Cathay Pacific's Attempts to Cut in E-Procurement - Assignment Example

CATHAY PACIFIC Ans In this era of globalisation and cut throat competition, attracting the has become a very challenging task for any business organisation. Airlines industry is no exception. Companies try to attract customers by being innovative in pricing techniques. After pushing the cost of production of goods and services to the limits, companies tried to find ways and means to cut down the procurement costs. Cathay Pacific too tried towards this end. E-procurement, in simple terms, is stated to be 'Buy the right commodity at the right time from the right people'. Working in tandem with the concept of e-business, e-Procurement, a B2B concept, is the online purchase of goods or services electronically. Cathay Pacific's CxeBuy electronic procurement system came into existence at its headquarters in Hong Kong by the end of 2001, across different departments and spend categories. Central to achieving Cathay's e-business vision was the impetus to apply Internet-based tools to building the most efficient purchasing process and capability in the industry. CXeBuy was the first Oracle Internet Procurement (OIP) solution ever implemented by Oracle for an airline. In March 2002, the Australia was identified as the first location to be benefited from CXeBuy as it had the potential of linking its six ports under a common purchasing process and supply base. Japan, with its five ports, was slated to be the next target for implementing this process. Initially Cathay Pacific adopted this strategy in order to be more competitive and to Web-enable the procurement of goods and services for five of the airline spend categories, namely: in-flight service, cargo, information technology, marketing and office supplies. The driving force behind this concept was the perceived potential to network all parties involved with the marketing, distribution, consumption and servicing of a Cathay's business in order to provide opportunities to significantly improve the co-ordination and efficiency of operations (OECD, 2001). The driving forces for adopting an e-procurement system and the salient features of such a system at Cathay are; Internet is to be used to transmit order information, between Cathay and its suppliers It was implemented to replace the existing Engineering Maintenance Planning and Control System (EMPACS). EMPACS also the inventory management system, has been around for the last 25 years. Management felt the need to streamline the requisitioning processes and purchase order approval processes. Financial Management Information System (FMIS) was used for processing payments and general bookkeeping activities. FMIS carried supplier address and billing information. Both EMPACS and FMIS used to manually key in the address and details whenever new suppliers were added or to change the details of existing suppliers. This manual operation was prone to errors. Common exchange rates information database was being maintained at SHARE which was used by many departments during their operations. SHARE held many different exchange rate tables like inter-airline billing rates, exchange rates in settling invoices raised by overseas suppliers etc. for the same period at any one time. These exchange rates were being manually updated. One separate Airline Purchasing Department (APD) comprising 50 staff was functional since 1996 to serve the five major user departments and respective spend categories: Marketing, Fuel Services, Information Technology, Ground Services and In-flight Services. The APD staff was to identify an appropriate supplier, enter the information onto EMPACS and generate a purchase order that was printed through the IBM mainframe located 20 kilometers away from Cathay's head office. Every few days a batch of purchase orders would be physically transported from Quarry Bay to Cathay City, where they would then be distributed to various department managers for approval to purchase. The approval process in itself used to take a few days with as many as seven approval, validation and distribution steps. Then only the purchase order could be mailed or faxed to the suppliers. This required significant lead time. Then there was the cost of holding additional inventory items, besides the cost of inventory. Figures of the In-flight Services Department alone indicate that the value of inventory held within the central stores was around US$3 million. It was anticipated that CXeBuy would help Cathay to better manage and control its expenditures, and to reduce the cost of purchasing and of goods purchased. Savings of US$38 million per year were predicted in savings in operating expenses, with US$10 million of inventory reduction. CXeBuy was expected to handle between 35% and 50% of Cathay's non-technical purchases, accounting for approximately US$385 million in 2000. After implementation of e-procurement, perceptible changes were visible. For example; i. By the end of 2001, Over 4000 items were made available through 400 electronic catalogues. This way the scope for ambiguities in item definition, picture, specifications etc were removed. ii. These catalogues could be updated regularly as and when required. iii. e-Procurement brought with it transparency in the ordering process. iv. With CXeBuy requisition to payment process could be electronically executed in an efficient and timely manner, that too after seeking clarifications with all heads of concerned department. v. Some degree of flexibility is also built into the system to allow for the procurement of non-catalogued items. vi. Goods available for purchase