GSK closes the loop using e-sourcing tools
David Hannon -- Purchasing, 6/3/2004 2:00:00 AM
The pharmaceutical industry is misunderstood, says Gregg Brandyberry, vice president of procurement, global systems and operations at Glaxo SmithKline. He says the industry has the reputation of being up to its eyeballs in cash ready for disposal, but in truth, the industry is so dependent on costly research and development, that most players are under extreme pressure to reduce all other business costs outside of R&D.
During both his session at PURCHASING magazine's Global Procurement Conference (see box at the end of story) and a similar presentation at the Conference Board's Electronic Procurement Conference in Chicago, Brandyberry said on average it costs $800 million to get a single drug to market and nine out of 10 drugs started do not make it to market.
"It is a difficult regulatory environment today," he says, adding that there are significant external pressures that are driving internal change at GSK. "All these things work together to set the stage for procurement to become a strategic partner to GSK."
GSK has an extremely large procurement organization (800 people worldwide with a $12 billion spend) largely left over from the 2001 merger between Glaxo Welcome and SmithKline Beecham. The purchasing group set a goal of developing what it called "best value purchasing" strategies, ensuring that GSK is getting the best possible price and cost for everything it buys. That means negotiating the best prices and making sure those contracts are adhered to.
To achieve both those goals, GSK looked to technology. The first step was setting up a sourcing portal called Galaxy, which provides a host of tools for sourcing and spend management. The tools work in step with GSK's strategy in that reverse auctions are used to lower cost while spend analysis functionality helps the company track who is buying off-contract.
"Our philosophy is to implement best of breed solutions including both internally developed and external solutions," says Brandyberry. "We want to configure these in a plug-and-play environment so we can change as the technology changes."
When it came to e-sourcing, it was love at first sight for GSK. In 2003, the company completed 939 e-sourcing events including 534 e-auctions, pushing more than $3.8 billion through the tools, almost one-third of its total spend. The spend areas targeted for e-sourcing have been as varied as production materials, capital equipment, freight services, hotel services and recombinant DNA.
"If you can auction DNA, you can auction everything," says Brandyberry. "We've used e-sourcing for legal services. Isn't that a beautiful thing? Lawyers logging on to bid their rates down. And in capital construction, we'll auction the works package and then allow the supplier that won that package to use our tool to auction the separate sub-contracts, such as electrical and sheet metal, to gain even further savings."
The advanced capabilities of e-sourcing tools like the E-Pass solution from Emptoris allow more complicated bidding projects to become targets for e-sourcing. GSK used e-sourcing on an IT outsourcing contract that was more than $500 million and had 5,532 bid fields. At the low end, GSK uses e-sourcing for daily $300 buys of drugs and lab supplies.
"We looked at 100 projects we completed without using auctions or electronic sealed bids and typically we were averaging 8% savings," says Brandyberry. "We've had a good procurement organization in place for a long time. But with auctions we're averaging 26% savings and 18% with electronic sealed bids."
GSK only awards contracts to the lowest bidder in about 20% of its auctions. Using bidding optimization technology has helped find an extra 7%-10% savings. Brandyberry says e-sourcing experience has taught him that there are basically three categories of bids. The first is what the seller wants to get. The next is the point where the buyer is willing to pay the price. But with auctions, the bidding goes further to the price the market will bear.
Brandyberry feels the auctions are good for both GSK and its suppliers because over the long-term only the healthiest suppliers will be able to compete in such a competitive environment. And the openness of the online format assures suppliers there is no "behind the scene" negotiating.
After putting so much effort into streamlining the sourcing and negotiation process, GSK's purchasing wanted to ensure that buyers use the preferred contracts and suppliers. To simplify that process for buyers, GSK set up its in-house "Orange Pages" content repository (so named because GSK's company color is orange). When a GSK employee wants to buy something, they type in a term and the Orange Pages takes them to the relevant content.
"This repository tells them who to buy from, what to buy, how to order," Brandyberry says. "We have a number of electronic ordering systems including Ariba for a general purpose electronic ordering system and other more vertically integrated systems for special areas like contingent workforce and travel." The Orange Pages is linked closely to a supplier performance tool, so buyers can easily see how a supplier is rated by other GSK buyers.
But the last step towards closing the sourcing loop is spend analysis and management. GSK was ahead of the curve in spend analysis and developed a tool in-house five years ago to better understand its spend. GSK is in the process of moving to the Emptoris ExpenseMap tool for spend analytics and management. The tool lets GSK produce actionable, granular reports and show budget owners who on their team is not buying from the preferred suppliers and what it cost that budget or business unit.
"Our internally developed tool was like coming out of the cave and into the sunlight because we were able to understand spend at a high level, but today we need to understand it at a granular level," Brandyberry says. "We're not policemen, but in today's environment where every dollar counts, this is the key to curing expense creep and getting after non-compliant spend."
The long and short of it is that the e-sourcing model has changed the way GSK thinks about procurement. He says traditionally procurement has sought big volume, long-term contracts for equal or lower price.
"We don't seek that anymore," he says. "Now factors like market conditions, excess capacity and cash flow drive our events, and there are many, many suppliers willing to supply us at a marginal basis."
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