E Procurement Paper Award Winner

8/8/2019 E Procurement Paper Award Winner

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SIM 2006 Paper Awards Competition

E-Procurement through Supply Chain Integration: Reaching Out to SMBs 1Graham R. Smith, Maha Shakir ,and Erkan Gulec

E-PROCUREMENT THROUGH SUPPLY CHAIN INTEGRATION:REACHING OUT TO SMBS

Graham R. SmithSohar Aluminium

111, PC 118 Al Harthy ComplexMuscat, Sultanate of OmanPhone: +968-2-466-0578Mobile: +968-9-281-5137

Email: [email protected]

Maha Shakir*College of Information Systems

Zayed University

P O Box 4783 Abu Dhabi, UAEPhone: 971-2-407-9693

Mobile: 971-50-327-2748Email: [email protected]

Erkan GulecMawahib Business DevelopmentsP O Box 29337, Abu Dhabi, UAE

Phone: +971-2-621-3322Mobile: +971-50-654-6624

E-mail: [email protected]

* Corresponding author


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E-PROCUREMENT THROUGH SUPPLY CHAIN INTEGRATION:REACHING OUT TO SMBS

EXECUTIVE SUMMARYThe use of information technology in the integration of business processes has madesubstantial 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 theincompatibility of business setup between the large organization and the majority ofits business partners.

While the big business enjoys the sophisticated IT infrastructure that supports manykinds of information integration, manipulation, and reporting, the small to mediumbusiness (SMB) partner is using IT only for simple clerical tasks. Until the bigbusiness 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 notfully realized.

This case examines how a large exploration and production company in the Oil andGas industry, namely Petroleum Development Oman (PDO), managed toelectronically integrate its complete supply chain -- including its full vendor1 base --through e-procurement. We show how the company astutely outsourced both thedelivery of the e-procurement solution and the management of the vendor relationshipprocess to a third party. By doing this, the company avoided huge upfront investmentand created the capability to support vendors from day one. This experience hassignificant implications for industry practitioners, highlighting how it is possible forthe 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 bigbusinesses can achieve successful adoption of e-commerce solutions in anenvironment where both the telecommunications and regulations supportingelectronic 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 manyquestions in the process.

1 We use the name vendor instead of supplier. Although the latter is more common in the MISliterature, vendor is the widespread name used to refer to goods and service providers in thepractitioner community, particularly in Oman and the surrounding region.


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INTRODUCTION

The use of information technology (IT) in organizations has made a substantialcontribution to improvements in both the efficiency of resource management and theeffectiveness of streamlining and transforming business processes. Approaching the21st century, electronic commerce (e-commerce) promised even greater benefits

through the use of Internet technologies. This period is widely referred to as the dotcom boom. Much of these promises were however hype. As a result, the dot comdoom followed when many of the new electronically-enabled businesses could notdeliver and went out of business.

The reasons for failure can be broadly summarized into two categories. The first isrelated to the technology. Technology that was immature, untried, and costly, posedconsiderable implementation difficulties, especially with the scarcity of IT personnel .The second category is related to the alignment between IT and business as manyimplementations of technology went through without giving due understanding ofbusiness processes involved and the business environment for which the system wasto operate within (i.e., what works well in Europe will not always work in the MiddleEast). Issues, such as the lack of experience in designing new non-traditional digitallyenabled business models and the inability of the business to handle the extra demandimposed by e-business, caused many of these problems2.

Following the burst of the dot com bubble, many businesses were reluctant to getinto the e-commerce bandwagon as they realized that they needed to establish soundIT infrastructures. Consequently, huge investments were put into enterprise resourceplanning (ERP) systems. Because ERP systems are so tightly integrated, usingstandard business processes, standard language, and terminology allowed for the firsttime many different business functions to communicate to each other. This assisted inthe 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 beyondthe enterprise to both vendors and customers. Hence, a spree of implementation ofcustomer relationship management (CRM) and supply chain management (SCM)systems, electronic marketplaces, and enterprise portals followed3. Implementation ofthese systems comes with their own challenges.

By connecting the different types of business processes and IT infrastructures acrosscompanies that more often than usual operate in different environments poses a majorchallenge. The challenge facing the PDO was how to connect some 3,000 vendors,

large, medium or small, into the companys supply chain from local, regional, andinternational trading communities in less than six months. Today, Oman is one of themost 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 anInternational Delphi Study,"European Journal of Information Systems (14:2), 2005, pp. 188-203.


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services successfully overcame the challenge by electronically extending its supplychain to reap the benefits of its business system investment in SAP -- a first tier ERPsystem.

We begin with introducing the business environment in which the PDO operateshighlighting 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 thethousands of its SMB vendors. This success was made possible through the smartchoice of the outsourced e-procurement model that facilitated adoption amongvendors, many of which can be classified as inexperienced users of IT. We comparethe alternative e-procurements models the that PDO considered and highlight thebenefits and drawbacks of these models in the context of the business environment atthe time.

