Technologies and their application in e-procurement for the petroleum industry

Kenneth Fung

A report submitted in partial fulfillment of the requirements

for the course DISS890 Electronic Commerce on the Internet

School of Computer and Information Sciences

Nova Southeastern University

December 3, 2000

Abstract

of a report Submitted to Nova Southeastern University in Partial Fulfillment of the Requirements for DISS890 Electronic Commerce

Technologies and their application in e-procurement for the Petroleum Industry

Kenneth Fung

December 3, 2000

With the rapid growth in electronic commerce, Internet technologies are being applied in the procurement process. These technologies leveraged the speed and connectivity of the Internet to deliver cost savings, improved effectiveness, and many intangible benefits in the procurement processes. The oil and gas industry is catching on to e-procurement.

This project takes a look at the Internet technologies, their applications, their impacts, and benefits to the procurement process and identifies the emerging trends of e-procurement for the petroleum industry. This report identifies the criteria for e-procurement solution selection and recommends some e-procurement implementation strategies. The writer recommends companies to work towards the e-synchronized supply chain and/or virtual corporation.

Table of Contents:

1 Introduction............................................................................................................................................................ 4

1.1 Problem Statement and Goal........................................................................................................................... 4

1.2 Relevance.......................................................................................................................................................... 5

1.3 Barriers and Issues........................................................................................................................................... 6

1.4 Plan and Approach.......................................................................................................................................... 6

1.5 Milestones......................................................................................................................................................... 6

2 Review of the Literature........................................................................................................................................ 6

2.1 Comparison of traditional procurement vs. e-procurement....................................................................... 6

2.2 Benefits of e-procurement:.............................................................................................................................. 8

2.3 Development of e-procurement...................................................................................................................... 9

2.4 Barrier and Issues of e-procurements......................................................................................................... 11

2.5 Technologies.................................................................................................................................................. 12

2.6 E-procurement standards.............................................................................................................................. 14

2.7 Petroleum specific exchanges, marketplaces and vortals......................................................................... 16

2.8 Current situation............................................................................................................................................. 17

2.9 Fighting for survival...................................................................................................................................... 18

2.10 Business Process...................................................................................................................................... 18

2.11 Different forms of exchange.................................................................................................................... 19

2.12 Recommendations..................................................................................................................................... 20

2.13 Future implications................................................................................................................................... 25

3 Methodology....................................................................................................................................................... 27

4 Results................................................................................................................................................................... 28

4.1 Summary.......................................................................................................................................................... 28

5 Conclusions.......................................................................................................................................................... 30

6 Figures:.................................................................................................................................................................. 31

7 References............................................................................................................................................................ 33

1 Introduction

This project report is to fulfill the requirements for DISS 890. This introduction describes: the problems and goals facing e-procurement in the petroleum industry, the relevance of the project in Business-to-Business e-commerce, barriers and issues encountered in preparing this project paper and the milestones of the project.

1.1 Problem Statement and Goal

In the new era of e-commerce, Internet technologies drastically increased speed and connectivity. They have created many intangible benefits in the business environment, e.g., improved customer satisfaction, better communication, and faster payment. Internet is growing fast. Everyday new/improved Internet technologies are introduced. Businesses are getting together to take advantage of these new technologies.

This project is focusing on technologies that are applicable to the procurement process. This report is to document the technologies, their applications; their implementation, and to identify the upcoming trends in e-procurement for the petroleum industry.

"Yankee Group forecasts that business-to-business e-commerce transactions in the petroleum and coal industry will grow from $11 billion in 1999 to $76 billion in 2004." (Sanborn, 2000). Oil and gas companies are impressed with the Internet, e-business, and online marketplaces. They are ready to use these technologies to connect with new suppliers and buyers in the global market place.

Online exchanges and marketplaces can benefit a petroleum company in many ways, e.g. reduce costs by using supplies/equipment catalogs, auctions, and by collaborating with global business units, business partners or suppliers. In the past year, numerous marketplaces and exchanges sprang up to capture the interest in Business-To-Business e-commerce and e-procurement. Many will not survive. As many petroleum companies begin to engage in e-procurement, they should be looking at the long-term survival of these marketplaces/exchanges. They should also look at the implementation strategies to ensure that they capture the expected benefits from e-procurement. E-procurement is only the beginning. As companies work together to streamline the procurement process, they will start to form alliances and partnership to synchronize their supply chain. E-procurement will gradually evolve into e-synchronized supply chain. Besides changing the way we do business, e-procurement is going to change the role of the procurement professionals. As the connectivity and the bandwidth of the Internet improve, the software vendors are moving towards the Application Service Provider (ASP) delivery model. With the Internet and its applications, companies are moving towards the virtual company concept. Companies will be working together as alliances and partners while virtually connected through the Internet.

Many e-procurement implementations were not successful. Before petroleum companies engage in implementing e-procurement, it would be advantageous to have a good understanding of the issues, the current situation, the best practices, and the future implications of e-procurement.

This project report is to compare the traditional procurement process with e-procurement, and highlight the status of e-procurements implementation in the petroleum industry. This report highlights business processes, guidelines and implementation strategies in successful e-procurement implementation. This report also assesses the future implications of e-procurement and its' evolution towards e-synchronized supply chain as well as virtual company.

The goal of this report is to highlight the issues, technologies, standards, business processes, best practices and future implications in the implementation of e-procurement in the petroleum industry.

1.2 Relevance

This project report is relevant to the study of e-commerce. E-procurement is the cornerstone of Business-To-Business e-commerce. It involves many technologies as well as many business and technology standards.

In a company, purchased goods and services account for a significant portion of a company's expenditures. Whether you are a manufacturer, distributor or a service company, you have to purchase raw material, products for resale or supplies. The traditional procurement process is inefficient, costly, paper intensive and lacks control. This leads to maverick buying, fragmented purchasing and does not take advantage of economy of scale. There are many procurement systems to manage the procurement function. These systems are expensive and are tailor made for large corporations. The Introduction of the Internet has changed everything. Many of these procurement systems are now web based or web enabled. Many vendors act as Applications Service Provider (ASP) to extend the power of these procurement systems to medium and small companies. There are many marketplaces and exchanges to cater to all companies via the Internet. They enable companies to communicate, connect and do business among each other. E-procurement is one of the prime activities.

"E-Procurement refers to those technologies and tools that enable e-businesses to stage and carry out business-to-business purchasing activities directly in the Web environment. It is any software platform that allows organizations to build on-line purchasing systems to rationalize buying activities, and further enable the development of industry exchanges; which then drives the re-calibration of supply chain pricing models. (OneClickB2B.com, 2000)" Companies are gradually moving from traditional procurement towards e-procurements. The e-procurement implementations are different for each company. Some companies start off with Purchasing Cards to help the purchasing department. Others extend their procurement module Enterprise Resource Planning (ERP) systems into the Internet. Still others subscribe to Application Service Providers (ASP) for their e-procurement implementations.

1.3 Barriers and Issues

Although procurement practices have been around for many years, Internet and e-procurement are new and ever changing. Everyday there are technological developments that may impact e-procurements. The expansion of Business-to-business e-commerce fueled the growth of e-procurement marketplaces and exchanges. Currently there are just too many marketplaces and exchanges. Many of them would not survive. In the petroleum industry, most of the marketplace and exchanges are less than a year old. It is very chaotic as petroleum companies engage in e-procurement in a fast changing and immature environment. On one hand, e-procurement promises great cost savings and benefits. On the other hand, the company has to completely change its business processes. The success of an e-procurement implementation is not a sure thing.

1.4 Plan and Approach

The project report is a descriptive study report. It is formatted in five chapters:

1) Introduction: Highlighted project's problem statement and goal, relevance, barriers and issues, plan and approach, and milestones,

2) Literature review: Reviewed literature relevant to e-procurement, its future implications, implementation strategies,

3) Methodology: Described the methods used in this project,

4) Results: Analyzed the e-procurement technologies and applications,

5) Conclusions: Highlighted the conclusions, future implications and recommendations and summary of e-procurement in petroleum industry.

