Partex. At that time, oil production averaged 341,000 barrels per day. By the mid 1980s, PDO got involved in natural gas production for industry. At that time, the average oil daily production was around 400,000 barrels per day with Oman oil reserves estimated at 3.8 billion barrels. With the lowering of the price of oil in the mid 1980s, PDO embarked upon an exercise of cost reduction and increased production. To achieve these goals, PDO focused on both innovation and experimentation to break its own records for both, drilling wells in the shortest time and for drilling the longest horizontal wells. By 2000, the average oil daily production rose to 840,000 barrels per day and a new liquefied natural gas (LNG) plant, costing $1.2 billion, was opened. There is a huge amount of purchasing activity involved in the business of oil and gas recovery. Hence, a significant amount of money is spent on procurement activities. It 8 For more information on PDO, refer to: PDO "PDO Company History," Petroleum Development Oman (PDO), 2006. Retrieved June, 2006, from http://www.pdo.co.om/PDO/AboutPdo/History/. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 6 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  7. 7. SIM 2006 Paper Awards Competition follows that there is a need for control systems to ensure compliance with both company procedures as well as governmental policies. As the majority shareholder for PDO is the government, there is a great emphasis on honesty, integrity, and fairness in the conduct of business. The contracting and procurement policy is thus based on open and competitive bidding through transparent procedures and the provision of equal opportunities to qualified contractors and vendors. As a result, PDO’s employees are expected to exercise the utmost care to avoid putting themselves into a position where they, directly or indirectly, accept or repay favors. PDO’s statement of business integrity emphasizes the need for transparency in all its transactions, which need to comply with the strictest accounting principles. As part of its community responsibility, PDO endeavors to promote the economy by engaging local enterprises in the course of its business, where appropriate and feasible. Considering the strict compliance expected in managing purchases, PDO has to balance competitive bidding requirement with bids being accessible to local vendors. IT Integration Starting in 1997 and over approximately two years, PDO underwent an extensive study to streamline its business operations. An internal taskforce was formed and many supply chain management experts were recruited where needed. A blueprint of existing business operations and the supporting IT systems was developed. Limitations in these systems were identified and recommendations for their resolution were made. As expected in a business that is structured along functional silos, the key limitation was the inefficiencies that result from the broken supply chain. Many variations of each process existed with approximately 108 IT systems interfacing them (see Figure 2 for a snapshot of these systems). Only five of these were considered major. These were: Electronic Materials Administration (EMA), General Ledger Millennium (GLM), a maintenance management system, a data warehouse, and a cluster of MS Access databases. One of the key outcomes of the two-year feasibility study was the identification of six strategic themes within the supply chain management area that guided the implementation of SAP. These are: 1. Financial transparency: to determine “what are we spending and where are we spending it?” 2. Process visibility: to integrate processes across the supply chain and enable traceability. 3. Process simplification: to streamline business operations. 4. Standardization: to standardize “documents, processes, contracts, whatever it might be.” For example, the study had identified that there are somewhere in the region of seven ways of producing a purchase order! 5. Automation: to automate the process, wherever practically feasible, thereby “time-librating the buyer, contract engineer, the field engineer, etc.” 6. Competent workforce: to create job flexibility for employees through developing their skills and capabilities so that they can move disciplines very easily. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 7 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  8. 8. SIM 2006 Paper Awards Competition Figure 2: Blueprint of PDO’s IT systems before the SAP-enabled business process redesign The go-ahead decision for SAP was made in October 1999, design commenced in February 2000, with implementation and subsequent go-live in January 2002. The implementation involved minimum customization as business processes were redesigned to realize the six strategic themes utilizing the SAP best practice capabilities. As predicted in many major ERP implementations9, SAP was not an easy experience for users who interpreted the SAP acronym as “Submit And Pray,” meaning, “you push the enter key and pray the system won’t crash!” Prior to SAP, procurement was divided into two main categories which were goods and supplies, and services. Each was the responsibility of a separate organizational function, those being purchasing and contracting. These functions were redesigned with the implementation of SAP into one integrated procurement organization. This created a single integrated end-to-end business process, for goods and services, across the supply chain. Nevertheless, SAP was not effective in terms of business reporting. An SAP business warehouse was subsequently implemented and was operational in January 2003. By then the cost of issuing a purchase orders (PO) was reduced from US$103 down to around US$43 and the request for quotation (RFQ) from US$309 down to US$129. 9 Markus, M.L. and Tanis, C. "The Enterprise Systems Experience-from Adoption to Success," In Framing the Domains of IT Research: Glimpsing the Future through the Past, R. W. Zmud (Ed.), Pinnaflex Educational Resources, Inc, Cincinnati, OH, 2000, pp. 173-207. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 8 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  9. 