Later we explore in detail the e-procurement operations through a review of theexchange hub operated by OTN, a start-up electronic document exchange provider ofwhom PDO was and remains a major customer. We further demonstrate the simplicityof 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 successcan stem from solutions that are simple yet difficult to envisage. We believe that inthis case success is a result of a careful understanding of technology, supply chainprocesses, and local business knowledge. When each of the three elements are equallyaddressed in the design of the e-procurement solution, probability for failure issignificantly reduced.

OMAN: BACKGROUND AND CHALLENGES

The Sultanate of Oman (or Oman) is a Middle Eastern country that lies at the easterncorner of the Arabian Peninsula, between Yemen, Saudi Arabia, and United ArabEmirates 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 mainlyArabic speaking -- approximately 300 million people who live on 5.25 million squaremiles5. The association was established in 1945 with the objectives of strengtheningties among member countries -- currently 22 countries -- and coordinating theirpolicies. The GCC was founded in 1981 with the aim of promoting coordinationbetween 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, fromhttp://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, fromhttp://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," SheikhMohammed, 2005. Retrieved June, 2006, fromhttp://www.sheikhmohammed.co.ae/english/history/history_arabia.asp.


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The land terrain of Oman is a combination of a central desert plain and ruggedmountains in the north and south. Historically Omanis were seafarers and commoditytraders who traveled to the Indian Ocean, East Africa, and the Arabian Gulf bringingseries of migrations to the region. Until the discovery of oil in 1964, the country waseconomically 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 isexperiencing an exponential growth as huge revenues are invested in diverse megamillion dollar projects. The main restriction to this growth lies in the scarcity ofhuman resources. This is due to two main reasons. The first is the relatively smallpercentage of local population in comparison to existing development opportunities.The second is the shortage of skills among locals. The latter, which is currently beingaddressed through a heavy emphasis on education in all areas (e.g., schools, highercolleges of technology, universities, professional development, training, etc.) stillneeds more time to be resolved when younger generations come into play.

As a result, human capital is imported and the percentage of the expatriate workforcevaries across GCC countries with Oman considered one of the best in terms of itsworkforce localization or Omanization7. On an annual basis, a comparison of the

7 According to Omans Statistical Year book 2005, the percentage of expatriate labor force in Oman isaround 50% distributed in the private sector (83%) and government (18%). The Sultanate of Oman isplanning to improve omanization in both private and government sectors from 17% and 82% in 2005,to 75% and 95% in 2020, respectively.


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percentage of Omanis and expatriates demonstrates an incremental but continuous risein the employment of locals.

The large population of the expatriate community has both its advantages anddisadvantages. While it brings a wealth of skills to fast track development, asignificant 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 mainlyfilled from South East Asian countries that attract a huge pool of labor, consideringthe high rate of unemployment in their home countries. For these reasons, a keyresponsibility for many governments in this region is to engage local enterprises in thedevelopment of the economy where appropriate and feasible.

THE PDO STORY

PDO8 is in the business of exploration, production, development, storage andtransportation of hydrocarbons in the Sultanate of Oman. Although oil exploration inOman started as early as 1937, when Omans Sultan Said bin Taimur granted a 75-year concession to the Iraq Petroleum Company (IPC), oil was not discovered until1963. On behalf of the IPC, exploration and production operations were run by PDOwhich had five shareholders: Royal Dutch Shell Group 23.75%, Anglo-PersianCompany (now, British Petroleum Company) 23.75%, Compagnie Franaise desPtroles (a predecessor of todays TotalFina-Elf) 23.75%, Near East DevelopmentCompany (a subsidiary of todays 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 thesuccessful 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 thePDO bringing foreign interest to its current percentages of 34% for Shell, 4% forTotal and 2% for Partex. At that time, oil production averaged 341,000 barrels perday. By the mid 1980s, PDO got involved in natural gas production for industry. Atthat time, the average oil daily production was around 400,000 barrels per day withOman oil reserves estimated at 3.8 billion barrels.

With the lowering of the price of oil in the mid 1980s, PDO embarked upon anexercise of cost reduction and increased production. To achieve these goals, PDOfocused 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 newliquefied 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 gasrecovery. 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 DevelopmentOman (PDO), 2006. Retrieved June, 2006, from http://www.pdo.co.om/PDO/AboutPdo/History/.


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follows that there is a need for control systems to ensure compliance with bothcompany procedures as well as governmental policies.

As the majority shareholder for PDO is the government, there is a great emphasis onhonesty, integrity, and fairness in the conduct of business. The contracting andprocurement policy is thus based on open and competitive bidding through transparent

procedures and the provision of equal opportunities to qualified contractors andvendors. As a result, PDOs employees are expected to exercise the utmost care toavoid putting themselves into a position where they, directly or indirectly, accept orrepay favors. PDOs statement of business integrity emphasizes the need fortransparency in all its transactions, which need to comply with the strictest accountingprinciples.