1.5 Milestones

The scope of the project report was limited but manageable. The following is a summary of the milestones for the project:

· Submitted idea paper on August 13, 2000

· Performed literature search on September 3, 2000

· Wrote literature review on October 29, 2000

· Submitted project proposal on September 24, 2000

· Wrote first draft on November 15, 2000

· Submitted project report November 27, 2000

· Due December 3, 2000

2 Review of the Literature

2.1 Comparison of traditional procurement vs. e-procurement

2.1.1 Traditional Procurement vs. e-procurement

Buying materials or services for a corporation can be a complex, multi-step process. The traditional procurement process starts with the user recognizing a need. He first checks to see if the item exists in inventory. If not, he would work with the purchasing department to determine the specifications. The purchaser has to find suppliers who make the product and determine whether they meet volume, delivery, quality, and price requirements and identify the best supplier for the item. Once a potential supplier has been chosen, the purchaser assembles the order, and gets the P.O. approved. He then sends the P.O. to the supplier. The supplier receives the order, sends the bill and ships the item. The receiver receives the item, and checks the goods with the P.O. The accounting department matches the invoice with the P.O. and pays the invoice. Baron illustrated the traditional procurement process with Figure 1 (Baron, Shaw, & Andrew D. Bailey, 2000). This process is complicated, inefficient, paper intensive and difficult to control. The complexity intensifies when errors were made during the processes, incomplete/over shipment, back order, substitution or consolidation of bills. The procurement activities: requisitioning, researching, qualification, shopping, quoting, P.O. writing, releasing, supplier performance tracking, certification, expediting, "fire fighting", are very time consuming and requires a lot of effort.

The interaction of the internal customers (users) with purchasing, accounting, receiving, suppliers, supplier's accounting and supplier's shipping departments can be very chaotic. Figure 2 illustrates the external view of procurement: Interaction between a buyer and several suppliers and several internal customers in a non-integrated environment (Baron et al., 2000). Many of the interactions involve a lot of paperwork that are needed to resolve problems. They add little value to the business. Buyers typically bid only two to four suppliers because they simply don't have time to deal with more (Porter, 2000a). They have to locate the right suppliers, compare them and contact them for bidding. They have to engage in some long drawn out negotiations with suppliers.

E-procurement looks at the activities in procurement. It eliminates, automates and/or transfers the activities to internal customers and/or suppliers. The requisition processes are simplified, automated and transferred to the internal customer by providing searchable, easy to use supplier catalogs. The approval process can be automated by workflow features in e-procurement systems or eliminated based on level and/or the nature of expenditures. The buying process can be simplified by allowing the internal customers access to competitive suppliers. Users can compare prices, access level of suppliers' inventory before placing the order. The product presentation is automated, simplified and enhanced by searchable customized supplier's e-catalogs. E-catalogs can drastically reduce the cost of coordination, data gathering, and analysis (Baron et al., 2000). Supplier sourcing is simplified by presenting to the internal customers only the approved suppliers' catalogs.

There are supplier clearinghouses that aggregate many suppliers' content, and customize it to fit customer's needs. They are connected to the internal systems to simplify, facilitate vendor product analysis, and make comparison or selection (Fortune.com, 2000a).

E-procurement simplified the complexity for dealing with the suppliers by centralizing the procurement functions and connecting all the parties through the Internet. Figure 3 highlighted the external view of procurement: Integrated interaction between buyer and several suppliers and several internal customers (Baron et al., 2000). The communications between all the parties are coordinated centrally using the e-procurement system connected by the external network (extranet), internal network (intranet) and the Internet.

Electronic procurement applies technology and re-engineers the procurement processes. E-procurement uses the Internet to facilitate communication and unify the stakeholders of the procurement process. Internal systems with their connections to the Internet can consolidate requirements and requests to communicate with the suppliers. Internal customers can view, search and initiate a purchase requisition. Buyers are focused on managing the procurement processes instead of doing the paper work. Receivers' jobs are simplified with workflow processes and automatic approval processes. Suppliers can then benefit from simplified processes.

2.1.2 Traditional vs. e-procurement Strategic sourcing:

In the past, companies tried to implement strategic sourcing with mixed results. Periodically, they sent teams of bright MBAs to the sites. They segment the purchasing budget by type of goods/services, identify the vendors for each segment, eliminate those that are not necessary, and re-negotiate lower prices by aggregating demand with "preferred suppliers" (Sprague, 2000). This approach provides more sales for the preferred suppliers at lower prices. The lower prices lead to cost saving for the company. This approach has several problems. The information of the analyses is not timely. The MBAs may not know the business and they are usually very expensive. The company has to guarantee more sales to the suppliers and to restrict the suppliers to the "preferred suppliers". The lower prices have to be negotiated.

With e-procurement, companies can analyze the buying pattern. The system can capture procurement information about every purchase in real time (Fortune.com, 2000a). Companies no longer have to setup specific initiatives for strategic sourcing.

Many companies use reverse auction to establish pricing and identify "preferred suppliers" to establish strategic partnership alliance to ensure delivery time, quality standards etc (Porter, 2000a). Reverse auction is web-based buyer auction (Web-based Procurement auction). It is one buyer (or a buying group) tendering his procurement needs via the Internet. This type of auction usually drives the prices down. The bid is evaluated with more than just price alone. Buyers also consider other criteria such as product quality, delivery time, and reliability. This requires multi-criteria auctioning systems that optimize the criteria (Heck & Vervest, 1998). While the buyers get reduced prices, the suppliers also reduce their selling costs. Some companies can spend up to 35% in sales and marketing. By participating in reverse auction, the buyers' needs are clearly identified. The suppliers are focused on giving the customer the best price, quality and service (Porter, 2000a).

2.2 Benefits of e-procurement:

Sprague estimated that companies can achieve savings of 10 - 25% per billion dollars purchased annually (Sprague, 2000). These savings are significant and have direct impact on the bottom line of the companies. Companies do not have to spend a lot of money to achieve significant savings. According to Fortune.com and AMR (2000), companies are achieving spending saving of 5 - 20% from simple process improvements like employee self-service purchasing (Fortune.com, 2000a). It reduces or eliminates maverick spending and reduces resources in requisition approval. IBM estimated that it saved $500 millions in 1999 by moving its procurement to the web (Manufacturing.net, 2000). In addition to cost reduction, e-procurement allows companies to collaborate with their suppliers and tap into their expertise.

Baron identified five tangible factors in the benefits of a web based procurement system: cycle time, transaction costs, error rate, inventory, and item prices. They estimated that transaction costs could be reduced by 25% and the cycle time by 33% (Baron et al., 2000). It is easy to understand the cost reduction because e-procurement streamlines the procurement process and reduces the complexity in the procurement process. By reducing the cycle time, companies can process the information as well as speed up the decision making process. With e-procurement, it would significantly reduce the time to process a P.O. from weeks to minutes. With e-catalogs and workflow systems, e-procurement can greatly reduce the transaction cost by automating the requisition processes. Sprague cited a study on a major supplier of automotive system, Dana Corp. The study found that the transaction costs were $48 - $ 104. Dana Corp. with e-procurement, the transaction costs will be lowered to $0.50 - $ 10 (Sprague, 2000). Internal customers (users) can select the items that they want to order. They can also save their regular items as a list for repetitive orders. With the system doing most of the paper work electronically, all the users have to do is to pick the right item and specify the quantity. This will completely eliminate transcription errors. By collecting the spend information, the companies can effectively negotiate a better volume discount with the suppliers. These changes in the procurement processes can generate great savings for the companies.

2.3 Development of e-procurement

The traditional procurement functions were handled as part of the accounting system. Whenever an internal customer (user) needed direct or indirect materials, he worked with the purchasing department to generate a PO. When he received the product, he informed Accounting department to pay the vendor.

