THE ROLE OF SIMULATION IN E-BUSINESS TRANSFORMATION

VLOGA SIMULACIJE PRI UVAJANJU ELEKTRONSKEGA POSLOVANJA

MOJCA INDIHAR-STEMBERGER, JURIJ JAKLIC, ANDREJ KOVACIC

University of Ljubljana, Faculty of Economics

Kardeljeva ploscad 17, 1000 Ljubljana, Slovenia

E-mail: mojca.stemberger@uni-lj.si, jurij.jaklic@uni-lj.si, andrej.kovacic@uni-lj.si

VESNA BOSILJ-VUKSIC

University of Zagreb, Faculty of Economics

Trg J.F.Kennedya 6, 10000 Zagreb, Croatia

E-mail: vbosilj@efzg.hr

ABSTRACT

Business renovation is a key aspect of electronic business and a high-level

strategy for managing change that generally cannot be handled by

continuous improvement and organizational restructuring methods. Business

process modeling and the evaluation of different alternative scenarios for

improvement are usually the driving factors of the business reengineering

process. In this paper, business process simulation is investigated as a tool

for deriving new knowledge on current business processes, such as

additional in-depth understanding of how the process is executed and the

identification of the sources of the problems observed during the process

execution. The main objective of the paper is to investigate the potential

benefits and outcomes of e-business transitioning that can be assessed in

advance by using simulation modeling. An example is presented of how

simulation modeling can be used understand a procurement process and to

evaluate how the proposed improvements and the introduction of electronic

business will influence the system performance.

Keywords: simulation modeling, business-to-business (b2b), business process reengineering

(bpr), business renovation, procurement.

POVZETEK

Pri uvajanju elektronskega poslovanja je izredno pomembna prenova

poslovanja in ustrezna strategija na najvišjem nivoju. Ponavadi tega ni moč

doseči zgolj z neprestanim izboljševanjem in z manjšimi organizacijskimi

spremembami. Pri prenovi poslovanja in ovrednotenju različnih scenarijev

sprememb v izvajanju poslovnih procesov igra pomembno vlogo simulacijsko

modeliranje. Prispevek predstavlja uporabo simulacij kot orodja za odkrivanje

novega znanja o trenutnem izvajanju poslovnih procesov, kot je natančno

razumevanje načina njihovega izvajanja in odkrivanje vzrokov problemov, ki

so bili pri izvajanju opaženi. Namen prispevka je predvsem raziskava

potencialnih prednosti, ki jih prinese uvedba elektronskega poslovanja. Še

preden se jih uvede, jih je moč ovrednotiti s pomočjo simulacije izvajanja

poslovnih procesov. Kot primer je obravnavan nabavni proces, za katerega

ocenimo, kakšni bodo učinki uvedbe elektronskega poslovanja.

1. INTRODUCTION

The value chain could be described as the set of activities an organization performs in order to

create and distribute its goods and services, including primary activities, such as inbound

logistics and operations, and also support activities, such as human resource management and

technology development [Porter, 1980]. Each of these activities adds some value to the product

or service. Competitive conditions and pressures in the global market are forcing companies to

search for strategies to streamline the entire value chain. Increasing the effectiveness of the value

chain will increase the competitiveness of a company. To compete effectively, organizations

must structurally transform their internal and external processes. These goals could be reached

by a simultaneous renovation of business processes and an implementation of electronic business

models.

Electronic business (e-business) is an execution by electronic means of interactive, inter-

organizational processes [Cunningham and Froschl, 1999]. E-business represents a shift in the

business doctrine that is changing traditional organizational models, business processes,

relationships and operational models that have been dominant for the past 20 years. The new

doctrine of e-business requires an enterprise to integrate and synchronize the strategic vision and

tactical delivery of products to its customers with the information technology and service

infrastructure needed to meet this vision and process execution [Phipps, 2000]. In the next few

years, successful enterprises will restructure their organization, process and technology

infrastructure for successful e-business execution.