As part of its community responsibility, PDO endeavors to promote the economy byengaging local enterprises in the course of its business, where appropriate andfeasible. Considering the strict compliance expected in managing purchases, PDO hasto balance competitive bidding requirement with bids being accessible to localvendors.

IT Integration

Starting in 1997 and over approximately two years, PDO underwent an extensivestudy to streamline its business operations. An internal taskforce was formed andmany supply chain management experts were recruited where needed. A blueprint ofexisting business operations and the supporting IT systems was developed.Limitations in these systems were identified and recommendations for their resolutionwere made. As expected in a business that is structured along functional silos, the keylimitation was the inefficiencies that result from the broken supply chain. Manyvariations of each process existed with approximately 108 IT systems interfacingthem (see Figure 2 for a snapshot of these systems). Only five of these were

considered major. These were: Electronic Materials Administration (EMA), GeneralLedger 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 sixstrategic themes within the supply chain management area that guided theimplementation of SAP. These are:

1. Financial transparency: to determine what are we spending and where are wespending it?

2. Process visibility: to integrate processes across the supply chain and enabletraceability.

3. Process simplification: to streamline business operations.

4. Standardization: to standardize documents, processes, contracts, whatever itmight be. For example, the study had identified that there are somewhere inthe region of seven ways of producing a purchase order!

5. Automation: to automate the process, wherever practically feasible, therebytime-librating the buyer, contract engineer, the field engineer, etc.

6. Competent workforce: to create job flexibility for employees throughdeveloping their skills and capabilities so that they can move disciplines veryeasily.


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Figure 2: Blueprint of PDOs IT systems before the SAP-enabled business process redesign

The go-ahead decision for SAP was made in October 1999, design commenced inFebruary 2000, with implementation and subsequent go-live in January 2002. Theimplementation involved minimum customization as business processes were

redesigned to realize the six strategic themes utilizing the SAP best practicecapabilities. As predicted in many major ERP implementations9, SAP was not an easyexperience for users who interpreted the SAP acronym as Submit And Pray,meaning, you push the enter key and pray the system wont crash!

Prior to SAP, procurement was divided into two main categories which were goodsand supplies, and services. Each was the responsibility of a separate organizationalfunction, those being purchasing and contracting. These functions were redesignedwith the implementation of SAP into one integrated procurement organization. Thiscreated a single integrated end-to-end business process, for goods and services, acrossthe supply chain. Nevertheless, SAP was not effective in terms of business reporting.An SAP business warehouse was subsequently implemented and was operational inJanuary 2003. By then the cost of issuing a purchase orders (PO) was reduced fromUS$103 down to around US$43 and the request for quotation (RFQ) from US$309down to US$129.

9 Markus, M.L. and Tanis, C. "The Enterprise Systems Experience-from Adoption to Success," InFraming 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.


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Almost six months after SAP go-live at which time the majority of teething problemshad been resolved, PDO realized that they have forgotten the other side of the chainlink fence, the vendors! RFQs were released through emails and quotations werereceived through a number of mediums, some electronic and some submitted in sealedenvelopes. When the request-receipt option in MS Outlook was switched on to trackthe 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 PDObuyers. Tracking these responses and linking these to the originating RFQs was both adifficult and time consuming process that often was overlooked because of itscomplexity.

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 towhere they were previously before SAP -- a total information black hole. It wastherefore 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, whatcaused it.

We dont know where anything is and the vendor would love it. [They say] now this is our chanceto get back into PDO and say: why didnt 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. Sowe had to find a solution to this problem. (PDO Supply Chain Manager, SAP)

To mend their broken supply chain, PDO started evaluating e-procurement solutionsonly to find out that many of these solutions were not designed for the SMB type ofbusiness. Most solutions required considerable upfront investment by members.Furthermore, the majority of these vendors are SMBs whose information systems arecomprised of common off-the-shelf-software and one or a few standalone PCs. Thissetup may be adequate for these SMBs, but for the larger buyers who invested heavilyin 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 paperdocuments as the main communication means for procurement management evenafter SAP went into operation.

E-procurement Solutions

To bridge the black hole separating the PDO from its vendors and to fully exploit theirinvestment 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 toTable 1 for a description of these solutions and Table 2 for the comparison criteriaused by PDO to evaluate them).


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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 designedwith simple yet easy to implement functionality that is based on the20-80 rule. Twenty percent of the e-procurement functionality wouldsatisfy eighty percent of business needs.

Bolero Bolero, also a DDE, was originally set up in 1998 by the internationalbanking community. Created as a neutral third party exchange, Bolerodeveloped standards to enable global cross-enterprise businessintegration, particularly in banking and finance.

Tejari Tejari is the Middle Easts first business-to-business (B2B) onlinemarketplace that allows companies to buy and sell goods and servicesonline. Established in 2000, Tejari supports e-procurement throughcataloging, e-tendering, and reverse auctions.