2.3.1 Procurement systems

As companies grow, the needs and complexity of procurement increase. Software companies developed procurement systems to address the special needs to manage the procurement processes. Buying materials or services for a corporation can be a complex, multi-step process. The traditional procurement process starts with the user recognizing a need. He first checks to see if the item exists in inventory. If not, he would work with the purchasing department to determine the specifications. The purchaser has to find suppliers who make the product and determine whether they meet volume, delivery, quality, and price requirements and identify the best supplier for the item. Once a potential supplier has been chosen, the purchaser assembles the order, and gets the P.O. approved. He then sends the P.O. to the supplier. The supplier receives the order, sends the bill and ships the item. The receiver receives the item, and checks the goods with the P.O. The accounting department matches the invoice with the P.O. and pays the invoice. This process is complicated, inefficient, paper intensive and difficult to control. The complexity intensifies when errors were made during the processes: incomplete/over shipment, back order, substitution or consolidation of bills. The procurement activities: requisitioning, researching, qualification, shopping, quoting, P.O. writing, releasing, supplier performance tracking, certification, expediting, "fire fighting", are very time consuming and require a lot of effort.

2.3.2 Procurement module of an Enterprise Resource Planning (ERP) system

Larger companies realized that it is very important to integrate the whole enterprise together, all the business functions as well as all the business units. Many software vendors developed Enterprise Resource Planning (ERP) systems to address the enterprise needs of these companies. In procurement, the procurement system evolved to be a module within the ERP System. It is fully integrated with all other business functions of the companies. These ERP systems improved the effectiveness of companies. Many of the ERP systems have the capability to communicate with other companies via Electronic Data Interchange (EDI). Many of the procurement systems in the petroleum industry are part of the CMMS (Computerized Maintenance Management System) (Singer, 2000). These systems manage plant maintenance. Getting the right parts or supplies at the right time is critical for the continuous production of the refinery, gas plant or oil well.

2.3.3 Electronic Data Interchange (EDI)

Companies started to communicate with their major suppliers by Electronic Data Interchange (EDI). It is the electronic exchange of specially formatted standard business documents such as Purchase Orders, invoices, approval of credits, shipping notices, and confirmation sent between business partners (Turban, Lee, King, & Chung, 1999). EDI ran on expensive Value Added Networks. The EDI process is mainly restricted to large companies. Many petroleum companies have used EDI. Industry association, Petroleum Industry Data eXchange (PIDX) is the EDI Committee of the American Petroleum Institute (API). It is the primary trade association representing all phases of the oil and gas industry (PIDX, 2000).

2.3.4 Web-procurement and ERP systems

In the 1990s, the Internet changed everything. Many of the ERP system vendors are enabling their systems into the Internet. In general, web enabled e-procurement systems has five main components: Electronic catalog and content management, Requisitioning, Approval routing, Order Management and Decision Support (Fortune.com, 2000b). In e-catalog, the system incorporates the buyer and supplier managed catalogs as well as third-party market places. By using the system, buyers can aggregate, host and maintain approved vendor, products and pricing information. In requisitioning, users can browse and search the e-catalogs, copy previous requisition or request a spot buy. Users can also route the requisitions for approval and track the approval and the order. In approval routing, the system presents lists of information of authorized users and checks each line item against spending limits budgets, contract limits, and other flexible rules. This rule-based feature provides exception reporting. In order management, the system can send the approved POs to XML enabled supplier systems directly. In decision support, the system uses database analysis and decision-support software to provide flexible reporting to track usage and spending and to support supplier negotiations (Fortune.com, 2000b). Other ERP systems have similar features. Integration reduces cycle time and transaction costs significantly.

2.3.5 E-marketplaces/Exchanges

Many companies do not have the resources for ERP systems or the ability to build their own e-procurement system. To engage in e-procurement, participation in an e-marketplace is more cost effective. These e-marketplaces are Application Service Provider (ASP) for the procurement process. These markets have three basic functions: Matching buyers and sellers, Facilitating transactions and Providing the infrastructure (Bakos, 1998). The e-marketplaces provide matching of buyers and sellers by aggregating sellers’ catalog according to buyers’ needs. They facilitate transactions by providing customized price discovery at specific catalogs for the buyer, providing facilities for searching and price comparison, and allowing buyers access to sellers’ inventory database to check availability. They provide the infrastructure by hosting the application and inviting both sellers and buyers to participate. Successful marketplaces have great selection from multiple sellers. Buyers can search for same or similar products and compare them side by side. The sellers benefit by lowering the cost of reaching the right buyer and the administrative processes. In traditional procurement, these processes are so complicated that companies have to hire many people to manage them. The traditional processes are neither effective nor efficient.

Marketplaces that involve many buyers and suppliers doing business at the same time are called exchanges. Many of the existing e-procurement marketplaces are exchanges.

2.4 Barrier and Issues of e-procurements

The Internet revolution is still in its early stages. The growth of the Internet is very fast. In 1997, global e-commerce generated $750 million in sales, grew to $2.3 billion in 1998 and was estimated to exceed one trillion dollars by 2003. Although we see a lot of Business to Consumer electronic commerce (B2C), behind the scene, much of the growth is attributed to Business to Business electronic commerce (B2B). Within B2B, e-procurement is still in its infancy. Study showed few companies have been able to connect effectively with their trading community.

One prominent technology in B2B e-commerce is EDI. It was slow in penetrating into the business communities because it was too costly for small to medium size companies. With the introduction of XML, companies are using Internet technologies and applying them into EDI. XML is quickly becoming the standard technology for communication between companies. Other process standards like RosettaNet and UNSPEC are emerging.

Successful implementation of e-Procurement does not depend on the technologies alone. Technology is the catalyst that facilitates change in business processes which will save company money. In the implementation of e-procurement, it is very important to review the existing procurement process and come up with an appropriate procurement strategy.

Although many companies are implementing e-procurement, few are realizing the full benefits of e-procurement. Supplier Selection & Management Report (2000) cited:

· Most procurement requests still require explicit approval. Requisition processes still require numerous approvals and complex rules. These processes follow their paper-based procurement.

· Processes to link firms to suppliers are not effective. The ordering processes are not very automated. Suppliers are receiving transmissions from EDI links or get orders via e-mail or fax. Ordering information is still being reentered into the order processing systems.

· Little business process change with e-procurement. Firms still only pay after manual review of each transaction, using a three-way match between requisition, invoice, and receipt. Few firms have processes trusting suppliers to pay after shipment confirmation.

· Purchasing departments do not analyze information on supplier performance and buyer preferences. This information enables the purchasing department to efficiently select suppliers and negotiate favorable contracts. Buyer patterns are not analyzed to tune workflow and speed up the purchasing processes (Staff, 2000b).

Companies that implement e-procurement need to refine their strategies towards exploiting the full potential of e-procurement.

2.5 Technologies

There are many technologies being applied in e-procurement. Some fundamental technologies that are being applied in e-procurement are:

· EDI via the Internet,

· Software agents,

· Extra-net,

· VPN - Virtual Private Network,

· Data warehousing and Data mining.

2.5.1 EDI via the Internet:

While EDI ran on expensive Value Added Networks, EDI via the Internet uses Internet e-mail and EDI standards with encryption to do EDI within Virtual Private Network. Companies set up extranets among partners and alliances utilizing web based hosting services. With the industry standard set by PIDX, EDI via Internet is very economical and effective. CommerceNet, an industry association of Internet commerce, initiated the EDI via Internet initiative (CommerceNet, 1997). It uses and exchanges EDI documents over SMTP (Simple Mail Transport Protocol) using MIME (Multi-purpose Internet Mail Extensions). The security is protected with digital signature and encryption. This includes adding S/MIME (Secure/ Multi-purpose Internet Mail Extensions) encryption and integrity technology. It includes digital certificates, both self-issued and from VeriSign.

2.5.2 Software agents:

Software agents are software programs that automate specific procurement processes. They are personalized, continuously running, and semi-autonomous pieces of software. They are used to support the information-rich and process-rich environment of electronic commerce. Software agents act as mediators in selecting products, merchants and making negotiations (Gebauer, 1998). They are used in supporting and automating activities such as information filtering and retrieval, evaluations, complex coordination tasks, and time-based interactions. In selecting products, software agents are used in product brokering. They assist a buyer (consumer or corporate buyer) in determining what to buy. They help retrieve and evaluate product information and, as a result, reduce search costs and improve decision quality. Software agents are also used in merchant brokering. They help a buyer determine from whom to buy. They help evaluate and compare the offers from different merchants. The evaluation criteria can be price or other features. They improve decision quality and reduce search costs. Software agents are also used in negotiations in auctions based on price.

