April 2007

ENHANCING SUPPLY CHAIN PERFORMANCE

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Electronic Procurement (e-Procurement) or locally known as e-Perolehan in Malaysia was initiated as one of the projects under the Electronic Government Flagship Programme. The aim of the government is to make all the suppliers and federal government agencies become electronic procurement enabled users by the year 2010.

Governments all over the world have demonstrated the need to improve the service delivery and be able to handle issues swiftly and satisfactorily. The advent of Internet Technology has made it possible for governments to transform themselves by offering various traditional services online. The use of Information and Communications Technology (ICT) in general, has also changed government service delivery process, business models and people’s expectations of the quality and effi ciency of information sharing and service delivery.

e-Government systems are not confi ned to automation of government service delivery systems targeted towards citizens’ at large (G2C). e-Government platforms also include the use of ICT to streamline the procurement processes within public sectors (G2G & G2B).

e-Procurement refers to “the use of electronic methods in every stage of the purchasing process from identifi cation of requirements through payment, and potentially to contract management”.

There are signifi cant benefi ts in adopting e-Procurement technologies. These benefi ts are expected to accelerate the rate of adoption of these technologies once the uncertainties that remain are reduced to levels that encourage signifi cant resource commitments. Organisations that use e-Procurement technologies report savings 42 percent in purchasing transaction costs, says A. Davila, M. Gupta, R. Palmer, in their article ‘Moving Procurement Systems to the Internet: The Adoption and Use of e-Procurement Technology Models’ published in the European Management Journal. This cost reduction is associated with less paperwork, which translates into fewer mistakes and a more effi cient purchasing process.

E-PROCUREMENT INITIATIVE IN MALAYSIA

The electronic procurement system streamlines government procurement activities and improves the quality of service it provides. It was offi cially launched in Malaysia in 1999 as one of the Electronic Government Flagship project. e-Procurement converts traditional manual procurement processes in the government machinery to electronic procurement on the Internet. The new procurement system allows the Government ministries to electronically select items to be procured from the computer, initiate an electronic approval process and also create, submit and receive purchase orders, delivery orders and other related documents electronically.

The Malaysian Government’s allocation of budget for procurement increased substantially from RM 6.1 million (USD1.75 million) in 1999 to RM14.2 million (USD 4.09 million) in 2003 and RM 21.4 million (USD 6.17 million) in 2006 (refer to Table 1).

On the supplier’s side, e-Procurement allows them to present their products on the World Wide Web (www), receive, manage and process purchase orders and receive payments from government agencies via the Internet. The supplier’s product catalogue, which can be viewed from any desktop with a web browser. The supplier is able to submit quotations, obtain tender document and submit tender bid through e-Perolehan. e- Procurement allows suppliers to register or renew their registration with the Ministry of Finance (MOF) through the Internet. Suppliers are able to submit application, check application status and pay registration fees through e-Perolehan.

Table 1: Malaysian Government Budget on Procurement

SOURCE: www.mof.gov.my

By subscribing to the e-Procurement system, suppliers will be able to participate in the procurement exercise by the government. Upon fi nal implementation of the e-Procurement system, full services will be available to all four types of procurement that is:

Phase 1:
Supplier Registration, Central Contract

FIGURE 1: E-PROCUREMENT REGISTRATION PROCESS

Phase 2:
Direct Purchase, Quotation and Tender

Starting from 6 October 2000, all new registrations, renewals and re-application of suppliers of products and services with Ministry of Finance were made online through the e-Procurement system. In order to transact with government agencies, suppliers are required to be e-Procurement enabled. Figure 1 summarises the fi ve step process that must be completed by all government suppliers, prior achieving full status as an e-Procurement enabled supplier (www.commercedc.com.my):

e-Procurement will be the single point of registration for the suppliers. All approvals of the application for registrationremain with  the Registration Department of MOF. Services available in the supplier registration module include the following (www. commercedc.com.my):

Supplier registration can be done online via the Internet using the e-Procurement website

e-Procurement routes all successful suppliers’ applications for online approval by the relevant authority upon full submission of completed documents.

e-Procurement facilitates generation of certifi cate for registered and successful supplier.