Singapore Tradenet Established in 1989, Singapore Tradenet provides electronic trading inthe form of structured messages between network subscribers inElectronic Data Interchange (EDI) format. The electronic messagingservice is administered by CrimsonLogic, which was previouslyknown as Singapore Network Services. Using this system, the tradingcommunity submit documents electronically to government bodiesthat when approved, are returned electronically to the sender. Thesystem that uses the mailbox concept, sorts and directs mail into thecorrect mailbox.

Trade-Ranger In a joint initiative between some of the leading energy andpetrochemical companies, Trade-Ranger was launched in July 2000with founding members including BP, Dow Chemical, RoyalDutch/Shell, and Total, to name a few. Setup as an e-procurementmarketplace serving the oil and gas, and chemical industry, the

marketplace main features are the standardization of procurement andcatalog processes, and global membership. Trade-Ranger was recentlyacquired by cc-hubwoo in May 2005, and was transformed from aconsortium that is privately held by customers to an independent e-procurement hub.

These solutions reflected different e-procurement flavors and included three of thefour widely recognized e-procurement business models10, which are:

(1) To join an existing private market place (i.e., Bolero11) or a tradingconsortium of organizations in the same line of business (i.e., Trade Ranger12 andSingapore TradeNet13).

10 For definitions of these four e-procurement business models, see Bakos, J.Y. "A Strategic Analysisof 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., andDay, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons from B2BExchanges," 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, fromhttp://www.trade-ranger.com/.


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Considering that PDOs main line of business is oil and gas recovery, Trade-Rangerappeared a viable solution. Its key limitation however was the substantial investmentneeded by both parties, the buyer and the vendor. Each pays registration fees that arebased upon size of company; each pays the yearly membership charge; each payswhen 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 localvendors, (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 andservices.

While Singapore TradeNets focus is moving documents, which was attractive toPDO, the EDI platform for this solution was seen as a major obstacle for adoptionamongst local vendors15. EDI is costly as it is proprietary technology requiringsignificant 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, especiallysince the company had just finished with its SAP implementation. Tension was highamong 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 tomaking another heavy investment, especially since timing coincided with theaftermath of the dot com bust.

(3) To join an independent marketplace (e.g., Tejari16 and iX217)

Both Tejari and iX2 were plausible alternatives. PDOs concerns regarding Tejariwere: (a) cost; joining the exchange would involve considerable upfront investmentby each participant in the form of an annual subscription fee. This is topped with thecost 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 wasquite 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 theIT 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, fromhttp://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 isthen mapped into the respective form on the exchange (i.e., RFQ, PO, or SE). The advantage ofsending data in this format is that it cannot be read or understood by a third party if intercepted.15 For information on EDIs unsuitability to SMEs, refer to: Christiaanse, E. "Performance Benefitsthrough 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/.


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applications like MS Word and MS Excel, and not everyone had internet access, andhence 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, ifnot 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 implementfunctionality that is based on the 20-80 rule. Twenty percent of the e-procurementfunctionality would satisfy eighty percent of PDOs needs. Furthermore, iX2 has onesingle point of entry which is the Internet, which makes it universally accessible. Inaddition, the price model is easy to understand by all PDO stakeholders, especiallyvendors, as only the senders pays.

(4) To outsource the development of the exchange.Although this alternative was not on the short list presented inTable 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 astart-up company that took every initiative to accommodate PDOs requests to tweak

the iX2 solution in order to comply with the big buyers purchasing practice18.

Table 2: Functionality matrix for e-procurement solutions

Criteria OTNiX2

Bolero Tejari SingaporeTradenet

TradeRanger

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 functionalitiesthat only iX2 satisfied are strategic influence and support. Strategic influence isdefined as the ability to collaboratively work with the preferred e-procurementsolution provider to enhance the solution to suit PDOs supply chain goals. Support is

18 At that time, PDO was the sole big buyer using the iX2 exchange for managing procurementactivities.


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defined as the capability of the vendor to offer not only the technical solution ofmanaging transactions electronically but also the implementation of this solution tothe vendor community. Both criteria provided satisfactory answers to the key questionPDO kept raising when evaluating e-procurement solutions, this being, whats in itfor the vendors?

Supply Chain IntegrationAlthough carrying out the feasibility study took six months, getting this approved byPDOs tender board took around six months, mainly because it required changes inthe business. Before e-procurement, for example, the RFQ process required a numberof supervisory signatures while none are needed today. Responsibility for theseapprovals are now delegated to the people doing the job, the PDO buyers.