2.5.3 Extranet:

Companies are giving access to their networks to customers, suppliers, partners, and alliances. Security is managed for the protection from the public, as well as with one another. It serves as a bridge between the public Internet and private corporate intranets. E-procurement uses extranet to securely present suppliers' catalog to facilitate transactions between back end systems of customers, business partners and suppliers (Gebauer, 1998). Extranets are more user friendly than "conventional" electronic data interchange (EDI) systems because they are web enabled and allow for less regimented and more ad-hoc inquiries. Before a company can operate an extranet, it has to have a fully functioning Intranet. The Intranet is extended with extra security to ensure that only selected business partners and suppliers can access the information and only the information targeted to them. Because an extranet is the organization gateway to the outside world, it has to be up-to-date because the needs, the requirements and standards of the business partners and suppliers have to be considered.

2.5.4 VPN - Virtual Private Network

VPN utilizes special security features to enable secured transactions to be conducted in the Internet. It can be defined as a secure intranet on the Internet. It uses encryption techniques, firewalls and tunneling protocols, e.g. the Point-to-Point Tunneling Protocol (PPTP). Tunneling, also called encapsulation, encloses one type of data packet into TCP/IP. The data packets are encrypted before encapsulation takes place (Gebauer, 1998). By using VPN, companies use Internet instead of expensive private network.

2.5.5 Data warehousing and Data mining:

As companies implement e-procurement solutions, the system can collect a lot of procurement data for management decisions. Companies are using data warehousing technologies to collect, aggregate, analyze data from legacy systems, ERP systems and purchasing systems from many locations within the company. This information about what the company is buying, and from whom, is used to make better purchasing and procurement decisions.

2.6 E-procurement standards

Beneath all the technologies is the struggle to develop a set of standards. To achieve and realize the potential for e-procurement, industries have to develop a set of standards. Porter (2000) highlighted that standards will be the key to providing interoperability in e-marketplaces (Porter, 2000b). This allows systems to communicate with each other more effectively. It would be easier to automate processes. There are various industry standard-setting bodies to develop:

· technical standards for system to system information exchanges, e.g. Electronic Data Interchange (EDI) and eXtensible Markup Language (XML).

· process definitions to enable seamless integration of supply chains, e.g. RosenettaNet.

· schemes to identify companies, subsidiaries, divisions, and locations, e.g. Dun & Bradstreet's DUNS numbers.

· schemes for product coding and classification, e.g. United Nations Standard Products and Services Classification (UNSPSC).

2.6.1 Extensible markup language (XML)

XML is the key standard that is going to revolutionize procurement. It gives small companies the capabilities to implement e-procurement. HTML (hypertext mark up language) presents data and information on the web. XML provides two-way communications through Web sites. It permits e-procurement trading partners to exchange information, thus forming the foundations of e-business. In e-procurement, a purchase order can be coded with tags to indicate the supplier, the price, required delivery dates, etc. It can be sent as a message. With XML, the message comes with Document Type Definitions (DTDs). These DTDs describe how the information should be assembled. It gives a company an independent way of defining and sending messages. XML allows any person to create any tag and any type of customized mark up language. Currently, there are many groups devising specific XML message definitions for specific industries (Porter, 2000b). These definitions give industry specific meaning to transactions. Thus it can accurately define the transactions.

In the petroleum industry, Petroleum Industry Data eXchange (PIDX) standard sub-committee is investigating and piloting XML technology. The PIDX Standards Subcommittee links national and international forums for EDI/EC standards development and maintenance (PIDX, 2000). This subcommittee proposes standards for the petroleum industry in EDI as well as in electronic commerce. Companies and their systems will be able to communicate specific industry transactions efficiently.

2.6.2 RosenettaNet

RoseettaNet is an independent consortium dedicated to the development and deployment of standard electronic business interfaces. These common electronic business interfaces are needed to communicate in system-to-system business exchange. Internet enables two servers to exchange information during a server-to-server electronic business exchange using HTML/XML. RosettaNet focuses on building a master dictionary to define properties for products, partners, and business transactions. This master dictionary along with an established implementation framework are used to support the eBusiness dialog and Partner Interface Process (PIP) (RosettaNet, 2000). With this standard, systems can exchange information without human intervention. Industries and government are backing this standard. General Services Administration (GSA) is one user that is the managing board of RosettaNet. Industries such as Petroleum, automotive and furniture are showing interest in building on the standard (Dillon, 2000). The support of these groups will promote more companies to process their transactions via the Internet.

2.6.3 DUNS

In e-procurement, it is important to have a universal unique descriptor for both the buyer and the supplier on the Internet worldwide. The D&B's Data Universal Numbering System (DUNS) is the most widely used. It has become the standard for keeping track of the world's business companies. The unique nine-digit code identifies and links more than 57 million companies worldwide. It is an internationally recognized common company identifier in EDI and global electronic commerce transactions (Dun&Bradstreet, 2000). This universal descriptor facilitates electronic commerce in the identification of companies.

2.6.4 UNSPSC

UN/Standard Product and Services Code (UNSPSC) is an open standard. It is hierarchical. The classification scheme is constantly maintained (for new products and services). It can modify existing structures to adapt to changing market offers. It is responsive to industry. The code assignments are impartial. To implement e-procurement, buyers and suppliers need a standardized common coding of product and services. UNSPSC are industry-standardized names/codes of products and services. They allow purchasing management to effectively source and analyze expenditures. By inserting these UNSPSC codes in electronic documents in the supply chain, such as product catalogs, Web sites, purchase orders, invoices, inventory/sales advises, and other computer applications, systems can process transaction data automatically. They can automate many management, analysis and decision functions and provide timely information. The naming scheme is hierarchical. It lets a given company to focus on a level of specificity that best suit its purposes and situation (UNSPSC, 2000). The UNSPSC code provides clear and concise description of products and services. The petroleum industry is using UNSPSC code for many industry segments. The segments that are specific for the petroleum industry are segment 15 (Fuels, Fuel Additives, Lubricants and Anti-corrosives Materials) and segment 71 (Mining, Oil and Gas Drilling Services) (ECCMA, 2000).

2.7 Petroleum specific exchanges, marketplaces and vortals

There are three general types of petroleum company exchanges: catalog exchange, auction site, and community site, or e-hub. These marketplaces reduce costs for the participants. Internet technologies can help reduce procurement costs and streamline the process by directly connecting buyers and sellers. On the buy side, companies can post their bid requirements and Request For Proposal (RFP) on exchange so that vendors can submit bids and companies can work together with the vendor to keep them informed on the status of the project (Sanborn, 2000a). Vendors would provide information and bid on the requirements. Keeping in mind that prices is not the only consideration. Quality and on time delivery would also be considered when selecting the vendor.

Many companies are moving towards e-procurement. For example, BP Amoco wants to conduct 90 percent of its procurement activity online by the end of 2000 and set criteria for supplies to have the capability of doing business via the Internet. Many of the larger oil and gas companies, such as Shell, BP Amoco and Chevron are already getting into online exchanges. (Sanborn, 2000a). These leading companies would drive the other oil and gas companies and their suppliers to conduct business online.

The most basic electronic marketplace is a site with a company catalog, a shopping cart, and the ability to accept purchase order and/or credit transactions. An exchange is much bigger with many suppliers interacting with many buyers. These exchanges facilitate supply chain and distribution efficiency improvements. They also provide greater variety and access to products and services as well as competitive pricing.

Petroleum industry specific marketplaces or vortals are available to both up streams and down streams.

Some vortals, e.g. FuelQuest.com (2000) focus in stream lining the ordering process (FuelQuest.com, 2000). The order process, from end to end, from procurement to invoicing, typically takes some 20 - 30 steps. By applying Internet technologies, the process can be reduced to 3 steps. It can generate great cost savings with minimal manual intervention. The benefits are 1) reduced overhead per order, 2) better procurement decisions, and 3) error reduction (Reid, 2000). By eliminating the extra non-value added steps, the ordering process is more efficient with less error. It also saves time and cost.