It is well known that e-business might bring several advantages to a company. However, existing

practical business applications have not always been able to deliver the benefits they have

promised in theory. Prior to adopting e-business, companies need to assess the costs needed for

setting up and maintaining the necessary infrastructure and applications, and they need to

compare this to the expected benefits. Although the evaluation of alternative solutions might be

difficult, it is essential because in this way some risks associated with the introduction of e-

business can be avoided. The business processes should be analyzed first in order to find out if

they are well defined, adequate, and ready for the implementation of new information

technology. Only in this way can an improvement in quality, lower costs, and shorter

performance times be expected.

Business Renovation (BR) or business process renovation and the introduction of information

system (IS) efforts integrate the radical strategic method of Business Process Re-engineering

(BPR) and more progressive methods of Continuous Process Improvement (CPI) with adequate

Information Technology (IT) infrastructure strategies. Process renovation is a re-engineering

strategy that critically examines current business policies, practices and procedures, rethinks

them and then redesigns the mission-critical products, processes, and services [Prasad 1999].

The methods of BR, which combine business process modeling and simulation modeling which

enables quantitative estimations of alternative renovated business processes [Bhaskar et al.,

1994], are one of the possible approaches to address the above-mentioned problem of the

evaluation of alternative solutions. In most instances, several models are built: one that

represents current practices, named the AS-IS model, and proposals for business process

renovation, TO-BE models.

The main objective of this paper is to develop a simple simulation model of an electronic

procurement business process that could be used to evaluate the potential benefits and constraints

of BR and the implementation of an e-business project. The paper is structured as follows. The

impact of IT on e-business is discussed in Section 2. Following a brief overview of business

renovation strategies in Section 3, business process modeling and a simulation with the

simulation modeling tool iGrafx Process are described in Section 4. An example of modeling

B2B processes is provided in Section 5. At this point, the applicability of simulation modeling

and the evaluation of alternative business process strategies are investigated. The main findings

of this research and concluding remarks are given in Section 6.

2. THE ROLE OF IT IN THE PROCESS OF NEW BUSINESS MODELS

DEVELOPMENT

There are three critical factors that determine business performance: business models, the

business environment, and change [Afuah and Tucci, 2000]. A competitive environment

(powerful suppliers and competitors) and change (supply and demand, government regulations

and deregulations, technologies and demographics) impact business models. Electronic business

(e-business) dramatically and strategically changes traditional business models. Parallel to the

development of Internet technologies, a great number of new business models have appeared,

providing significant changes in the nature of business processes. Some basic questions that

global business leaders are faced with are: Has the classical business model invented in the 19th-

century outlived its usefulness? Is it capable of successfully handling the complexity of IT and

today's “New economy”?

2.1. IT as the Enabler of Business Renovation

To explore the role of IT in e-business, the contributions of IT could be categorized in two

different ways [Chang, 2000]. First, it contributes greatly as a facilitator to the process of re-

engineering. Second, IT contributes as an enabler to master the new process in the most effective

way [Davenport and Short, 1990].

As the Internet becomes a very important component of companies' information systems, it plays

an increasingly significant role. The Internet enables companies of all sizes to develop new

online business models, which means improving and altering the ways in which they operate and

interact with business partners, customers and suppliers. Companies are now pursuing more

intensive and interactive relationships with their suppliers, collaborating in new product

development, integrating key business processes and cross-functional information sharing on a

range of issues [McIvor, 2000]. The Internet enables the complete integration of inter-

organizational processes in BR projects to take place [Alt et al, 2000] and extends the strengths

of BR to new strategic options (e.g. electronic distribution), new possibilities for processes (e.g.

order entry, distribution, on-line payment) as well as technical issues (e.g. integration of

Enterprise Resource Planning systems (ERP) with Electronic Commerce (E-commerce), Supply

Chain Management (SCM), Customer Relationship Management (CRM), etc.). The advantages

of IT and the Internet (faster connections, speed of delivery, collaboration capabilities, and

information collected across all commerce channels) yield unprecedented opportunities to

suppliers and buyers. These advantages will help them to connect and establish mutually

profitable relationships.