In collaboration with OTN, PDO successfully managed to electronically link to theirSMB vendors using iX2, a web-based software application developed utilizing arange of technologies, some developed by OTN and others in collaboration withtechnology partners. There is no upfront cost for members to sign up and the senderpays the transmission cost. This means that PDO pays for all their outgoingcommunications 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 theydecide to respond, they are charged for sending the quotations. Payments are donethrough the OTN exchange using OTN credits that can be purchased by the vendor inthe same way pre-pay mobile phone cards are now purchased. This simplifies thepayment process for PDO and eliminates the cash flow problems associated withinvoicing 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) SmartInvoice (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 notcounted by OTN as separate documents and hence they are not chargeable. Both POand SE are structured documents that vendors cannot change, while RFQ is semi-structured. Vendors fill the specified fields in the RFQ before they submit theirquotations through iX2 (refer to Figure 3 that shows the setup for the PDOs e-procurement system).

PDO mandates that all its vendors be registered with OTN. When PDO sends an RFQthrough the OTN exchange, the RFQ becomes accessible to all vendors. Vendors canboth access the RFQs and reply, using iX2. A reply can either be no-bid or submissionof 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 thepossibility of fraud as there is no means for the current lowest bid being transmitted toa different vendor and that vendor re-bidding at a lower price. Quotations areanalyzed and, when awarded, a PO is issued to the winning bidder through iX2. Thevendor sends PDO details of the service completed and a price that is referenced fromthe PO. PDO then confirms this and sends a SE19 to the vendor through iX2. Thevendor then issue a SI to PDO through iX2.

19 SE is the document the vendor needs to submit to raise an invoice to PDO.


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Figure 3: The e-procurement system setup for PDO

To facilitate adoption among vendors, PDO outsourced the management of the vendorcommunity to OTN. Free ongoing training sessions are offered to vendors. If a vendordoes not own a PC or has no permanent Internet connection, the OTN exchange sendsa text message to the vendors mobile phone with the information update, which canbe the issuance of a new RFQ for example. The vendor, using an Internet caf 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 notresponded because they fell into the incorrect PDO classification and received RFQsthat were irrelevant to their line of business.

In addition to SAP and iX2, PDO uses two other major systems for its e-procurementactivities. The first is the Public Open Tendering (POT)20 system through OTN andthe second is the reverse auction through Ariba21

POT, which went live in November 2004, is the portal PDO uses to advertise anddeliver 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 vendoris able to apply and download all tender related documents directly from the portalwithout 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," OmanTradaNetLLC, 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 themerger 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.

ErrorReports

InternalInternal

MailMail

RelayRelayServerServer

SAPSAP UNIX ServerUNIX Server

UNIX Script

ExternalExternal

MailMailRelayRelay

ServerServer

VendorsVendors

VendorsVendors

View items:View items:

-- ReceivedReceived

-- OpenedOpened

-- RespondedResponded

Both PDOBoth PDO

andand

Vendor canVendor canview theview the

wholewhole

processprocessOnlineOnline

POs,POs,

RFQ'sRFQ's

& SE& SEss

In RDIIn RDI

formatformat

Omantel ProvideOmantel Provide

InfrastructureInfrastructure

WWWWWW

ExtranetExtranetIntranetIntranet

BuyersBuyers

RFQsPOsSEs

SI


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identify potential vendors from outside their existing vendor list and to minimize thenumber of vendors unnecessarily visiting PDO each day. OTN are currentlydiscussing plans which would allow for more features like tender response submissionand interactive clarification mediums, such as forums and instant messages betweenthe vendor and the buyer. The new POT version is also expected to include thereverse 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 SAPimplementation 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 iX2s fifth electronic document, Smart Invoice (SI).

E-procurement Benefits

The main benefit of using an electronic marketplace is the cost reduction that resultsfrom huge gains in procurement efficiencies, particularly for the buyer. These includereducing both search and product costs for buyers and reducing the cost ofcommunication 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 toUS$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 toapproximately US$1.5 (refer to Table 5 for cost comparison of standard RFQtransactions via different transmission mediums).

Table 4: Cost Comparison of standard procurement processes

Old System

2001

SAP

2002

iX2

2003

PO US$103 US$43 US$18

RFQ1 US$309

or US$103 * 3

US$129

or US$43 * 3

US$54

or US$18 * 3

Invoice2 US$34 Not available US$12.501 Three competitive quotations are required.2 The US$34 is based on the benchmark in the Aberdeen Group, Invoice Reconciliation & PaymentBenchmark Report, June 2004.Note: Details of SE transaction costs are not available.


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Table 5: Cost comparison of standard RFQ transactions

Media

Hardcopy Fax Email iX21

RFQ unit cost US$3 US$2.67

[OMR1.025]

US$1.63

[OMR0.625]

US$1.43

[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 ishaving both accurate and up-to-date information about vendors. It is very common inOman 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 theirbusiness. Being registered and having approved vendor certificates gives themcredibility, hence they have an advantage when they bid for business elsewhere. As aresult, many of PDOs registered vendors are not active. Still, they are on the list andare sent RFQs but are not responding. This is considered both an administrative andcost burden to PDO. These inefficiencies were gradually eliminated once OTN tookover 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 ofElectronic 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., andMinahan, T. "The E-Procurement Benchmark Report: Less Hype, More Results,"Aberdeen Group,2004. Retrieved January, 2006, fromhttp://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.