9. SIM 2006 Paper Awards Competition Almost six months after SAP go-live at which time the majority of teething problems had been resolved, PDO realized that they have forgotten the “other side of the chain link fence,” the vendors! RFQs were released through emails and quotations were received through a number of mediums, some electronic and some submitted in sealed envelopes. When the request-receipt option in MS Outlook was switched on to track the status of the procurement documents sent, around 2,000 documents were generated. Considering that some documents (e.g., RFQ) are sent more than once, around 6,000 acknowledgements of emails-read were received per day by PDO buyers. Tracking these responses and linking these to the originating RFQs was both a difficult and time consuming process that often was overlooked because of its complexity. Realizing that these huge number of emails were just a total administrative burden, the request-receipt option in MS Outlook was switched off and buyers went back to where they were previously before SAP -- a total information black hole. It was therefore common for vendors to complain about not receiving pricing invitations, especially since PDO buyers could not prove whether this was true, and if it was, what caused it. We don’t know where anything is and the vendor would love it. [They say] now this is our chance to get back into PDO and say: why didn’t you send me that RFQ? Where is that purchase order? What happened to my receipt? We just stepped back 24 months to where we were previously. So we had to find a solution to this problem. (PDO Supply Chain Manager, SAP) To mend their broken supply chain, PDO started evaluating e-procurement solutions only to find out that many of these solutions were not designed for the SMB type of business. Most solutions required considerable upfront investment by members. Furthermore, the majority of these vendors are SMBs whose information systems are comprised of common off-the-shelf-software and one or a few standalone PCs. This setup may be adequate for these SMBs, but for the larger buyers who invested heavily in ERP-type systems and wants to use them to their full potential, it is a major problem. This problem was clearly evident when PDO continued using paper documents as the main communication means for procurement management even after SAP went into operation. E-procurement Solutions To bridge the black hole separating the PDO from its vendors and to fully exploit their investment in SAP, an exploration of e-procurement solutions in the market started. Five e-procurement solutions were identified and evaluated by PDO. These were iX2, Bolero, Tejari, Singapore TradeNet, and Trade-Ranger (refer to Table 1 for a description of these solutions and Table 2 for the comparison criteria used by PDO to evaluate them). E-Procurement through Supply Chain Integration: Reaching Out to SMBs 9 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  10. 10. SIM 2006 Paper Awards Competition Table 1: e-Marketplaces evaluated by PDO e-Marketplace Description iX2 by OTN iX2 is a digital document exchange (DDE) that is developed by OTN, a local startup e-procurement company in Oman. iX2 was designed with simple yet easy to implement functionality that is based on the 20-80 rule. Twenty percent of the e-procurement functionality would satisfy eighty percent of business needs. Bolero Bolero, also a DDE, was originally set up in 1998 by the international banking community. Created as a neutral third party exchange, Bolero developed standards to enable global cross-enterprise business integration, particularly in banking and finance. Tejari Tejari is the Middle East’s first business-to-business (B2B) online marketplace that allows companies to buy and sell goods and services online. Established in 2000, Tejari supports e-procurement through cataloging, e-tendering, and reverse auctions. Singapore Tradenet Established in 1989, Singapore Tradenet provides electronic trading in the form of structured messages between network subscribers in Electronic Data Interchange (EDI) format. The electronic messaging service is administered by CrimsonLogic, which was previously known as Singapore Network Services. Using this system, the trading community submit documents electronically to government bodies that when approved, are returned electronically to the sender. The system that uses the mailbox concept, sorts and directs mail into the correct mailbox. Trade-Ranger In a joint initiative between some of the leading energy and petrochemical companies, Trade-Ranger was launched in July 2000 with founding members including BP, Dow Chemical, Royal Dutch/Shell, and Total, to name a few. Setup as an e-procurement marketplace serving the oil and gas, and chemical industry, the marketplace main features are the standardization of procurement and catalog processes, and global membership. Trade-Ranger was recently acquired by cc-hubwoo in May 2005, and was transformed from a consortium that is privately held by customers to an independent e- procurement hub. These solutions reflected different e-procurement flavors and included three of the four widely recognized e-procurement business models10, which are: (1) To join an existing private market place (i.e., Bolero11) or a trading consortium of organizations in the same line of business (i.e., Trade Ranger12 and Singapore TradeNet13). 10 For definitions of these four e-procurement business models, see Bakos, J.Y. "A Strategic Analysis of Electronic Marketplaces," MIS Quarterly (15:3), 1991, pp. 295-310., Wise, R. and Morrison, D. "Beyond the Exchange: The Future of B2B," Harvard Business Review (78:6), 2000, pp. 86-96., and Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons from B2B Exchanges," California Management Review (45:2), 2003, pp. 131-150. 11 For information on Bolero, refer to: Bolero "Bolero Home Page," Bolero, 2006. Retrieved June, 2006, from http://www.bolero.net/. 12 Trade ranger was acquired by cc-hubwoo in 2004. For information on cc-hubwoo, refer to: cc- hubwoo "cc-hubwoo Business Streamlined," cc-hubwoo, 2005. Retrieved June, 2006, from http://www.trade-ranger.com/. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 10 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  11. 