There are many petroleum industry focused exchanges. These exchanges are focusing on different aspects of the petroleum industry. Some provide process improvement and significant saving in order processing. They help buyers to get the best in pricing and availability at the terminal. Vortals, e.g. DownstreamEnergy.com (2000), are looking at simplifying the distribution channel from the refinery to the wholesaler (DownstreamEnergy.com, 2000). They enhance buying decisions and are adding on-trading and inventory management functions. Others are more integrated and provide end-to-end Internet supply chain solution to the convenience store and petroleum industries. They aggregate fuel procurement with real-time market pricing for the buyer (Reid, 2000). Participants can get a much better price. Real time market pricing helps participants in making their procurement decisions.

The upstream exchanges focus on bulk crude trading and oil property trading. Others focused on maintenance, repair and operations. For example, HoustonStreet.com (2000) is focusing on trading of energy resources (HoustonStreet.com, 2000). IndigoPool.com (2000) is into oil property trading (IndigoPool.com, 2000). Petrocosm.com (2000) is focusing on petroleum industry maintenance, repair and operational support procurements (PetroCosm.com, 2000). There are exchanges that help the smaller oil and gas companies to leverage volume savings by forming a buying group. They provide web pages and product catalog capabilities for the members and auctions to get rid of dead inventory (Reid, 2000). Participants can improve their cash flow and can focus on their core operations.

The major oil and gas companies have the ability to establish proprietary digital supply chain and procurement systems to support their operations. These systems can link to thousands of suppliers to provide a seamless and streamlined process. This reduces costs for the supplier and distributor. Some as ASP, provide additional services, e.g. labor scheduling, inventory management, time and attendance, and pricing. There are marketplaces that are hosted by major petroleum companies. One major concern is data security. It is an ethical issue when hosting company is also in competition with their customers (Reid, 2000). Alliances have to be formed while companies are competing with each other in the market.

The petroleum industry is very capital and equipment intensive. Buying and selling petroleum and retailing equipment on the Internet in a market place is a natural step. Marketplaces like, EZPetro.com (2000) and PetroDirect.com (2000), are equipment specific market places that adopt the business model of Amazon.com and E-bay (EZPetro.com, 2000), (PetroDirect.com, 2000). Many of them are catalog and auction sites (Reid, 2000). These sites consolidate supplier catalogs for the customers. They also hold supplier auctions or buyer auctions for their customers.

2.8 Current situation

Fitzgerald (2000) cited a survey of purchasing professionals. The survey showed that major corporations are only in the early stages of implementing their e-procurement strategies. They believe that e-procurement will enable them to integrate their entire supply chains and make major contributions to company profitability and competitiveness. Most of the activities are in buying of indirect materials, mainly maintenance, repair and operating (MRO) supplies and office products. They plan to implement e-procurement systems with existing suppliers. Those suppliers do not invest in e-commerce technology are highly likely to be replaced by suppliers that can and will invest in these tools (Fitzgerald, 2000). E-procurement will enable companies to minimize inventory and its costs, speed up cycle times and enable products to be made that better suit end users' needs. Besides reducing transaction costs, a significant long-term benefit of a solid e-procurement strategy will be freeing purchasing resources from transaction processing and directing them toward strategic sourcing activities.

2.9 Fighting for survival

While companies see the potential of e-procurement and set up exchanges, many of them are fighting for survival (Wilson & Mullen, 2000). According to the GartnerGroup, there are way too many exchanges and a majority will fail. There will be a consolidation within the industry (Morneau & Darrow, 2000). Many exchanges will fail because participants do not want to open up their business practices to competitors. To succeed, exchanges have to enable companies to work efficiently with suppliers, customers, and partners.

Companies looking to join or transact business over an exchange have to determine which ones are most likely to survive and thrive. Most exchanges require participants to enable e-catalogs and tie in their back-end applications to unlock the potential for increasing sales and improving transaction efficiency. This requires great commitment and has high switching costs. Switching from one exchange to another would cost you a fair amount of resources. You may have to re-setup e-catalogs and business rules as well as the employee to the new exchange.

2.10 Business Process

2.10.1 Content management:

Procurement needs of the petroleum industry is very specific. There are many marketplaces and exchanges that cater specifically to the Petroleum Industry. For them, content management is very important. E-catalog is the electronic presentations of information about the product and/or services of an organization. To the petroleum industry specific sites, e-catalog is vital in e-procurement. E-catalog in its simplest form is the supplier's web page. This type of e-catalog is static, passive and dumb. These e-catalogs have to be updated regularly. They do not respond to users' needs and are not able to learn from experience. Good content management strives towards intelligent catalogs. These catalogs are searchable, system understandable and processable. They are dynamic, and present according to users' needs. Marketplaces and exchanges with good content management aggregate catalogs from many suppliers and present them to the customers based on their specific procurement policies, needs and requirement (Baron et al., 2000). By providing customized content, users can save time and effort in the procurement processes. They add value to the procurement processes.

2.10.2 Auctions

Many of the exchanges in the petroleum industry engage in auctions. There are basically three types of auction between buyers and suppliers: 1) Web-based supplier auction (Web-based sales auction or auction) is one supplier offering to as many buyers as allowed into the auction. These auctions tend to drive the prices up. 2) Web-based buyer auction (Web-based Procurement auction or reverse auction) is one buyer (or a buying group) tendering his procurement needs via Internet. This type of auction usually drives the prices down. The bid is evaluated with more than just price alone. Buyers also consider other criteria such as product quality, delivery time, and reliability. This requires multi-criteria auctioning systems that optimize the criteria. 3) Web-based Many-to-Many Auction (Exchange or Market place) is many suppliers offering to many potential buyers (Heck & Vervest, 1998). These auctions provide dynamic matching of buyers and sellers. While supplier auction works for the supplier, it also facilitates location of the appropriate suppliers for quality products. The reverse auction favors the buyer but vendors also benefit by locating the buyers. They can focus on giving the buyers the best deal with a good balance of price, quality and just in time delivery.

2.11 Different forms of exchange.

Ownership and funding are two main criteria in choosing an exchange.

2.11.1.1 Company operated exchanges:

Exchanges, such as Wal-Mart's RetailLink, are owned and operated by a single, dominant company. In the petroleum industry, many of the petroleum marketplace is owned and operated by the industry giants, Petrolcosm.com's major sponsor are Chevron and Texaco (PetroCosm.com, 2000). IndigoPool.com is launched by oil and gas industry supplier Schlaumberg (IndigoPool.com, 2000). According to experts a company-dominated exchange may seem less democratic, but such e-marketplaces are easier to build and operate because there's a clear leader in technical and business development. Proprietary exchanges also have the financial backing of the dominant company, which enables them to move ahead quickly without worrying so much about short-term profits (Wilson & Mullen, 2000). Companies join these exchanges to do business with or take advantage of the dominant company. Very much like the anchor tenant of a shopping mall, these companies attract the affiliating buyers and suppliers in procurement. The sponsor company has vested interest to support the marketplace. In the petroleum industry, several industry giants have made public announcements in the on-line exchanges. "BP Amoco, for example has stated that it wants to conduct 90 percent of its procurement activity online by the end of 2000 and will be adding a fourth criteria for suppliers: the capability of conducting commerce via the Internet (Sanborn, 2000b)"

2.11.1.2 Consortium operated exchanges:

Some exchanges, to achieve dominance, are operated by high profile companies of an industry. In the auto industry, Covisint, was developed by groups of companies in the same industry (Wilson & Mullen, 2000). Member companies will focus on procurement in the auto industry. Consortium-operated exchanges are difficult to operate. Each member of the consortium has its own goals and objectives. It is difficult and time consuming to build consensus. The Companies must agree on the technology and data formats they will use, and then integrate their respective e-business applications with another to work within the exchange. Covisint had difficulty getting agreement among its founders, General Motors, Ford, and DaimlerChrysler as well as its two key software vendors, Oracle Corp. and Commerce One Inc. Each uses different technology, data format and systems. Consortium based exchanges with less number of partners are progressing faster. PetroCore.com is setup by PricewaterhouseCoopers, with support from BP Amoco and Cheveon. UpstreamInfo.com is a portal headed by Chevron and EDS and other partners. Shell Oil, BP Amoco, Tosco and 13 other companies have joined forces to create a consortium based exchange (Sanborn, 2000a). Although the initiative was announced, there is not much happening to-date.