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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 processmanagement costs were realized by PDO.

Enabling the buyer tolocate vendors thatbetter match theirneeds

Because vendor details were not often updated, PDO buyers were oftensending irrelevant RFQs to vendors. Now that OTN is keeping vendorinformation up-to-date and verifying the categories each vendor is capable ofhandling, PDO is more effective in reaching qualified vendors.

Reducingrequisition-to-ordertime cycles for bothbuyers and vendors

Vendors instant access to RFQs once they are posted and the elimination ofsignatures that were previously needed by PDO buyers to issue RFQs are twoexamples of how cycle time has been reduced for both parties.

Extending and/orconsolidating thevendor base

PDO used the POT system to extend its vendor base. No pre-qualifications arerequired by vendors, who now can download all tender related documentsdirectly from the portal without the need to visit PDO physically.

PDO used iX2 to consolidate its vendor base. Many vendors had registeredwith PDO only to get credibility when applying for jobs elsewhere! OTNhandling of the vendor relationship helped PDO in identifying no-responsevendors and verifying vendor data. This reduced the number of active vendorsby around 30 percent.

Increasing processvisibility across thesupply chain

One interesting example of process visibility was when a flood of old purchaseorders were generated upon a SAP upgrade. OTN, the iX2 e-procurementsolution provider, identified this problem after noticing the abnormal trafficand subsequently informed PDO before this problem was noticed by vendors.Working closely with OTN, PDO managed to inform vendors of this problemearly enough to avoid any negative publicity. PDO was later advised that thiswas not an isolated incident and that many other SAP upgrades experiencedthe same problem. Unfortunately, few of these had such visibility within theirsupply chain processes to alert them.

Increasing spendvisibility

Spend visibility is improved through better vendor profiling, procurementdecision auditing, and spend analysis. Among others, this type of benefit wasless prevalent, maybe because iX2 did not have the cataloguing capability,hence did not provide the drilling feature into spend categories.

Enhancingrelationshipsbetween buyers andvendors

By outsourcing the management of the vendor relationship process to OTN,PDO buyers are now more focused on the core process of procurement. OTNon the other hand deals with all other vendor related enquiries, especially theserelated to using iX2 and no-response bids.

Enhancing corporategovernance

E-procurement helped PDO reduce off-contract maverick spending, thusincreasing compliance with its strict purchasing policies. Since all submittedquotations are locked into iX2 until their release on the bid due date, vendorsdont have to wait until the last minute to submit bids in fear an insider maydisclose their details to a competitor.

Increasingprofessionalismthrough the adoptionof best practice

There is an increased level of accountability for both PDO buyers and vendorsnow as the whole procurement process is configurable and traceable by bothparties. A Buyer chooses not only the vendor company he sends the RFQ tobut also the employee responsible for this specific type of purchase. Vendorcompany employees can choose to manage received RFQs centrally by oneperson who opens all RFQs and delegates these to different divisions or byconfiguring iX2 to send the RFQs to the concerned division directly.

Aligning with parentcompany

Although PDO has strong ties with some major internal oil companies, noevidence on this type of benefit was reported.


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LESSONS AND SIGNIFICANCE

Considering the specific business, organizational, and technological contextsdiscussed here, the case provides several key lessons on issues related toidentification, selection, implementation, and enhancement of the e-procurementprocess, many of which are supported by current literature.

The shakeout in the B2B exchange market resulted in the disappearance -- eithergoing out of business or being absorbed by existing exchanges -- of around 90% ofUS-based exchanges in 2003 as compared to total market peak in mid 200024. Manylessons were learnt from this shakeout and these provided guidelines to both theestablishment of new exchanges or sustainability of existing ones. The case describedand analyzed here is a success story of a new exchange that benefited from theseearlier lessons.

Earlier studies25 on the success and failure of B2B electronic marketplaces suggestdifferent barriers to the implementation of e-procurement (refer to Table 7). Thesebeing: economic feasibility, business environment, solution provider, buyer, and

vendors.

Many of the lessons suggested here stem from how both PDO and OTN collaboratedto overcome these barriers. Each obstacle and how it was resolved, is described next.

Lesson #1: Challenge common assumptions about the competitivebidding model.

Cause for failure is often attributed to the competitive bidding model that runs againstthe modern approach to the buyer-vendor relationship where other factors -- such astime, quality, and service -- play a major role in the purchase decision. PDO, as wellas other governmental organizations in Oman, was under continuous scrutiny by thegovernment 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. PDObuyers now cannot see the bids until bid closing time. Lowest bidders therefore havethe peace of mind that no PDO insider could possibly give away their bid informationto 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., andWise, 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 includedin the survey with the highest score 9.7 and the lowest 1.7, Omans score is above average and is withinthe top 20%. This is good however it is far from ideal which suggests that some dishonesty do exist andif 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.