2.2. E-business Models Development

Within the overall electronic business economy, there are two major models: business-to-

consumer (B2C) and business-to-business (B2B). As a result of the early success of business-to-

consumer Internet companies which provided new ways for consumers to purchase goods,

several entrepreneurs developed Internet solutions for long-standing business purchasing

problems. Business-to-business models have experienced explosive growth in the marketplace,

beginning in the early 1990s. The market for B2B has continued to expand with predictions that

the B2B model will far exceed the B2C model in the future. Forrester research estimates that

over $1.5 trillion in goods and services will be purchased through B2B e-commerce by the year

2003, while this number could be about $108 billion for B2C e-commerce [Forrester Research,

2000].

The business-to-business model could be defined as the use of electronic interactions to conduct

business among enterprises [Turban et al, 2000]. B2B includes purchasing and procurement,

sales activities, payment management, inventory management, channel management, supplier

management, and service support. In recent literature, several B2B models have been described

[Kalakota and Robinson, 2001], [Turban et al, 2000], [Afuah and Tucci, 2000], [Deitel et al,

2001]. Most business activities are business-to-business [May, 2000] and a huge potential lies in

the introduction of e-business in both the inside and outside part of the value chain. One of the

important issues in e-business implementation is the ease with which flexible structures in the

supply-demand relationship can be established to become the driving force for cooperation

through strategic alliances between business partners [Roberts and Mackay, 1998]. The Value

Chain Model, developed by Porter [1985], considers the main activities present in the supply-

chain process management and takes IT as a key element in driving these activities. However,

several problems and obstacles occur during the introductory phase of the business-to-business

model. The investments into information technology can be significant, common standards for

this industry are yet to emerge, let alone to be adopted, and the way that the company operates

has to be (sometimes radically)transformed. But the results can be rewarding for both sides in the

form of savings through reduced costs, process efficiencies, and compliance [Deise et al., 2000].

Nowadays, companies are investing heavily to transform their traditional business into e-

business, but most of them lag behind in adopting the Internet in the process of procurement.

The indirect procurement process is usually considered as unstrategic and is therefore

overlooked. However, savings in this area can be huge. Knowledge of established contracts and

of what buyers are actually spending on each supplier's product is very worthwhile, since a 10

percent reduction in indirect procurement costs can result in a 50 percent increase in profit

margin [Deise et al.]. According to many industry analysts, the big three auto companies

procuring over $240 billion a year may expect to save anywhere from $2,000 to $3,000 per

$19,000 vehicle through online procurement, supply-chain, information sharing and

collaboration [Baer and Davis, 2001]. While small companies could gain competitive advantage

and extend their customer base by using e-commerce, it must be stressed that the key business

driver for large companies should be the implementation of an e-procurement process.

3. BUSINESS RENOVATION

Business Process Re-engineering (BPR) is an organizational method which demands the radical

redesign of business processes in order to achieve higher efficiency, better quality and more

competitive production [Hammer and Champy, 1993]. It is also a method of improving the

operation and therefore the outputs of organizations [Kovacic, 1999]. This means analyzing and

altering the business processes of the organization as a whole. BPR was first introduced in a

research program at MIT (Massachusetts Institute of Technology) in the early nineties. The term

was used in the description of Davenport and Short's 1990 research project [Davenport and

Short, 1990]. They found that the implementation of modern information technology in

organizations means not only the automation of managerial and production tasks, but also has an

enormous and direct effect on the means and quality of the work done.