on CXeBuy could be sourced from local or overseas suppliers and could be contracted in foreign currencies. Requisition approval was speeded up as the system had to mechanism to display all items in the shopping cart in Hong Kong dollars. vii. As a result the transmission of orders required no signatures, printing and manual handling. viii. As a precautionary measure both EMPACS and CXeBuy were run in parallel in 2001, processing a total of 4600 order. Buoyed with the performance of the new system the parallel running was stopped at the beginning of 2002. Now all non-technical goods, transferred onto CXeBuy, were procured through CXeBuy. During March 2002, 1330 such purchase orders were successfully processed through CXeBuy. Cathay has now made futuristic plans to procure more items through CXeBuy. After having a look at the pointers as mentioned above it can be said that the e-procurement process is having a positive effect on the overall performance of Cathay. Ans 2: Whitefield Diffie, the inventor of public key cryptography, said (Goodwin, 2005), "Business would face new risks in the future, as more computing power is outsourced". That's indeed the biggest concern in moving from a manual system to an online system. Many of the efficiencies of an online system flow from improved handling of information, reduction in time consumed for transcribing the data, scope for errors is reduced. But the biggest concern is, what if some of the critical information land into some mischievous hands. Cases of hacking government sites are not new. It is found that virus producing IT experts make the first move in taking advantage of the latest technology. An online procurement system can face the risk in the form of; i. An artificial demand is created by hackers on the system. The supplier goes through the page and starts processing the order, where there's none. ii. Similarly the required quantity of an item may be artificially boosted. iii. At times of critical demand for some item, the system breakdown may halt the process of procurement. iv. The item specifications presented to suppliers in the electronic catalogue is not meant for public consumption. Some supplier may pass on these specifications to some undesired elements or some competitors of Cathay Pacific. v. If the supplier side of the webpage is hacked by some crackers, even then there's a danger of the information being passed on to some undesired elements. vi. Since Cathy Pacific is in automation mode, therefore a retrenchment of staff is a possibility. This may invite the anger of some staff members, who in turn may pose a threat to the system. vii. Since the e-procurement relies heavily on the Just-in-Time (JIT) concept of manufacturing, if somehow the e-procurement system fails to deliver, then there wont' be sufficient lead time to process the order manually. This may result in halting of some operations. viii. The manual form of supplies and distribution is in vogue for as long as the business process has started, therefore the legal system has evolved over the years to take care of infringements in this process. Such a mechanism is yet to be established for e-business. Though legal framework is in place to take care of e-businesses and IT applications, yet it is in an evolutionary phase and may present typical situations for the company. ix. If not handled professionally such aberrations may lead to damage to customers, damage to brand equity of Cathay, loss in the market share, competitor's gain and complications from virtual contracts. Therefore Cathay Pacific can take certain precautions to make sure the possibility of such a negative impact is reduced considerably. To this end; Cathay will have to make use of sound judgment regarding the credibility of suppliers, their previous business with the company, their past behavior etc. Cathay keeps reviewing the performances of its suppliers and the system. Adequate firewall protection is in place to avoid any damage to the system and the software used is updated regularly. Cathy should implement the system in a phased manner, so that the workforce is not unduly worried about their future. In order to review the performance of the system, Cathay will have to take into confidence all the concerned departments and without their input, such an exercise has no meaning. To solicit adequate feedback, Cathay will have to take into confidence the concerned groups of employees and/or the unions representing them, in order to allay their undue fears. Ans. 3: Some of the performance monitors required for the e-procurement process are; i. Time taken in performing the procuring tasks. This should include overall time as well as time taken in different processes involved. So far the system has proved itself useful with considerable reduction in the procurement time. This has the potential to do away with the requirement of lead time. ii. Saving in manpower. If only the system results in saving of manpower and the efforts than only will it remain useful. So far it has proved its utility by reducing the requirement for multiple numbers of hands an order was supposed to go through. iii. Reduction in inventory management costs. Huge costs are involved to manage surplus inventory items. In addition such storage also results in pilferage and spoilage losses. How e-procurement reduces such costs is required to be monitored. iv. Difference in revenue earnings and profits. It has to be monitored that the system savings get translated into real revenue earnings and profits. Such a reflection on the annual financial statement will go a long way for the success of the system. The