11. SIM 2006 Paper Awards Competition Considering that PDO’s main line of business is oil and gas recovery, Trade-Ranger appeared a viable solution. Its key limitation however was the substantial investment needed by both parties, the buyer and the vendor. Each pays registration fees that are based upon size of company; each pays the yearly membership charge; each pays when sending or receiving a document; and each is charged for the bespoke software needed to operate the e-marketplace. Both Trade Ranger and Bolero were short listed but were later discarded because (a) they were both too big and too sophisticated for vendors to use, particularly local vendors, (b) they did not support widely-common standards for moving documents (e.g., RDI files14), and (c) they mainly focused on goods as opposed to goods and services. While Singapore TradeNet’s focus is moving documents, which was attractive to PDO, the EDI platform for this solution was seen as a major obstacle for adoption amongst local vendors15. EDI is costly as it is proprietary technology requiring significant upfront investment, not only in the technology itself but in standardization and training. (2) To establish their own marketplace. This was not on the shortlist as it was considered a very high risk option, especially since the company had just finished with its SAP implementation. Tension was high among employees who were in the process of learning how to work with the system. Furthermore, senior management at that stage would not have been receptive to making another heavy investment, especially since timing coincided with the aftermath of the “dot com” bust. (3) To join an independent marketplace (e.g., Tejari16 and iX217) Both Tejari and iX2 were plausible alternatives. PDO’s concerns regarding Tejari were: (a) cost; joining the exchange would involve considerable upfront investment by each participant in the form of an annual subscription fee. This is topped with the cost of developing the items that go into the catalogue by each subscribed business. Since the majority of PDO vendors are SME type of businesses, adoption risk was quite high. How could a one-person self-employed type of business afford such costs? (b) Skills and experience of participants; SME businesses were at the low end of the IT maturity scale. While many had computers, these were mainly used for office type 13 For information on TradeNet, refer to: TradeNet "Tradenet: The One-Stop E-Platform for Trade Declaration," TradeNet, 2004. Retrieved June, 2006, from http://www.tradenet.gov.sg/trdnet/index_home.jsp. 14 The Raw Data Interchange (RDI) format is used to send data without any formatting. This data is then mapped into the respective form on the exchange (i.e., RFQ, PO, or SE). The advantage of sending data in this format is that it cannot be read or understood by a third party if intercepted. 15 For information on EDI’s unsuitability to SMEs, refer to: Christiaanse, E. "Performance Benefits through Integration Hubs," Communications of the ACM (48:4), 2005, pp. 95-100. 16 For information on Tejari, refer to: Tejari "Tejari: Middle East Online Marketplace," Tejari, 2006. Retrieved March, 2006, from http://www.tejari.com/English. 17 For information on iX2, refer to: iX2 "Otn: Digital Information Exchange," Oman TradaNet LLC, 2004. Retrieved June, 2005, from http://www.ixnet.com.om/. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 11 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  12. 12. SIM 2006 Paper Awards Competition applications like MS Word and MS Excel, and not everyone had internet access, and hence email, at that time. With all the sophistication involved into developing e- catalogues and keeping these up-to-date, getting vendors involved was not an easy, if not an impossible, task. iX2 was selected by PDO as the favorable option for several reasons but mainly because of its simplicity. iX2 was designed with simple yet easy to implement functionality that is based on the 20-80 rule. Twenty percent of the e-procurement functionality would satisfy eighty percent of PDO’s needs. Furthermore, iX2 has one single point of entry which is the Internet, which makes it universally accessible. In addition, the price model is easy to understand by all PDO stakeholders, especially vendors, as only the senders pays. (4) To outsource the development of the exchange. Although this alternative was not on the short list presented in Table 1, the way iX2 was adopted by PDO shows that it is a blend of the two e- procurement business models (3) and (4). This was possible because OTN was still a start-up company that took every initiative to accommodate PDO’s requests to tweak the iX2 solution in order to comply with the big buyer’s purchasing practice18. Table 2: Functionality matrix for e-procurement solutions Criteria OTN Bolero Tejari Singapore Trade iX2 Tradenet Ranger Purchase order (PO) pdf Request for quotation (RFQ) pdf Trace & Track by Buyer Trace & Track by vendor Website entry Vendor adoption ? ? XML SMS Strategic influence Support Considering the evaluation criteria for all solutions in Table 2, the two functionalities that only iX2 satisfied are strategic influence and support. Strategic influence is defined as the ability to collaboratively work with the preferred e-procurement solution provider to enhance the solution to suit PDO’s supply chain goals. Support is 18 At that time, PDO was the sole big buyer using the iX2 exchange for managing procurement activities. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 12 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  13. 13. SIM 2006 Paper Awards Competition defined as the capability of the vendor to offer not only the technical solution of managing transactions electronically but also the implementation of this solution to the vendor community. Both criteria provided satisfactory answers to the key question PDO kept raising when evaluating e-procurement solutions, this being, “what’s in it for the vendors?” Supply Chain Integration Although carrying out the feasibility study took six months, getting this approved by PDO’s tender board took around six months, mainly because it required changes in the business. Before e-procurement, for example, the RFQ process required a number of supervisory signatures while none are needed today. Responsibility for these approvals are now delegated to the people doing the job, the PDO buyers. In collaboration with OTN, PDO successfully managed to electronically link to their SMB vendors using iX2, a web-based software application developed utilizing a range of technologies, some developed by OTN and others in collaboration with technology partners. There is no upfront cost for members to sign up and the sender pays the transmission cost. This means that PDO pays for all their outgoing communications to vendors as they would when sending via fax, email or post. Vendors register for free and read all incoming communications for free. Only if they decide to respond, they are charged for sending the quotations. Payments are done through the OTN exchange