3.1. The Evolution of BPR

BPR has become one of the most popular topics in organizational management, creating new

ways of doing business [Tumay, 1995]. Many leading organizations have conducted BPR in

order to improve productivity and gain competitive advantage. However, regardless of the

number of companies involved in re-engineering, the rate of success of re-engineering projects is

less than 50% [Hammer and Champy, 1993]. Some of the frequently mentioned problems related

to BPR include the inability to accurately predict the outcome of radical change, the difficulty in

capturing existing processes in a structured way, the lack of creativity in process redesign, the

level of costs incurred in implementing the new process, and the inability to recognize the

dynamic nature of the processes.

On the other hand, CPI integrates methods such as industrial engineering, systems analysis and

design, socio-technical design and total quality management [Davenport, 1993], [Galliers, 1998].

Continuous improvement refers to programs and initiatives that emphasize incremental

improvement in work processes and outputs over an open-ended period of time [Davenport and

Beers, 1995]. Several researchers suggest that using CPI techniques dramatically increases

competitive advantage. Furthermore, it is particularly suggested that TQM be integrated with

BPR [Al-Mashari and Zairi, 1999].

In the 90s, BPR focused on internal benefits such as cost reduction, the downsizing of a company

and operational efficiency, which are more tactical than strategically focused. Nowadays, e-

business renovation strategies focus on the processes between business partners and the

applications supporting these processes. These strategies are designed to address different types

of processes with the emphasis on different aspects [Phipps, 2000], [Kalakota and Robinson,

2001]: customer relationship management, supply chain management, selling-chain

management, and enterprise resource planning. Recent BR research papers demonstrate the

critical role of information technology in business process restructuring [Broadbent et al., 1999],

[Teng et al., 1998].

3.2. Re-engineering Through Simulation Modeling

Many different methods and techniques can be used for modeling business processes in order to

give an understanding of possible scenarios for improvement [Ould, 1995]. IDEF0, IDEF3, Petri

Nets, System Dynamics, Knowledge-based Techniques, Activity Based Costing and Discrete-

Event Simulation are only some examples of business process modeling techniques widely used

[Eatock et al, 2000]. There are also many software tools on the market that use these modeling

techniques.

In Kettinger et al, 1997, an empirical review was made of existing methodologies, tools, and

techniques for business process change. The authors also developed a reference framework to

assist the positioning of tools and techniques that improve re-engineering strategy, people,

management, structure, and the technology dimensions of business processes. However,

relevance is far more important than completeness [Davenport, Prusak, 1998] and simple models

are far more understandable for non-specialists. Process modeling tools must be capable of

showing interconnections between the activities and conducting a decomposition of the

processes. These tools must help users to conduct “what-if” analyses and to identify and map no-

value steps, costs, and process performance (bottleneck analysis). They should be able to develop

AS-IS and TO-BE models of business processes, which represent both existing and alternative

processes. They must be validated and tested before implementation. They can be used to predict

characteristics that cannot be directly measured, and can also predict economic and performance

data that would otherwise be too expensive or impossible to acquire.

Some of the benefits can be directly evaluated and predicted, but others are difficult to measure

(intangible benefits). Some intangible benefits might be (as observed in several case studies in

Slovenian companies that have introduced e-sales) the improved image of a company as a whole,

increased market share, better relationships with business partners, and increased customer

satisfaction. This research investigates some of the benefits and outcomes of introducing new

processes (time and cost savings, workload reduction and increased throughput) that could be

measured in advance by simulation modeling.

Simulation has an important role in modeling and analyzing the activities in introducing BPR

since it enables quantitative estimations to be made on the influence of the redesigned process on

system performances [Bhaskar et al, 1994]. The majority of simulation software implements a

model using the discrete-event method [Seila, 1995]. The simulation of business processes is

suggested for use in BPR projects as it allows the essence of business systems to be understood,

the processes for change to be identified, process visions to be developed, new processes to be

designed and prototyped and the impact of the proposed changes on key performance indicators

to be evaluated [Greasley and Barlow, 1998]. The reasons for the introduction of simulation

modeling into process modeling can be summarized as follows: simulation allows for the

modeling of process dynamics, the influence of random variables on process development can be

investigated, re-engineering effects can be anticipated in a quantitative way, process

visualization and animation are provided, and simulation models facilitate communication

between clients and an analyst.