cost of system integration may be adjusted in phases. v. Responses from and benefit to consumers i.e. airline travelers. Customers too will be at the receiving end of better service, since they get to use fresh items on board. vi. Overall benefit to the brand equity of Cathay Pacific. A satisfied customer is the best brand ambassador for a company. Therefore once the system benefits get translated into loyalty of customers, this will go a long way in the growth of the business for Cathay. vii. Suppliers' level of performance and satisfaction. Suppliers too are an integral part of the organisation, as they are the one's on whose supplies the credibility of the company depends. A happy and satisfied supplier will go an extra mile to supply suitable and hygienic items for the company. viii. Coordination amongst different related departments. Instead of passing the buck, the managers must do a brainstorming session and come out with strategies for better coordination amongst different departments to provide further impetus to the move for improvements. ix. Satisfaction and performance level of the staff at Cathay. It appears at present the staff is little apprehensive about the present exercise. A worker with high satisfaction and security level proves to be a valuable asset for a company and he/ she will be motivated to put his best efforts for the company. But, the feeling of insecurity dissatisfaction may prove to be fatal liability for Cathy Pacific. x. Reduction in wastage levels. Since over-storage (as done earlier) might have resulted in some amount of wastage in terms of the expiration of shelf life of some items like liquid soap, napkins etc. xi. Performance of the server and the online system. How the server functions under different level of stress and schedules will provide information about the types of workload it could take. xii. Monitoring of security concerns. Security issues need be addressed properly with regular updation of security concern log book items, as the number and types of viruses and other security threats keep cropping up on a routine basis. xiii. Reactions from the industry, press and the respective governments. How the outside world reacts to the steps being taken by an organisation goes a long way in the implementation process. If there is public outcry on some issues and press and media reports start denouncing the measures being taken by the company, then it becomes very difficult for the company to ignore such concerns. xiv. Concerns of dissenting PSC members too need to be monitored and addressed regularly, as, howsoever premature their concern may appear at this stage, their concern arises from inherent weaknesses of the internet and some recent dot com frauds. Ans. 4: In general, for success in any business the competencies required are (SCANS, 2000); Resources Management: i.e how the company Identifies, organizes, plans, and allocates its resources Interpersonal Communication: i.e. how the company develops the interpersonal communication environment within the organisation. Information Management: How the company acquires, evaluates and translates the information. Technology Management: Cathay is supposed to be in regular touch with the latest advancements in order to fully utilize the benefits of e-business. Today, companies are presented with an increasingly bewildering and expensive array of cutting edge, must have, technological developments to consider (e.g. ERP, EIP, SCM, CRM, SSC, B2C & B2B e-commerce, ASP1). Many of these developments represent the continuation of trends begun in previous generations of technologies (Bhimani, 2003). E-procurement is part of this evolutionary process. Therefore Cathy Pacific must develop a set of competencies for improving the procurement process and to deliver cost effective, value for money services. These could be; It could be at the local end in the form of reduced levels or processes for preparing a supply order. Developing effective checks and monitoring points to measure up the process and outputs By being sensitive to the concerns of the workforce. By keeping an eye on the latest advancements in the field and what the competitors are doing. References: 1. http://www.cathaypacific.com (15 December, 2006) 2. http://www.ciol.com/content/e_ent/procurement/ 3. Steven Crane, (May 2001), In The Nick of Time, CFO Asia, Hong-Kong, available online at http://www.cfoasia.com/archives/200105-31.htm (15 December, 2006) 4. Cathay Pacific Joins World's Largest B2B Airline Exchange, (July 24, 2000), People's Daily, China, available online at http://english.peopledaily.com.cn/english/200007/24/eng20000724_46299.html (15 December, 2006) 5. Cathay Pacific to Save Cost by On-line Buying, (April 02, 2001), People's Daily, China, available online at http://english.peopledaily.com.cn/english/200104/02/eng20010402_66624.html (15 December, 2006) 6. Bhimani, Alnoor (2003). Management Accounting in the Digital Economy. Oxford: Oxford University Press. 7. OECD (2001), The Internet and Business Performance, available online at http://www.oecd.org/dataoecd/9/26/2731209.pdf (15 December, 2006) 8. Goodwin, Bill (20 Sept, 2005), 'Expert warns of growing risks of internet-based computing power', available online at http://www.computerweekly.com/Articles/2005/09/20/211861/expert-warns-of-growing-risks-of-internet-based-computing.htm (15 December, 2006) 9. e-business risk http://www.aon.com/us/busi/risk_management/risk_consulting/ebusiness_risk/default.jsp 10. Skills and Competencies Needed to Succeed in Today's Workplace, http://www.ncrel.org/sdrs/areas/issues/methods/assment/as7scans.htm Read More