EDI Holds Promise for State Procurement Processes

Electronic procurement systems may be the key to streamlining cumbersome purchasing requirements.

by / May 31, 1996
To a large degree, the federal government, in addition to the commercial sector, has led the way in the use of electronic procurement solutions. The Clinton administration, as part of its program to streamline government processes and reduce inefficiencies, mandated the adoption of an electronic commerce system for federal procurements. The GE Information Services (GEIS) Bid Board and CACI's Quickbid service have both demonstrated the merits of electronic procurement solutions and services.

In fact, a 1995 G2 Research study revealed that 60 percent of state procurement offices surveyed have implemented or evaluated electronic procurement solutions or are planning to do so over the next year. The common components of their electronic procurement solutions include the Internet, electronic bulletin boards, and electronic data interchange (EDI). EDI, in particular, holds promise for state procurement offices seeking to streamline the purchasing process. EDI enables the transmission of transaction-oriented business information in a format that allows direct importation of the data into a computer system.

This year, Indiana piloted an electronic procurement solution using an EDI-based system developed by Advanced Procurement Systems (APS). Ameritech and GEIS are also working on aspects of the pilot. The Indiana Bid Board currently has more than 220 vendors utilizing the system which is testing the purchase of goods and services valued from $5,000 to $25,000. The APS software is being leased to any vendor interested in doing business electronically with the state, according to David Gragan, director of procurement for Indiana. "The vendors will find it more convenient and efficient to hit the send button on a PC when responding to a procurement request than putting together a bid package and FedExing it to Indianapolis," he said.

The potential value of an electronic procurement solution in saving time and reducing the operating cost of a procurement office can be seen by comparing the electronic and manual processes. For example, in Indiana, a buyer at the state procurement office reviews an agency procurement requisition and decides on an appropriate purchasing method, which could be a formal bid process involving print advertising and mail or courier response. The entire manual approval, bidding and evaluation process can take time.

In contrast to the manual procurement process, the execution of an electronic procurement is significantly faster. Using the Indiana system, the procurement office is able to electronically post a request for quotation to the Indiana Bid Board, where it can be reviewed by interested vendors. Vendors are able to enter quotations and transmit them to the Bid Board where they are electronically locked until the bid due date. After the bids are evaluated and the contract awarded, the procurement office transmits a purchase order to the winning bidder, while information on the winning bid, including pricing, is posted to the Bid Board.

An electronic procurement solution such as Indiana's provides a variety of benefits to both governments and their trading partners. The primary benefits for governments using electronic procurement solutions include:

Cost savings on goods and services -- Procurement information available electronically results in lower costs for procurement offices. Agencies using electronic procurement systems are able to involve larger numbers of vendors without significant increases in workload. This can increase vendor competition for government business and may consequently lower vendors' prices. Cost savings can also be achieved through improved inventory management.
Reduced administrative requirements -- Purchasing departments are able to cut down on time-intensive administrative operations, including processing vendor bids, preparing the hardcopy paperwork necessary for RFPs, and maintaining hardcopy information about the thousands of products available to government agencies.
Reduced data entry -- Information received electronically from a trading partner can be exported to a business application without any need for manual data entry. The result is not only faster transaction speeds, but the elimination of potential errors in subsequent data entry.
Likewise, vendors also benefit from utilizing electronic commerce solutions in transactions with state and local governments. In fact, the University of Missouri-Columbia, now in the process of piloting the APS EDI system, found that vendors are more willing to consider electronic procurement solutions if they understand the benefits of the system. Jennifer Alexander, a senior management analyst with the University of Missouri-Columbia, noted that other university campuses would probably begin using the electronic procurement system in order to increase vendor interest by providing a greater potential market. In particular, government suppliers will experience:

Improved cash management -- Improvements in cash flow can result from faster turnaround and easily tracked electronic funds transfers. In particular, vendors will be able to anticipate the exact amount of receivables being realized.
Increased business opportunities -- Vendors will more easily learn about procurement opportunities in government. In addition, vendors in locations remote from government clients will be able to conduct business through the electronic medium and increase the volume of business done with government.
Lower cost of doing business -- Vendors will experience significant cost savings by cutting down on paper and postage costs and eliminating redundant data entry. Furthermore, the cost of submitting a proposal is lower.
In addition, vendors using electronic commerce may be able to reduce inventory and speed up fulfillment of government purchase orders. This will allow companies to improve working capital and improve customer service levels.

The transition to automated purchasing and then to EDI-based electronic procurement can have its pitfalls. For example, in order to implement electronic procurement, governments will need to reengineer work processes from manual, paper-based processes to completely electronic processes. Not only will governments need to address problems arising from the adoption of new technology and processes, employees must be trained to utilize the new systems efficiently and effectively. The University of Missouri-Columbia, however, which had previously automated its purchasing processes with an APS purchasing system, found it relatively easy to integrate the EDI software.

In addition, many state and local government purchasing applications are not capable of accepting EDI transactions. A 1995 G2 Research study found 50 percent of state procurement departments surveyed did not have EDI-capable automated purchasing systems. In addition, older mainframe purchasing applications may have difficulty translating their customized data fields into fields defined by standard EDI transaction sets.

Security concerns remain an issue for electronic commerce implementations. Because a system dedicated to electronic commerce needs to be operational at all times, a major disruption of electronic transactions could occur if the system is breached. In addition, there is some concern from vendors that confidential information could be copied by unauthorized system users.

Finally, the authentication of electronic procurement transactions can be difficult without the use of a digital signature which can be accepted in place of a hard copy signature. States are taking steps to address this problem. Utah has passed a law establishing digital signatures as the legal equivalents of hard copy signatures. The law will probably be duplicated by other states.

The potential quantifiable benefits realized from modernizing the procurement process combined with EDI technology has given government the means to effect real change. The use of automated purchasing applications will increase interest in electronic commerce and procurement. Furthermore, the growing acceptance of EDI will see its use continue to spread across different agencies and levels of government.

For more information contact Bill Loller at G2 Research Inc. at 415/964-2400.