2.11.1.3 Independent trading exchanges

Independent trading exchanges, such as WorldOil.com, have no affiliation with the buyers or suppliers that participate (Wilson & Mullen, 2000). They are the most likely to develop services that fit an entire industry's needs, with no particular bias. But these exchanges are subject to funding and profitability pressures. They rely on transaction fees to generate cash flow, and some may price themselves out of the market. The exchanges that are able to line up enough members, buyers and suppliers and engage them to actively participate will be able to survive. Being able to enter the exchange market early and able to secure enough subscribers and investors will give them a head start.

2.12 Recommendations

2.12.1 Things to consider when joining an exchange

One factor affecting exchange is liquidity, i.e. the number of buyers and sellers that participate (Wilson & Mullen, 2000). The more buyers and sellers the better. It should also be balanced. Suppliers would prefer to participate in exchanges that have many buyers in their industry. At the same time, they do not want to engage in price competition. They should focus on providing value-added services to differentiate themselves from other suppliers. At times, they would be participating in "Buyers auction" but they would not want to be part of the sites that are dominated by buyers whose objectives are just to get the lowest prices. If an exchange provides added value to the buyer, the chance to prosper in the industry will be much better. These exchanges focus on automating the industry's supply chain. They enable technologies to provide online payment, negotiation, credit checking, logistics, and order management. Exchanges should not be just focus on catalog content. Exchanges that simply amalgamate suppliers' electronic catalogs without added value would not be able to compete.

Currently, most exchanges are not integrated with the back-end applications, such as ERP and corporate systems. Linking to the back-end systems would allow buyers and sellers to process orders or pay bills with minimal intervention. If companies could directly link their corporate systems to the exchanges, they could process transactions in real time. This will greatly add value to the companies in the supply chain.

In the petroleum industry, if you want to join an exchange, you should look for an exchange that:

· is specific to the petroleum industry and your line of business,

· dominates the petroleum industry's exchanges,

· provides added value in streamlining your business process,

· is own and operated by a third party and not the industry giants like Shell, BP, or Chevron. Sometimes, you may not have any choice if you want to do business with them,

· has many petroleum industry specific suppliers participating in the exchange.

2.12.2 E-procurement solutions selection

In the near future, there would be a shakeup in the market places and exchanges. Many of the marketplaces/exchanges are fighting for survival. Successful exchanges are the ones that are filling a need, well funded and managed by people with sound petroleum industry or convenience retailing expertise. There are many e-procurement start-ups: ASP, procurement systems, exchanges, market places, vortals. Each e-procurement solution has its own compelling case to serve your company. Joining a marketplace or exchange, and implementing an e-procurement system will significant impact your company. You have to evaluate each e-procurement solution on its ability to benefit your company by focusing on due diligence and return on investment. The e-procurement solution provider is not just a system vendor. It is your business partner and has great impact in the day-to-day operations.

Gunn (2000) introduced a series of questions to help you select your next e-commerce or e-procurement solution:

· Due diligence: Generate a list of questions to answer as you research on the e-procurement solution provider (Gunn, 2000). These questions are focused on how the e-procurement solution can help you run your business, improve your business processes and return on investment. Compare the e-procurement solution providers on the benefits it generate, the people that provide the solutions, the financial stability, and the technology used.

· Benefits: Research on the business model and applications and how your business can benefit from them. Analyze how the solution can help your company grow and/or reduce costs. There are many petroleum industry procurement sites that only aggregate your suppliers' catalogs or only the core process of procurement. You want your solutions to be able to be comprehensive and integrate well with your back-office systems.

· People: Who is on their management team and board of advisers? What are their petroleum industry, technologies and Internet experience? E-procurement solutions are more than just software and systems. In addition to strong technical capabilities, your solution provider has to understand your business. There are many "dot.com" companies that has great concept and technical capabilities. Those who survive are the ones that have sound financial management skills and know your customer, your business and your industry.

· Funding: Is the solution provider financially sound? Can it penetrate and dominate its market? What companies have a vested interest in the company? Do industry giants like Shell, BP, and Chevron back them? Do these firms have any track record or success in funding e-commerce ventures? Since e-commerce is still a very new phenomenon, there may not be much track record of success, but some track record is better than no track record. How much funding has the company received? How much more is there to come? Is there any plan for additional funding? What is the "burn" rate of funds in the development of the company? (How fast is the fund going to be used up in the development of the company?) There are many "dot.com" companies that used up most of the initial funding before they can establish their business. You should analyze the solution provider on its relationship with you, its operating costs, available funding for development, and the revenue to ensure that the solution provider is financially sound to be your business partner (in e-procurement).

· Technology: Is the technology stable and able to handle your company's transactions? It is very important to balance the use of leading edge technology with stable mature technology. You want to gain a competitive edge by using leading edge technology that is stable. In B2B e-commerce, security is of prime importance. Are the security features acceptable? Is the software application and operating system platform industry standard in the petroleum industry or is it a newly designed application? Is the technology proven to be able to serve your business needs? Can they handle your level of transactions? Is the response time acceptable? What are the new enhancements and how will they help your business? How is the company's technical support?

By researching and comparing your solution providers, you can assess the:

· return on investment of the implementation. You would be able to make sound financial based decision in choosing your provider.

· impacts on your business process, your people, your current and new customers. You would be able to analyze the intangible benefits on your people, process and customers.

You want to make sure the company that you choose as your e-procurement implementation is a good business partner and the e-procurement implementation is a sound business investment (Gunn, 2000).

2.12.3 Implementation guidelines

To implement an e-procurement system, Fitzgerald (2000) suggested companies should:

· standardize the business processes and systems. Make sure your company understands the existing business processes, document and standardize them. You can also just implement the e-procurement without creating standardized systems. You may run into problems in getting users to buy-in while you implement your e-procurement system. Standardized systems use universal coding systems, XML, with standardized product descriptions and processes. Standards will allow easy connection with your business partners and alliances. Petroleum industry has a head start in implementing standardized systems. It has engaged in EDI and many companies have participated in industry standard task forces in royalty, marketing and regulations.

· focus on content management processes and the ability to publish content that enables e-procurement. Make sure the contents are tailor made for the user in the format so systems can automate the content. Content management would be focused on accessing petroleum industry specific suppliers' catalogs as well as making sure that they are customized for streamline transaction processing. In petroleum industry, many of the users are in remote work sites, technical support would be difficult.

· clean up their internal databases before implementing e-procurement. Before you implement e-procurement, make sure your data is updated and correct. It is much more difficult to correct errors after implementation than to ensure the data is correct to begin with. Make sure the system is setup right the first time.

· understand and define the existing business rules, and requirement workflow, especially the petroleum industry specific ones. Understand your business process. Document them. Based on these business rules and workflow, you can configure the e-procurement systems according to needs. These business rules and workflow are needed to ensure the e-procurement solution can streamline the business processes. It is much easier to work with well-defined processes during implementation. These processes are critical in automating the requisition-to-delivery cycle.

· simplify transactions and make suppliers and their information readily available to the buyers and the users. Empower the users. In petroleum industry, many of the users are at the well site. Having the system available at the well site allows them to make timely decisions which will greatly improve your business process. As you document your business process, business rules, and workflow, you want to simply the processes and automate them as much as possible. On-line access of supplier's current inventories is one of the many features of e-procurement.

· consolidate procurement of small use items to single source and suppliers. Instead of dealing with many small suppliers once in a while, you deal with bigger suppliers often. This will reduce procurement errors and help to simplify electronic transactions, including payments. This is especially important for the petroleum industry because the users may be in remote locations and shipment may have to be scheduled and planned.