The supplier registration module supports online renewal of registration by the suppliers.

The supplier registration allows online application for registration of additional category or “bidang”.

e-Procurement supports online suspension or termination of the supplier registration.

E-PROCUREMENT BUSINESS MODEL

The business model that is used for the im plementation of e- Procurement is an end-to-end model. Procurement requires acomplete integration of services from the buyer to the supplier and vice-versa. To ensure the success and consistency of procurement services, the responding organisation shall provide an end-to-end solution. In this model, there are three distinct communities, namely the supplier community, the buyer community, and the procurement service provider. The above fi gure illustrates the three core entities involved in Malaysia’s e-Procurement initiative.

SUPPLIER COMMUNITY

The supplier community consists of suppliers who have registered with the MOF to provide supplies and services to the government. There are more than 100,000 registered suppliers (www.commercedc.com.my) supplying goods under four categories i.e. Central Contract, Direct Purchase, Quotation and Tender purchase. These suppliers bear the responsibility to coordinate with the procurement service provider and register onto the new system with the Government Procurement Management Division, within MOF. All suppliers are required to provide and update the necessary information regarding the items that they supply online.

BUYER COMMUNITY

The government is the buyer community. The Malaysian government spent about RM 18 791 million (USD 5,444 million) on procurement in the year 2005 and has increased the amount to RM 21 425 million (USD 6,207 million) in for the year 2006 (www.mof.gov.my). The cost of processing and managing this process is extremely high with increasing expectation from the supplier side for the government to be more effi cient. It is the responsibility of the buyer i.e. government to have the necessary information in place to be able to accept and respond to the supplier electronically in the process of procurement.

PROCUREMENT SERVICE PROVIDER

The procurement service provider (Commerce. Com Sdn. Bhd.), provides the electronic concept solution which enables the full transaction of the procurement process between the buyer and the seller. The end-to-end model requires the service provider to provide a total solution to both the supplier and the buyer community. This includes application, hardware and software if necessary and more importantly the capability to exchange business documents between the communities e.g. Purchase Orders, Request for Quotation, and Request for Tender Document etc. The security and confi dentiality of this document shall be ensured so as not to comprise the confi dence of both communities. The service provider shall also adhere to all necessary government procurement policies and legal requirements. However, Commerce.Com can provide advice and give suggestions to the government if necessary with the aim of improving the current processes in order to enhance the effi ciency and to lower the cost of operation for the government. Currently, Commerce Dot Com Sdn Bhd is involved in 2 modules for e-Perolehan:

  • Module 1 – Registration of the suppliers on-line with Ministry of Finance
  • Module 2 – Transactions – Central Contract, Direct Purchase, Quotation and Tender.

e-Procurement Benefits

The findings from the interview with the parties concerned, suggest several benefits of  e-Procurement for the government. The system firstly, offers more effective and efficient  procurement process in line with the country’s transformation to the knowledge based  economy (KEconomy). E-Procurement is a vehicle for the government to leapfrog into the new  economy and promote the widespread adoption of e-Business in the country. The system  also is stated to lower the operational cost for the government over time. In addition, the  government will be able to reduce administration and operational costs through the usage of  e-Procurement as business processes are reduced and streamlined. From the government’s  perspective, the e-Procurement system provides latest product information and pricing  available on-line. e-Procurement will always be up to date with the latest information that  will help the buyer to make a more accurate procurement decision. A government buyer  would have immediate access to a wide variety of products and services available to them via  e-Perolehan, which will make them a better informed buyer. Overall, the government will  benefit from improved purchasing control, scale economies and greater accuracy in the  ordering and billing process. Off-contract and uncontrolled purchases that drive up product  cost and reduce negotiation leverage will be minimised. It also prevents corruption by  eliminating gate-keepers and reduces abuse of discretion and other opportunities for  corruption. Besides that, information such as status of back orders and delivery status will be up-to-date and available electronically. This will help the government agencies in planning  and budgeting process. The government ministries will also still maintain the freedom and  responsiveness of decentralized purchasing, given the relevant information on the products  and specifications.