The final reason for using simulation modeling is the fact that it can be increasingly used by

those who have little or no simulation background or experience [Zahir et al, 2000]. Modern

simulation software includes a graphic user interface (GUI), enabling process animation and a

graphical display of simulation results. Simulation software often includes connections with flow

diagramming tools and CASE tools, which result in faster simulation execution and more precise

simulation experiment output variables.

4. BUSINESS PROCESS MODELING USING THE IGRAFX PROCESS

The iGrafx Process [Micrografx] software is a powerful and suitable tool for process mapping

and simulation modeling in BPR projects. It provides powerful graphical process modeling and

simulation, as well as comprehensive diagramming capabilities.

Figure 1 shows the basic modeling elements of the process map technique used by the iGrafx

Process. An activity is an individual step of a process map presented as a symbol in a flowchart.

Each activity can set or determine the following information:

Inputs: an activity can have one or many inputs that arrive by way of incoming connection

lines.

Resources: a resource is a person, machine, or other asset that may perform the activity. An

activity can use several resources or more than one kind of resource simultaneously.

Task: the task information covers the duration that the activity takes, its associated costs,

activity base, and schedule.

Outputs: the outgoing connection lines from an activity attach to other activities for further

processing.

Figure 1. Basic modeling elements of the process map technique

Modeling elements are connected with links which describe the process flow. Each activity is

placed in one or more departments that represent an organizational unit which performs these

activities. A transaction can be split in order to be processed simultaneously by different

departments or resources, and batched again in a single transaction. Each activity can be defined

in detail by several attributes, such as: types and number of resources performing the activity,

duration of the activities (constant or stochastic) and different types of costs (value added, non

value added, or business value added). The costs of the resources utilization can be defined

according to the hourly rates, rates per use, and overtime rates. Schedules for resources and event

generators are fully customizable.

All the above-mentioned and other possibilities offer a detailed cost and time analysis of

business processes. One of the main advantages of this modeling technique is its simplicity; even

people unskilled in business process modeling can easily understand and use this technique. The

reports generated by the iGrafx Process software allow the re-engineering effects to be

anticipated and show the results in quantitative parameters, such as the number of transactions in

queue, the cost and time of the utilization of the resources and the time of the process cycle. The

tool also offers the possibility to visually trace the process execution; different colors are

attached to activities in order to observe bottlenecks, idle activities etc.

iGrafx IDEF0 is a powerful modeling solution integrated into the iGrafx process management

platform that enables companies to quickly build consistent and comprehensive IDEF0 business

models. IDEF diagrams are used widely, especially for business process analysis and modelling.

They represent the standard modelling and analysis method for enterprise engineering and

support particular reengineering activities such as simulation modelling and information system

modelling. They can not represent all the elements important for simulation modelling, such as

queues, random behavior and process dynamics, but could provide the basic elements for

simulation model development.

Due to their simplicity and understandability, it seems appropriate to develop IDEF diagrams

during preliminary phases of business process modelling project in order to develop “AS IS”

models. In later phases, when “TO BE” models are developed, IDEF diagrams could be simply

transformed into the iGrafx Process simulation model. Simulating the effects of redesigned

processes before implementation improves the chances of getting the processes right at the first

attempt. The advantages of simulation modelling were demonstrated on the example of the

procurement process model using the iGrafx Process software.

5. SIMULATION MODELING OF THE B2B PROCUREMENT PROCESS

This study refers to the indirect procurement process of a real Slovene company. Several

interviews had to be performed because knowledge about the business process was not

documented and moreover not well defined. The main difficulty in business process modeling

was to find out the time required for each activity as the employees usually overestimate it. The

experiences of one of our team members who had participated in more than twenty BPR project

by now helped a lot in this phase of the modeling. The data to construct the model was taken

from IS reports and interviews with subject-matter experts. The model was refined continually

during the analysis phase as new information and data were added.