using OTN credits that can be purchased by the vendor in the same way “pre-pay” mobile phone cards are now purchased. This simplifies the payment process for PDO and eliminates the cash flow problems associated with invoicing for OTN. Through iX2, PDO moves five types of documents: (1) Request for quotation (RFQ), (2) Quotation (Q), (3) Purchase order (PO), (4) Service entry (ES), and (5) Smart Invoice (SE). While the first four were available from the start, SE was recently implemented in March 2006. The sender incurs charges when an e-document is sent. Other e-documents such as notifications, reminders, and acknowledgments are not counted by OTN as separate documents and hence they are not chargeable. Both PO and SE are structured documents that vendors cannot change, while RFQ is semi- structured. Vendors fill the specified fields in the RFQ before they submit their quotations through iX2 (refer to Figure 3 that shows the setup for the PDO’s e- procurement system). PDO mandates that all its vendors be registered with OTN. When PDO sends an RFQ through the OTN exchange, the RFQ becomes accessible to all vendors. Vendors can both access the RFQs and reply, using iX2. A reply can either be no-bid or submission of quotation details. Quotation details are locked into the system until the bid due date when they are released to the PDO buyers who issued them. This removes the possibility of fraud as there is no means for the current lowest bid being transmitted to a different vendor and that vendor re-bidding at a lower price. Quotations are analyzed and, when awarded, a PO is issued to the winning bidder through iX2. The vendor sends PDO details of the service completed and a price that is referenced from the PO. PDO then confirms this and sends a SE19 to the vendor through iX2. The vendor then issue a SI to PDO through iX2. 19 SE is the document the vendor needs to submit to raise an invoice to PDO. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 13 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  14. 14. SIM 2006 Paper Awards Competition Intranet Extranet WWW View items: - Received Buyers - Opened - Responded Vendors SAP UNIX Server UNIX Script POs, RFQ's & SE’s SE’ Both PDO Error In RDI Reports format and Vendors Vendor can RFQs view the POs whole External SEs Mail process SI Internal Relay Online Mail Server Relay Server Omantel Provide Infrastructure Figure 3: The e-procurement system setup for PDO To facilitate adoption among vendors, PDO outsourced the management of the vendor community to OTN. Free ongoing training sessions are offered to vendors. If a vendor does not own a PC or has no permanent Internet connection, the OTN exchange sends a text message to the vendor’s mobile phone with the information update, which can be the issuance of a new RFQ for example. The vendor, using an Internet café or any of the OTN offices, can login and pickup a digital copy of the RFQ free of charge. Furthermore, OTN continuously verifies vendors’ contact details and checks no- response bids. This verification identified the problem that many vendors had not responded because they fell into the incorrect PDO classification and received RFQs that were irrelevant to their line of business. In addition to SAP and iX2, PDO uses two other major systems for its e-procurement activities. The first is the Public Open Tendering (POT)20 system through OTN and the second is the reverse auction through Ariba21 POT, which went live in November 2004, is the portal PDO uses to advertise and deliver their tenders to any potential bidders. Potential bidders log on to the system, after registering online, and browse for tenders they might be interested in. A vendor is able to apply and download all tender related documents directly from the portal without the need to visit PDO physically. The key to adopting POT was for PDO to 20 For information on POT, refer to: POT "PDO: Online Public Tendering System," OmanTradaNet LLC, 2004. Retrieved June, 2006, from http://www.pdotenders.com. 21 The reverse auction solution PDO has been using since 2000 was known as FreeMarkets before the merger with Ariba in 2004. For information on Ariba, refer to: Ariba "Ariba Spend Management," Ariba Inc., 2006. Retrieved June, 2006, from http://www.ariba.com. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 14 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  15. 15. SIM 2006 Paper Awards Competition identify potential vendors from outside their existing vendor list and to minimize the number of vendors unnecessarily visiting PDO each day. OTN are currently discussing plans which would allow for more features like tender response submission and interactive clarification mediums, such as forums and instant messages between the vendor and the buyer. The new POT version is also expected to include the reverse auction feature. Refer to Table 3 for the timeline for implementing the systems described in this case. Table 3: Timeline for implementing main PDO systems Month/Year Event 1997 PDO starts SAP feasibility study. October 1999 Go ahead decision for SAP. February 2000 SAP design team kickoff meeting; members became part of the SAP implementation team later. January 2002 Go live with SAP. January 2003 Go live with SAP Business Warehouse. July 2003 Go live with iX2 using three electronic documents: Request for quotation (RFQ), Purchase Order (PO), and Service Entry (SE). November 2004 Go live with Public Open Tendering (POT). March 2006 Go live for iX2’s fifth electronic document, Smart Invoice (SI). E-procurement Benefits The main benefit of using an electronic marketplace is the cost reduction that results from huge gains in procurement efficiencies, particularly for the buyer. These include reducing both search and product costs for buyers and reducing the cost of communication for vendors. The cost benefits for PDO of using the OTN exchange in procurement has been substantial. The cost per order went down from US$103 to US$13 (refer to Table 4 for cost comparison of standard procurement processes) while the transaction cost for sending an RFQ went down from US$3 to approximately US$1.5 (refer to Table 5 for cost comparison of standard RFQ transactions via different transmission mediums). Table 4: Cost Comparison of standard procurement processes Old System SAP iX2 2001 2002 2003 PO US$103 US$43 US$18 1 RFQ US$309 US$129 US$54 or US$103 * 3 or US$43 * 3 or US$18 * 3 Invoice2 US$34 Not available US$12.50 1 Three competitive quotations are required. 