For the suppliers, the benefits cited from adoption of the e- Procurement system include  greater accessibility to government buyers, provides an opportunity to transition into  e-Business, providing an entry point for e-Business capability, and also enable adoption of  e-Business concept more rapidly, through the usage of e-Procurement system. The system also  proffers faster and more cost-effective advertising for suppliers, as through the Internet  platform, suppliers would virtually have a borderless advertising channel at a very low cost.  In terms of process, the system simplifies the overall procurement process for the suppliers by  reducing administrative and operational costs. Through e-Perolehan, almost all the business  operations will be automated, thus not only leading to lower operational costs, but also faster  turnaround time to the buyer. Suppliers would also be able to receive payments faster  through electronic payment. Supported by a highly secured network infrastructure, suppliers  would be able to receive payments for goods and services in a shorter period.Through the e-Procurement system, the suppliers are able to  use a single electronic  catalogue for all government ministries while extending a global reach electronically to  existing and new customers on the service (www.eperolehan.com). Suppliers shall also benefit  from improved information accuracy, increased productivity and reduced  operational cost with the electronic retrieval and submission of quotation and tender  information. Efficient processing on both supplier and buyer community will also translate to  faster payment turnaround time.

According the government’s official document the main aim of e-Procurement is to enhance  the efficiency and effectiveness of the purchasing transactions between government and suppliers. The Government has appointed a company called Commerce Dot Com Sdn. Bhd. for  the purpose of developing, managing and maintaining e-Procurement under the scheme of  Build, Operate and Transfer (BOT).

e-Procurement- Project update

The scope of work and implementation schedule for e-Procurement will be carried out in four phases:

Phase 1

The first phase of the e-Procurement initiative started in October 2000, with the intention of  developing an e- Procurement system for the purchase of goods involving Responsibility  Centres (Pusat Tanggungjawab / PTJ) within the government. The first phase of the project  involved four central agencies namely, the Administration Department, MOF, the Malaysian  Administrative Modernization and Management Planning Unit (MAMPU), Head Office,  National Accountant Department (JPN), and the Head Office, National Audit Department  (JAN). The objective of Phase 1 was to develop an online registration system in order to  register suppliers/companies who supplies goods and services with the Department of  Government Purchases, MOF.

Phase 2

The second phase of the project started in January 2001. The objective of this phase was to  expand e-Procurement system to one PTJ at the following Departments and Ministries: Prime  Minister’s Department, Ministry of Defence, Ministry of Home Affairs, Ministry of Education, Ministry of Health, Ministry of Works, Ministry of Agriculture, Ministry of International  Trade and Industry, Ministry of Energy, Water and Telecommunications, and Ministry of  Science, Technology and Innovations. Under Phase 2, the idea was to develop e-Procurement  system for purchases through tender, quotation and direct purchase for all agencies involved.

Phase 3

Phase 3 of the e-Procurement project started in January 2002. The focus of this phase was to  roll-out the systems developed in Phase 1 and 2. Stated differently, while the phase 1 and 2  were akin to strategic formulation of the e-Procurement initiative, the goal of Phase 3 was to  get the various entities involved in the initiative into an execution mode.

Phase 4

The final (on-going) phase of the project started in January 2004, with the objective of improving e-Procurement system accordingly, based on feedback received from all three parties involved in the procurement process, i.e. the service provider, the buyer community  and the various PTJ’s within the government sector.