The study emphasizes the assessment of savings in terms of time and cost for the execution of

one purchase transaction. During the first phase of the research, an AS-IS model was developed

(Figure 2). The indirect procurement process starts in any department where a need is identified

and is performed in three departments: Purchasing, Warehouse and Finance/Accounting. There

are seven employees working on this process; a detailed list can be found in Table 2. The details

of the activities are presented in Table 1.

The simulation of a two-year performance was carried out, with the assumption that the process

starts every 1 to 5 hours during working time. The report shows that an average indirect

procurement process lasts for about 20 days and the average cost is $50. However, the

quantitative results of the simulation experiment presented in the simulation report, no matter

how precise and deep the simulation is, are only one aspect of the business process analysis.

Business process maps themselves can frequently show many problems that have not been

observed before. In this research two main (and very common) problems have been discovered:

The communication between the insiders of the business process and the communication

between the company’s employees and its suppliers is slow and ineffective; consequently,

many time gaps occur in the process execution.

Very often during the process execution, the same data are inserted (e.g. purchase order

and acceptance slip) and therefore problems of data inconsistency, integrity and accuracy

occur [Turban et al., 2000; Redman, 1995].

Department

Purchase dept.

Warehouse

Finance /Accounting

Start

Purchase order (PO) preparation

13PO

approval

15Sending PO to supplier

16

Waiting for acknowledgment

17

Waiting for approval

14

PO acknowledged?

18

Updating and

sending PO

19

Sending order to receiving

clerk

20

Waiting for invoice

33

Comparing bill,

acceptance slip

and PO

35

Agreement?

36

Authorizing invoice

38

Reconciliation37

Reconciliation27

Delivery acceptance

30 Filling in acceptance

slip

31

Comparison of order and delivery note

23

Agreement?

24Sending goods for unloading

28

Reject delivery

25

Waiting for delivery

21Accepting

delivery note

22 Sending acceptance

slip to purchase

dept.

32

Inform purchase

dept.

26

End

Yes

No

No

Yes

No

Yes

Accepting requisition

2 Selecting the best

supplier is necessary?

6

Collecting and combining requisitions

7 Issuing Request for Quotation

(RFQ)

8No

Find a qualified supplier

9Waiting for proposals

10 Evaluation of terms and conditions and negotiations

11

Registering invoice

34

Creating and

transmitting payment orders

40Filling invoice

44

Booking invoice

41

Waiting for bank

statement

42

Booking payments (accounts payable)

43

Yes

Inventory level

checking

3 Inventory level is

sufficient?

4

No

EndReservation of goods

and notifying the employee

5

Yes

Confirming invoice for payment

39

Identify a need and requisition preparation

1

Selection of one or two suppliers

12

Agreement?

29

No

Yes

Figure 2: Existing process (AS-IS model)

Activity Resources Time Outputs1 Identify a need and requisition preparation Employee 10 – 60 min2 Accepting requisition Purchasing officer 5 min3 Inventory level checking Purchasing officer 1 – 20 min4 Inventory level is sufficient? Yes - 20%, No - 80%5 Reservation of goods and notifying the employee Purchasing officer 10 min6 Selecting the best supplier is necessary? Yes - 40%, No - 60%7 Collecting and combining requisitions Purchasing officer 5 – 60 min8 Issuing Request for Quotation (RFQ) Purchasing officer 10 – 20 min9 Find a qualified supplier Purchasing officer 5 – 120 min10 Waiting for proposals 1 week