· automate the payment process by linking electronic invoices to purchase orders. Use electronic funds transfer to settle invoices. These processes can be integrated into an web enabled requisition system.

· analyze buying trends and spend data to have a better understanding and control of the money spent. After implementing your e-procurement system, you want to use the data collected to improve your procurement processes.

· join a marketplace/exchange that is supplier neutral. With a third party marketplace/exchange, you would not be influenced and dominated by the supplier/buyer that sponsors the marketplace. However, sometimes you may have to join an exchange to do business with the industry giants like Amoco, Chevron, and Shell.

2.12.4 Implementation strategies

As petroleum companies begin to engage in e-procurement implementation, they should look at the best practices available and use them as guidelines for their implementations. There are three steps that will help your e-procurement implementation successful:

1. Make requisition rules-based

2. Connect to multiple suppliers

3. Replace manual authorization with "smart" payment processes (Staff, 2000b).

2.12.4.1 Make requisitions rules-based

In traditional purchasing, employees scan paper catalogs and circulate multi-part requisitions to get required approvals. This is especially time-consuming in the petroleum industry as many of the supplies and parts are industry specific. E-procurement systems configure supplier catalogs to your company policies, departments and employees.

You should:

· Use reusable "shopping carts" for repeated frequently purchased items. Regular requisitions should be based on standard contracts, flow without approvals.

· Use workflow applications to speed standard requisitions with automating approval criteria.

· Configure the systems to produce exception reports and warning when decisions are required. Highlight performance indicators such as warning when requisitions are approaching budget limits. These warnings should be in real time and fired off as alerts.

· Collect procurement information on suppliers to ask what-if questions about supplier or buyer trends (Staff, 2000b). Using this information, management can negotiate a better supplier contract, reduce inventories, and come up with good sourcing strategies.

Making requisition rule based is especially important for petroleum industry because the industry is capital intensive, purchasing is especially time sensitive and the people can be geographically disperse. Not able to have a specific part for an equipment at the well site at the right time can stop production and cost the company a lot of money. Making requisition rule base will prevent this from happening.

2.12.4.2 Connect to multiple suppliers

A company should connect to supplier-focused clearinghouses or marketplaces. All the buyers have to do is to link once and reach many suppliers. Many of these market places offer stream-lined catalog, back office automation services (Staff, 2000b). This will remove the effort for buyers in locating the appropriate suppliers for their needs. These clearing houses also provide suppliers access to many qualified buyers. Petroleum specific suppliers clearing houses are emerging.

2.12.4.3 Replace manual authorization with "smart" payment processes:

Tradition procurement focused the three-way matching of requisitions to receipts and invoices. Instead, companies should negotiate with preferred suppliers (their clearinghouse/marketplace) and authorize payment based on electronic certification programs. The program sets goals for responsiveness, order accuracy and delivery. It continuously analyzes purchasing information in real-time using data mining tools to drive workflow and to measure results. It authorizes payments to certified suppliers upon receipt of a shipment advice. If employees do not receive what they ordered, the system sends out exceptions that count against supplier certification goals, and submits a request for an offsetting credit from the supplier. Certified suppliers that meet performance goals are paid immediately through electronic funds transfer. These certified suppliers should offer price discount for immediate payment. So that the buyers would require less accounting staff and lower costs (Staff, 2000b). It creates a win-win situation for both parties. Many petroleum companies participated in EDI and Electronic Fund Transfer. They are used to participating in "smart" payment process.

2.13 Future implications

E-procurement is in its infancy. Purchasing heads at large companies see huge potential in what the Internet can bring to purchasing. Many see the Internet as being the tool that will finally enable them to integrate their entire supply chains, end to end. They believe the Net will make usage and forecast data much more accurate and available to all links in the chain. And while they say that basic approaches to supplier relations won't change, the Net presents them with a powerful supply management tool that will continue evolving for many years (Fitzgerald, 2000).

In a purchasing survey, Fitzgeral (2000), projected that there would be:

· a significant shift towards demand-pull requisitioning systems in procurement. They will reduce the lags and inventory build-ups. Shipment will be just-in-time for production and use. It is especially important, as the petroleum industry is very capital intensive and many of the well sites are in remote locations. Having the right part delivered at the right time when needed is very important to them.

· more integrated ordering/planning. In petroleum industry, sales and maintenance will drive the procurement. Buying will be integrated to supplier's production systems. The production systems will in turn trigger procurement for raw materials and supplies all the way down the supply chain.

· more timely communication. Companies are working with the suppliers. They may even form alliances, partnerships and even joint ventures. With close buyer-supplier relationship, companies may share need to know production planning information to improve each others' business processes so that they can plan and purchase raw materials at the best price and have on time delivery. In the petroleum industry, many of the projects are joint venture and alliances between suppliers and partners. For example, a pipeline expansion involves the business partners, the engineering companies, the field services companies as well as the suppliers of parts and equipment.

· automation of the entire procurement process. As companies start to link their systems together, there would be less and less data input. Purchasing department will be able to handle less paper processing and able to focus on strategic sourcing.

· implementation of true strategic sourcing. With better supplier relationship, companies will be able to look beyond the price and terms. Suppliers will be able to focus on providing on-time delivery of the best quality products/services.

· participation in auctions and buying consortiums to supplement or extend strategic sourcing. This will benefit both the buyer and the supplier. The buyer can get the best price. The supplier would not need to deal with many buyers with many orders.

As the above activities develop, companies enabled by many e-procurement software vendors and marketplaces will gradually evolve towards e-synchronized supply chain.

2.13.1 Evolution to e-synchronized supply chain

Copacino (2000) predicted that an electronically linked, integrated supply chain is emerging. "The e-synchronized supply chain is a concept that links suppliers, manufacturers, distributors, customers, and carriers in an Internet-enabled electronic network that allows for coordinated planning, real-time exchange of information, bidding and negotiation, transaction execution, and performance reporting (Copacino, 2000)." The e-synchronized supply chain is not here yet. Buyer-Supplier relationship is still not developed to the extent that they link their systems together. But the capabilities and components are being developed and are readily available. The Business-to-business (B-to-B) petroleum industry exchanges are springing up in the past year. These exchanges will be fighting for members, and sponsors. There will be consolidations, mergers and acquisitions. Those who survive will be large enough, technologically capable to engage in the e-synchronized supply chain. These exchanges are vertical exchanges. The new breed of web enable software and systems have capabilities from e-procurement, to supply chain planning, processing and collaboration with partners and alliances. Companies should focus on their core competencies. They should do what they do best and outsource non-core capabilities by forming outsourcing partnerships and alliances. These partnerships and alliances will work together through the e-synchronized supply chain.

2.13.2 Development of virtual company

While e-synchronized supply chain looks at vertically integrating buyers and suppliers together in the procurement processes. Companies also look inwards and evolve towards the virtual company. The concept of Virtual Company looks at the product/service delivery model and corporate organizational structure from different perspectives. It extents beyond just the procurement processes or the supply chain. It extents into how the company will operate. The ASP model for procurement can be extended into the back office. Companies may want to outsource all their systems and non-core services. The companies gradually turn into virtual corporations, like Refinco LLC. Refinco is a petroleum marketer with 23 stores and 3 blending plants. It completely eliminated its physical head office, most of the middle management, and support staff. It uses ASP services to cover the accounting and back-office functions. This allows management staff to focus on the core business process in operating the company. Information is online real time and available on the Internet for timely reporting. Management and staff all have home offices. It frees up time for management and staff to focus on running and managing the company (Reid, 2000). While companies like Refinco are few, one has to acknowledge that virtual companies can be very effective. Internet and improved connectivity play a great part in making virtual corporations a reality.

2.13.3 Future role of Procurement professionals

With improved connectivity, automation and e-synchronized supply chain, what would the future role of procurement professionals be? What would they be doing?