Issues and Challenges

Table 2 presents the e-Procurement statistics, which clearly indicates the low level of adoption and usage of e-Procurement services in Malaysia even though it has been implemented since  the year 2000. The following points highlight the key issues inherent within Malaysia’s  e-Procurement initiative that prevents the government and the service provider from  maximizing the value potential of the. These facts are gathered from the suppliers during the interview process:

Cost

There are costs involved before a supplier becomes e- Procurement enabled. Specifically,  suppliers have to bear the cost of purchasing a smartcard for transaction, pay for training,  and also any software renewal cost that occurs. These payments are directed towards  Commerce DotCom Sdn Bhd. Given that the majority of the suppliers within the traditional category belong to the small-medium size operations scale, it is only natural that they are not  keen in becoming players within e-Perolehan, given the costs involved, to become e-  Procurement enabled.

Infrastructure and Skills

As mentioned the majority of the supplier community fall within the small-medium size  industry grouping. Traditionally, this sector has not been well versed with use of state of the  art information systems. Issues such as lack of bandwidth support, poor computing and  information systems architecture in general, prevents the majority of the suppliers from  playing a more active part in e-Perolehan.

Business Focus/Change Management

The majority of the suppliers are not keen to do business with the federal government, given  the e-Procurement requirement. Suppliers prefer to do business with local and state  governments as they can use traditional methods for selling tier products. Furthermore  e-Procurement still has not gone into tender and quotation compared to direct purchase and  central contract, which is small in volume. This issue is also in line with the need for better  change management to convert the mindset of traditional sellers to embrace change and use  technology in the procurement process in general.

System Constraints

The system in its current incarnation is not robust on several aspects. For examples, a  supplier registered with the system, can only upload product information for ten different product areas, for free. Additional charges will; be incurred if more product lines are listed  within the system. In short, for a company that has a wide product line, the additional cost involved to market the product via the system, might not be attractive.

Government Policy

Although the federal government encourages suppliers to become e-Procurement enabled, the  government can decide if it is willing to transact with a non e-Procurement company, as long  as the company is registered with Ministry of Finance. Stated differently, although in theory  the supplier community must become part of the e-Procurement system, in practice, this  requirement has not been made mandatory as  yet.

Discussion and Recommendations

One of the main challenges for an e-Procurement project is the establishment of an  appropriate and context tailored strategy. Every project or initiative needs to be rooted in a  very careful, analytical and dynamic strategy. This seems to be a very difficult task,  requiring a focus on many aspects and processes, a holistic vision, long-term focus and  objectives. Many public institutions limit their activities to a simple transfer of their  information and services online without taking into consideration the re-engineering process  needed to grasp the full benefits. The government must have a clear strategy to overcome the  barriers to change. Part of the strategy is to engage in a rigorous assessment of the current  situation, the reality on the ground and the inventory of projects, articulate costs, impacts  and benefits of programme as well as continuously monitor and evaluate the project  upgrading. Borrowing a lesson from the private sector, e-Procurement must be customer- driven and service oriented. This means that a vision of e-Procurement implies providing  greater access to information as well as better, more equal services and procedures for public and businesses.

Conclusion

The e-Procurement initiative in Malaysia is pretty much at an infant stage, albeit significant  time, money, and efforts already invested into the project. To ensure the true potential and  benefits of e-Procurement is realised by all parties involved, emulating success stories from  e-Procurement initiative such as in West Australia, Taiwan, Singapore, Canada and in  Andhra Pradesh, India, is a must for the Malaysian government. For a start, significant  change to the mindset of the traditional suppliers is required. This can be done via active and  continuous promotion and education of e-Procurement and the benefits it brings to the  supplier community, and also to the government. In addition, the service providers, namely,  Commerce Dot Com Sdn Bhd, should reconsider reducing the cost of training and purchasing of the smart card, particularly for the small scale suppliers. Lastly, the federal government  should craft out policies that are favourable and non-conflicting with the policy objectives and  implementation plan inherent within the e-Procurement initiative.

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