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Table 7: Common barriers to successfully implementing e-procurement

Category Common barriers

High setup costs

Unsustainable growth

Unconvincing pricing

Economic feasibility

Not enough profit

Solution provider Half-baked business model

Ineffective public infrastructure [to discuss for PDO]Business environment

Restrictive regulations from domestic governments

Organizational inertia (within the buyer organization)

Buyers fear about the capability of the e-procurement solution provider

Buyer

Buyers fear about the integrity of the e-procurement solution provider

Vendors fears of competitive biddingVendor

Little benefits to vendors

Lesson #2: Share the benefits, particularly with vendors.

Little benefit to vendors is considered a cause for failure, particularly when thesustainability of the e-procurement exchange is at stake. This case study is full ofevidence showing how benefits to vendors were a major consideration from day one.Besides the assurance of competitive bidding described above, benefits include morerelevant 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 datacleansing and updating vendor information not only increased the efficiency ofbuyers operations, but also benefited vendors through the receipt of relevant RFQsthat are delivered to a person, department or company specializing in the sale of itemssought. On the extreme, there were numerous instances in the past where cateringcompanies received RFQs for the supply of pumps!

Lesson #3: Customization may be an option, especially whenrequirements 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 forPDO. The main strength of OTNs exchange offering was that it was simple. Theexchange automated around 20% of inter-organizational functionality but delivered80% of the benefits to make the model sustainable to both parties. To achieve this,OTN carefully studied PDOs need and tailored the iX2 exchange to deliver bothtechnology and business process needs at the same time. This complementary offeringmakes the OTN example a distinctive example of working with the customer. OTN


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moved beyond executing transactions to create the infrastructure and standardsnecessary to streamline communications between buyers and sellers.27

Lesson #4: When public infrastructure is not effective, focus on serviceand 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, GeneralTelecommunications Organization (GTO), was replaced by OmanTelecommunications Company (Omantel) in a step towards privatization. In 2004, thestate-owned company was split in two, Omantel (fixed line and Internet servicesprovider) and Oman Mobile (mobile services provider), both under the control of aholding company (Omantel), which now includes 30% public ownership. WhileOman now has a second mobile operator, Nawras, there are no recent plans forliberalizing the fixed line and/or Internet market in the near future.

It is noted that an organizational business context where industry is regulated and thelevel of competition is low is less than ideal for e-procurement to flourish29. Aspredicted, both PDO buyers and OTN staff cite many instances when the Internetconnectivity was interrupted at the time of bids closings. However, through OTNsscrupulous monitoring of iX2 service levels and continued communications with PDObuyers, the situation is resolved through both extending bids closing date andinforming all vendors.

Another point of interest here is that while the level of Internet services may beinadequate, mobile phone usage is not. One of OTNs critical success factors seems tobe using SMS messages to reach vendors anyplace, anywhere, and anytime (refer toFigure 4 for a snapshot of vendors mobile showing text messages for POnotifications). In many other places, the same can be true about the Internet; in thisregion, it is not always true!

Lesson #5: The Identification of the critical feature that makes or breaksthe system is key to success.

It is very important for an organization seeking an IT solution to resolve a businessproblem, as was the case for PDO, to clearly identify the key feature the solution mustsatisfy. For PDO, it is that the solution needs to be manageable by vendors. This isreflected in the key question PDO kept raising when evaluating e-procurementsolutions and this was whats in it for the vendors?

27 Daniel, E.M. and White, A. "The Future of Inter-Organisational System Linkages: Findings of anInternational 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 "OmanTelecommunications Company," SHUAA Capital PSC., 2006. Retrieved June, 2006, fromhttp://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 QuarterlyExecutive (4:3), 2005, pp. 343-360.


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Figure 4: Vendors mobile showing text messages for PO notifications

Lesson #6: The collaboration between the big buyer and theindependent e-procurement solution provider is important for the longterm sustainability of the e-procurement exchange.

The iX2 exchange targets a re-formed30 market wherein supporting an existingbusiness provides considerable opportunities for creating efficiency. However, theobstacles 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 collaborationbetween the solution provider, OTN, and its key members, of which PDO is one.Although PDO opted for the independent marketplace solution, it required a heavyinvolvement in the development of the exchange thus reaping the benefits that aretraditionally acquired by the outsourcing model. This combination has beeninstrumental in both selecting the best-fit solution and the successful implementationlater on because:

(1) PDO was not obliged to adopt something new or considerably different from theway 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, andpurpose of the market. Instead these markets form around technologies that enable cost reductions orimprovement to existing way of doing business. For more information on classification and problemsof B2B electronic exchanges, refer to: Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts inDigital 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.).


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generated would bring in enough revenue to sustain OTNs new venture, the exchangewas designed to accommodate many of PDOs needs. A breakthrough type ofelectronic exchange that would dramatically change the way an established companyoperates -- 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 reportedthat value accumulates through combining the management of e-transactions withmanaging part of the e-procurement process33.