11 Evaluation of terms and conditions and negotiationsPurchasing officerPurchasing director 1 – 3 hrs

12 Selection of one or two suppliers Purchasing director 10 min13 Purchase order (PO) preparation Purchasing officer 5 – 20 min14 Waiting for approval 0 – 24 hrs15 PO approval Purchasing director 10 min16 Sending PO to supplier Purchasing officer 10 min17 Waiting for acknowledgment 1 – 48 hrs18 PO acknowledged? Yes - 80%, No - 20%19 Updating and sending PO Purchasing officer 5 – 10 min20 Sending order to receiving clerk Purchasing officer 10 min21 Waiting for delivery 1 – 10 days22 Accepting delivery note Receiving clerk 1 min23 Comparison of order and delivery note Receiving clerk 5 – 10 min24 Agreement? Yes - 95%, No - 5%25 Reject delivery Receiving clerk 20 min26 Inform purchase dept. Receiving clerk 1 – 5 min27 Reconciliation Purchasing officer 30 – 120 min28 Sending goods for unloading Receiving clerk 5 min29 Agreement? Yes - 95%, No - 5%30 Delivery acceptance Warehouseman 15 – 120 min31 Filling in acceptance slip Warehouseman 5 – 15 min32 Sending acceptance slip to purchase dept. Warehouseman 1 – 30 min33 Waiting for invoice 0 – 10 days34 Registering invoice Purchasing officer 10 min35 Comparing bill, acceptance slip and PO Purchasing officer 5 – 20 min36 Agreement? Yes - 95%, No - 5%37 Reconciliation Purchasing officer 10 – 40 min38 Authorizing invoice Employee 5 – 30 min39 Confirming invoice for payment Accountant 5 – 60 min40 Creating and transmitting payment orders Accountant 1 – 5 min41 Booking invoice Accountant 5 min42 Waiting for bank statement 1 – 2 days43 Booking payments (accounts payable) Accountant 5 min44 Filling invoice Financier 1 – 5 min

Table 1: Activities in AS-IS model

In the second phase of the project some changes and improvements in the procurement process

were proposed. Proposals were based on the generic models of introducing e-business into

procurement processes as proposed by [Deise et al., 2000] and some of them were based on the

simulation analysis (simulation reports and bottlenecks discovered while observing model

tracing). Many changes come from the introduction of new technology, although many of them

are of an organizational nature (different ways of working). This is usually the most difficult part

of introducing new, or re-engineering existing, business processes. The following changes

relating to the introduction of e-business inside the company and with the suppliers were

assumed:

Long-term contracts and e-business connections are implemented with the selected

suppliers

Electronic product catalogues and product configurators are available to employees

Product availability and pricelists are available on-line

Approval and authorization procedures are preconfigured in the electronic indirect

procurement process (automated) to ensure they conform to policies

A workflow management system is used in the company

Comparing bill, acceptance slip and purchase order (PO) is supported by an integrated

database

Electronic delivery tracking is offered

Electronic payment is introduced

A TO-BE model of the indirect procurement process was developed. Its process map is shown in

Figure 3. Many activities became unnecessary, while some others were performed more

efficiently.

Department

Purchase dept.

Warehouse

Finance /Accounting

Start

Purchase order (PO) generation

and transmission

7

Reconcil iation14

Delivery acceptance

15Fill ing in

acceptance slip

(confirming acceptance)

16

Agreement?

11Sending goods for unloading

10

Reject delivery

12

Waiting for delivery

8Accepting delivery

note

9

Inform purchase

dept.

13

End

No

Yes

Select items from the authorized e-buying

catalogues and create requisition

5

Requisition approval

6

Creating and

transmitting payment

orders

18

Inventory level

checking

2 Inventory level is

sufficient?

3

EndReservation of goods

4

Yes

Confirming invoice for

payment

17

Identify a need

1 No

Figure 3: Renewed process (TO-BE model)

More precisely, the following changes that are the consequence of the above proposals are made

in the TO-BE model:

Selecting the best supplier and appertaining activities is done previously, during the

establishment of a long-term contract with suppliers.

Collecting and combining is done automatically within PO generation.

Requisition approval is usually done automatically (business rules are enforced);

sometimes the purchasing director has to approve the requisition (it is performed by a

workflow management system).