2 The US$34 is based on the benchmark in the Aberdeen Group, Invoice Reconciliation & Payment Benchmark Report, June 2004. Note: Details of SE transaction costs are not available. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 15 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  16. 16. SIM 2006 Paper Awards Competition Table 5: Cost comparison of standard RFQ transactions Media Hardcopy Fax Email iX21 RFQ unit cost US$3 US$2.67 US$1.63 US$1.43 [OMR1.025] [OMR0.625] [OMR 0.550] 1 iX2 price includes outsourced vendor management; price quoted is the current price as of June 2006 . Note: Omani Riyal (OMR) = US$2.60078 (Source accessed Saturday, June 10, 2006: http://www.x- rates.com/d/OMR/table.html) Other benefits22 include: − Enabling the buyer to locate vendors that better match their needs − Reducing requisition-to-order time cycles for both buyers and vendors − Extending and/or consolidating the vendor base − Increasing process visibility across the supply chain − Increasing spend visibility − Enhancing relationships between buyers and vendors − Enhancing corporate governance (e.g., reducing off-contract maverick spending for the buyers and increase compliance) − Increasing professionalism through the adoption of best practice − Increasing alignment with parent company Refer to Table 6 for a summary of how these benefits apply to PDO. One key benefit of outsourcing the management of the vendor relationship to OTN is having both accurate and up-to-date information about vendors. It is very common in Oman as well as in the other GCC countries for many vendors to attain registration with the large oil companies even if they are not interested in bidding for their business. Being registered and having approved vendor certificates gives them credibility, hence they have an advantage when they bid for business elsewhere. As a result, many of PDO’s registered vendors are not active. Still, they are on the list and are sent RFQs but are not responding. This is considered both an administrative and cost burden to PDO. These inefficiencies were gradually eliminated once OTN took over the ongoing process of verifying vendor details and checking no-response bids23. 22 For a comprehensive review of e-procurement benefits, refer to: Bakos, J.Y. "A Strategic Analysis of Electronic Marketplaces," MIS Quarterly (15:3), 1991, pp. 295-310., Hsiao, R.-L. and Teo, T.S.H. "Delivering on the Promise of E-Procurement," MIS Quarterly Executive (4:3), 2005, pp. 343-360., and Minahan, T. "The E-Procurement Benchmark Report: Less Hype, More Results," Aberdeen Group, 2004. Retrieved January, 2006, from http://www.aberdeen.com/summary/report/benchmark/eProcurement122904b_TM.asp. 23 A no-bid reply is considered a response and is free of charge to the vendor. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 16 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  17. 17. SIM 2006 Paper Awards Competition Table 6: Application of e-procurement benefits realized by PDO Benefit type Application to PDO Reducing costs Substantial cost reductions in both transaction and procurement process management costs were realized by PDO. Enabling the buyer to Because vendor details were not often updated, PDO buyers were often locate vendors that sending irrelevant RFQs to vendors. Now that OTN is keeping vendor better match their information up-to-date and verifying the categories each vendor is capable of needs handling, PDO is more effective in reaching qualified vendors. Reducing Vendors’ instant access to RFQs once they are posted and the elimination of requisition-to-order signatures that were previously needed by PDO buyers to issue RFQs are two time cycles for both examples of how cycle time has been reduced for both parties. buyers and vendors Extending and/or PDO used the POT system to extend its vendor base. No pre-qualifications are consolidating the required by vendors, who now can download all tender related documents vendor base directly from the portal without the need to visit PDO physically. PDO used iX2 to consolidate its vendor base. Many vendors had registered with PDO only to get credibility when applying for jobs elsewhere! OTN handling of the vendor relationship helped PDO in identifying no-response vendors and verifying vendor data. This reduced the number of active vendors by around 30 percent. Increasing process One interesting example of process visibility was when a flood of old purchase visibility across the orders were generated upon a SAP upgrade. OTN, the iX2 e-procurement supply chain solution provider, identified this problem after noticing the abnormal traffic and subsequently informed PDO before this problem was noticed by vendors. Working closely with OTN, PDO managed to inform vendors of this problem early enough to avoid any negative publicity. PDO was later advised that this was not an isolated incident and that many other SAP upgrades experienced the same problem. Unfortunately, few of these had such visibility within their supply chain processes to alert them. Increasing spend Spend visibility is improved through better vendor profiling, procurement visibility decision auditing, and spend analysis. Among others, this type of benefit was less prevalent, maybe because iX2 did not have the cataloguing capability, hence did not provide the drilling feature into spend categories. Enhancing By outsourcing the management of the vendor relationship process to OTN, relationships PDO buyers are now more focused on the core process of procurement. OTN between buyers and on the other hand deals with all other vendor related enquiries, especially these vendors related to using iX2 and no-response bids. Enhancing corporate E-procurement helped PDO reduce off-contract maverick spending, thus governance increasing compliance with its strict purchasing policies. Since all submitted quotations are locked into iX2 until their release on the bid due date, vendors don’t have to wait until the last minute to submit bids in fear an insider may disclose their details to a competitor. Increasing There is an increased level of accountability for both PDO buyers and vendors professionalism now as the whole procurement process is configurable and traceable by both through the adoption parties. A Buyer chooses not only the vendor company he sends the RFQ to of best practice but also the employee responsible for this specific type of purchase. Vendor company employees can choose to manage received RFQs centrally by one person who opens all RFQs and delegates these to different divisions or by configuring iX2 to send the RFQs to the concerned division directly. Aligning with parent Although PDO has strong ties with some major internal oil companies, no company evidence on this type of benefit was reported. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 17 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  18. 18. SIM 2006 Paper Awards Competition LESSONS AND SIGNIFICANCE Considering the specific business, organizational, and technological contexts discussed here, the case provides several key lessons on issues related to identification, selection, implementation, and enhancement of the e-procurement process, many of which are supported by current literature. The shakeout in the B2B exchange market resulted in the disappearance -- either going out of business or being absorbed by existing exchanges -- of around 90% of US-based exchanges in 2003 as compared to total market peak in mid 200024. Many lessons were learnt from this shakeout and these provided guidelines to both the establishment of new exchanges or sustainability of existing ones. The case described and analyzed here is a success story of a new exchange that benefited from these earlier lessons. Earlier studies25 on the success and failure of B2B electronic marketplaces suggest different barriers to the implementation of e-procurement (refer to Table 7). These being: economic feasibility, business environment, solution provider, buyer, and vendors. Many of the lessons suggested here stem from how both PDO and OTN collaborated to overcome these barriers. Each obstacle and how it was resolved, is described next. Lesson #1: Challenge common assumptions about the competitive bidding model. Cause for failure is often attributed to the competitive bidding model that runs against the modern approach to the buyer-vendor relationship where other factors -- such as time, quality, and service -- play a major role in the purchase decision. PDO, as well as other governmental organizations in Oman, was under continuous scrutiny by the government to ensure strict compliance with purchasing guidelines, particularly transparency. Vendors were expected to abide by these guidelines or lose business. iX2 had facilitated the enforcement of these guidelines to the benefit of both parties. For PDO it is compliance and for vendor it is guaranteed competitive bidding. PDO buyers now cannot see the bids until bid closing time. Lowest bidders therefore have the peace of mind that no PDO insider could possibly give away their bid information to other competing bidders.26 24 For further details on the dot com bust, refer to: Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons from B2B Exchanges," California Management Review (45:2), 2003, pp. 131-150. 25 For an extensive discussion of e-procurement barriers, refer to: (Ibid.), Hsiao, R.-L. and Teo, T.S.H. "Delivering on the Promise of E-Procurement," MIS Quarterly Executive (4:3), 2005, pp. 343-360., and Wise, R. and Morrison, D. "Beyond the Exchange: The Future of B2B," Harvard Business Review (78:6), 2000, pp. 86-96. 26 Oman has a Corruption Perceptions Index of 6.2 in 2005. Considering that 156 countries are included in the survey with the highest score 9.7 and the lowest 1.7, Oman’s score is above average and is within the top 20%. This is good however it is far from ideal which suggests that some dishonesty do exist and if not controlled, it is to the disadvantage of the vendor. For further details on this index, refer to: Transparency International "Corruption Perceptions Index," Transparency International, 2005. Retrieved June, 2006, from http://www.transparency.org/policy_research/surveys_indices/cpi/2005. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 18 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  19. 19. SIM 2006 Paper Awards Competition Table 7: Common barriers to successfully implementing e-procurement Category Common barriers Economic feasibility High setup costs Unsustainable growth Unconvincing pricing Not enough profit Solution provider Half-baked business model Business environment Ineffective public infrastructure [to discuss for PDO] Restrictive regulations from domestic governments Buyer Organizational inertia (within the buyer organization) Buyer’s fear about the capability of the e-procurement solution provider Buyer’s fear about the integrity of the e-procurement solution provider Vendor Vendor’s fears of competitive bidding Little benefits to vendors Lesson #2: Share the benefits, particularly with vendors. Little benefit to vendors is considered a cause for failure, particularly when the sustainability of the e-procurement exchange is at stake. This case study is full of evidence showing how benefits to vendors were a major consideration from day one. Besides the assurance of competitive bidding described above, benefits include more relevant RFQs and an improved customer experience through OTN. The process of registering the vendors in the exchange contributed towards checking vendor lists as many were duplicate, inconsistent, or incorrect. This process of data cleansing and updating vendor information not only increased the efficiency of buyer’s operations, but also benefited vendors through the receipt of relevant RFQs that are delivered to a person, department or company specializing in the sale of items sought. On the extreme, there were numerous instances in the past where catering companies received RFQs for the supply of pumps! Lesson #3: Customization may be an option, especially when requirements are not demanding. Cause for failure can sometimes be attributed to the half-baked business model, wherein companies that ran the exchange did not put enough time and effort into evaluating customer priorities to create a distinct offering. Again, this was not true for PDO. The main strength of OTN’s exchange offering was that it was simple. The exchange automated around 20% of inter-organizational functionality but delivered 80% of the benefits to make the model sustainable to both parties. To achieve this, OTN carefully studied PDO’s need and tailored the iX2 exchange to deliver both technology and business process needs at the same time. This complementary offering makes the OTN example a distinctive example of working with the customer. OTN E-Procurement through Supply Chain Integration: Reaching Out to SMBs 19 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  20. 