As a result of e-procurement, procurement professionals will have different job titles, different statuses, with different roles and responsibilities (Johnson, 2000). The traditional role of procurement professional to maximize opportunities for increased value in procurement (with respect to both direct and indirect costs) and to minimize any risk exposure from the acquisition of goods and services would be the same. However, e-procurement will have a great impact on how they fulfill their role. Purchaser would not be handling transactions. Procurement professionals will be focusing on increasing value to the business operation, e.g. contract negotiations, supplier sourcing, and buying trend and spend analyses. They would be developing e-procurement strategies and solutions for the companies. The Corporate executives would be counting on the procurement professionals to enable process improvements in procurements. They will be heading or participating in consortium, co-operatives or buying groups. They will be providing data and influencing the electronic intermediaries and infomediaries which bring buyers and suppliers together in exchanges. The procurement professionals are key players in the companies' overall e-Commerce strategy.

3 Methodology

This project is a literature research based descriptive study. The result of this project is a summary on the status, guidelines, implementation strategies and future implications of e-procurement in the petroleum industry. The research method used in this project is mainly searching for literature relating to the subject. These literatures include web sites, trade journals, articles, and on-line resources. Full text articles were located from the NSU electronic library and downloaded for reference.

The main search databases used in the NSU electronic library were ACM digital library, FirstSearch 's Business & Management Practices database and WilsonWeb OmniFile Full Text Mega database (Staff, 2000a). ACM Digital Library is a database with citations and full-text of Association for Computing Machinery (ACM) articles from journals, magazines, and conference proceedings. FirstSearch 's Business & Management Practices is a database with resources on the practical aspects and approaches of business management. It covers more than 300 core management journals and trade publications as well as management-related articles from business sources.Wilson OmniFile: Full Text Mega is a multi-disciplinary database with numerous full text articles on business and applied sciences.

The main search engine used were AltaVisa.com and C4.com (AltaVista.com, 2000; C4.com, 2000). Online articles were located from Internet searches and were printed for reference. The references were stored in the e-procurement database and organized by EndNote bibliographic program (ISIResearchsoft, 2000).

4 Results

The writer reviewed the literature related to the technologies used in electronic procurement, the business models, processes and practices used in petroleum industry. This report identifies the future emerging trends in e-procurement, and highlights several criteria for e-procurement solutions selection, guidelines and implementation strategies.

4.1 Summary

The Internet has changed everything. It initiated electronic commerce. In the next few years, Business-to-Business electronic commerce is expected to growth exponentially. E-procurement is one of the key components of B2B e-commerce.

In a petroleum company, purchased goods and services account for a significant portion of a company's expenditures. The traditional procurement process is complicated, inefficient, paper intensive and difficult to control. The complexity intensifies when errors were made during the processes, incomplete/over shipment, back order, substitution or consolidation of bills. E-procurement eliminates, automates and/or transfers the procurement activities to internal customers and/or suppliers by providing searchable, easy to use supplier catalogs, by automating approval, by allowing the internal customers access to competitive suppliers.

Companies implement strategic sourcing by analyzing and consolidating purchasing using aggregating demand to negotiate lower prices. With e-procurement, the systems provide timely information. Companies can establish strategic partnership alliance to ensure delivery time, quality standards etc.and use web-based buyer auction to achieve lower pricing.

Companies can expect to save 10 - 25% per billion dollars purchased annually by implementing e-procurement. In addition to cost reduction, e-procurement allows companies to collaborate with their suppliers. It reduces cycle time, transaction costs, error rate, inventory, and the item prices.

Traditionally the procurement functions were handled as part of the accounting system. As companies grow, the needs and complexity of procurement increase. Software companies developed procurement systems to address the special needs to manage the procurement processes. Larger companies implemented ERP systems to integrate the whole enterprise together, all the business functions as well as all the business units. Procurement is one of the functions. Many of the ERP systems have the capability to communicate with other companies via Electronic Data Interchange (EDI). Many of the procurement systems in the petroleum industry are part of the CMMS (Computerized Maintenance Management System). These systems manage plant maintenance. Getting the right part or supplies at the right time is critical for the continuous production of the refinery, gas pant or oil well.

The procurement systems and the procurement module of the ERP systems gradually evolved into web enabled e-procurement systems. To many smaller companies, engage in e-procurement, participation in an e-marketplace is more cost effective. These e-marketplaces are Application Service Provider (ASP) for the procurement process. Many of the marketplaces transformed into exchanges.

There are many technologies being applied in e-procurement. Some fundamental technologies that are being applied in e-procurement are: EDI via the Internet, Software agents, Extra-net, VPN - Virtual Private Network, Data warehousing and Data mining.

To support these technologies, e-procurement utilizes many standards to provide interoperability in e-marketplaces. They allow systems to communicate with each other more effectively. It would be easier to automate processes. These standards includes EDI and XML, RosenettaNet, Dun & Bradstreet's DUNS numbers and UNSPSC.

There are three general types of petroleum company exchanges: catalog exchange, auction site, and community site, or e-hub. Many petroleum companies are moving towards e-procurement. There are numerous Petroleum industry specific marketplaces or vortals for both up streams and down streams. Currently most of the petroleum companies are in the early stages of implementing their e-procurement strategies. But as companies see the potential of e-procurement and set up exchanges. There are just too many exchanges. Many exchanges will fail. These include many petroleum industry focused exchanges. Procurement needs of the petroleum industry is very specific and marketplace e-procurement content management is very important. Customized, searchable, system understandable and processable contents are needed. Many of the exchanges in the petroleum industry engage in auctions. Companies can participate in both web-based supplier auctions and Web-based buyer auctions.

Marketplaces and exchanges in the Petroleum industry can be classified into

company operated exchanges, consortium operated exchanges and independent trading exchanges. Petrolcosm.com's is an example of company operated exchange owned by Chevron and Texaco. Shell and 13 other companies are setting up a consortium operated exchange. Independent trading exchanges, such as WorldOil.com, have no affiliation with the buyers or suppliers that participate.

If you want to join an exchange, in the petroleum industry, you should look for a leading exchange in the industry. It should provide added value in streamlining your business process, and is owned and operated by a third party.

In the near future, there would be a shakeup in the market places and exchange. You have to evaluate each e-procurement solution on its ability to benefit your company by focusing on due diligence and return on investment. The e-procurement solution provider is not just a system vendor. It is your business partner and has great impact in the day-to-day operations.

After you have selected your e-procurement solution. You have to make sure your implementation is successful. Many e-procurement implementations follow the existing procurement processes without process improvements. Successful e-procurement implementations take advantage of the design of the Internet, manage by exception and continuously analyze and optimize the procurement processes. As petroleum companies begin to engage in e-procurement implementation, they should look at the best practices: Make requisition rules-based, Connect to multiple suppliers, Replace manual authorization with "smart" payment processes.

E-procurement will evolve into e-synchronized supply chain linking suppliers, manufacturers, distributors, customers, and carriers in a network that allows for coordinated planning, real-time exchange of information, bidding and negotiation, transaction execution, and performance reporting. While e-synchronized supply chain looks at vertically integrating buyers and suppliers together in the procurement processes. Companies also look inwards and evolve towards the virtual company. It extents beyond the procurement processes or the supply chain. It applies the ASP model into the back office by outsourcing all their systems and non-core services.

E-procurement also changes the role of the procurement professionals. The purchaser would not be handling transactions. They will be focusing on supply chain management and on value adding activities such as contract negotiations, supplier sourcing, and buying trend and spend analyses.

5 Conclusions

Opportunities are many for a petroleum company to implement e-procurement. By carefully choosing your e-procurement solutions and by implementing "hand-free" procurement, a company can achieve great savings and benefits. Technology is the enabler of e-procurement. The key success factor for e-procurement implementation is the change in business processes. The writer recommends companies to gradually work towards improving the company's business practices in the new paradigm. E-procurement is only the beginning. E-synchronized supply chain and virtual office are soon to become a reality and to be incorporated in our business practices.

6 Figures:

Figure 1: Traditional procurement steps:

Figure 2: External view of traditional procurement processes with several internal customers, a buyer and several external suppliers

Figure 3: External view of e-procurement processes with several internal customers, a buyer and several external suppliers

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