PO generation is done automatically and PO approval is omitted.

Waiting for acknowledgement is omitted, because availability is evident from electronic

product catalogues.

Sending order to receiving clerk is done automatically (receiving clerk obtains PO by

workflow management system).

Comparison of order and delivery note is done automatically.

Confirming acceptance is shortened as this is done by checking the PO data in the

database.

Waiting for invoice is omitted (invoice is automatically created by IS of supplier after

confirming acceptance).

Registering invoice is not necessary.

Comparing bill, acceptance slip and PO is done automatically.

Creating and transmitting payment orders is shortened due to the introduction of

electronic payment; waiting for bank statement is also shortened.

Duration of the simulation 2 years

Employees Number Hourly rateEmployee (any) $15Purchasing officer 1 $10 Purchasing director 1 $20 Receiving clerk 1 $10 Warehouseman 1 $8 Financier 1 $15 Accountant 1 $15

AS-IS model

TO-BE model

Time for one transaction (Cycle time)

20 days 5 days

Costs of each transaction $50 $36

Table 2: Parameters and comparison of the two models

Both models (AS-IS and TO-BE) were analyzed and compared according to the time and cost of

an average process execution (Table 2). The results of the comparison show that the time could

be significantly shortened if the proposed solutions are used. The costs can also be cut from (on

average) $50 to $36 for one process execution.

Of course, one should stress other important benefits that are more difficult to be measured or

evaluated in advance, such as better working relationships with suppliers, suppliers having better

and more accurate evidence of the company’s needs and who react more promptly to partners’

demands. On the other hand, several problems can occur in the introduction of e-business

solutions, especially in the B2B model; high costs and risks are always associated with such a

project.

6. CONCLUSION

E-business represents a shift in business doctrine since it changes traditional organizational

models, business processes, relationships and operational models. The corporate value chain

links the different processes and players in the domain of e-business. Therefore, most traditional

firms will not be able to conduct business in the traditional way any more. One of the ways of

accomplishing these goals is BR, which uses additional features included in simulation modeling

methods. Simulation modeling is the "cost-effective" method of exploring "what-if" scenarios

quickly and finding a solution to a problem or providing a better understanding of the problem

because this method is supported by a number of software tools that provide a graphical

representation of the business processes by executable models.

In this research, the indirect procurement process of the real Slovenian companies and the

“virtual” e-procurement process were modeled using the iGrafx Process modeling and simulation

tool. The opportunity for "standard e-procurement model" development was explored. The e-

business environment and its characteristics were examined, and this was followed by an

evaluation of the impact of electronic commerce on the procurement process. The costs and

benefits of future e-business implementation were analyzed and different models were compared.

The results of the research indicate that business process modeling and discrete-event simulation

are valuable mechanisms for realizing the real business value of B2B e-commerce.

The business process model enabled the accurate description of the indirect procurement process

and facilitated the evaluation of process through simulation. Although only a "prototype" of the

model was developed, it showed that the introduction of e-business would cause organizational

and technological changes. The changes in technology are mostly concerned with new IT and IS

implementation. The organizational changes should help to remove or reduce non value-adding

activities in the procurement process, to maintain or reduce the stocks by precisely matching

supply and demand, and to increase the productivity of the supply-chain process through

improvements made in purchase order management. Advances made in the procurement process

have greatly reduced the costs and time involved in the procurement life-cycle. The

improvements made in the process of indirect procurement were evaluated presenting the

simulation results to the managers and end-users. The model was well accepted by both of them

and management was impressed enough to plan to make simulation modelling an integral part of

its business renovation plans.

The benefits of the developed model should be explored through further research. The most

critical issues of IT and e-business adoption have been recognized, but there are still other factors

that have to be identified and analyzed. The authors plan to extend the research by developing

simulation models of Croatian and Slovenian companies involved in e-business to establish a

richer analysis of B2B usage and to evaluate the main critical success factors for e-procurement

implementation.

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