20. SIM 2006 Paper Awards Competition moved “beyond executing transactions to create the infrastructure and standards necessary to streamline communications between buyers and sellers.27” Lesson #4: When public infrastructure is not effective, focus on service and substitute one technology with another. The telecommunication sector in Oman as in other GCC countries is regulated by the government28. It was not until 1999 that the state-owned monopoly, General Telecommunications Organization (GTO), was replaced by Oman Telecommunications Company (Omantel) in a step towards privatization. In 2004, the state-owned company was split in two, Omantel (fixed line and Internet services provider) and Oman Mobile (mobile services provider), both under the control of a holding company (Omantel), which now includes 30% public ownership. While Oman now has a second mobile operator, Nawras, there are no recent plans for liberalizing the fixed line and/or Internet market in the near future. It is noted that an organizational business context where industry is regulated and the level of competition is low is less than ideal for e-procurement to flourish29. As predicted, both PDO buyers and OTN staff cite many instances when the Internet connectivity was interrupted at the time of bids closings. However, through OTN’s scrupulous monitoring of iX2 service levels and continued communications with PDO buyers, the situation is resolved through both extending bids closing date and informing all vendors. Another point of interest here is that while the level of Internet services may be inadequate, mobile phone usage is not. One of OTN’s critical success factors seems to be using SMS messages to reach vendors anyplace, anywhere, and anytime (refer to Figure 4 for a snapshot of vendor’s mobile showing text messages for PO notifications). In many other places, the same can be true about the Internet; in this region, it is not always true! Lesson #5: The Identification of the critical feature that makes or breaks the system is key to success. It is very important for an organization seeking an IT solution to resolve a business problem, as was the case for PDO, to clearly identify the key feature the solution must satisfy. For PDO, it is that the solution needs to be manageable by vendors. This is reflected in the key question PDO kept raising when evaluating e-procurement solutions and this was “what’s in it for the vendors?” 27 Daniel, E.M. and White, A. "The Future of Inter-Organisational System Linkages: Findings of an International Delphi Study," European Journal of Information Systems (14:2), 2005, pp. 188-203. 28 For information on Oman Telecommunications providers, refer to: SHUAA Capital PSC "Oman Telecommunications Company," SHUAA Capital PSC., 2006. Retrieved June, 2006, from http://www.ameinfo.com/financial_markets/Oman/Company_OM0138/. 29 Hsiao, R.-L. and Teo, T.S.H. "Delivering on the Promise of E-Procurement," MIS Quarterly Executive (4:3), 2005, pp. 343-360. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 20 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  21. 21. SIM 2006 Paper Awards Competition Figure 4: Vendor’s mobile showing text messages for PO notifications Lesson #6: The collaboration between the big buyer and the independent e-procurement solution provider is important for the long term sustainability of the e-procurement exchange. The iX2 exchange targets a re-formed30 market wherein supporting an existing business provides considerable opportunities for creating efficiency. However, the obstacles inherit in this type of market are: (1) users are not quite receptive to change, (2) the exchange ability to capture value is slow because of considerable constraints, (3) there is no value for first-mover advantage, and (4) non-traditional pricing structures are not acceptable. The sustainability31 of this type of market needs a strong degree of collaboration between the solution provider, OTN, and its key members, of which PDO is one. Although PDO opted for the independent marketplace solution, it required a heavy involvement in the development of the exchange thus reaping the benefits that are traditionally acquired by the outsourcing model. This combination has been instrumental in both selecting the best-fit solution and the successful implementation later on because: (1) PDO was not obliged to adopt something new or considerably different from the way they do business. OTN, the technology exchange company, was a new start-up in the process of simultaneously enrolling clients and developing the technology. Knowing that PDO is a major client and that the number of transactions the PDO 30 A reformed market is one where “technology does not change the basic structure, functioning, and purpose of the market. Instead these markets form around technologies that enable cost reductions or improvement to existing way of doing business.” For more information on classification and problems of B2B electronic exchanges, refer to: Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons from B2B Exchanges," California Management Review (45:2), 2003, pp. 131-150. 31 Sustainability is reported as one of the direct causes of failures of electronic exchanges (Ibid.). E-Procurement through Supply Chain Integration: Reaching Out to SMBs 21 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  22. 22. SIM 2006 Paper Awards Competition generated would bring in enough revenue to sustain OTN’s new venture, the exchange was designed to accommodate many of PDO’s needs. A breakthrough type of electronic exchange that would dramatically change the way an established company operates -- which PDO avoided -- is identified as one key inhibitor of success32. (2) OTN packaged the exchange solution with the vendor support process to create value to PDO. Recent studies of success and failure of electronic exchanges reported that value accumulates through combining the management of e-transactions with managing part of the e-procurement process33. Working closely with OTN, PDO managed to overcome common barriers to the success of the B2B electronic exchange. These barriers, and how they were overcome provided the content for the lessons given here. CONCLUSION Oman does not have the immense oil resources of some of its neighbors. Oil production that had climbed above 900,000 barrel per day in 2000 has recently declined to 780,000. This, in addition to the rising cost of production owing to Oman's complex geology caused a reduction of revenue, thus putting a lot of pressure on PDO to come up with innovative solutions to improve