Working closely with OTN, PDO managed to overcome common barriers to thesuccess of the B2B electronic exchange. These barriers, and how they were overcomeprovided the content for the lessons given here.

CONCLUSION

Oman does not have the immense oil resources of some of its neighbors. Oilproduction that had climbed above 900,000 barrel per day in 2000 has recentlydeclined to 780,000. This, in addition to the rising cost of production owing to Oman'scomplex geology caused a reduction of revenue, thus putting a lot of pressure on PDOto come up with innovative solutions to improve efficiency, particularly in the use oftechnology. Tailoring e-procurement solutions to SMB vendors needs was a keyelement that enabled PDO to leverage its investment in SAP and be more efficient andeffective in handling procurement activities.

Advancements in the use of Internet-based business-to-business (B2B) solutions tomanage procurement mainly target large businesses leaving SMBs with little or noopportunity for getting a bite of the cherry. E-procurement presents a goldenopportunity for SMB vendors to keep their costs down, extend their reach, andcapitalize on the local knowledge they have. The two major impediments SMB

vendors face to exploit e-procurement opportunities are unfamiliarity with large-buyerhubs and high upfront cost for signing up. In the Middle Eastern region, where ITadoption 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 PDOs January 2002 SAP implementation that replaced some 108 legacybusiness systems at a cost of $US20 million, managing the contracting andprocurement process remained semi-manual. With more than 3,000 vendors, it wasvery difficult for PDO buyers to keep track of emails sent and vendors responses.Therefore, it was common for vendors to complain about not receiving pricinginvitations, especially since PDO buyers could not prove whether this was true, and ifit was, what caused it.

The majority of these vendors are SMBs whose information systems incorporatecommon off-the-shelf-software and one or a few standalone PCs. This setup may beadequate for these SMBs, but for the larger buyers who invested heavily in ERP-typesystems 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.


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problem was evident when PDO kept utilizing paper documents for procurementmanagement even after SAP went live.

In collaboration with OTN, a startup document exchange company, PDO successfullymanaged to forge electronic links to 100% of its vendors, irrespective of size orlocation, using the web-based software application, iX2. To facilitate adoption among

vendors, PDO outsourced the management of the vendor community to OTN. Thispackaging of the technology with the management of business process was key to thesuccess of e-procurement to all parties involved.

The benefits to PDO for using the OTN exchange in procurement have beensubstantial. The cost per order plummeted from US$103 to US$13. The ability totrack the movement of documents through the system increased visibility andconsequently enabled the identification and swift resolution of bottlenecks. Otherbenefits, such as purchase cycle time and data-entry error reduction, result from thesystems 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 aspossible is kept at a local level. Larger businesses are often rewarded when they areseen to comply. PDOs success in forging electronic links with the local SMB vendorsis a key step towards the implementation of this directive. PDO also uses the OTNexchange to deal with larger vendors such as Halliburton and Schumberger, due toiX2s scalability advantage.

Oman has very much benefited from being a testing ground for e-procurement in theGulf 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 solutionsby regional exchanges in Egypt, Qatar, and the UAE, are just starting.

Although transaction volume derives profitability, it is argued that when the numberof members in the exchange grows and members have equal rights, no oneparticipant has strong commitment to the survival of the exchange.34 This is onechallenge PDO needs to address when OTN grows and other big buyers exert theirinfluence to get things done their way.

34 Refer to: Day, G.S., Fein, A.J. and Ruppersberger, G. "Shakeouts in Digital Markets: Lessons fromB2B Exchanges," California Management Review (45:2), 2003, pp. 131-150.


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CONTRIBUTORS

This case study was developed by the following contributors. Summaries of theirpractical experiences with affiliations are provided.

Graham R. SmithSAP PTP Process LeadSohar Aluminium

Dr Graham R Smith was part of the Shell Services International (SSI) teamresponsible for developing the feasibility study for the implementation of SAP inPDO. When the project was approved, he joined PDO and became part of the designand implementation team. Following the SAP go-live in 2002, Graham was one of thekey people that successfully evaluated and implemented the electronic exchange forPDO 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 ShakirAssistant ProfessorCollege of Information SystemsZayed University

Dr Maha Shakirs recent work focuses on the management and implementation ofstrategic IS applications, particularly ERP. Using the case study qualitative researchapproach, she developed IS implementation case studies for both teaching andresearch. Maha is interested in carrying her work forward with a focus on the use ofIT in inter-organization integration, particularly the study of electronic exchanges.

Erkan GulecGeneral ManagerMawahib Business Developments

Erkan is a seasoned management and IT consultant and entrepreneur. Prior tostarting up MBD in Abu Dhabi in 2004, Erkan has worked in Accenture(previously Andersen Consulting) for 12 years from the entry-level Analystposition to Senior Manager in Supply Chain Management. He is specialized inthe 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.

Documents

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