efficiency, particularly in the use of technology. Tailoring e-procurement solutions to SMB vendors’ needs was a key element that enabled PDO to leverage its investment in SAP and be more efficient and effective in handling procurement activities. Advancements in the use of Internet-based business-to-business (B2B) solutions to manage procurement mainly target large businesses leaving SMBs with little or no opportunity for getting a “bite of the cherry.” E-procurement presents a golden opportunity for SMB vendors to keep their costs down, extend their reach, and capitalize on the local knowledge they have. The two major impediments SMB vendors face to exploit e-procurement opportunities are unfamiliarity with large-buyer hubs and high upfront cost for signing up. In the Middle Eastern region, where IT adoption is not yet mature, many still lack the basic infrastructure requirements for e- commerce to flourish such as e-commerce law and electronic banking. After PDO’s January 2002 SAP implementation that replaced some 108 legacy business systems at a cost of $US20 million, managing the contracting and procurement process remained semi-manual. With more than 3,000 vendors, it was very difficult for PDO buyers to keep track of emails sent and vendors’ responses. Therefore, it was common for vendors to complain about not receiving pricing invitations, especially since PDO buyers could not prove whether this was true, and if it was, what caused it. The majority of these vendors are SMBs whose information systems incorporate common off-the-shelf-software and one or a few standalone PCs. This setup may be adequate for these SMBs, but for the larger buyers who invested heavily in ERP-type systems and want to use them to their full potential, it is a major problem. This 32 (Ibid.). 33 Wise, R. and Morrison, D. "Beyond the Exchange: The Future of B2B," Harvard Business Review (78:6), 2000, pp. 86-96. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 22 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  23. 23. SIM 2006 Paper Awards Competition problem was evident when PDO kept utilizing paper documents for procurement management even after SAP went live. In collaboration with OTN, a startup document exchange company, PDO successfully managed to forge electronic links to 100% of its vendors, irrespective of size or location, using the web-based software application, iX2. To facilitate adoption among vendors, PDO outsourced the management of the vendor community to OTN. This packaging of the technology with the management of business process was key to the success of e-procurement to all parties involved. The benefits to PDO for using the OTN exchange in procurement have been substantial. The cost per order plummeted from US$103 to US$13. The ability to track the movement of documents through the system increased visibility and consequently enabled the identification and swift resolution of bottlenecks. Other benefits, such as purchase cycle time and data-entry error reduction, result from the system’s capability to carry out vendor profiling, procurement decision auditing, spend analysis, and direct capture of data at one point. For many countries in the region, it is a government directive that as much business as possible is kept at a local level. Larger businesses are often rewarded when they are seen to comply. PDO’s success in forging electronic links with the local SMB vendors is a key step towards the implementation of this directive. PDO also uses the OTN exchange to deal with larger vendors such as Halliburton and Schumberger, due to iX2’s scalability advantage. Oman has very much benefited from being a testing ground for e-procurement in the Gulf region. PDO has proved that e-procurement can work, and work very well. While the OTN exchange has been operational for three years now, similar solutions by regional exchanges in Egypt, Qatar, and the UAE, are just starting. Although transaction volume derives profitability, it is argued that when the number of members in the exchange grows and members have equal rights, “no one participant has strong commitment to the survival of the exchange.34” This is one challenge PDO needs to address when OTN grows and other big buyers exert their influence to get things done their way. 34 Refer to: Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons from B2B Exchanges," California Management Review (45:2), 2003, pp. 131-150. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 23 Graham R. Smith, Maha Shakir ,and Erkan Gulec
  24. 24. SIM 2006 Paper Awards Competition CONTRIBUTORS This case study was developed by the following contributors. Summaries of their practical experiences with affiliations are provided. Graham R. Smith SAP PTP Process Lead Sohar Aluminium Dr Graham R Smith was part of the Shell Services International (SSI) team responsible for developing the feasibility study for the implementation of SAP in PDO. When the project was approved, he joined PDO and became part of the design and implementation team. Following the SAP go-live in 2002, Graham was one of the key people that successfully evaluated and implemented the electronic exchange for PDO in collaboration with OTN, the local technology service provider. In May 2006, Graham moved to Sohar Aluminium to lead the SAP Purchase to Pay implementation. Maha Shakir Assistant Professor College of Information Systems Zayed University Dr Maha Shakir’s recent work focuses on the management and implementation of strategic IS applications, particularly ERP. Using the case study qualitative research approach, she developed IS implementation case studies for both teaching and research. Maha is interested in carrying her work forward with a focus on the use of IT in inter-organization integration, particularly the study of electronic exchanges. Erkan Gulec General Manager Mawahib Business Developments Erkan is a seasoned management and IT consultant and entrepreneur. Prior to starting up MBD in Abu Dhabi in 2004, Erkan has worked in Accenture (previously Andersen Consulting) for 12 years from the entry-level Analyst position to Senior Manager in Supply Chain Management. He is specialized in the selection and implementation of ERP systems, such as SAP and Oracle, with specific emphasis on contracts, procurement, logistics and maintenance functions. In recent years, Erkan has focused on the oil and gas industry. E-Procurement through Supply Chain Integration: Reaching Out to SMBs 24 Graham R. Smith, Maha Shakir ,and Erkan Gulec