Consolidate software buy for cost savings-and more
By Susan Avery -- Purchasing, 4/20/2000 2:00:00 AM
By consolidating the software spend within the purchasing function, organizations gain not only cost-saving benefits resulting from pooling the buy but also a better understanding of user requirements across the company. Armed with this information, purchasing can do a better job of what it does best: Match end-user needs with optimal products and suppliers.
Such is the case at Delta Air Lines, Atlanta, Ga.
"Centralized procurement allows for a deeper, more robust understanding of the varying needs across the enterprise as well as strengthening the buying position due to maximized leverage of speed," says Michael J. McHale, general manager-technology & telecommunications purchasing, and president of DeltaTel Inc., a wholly owned subsidiary of Delta Air Lines (PUR: July 16, 98; p. 189).
Some of the benefits of centralized procurement of software now being realized by Delta are more control, more leverage, a deeper understanding of the business requirements, and more efficient processes.
McHale, who has spent the past eight years working in purchasing at Delta, currently is responsible for managing the technology and telecommunications spend there-more than $500 million worth of technology-related goods and services annually. These purchases include hardware, software, communications and professional services.
As GM, one of McHale's primary responsibilities is to establish a vision, direction and core mission for the department. To this end, he has set aggressive performance measures to achieve and track capital and operating savings for software just as his organization does for hardware, professional services or telecommunications. Some of the areas of focus for software include: cost avoidance, improved supplier performance, product quality, supplier diversity and supply base rationalization. "We are committed to developing and maintaining quantitative measurements to influence the behavior of our suppliers," he says.
"When Mike Ellenburg (vice president-purchasing) came on board, he began transforming the department into a world-class organization," says McHale. "He upgraded the quality of the personnel, he began applying principles of strategic supply chain management, and most important, he began educating the rest of the company about the value added by purchasing. This convinced other departments to get us involved earlier in the procurement process."
McHale's organization purchases software for large systems or mainframe computers that run large applications such as the ERP system; mid-tier systems or servers such as unix that run various internal and external business and consumer-based applications; development requirements that provide the tools for software developers; and desktop requirements such as the Microsoft suite of products. Delta's software expenditure is approximately $85 million to $100 million annually. The FY00 projected spend is $100 million.
A niche-oriented buy, software's challenges for purchasing operations are centered around single/sole source issues, says McHale. Software licensing fees and maintenance requirements can be unique; the pricing models software companies use are oftentimes complex and require specialized legal involvement. What's more, purchasing professionals responsible for software must take great strides to stay abreast of how the industry is evolving.
"While software is probably the most elusive of technology commodities, it is imperative that we practice fundamental concepts of sourcing complete solutions and remain committed to cultivating the correct mix of suppliers to maximize Delta's return on its investment.," says McHale.
To do so, McHale's group works closely with its internal customer, Delta Technology, a wholly owned subsidiary of Delta Air Lines. Delta Technology provides all of the technical solutions for Delta. A dotted line reporting structure to the CIO helps to ensure solid communication.
Purchasing also maintains a good relationship with the company's information technology (IT) function. Still, the roles remain distinct. Purchasing is completely responsible for relationships with suppliers and represents Delta's interest in negotiations; the technology organization determines the best technical solution and works through any and all technical issues.
Purchasing gets involved at the point that there is a clear need to source a solution, says McHale: "The earlier the better, and obviously before any kind of technology or supplier selection has been made. This is critical to ensure that purchasing can optimize the leverage available in the sourcing process." The company has clear guidelines that ensure purchasing's involvement at the appropriate time.
As such, purchasing is responsible for providing expertise in the commodity, procurement policies and procedures, as well as procurement/sourcing strategies. In addition to sourcing the best overall solutions for the business, purchasing is a very integral part of the company's compliance, distribution, license recycling and retirement programs.
To aid in product selection, purchasing uses the Internet. (It also is developing its own e-commerce initiatives.) Delta also pushes to receive all software electronically, which is more efficient and cost effective. In addition, Delta uses the company intranet whenever possible to distribute software internally. This process reduces cost while helping to maintain a common software technology "footprint" out in the field.
For most sourcing decisions, the purchasing organization has developed a comprehensive RFP (request for proposal) program. This process evaluates the technical fitness, functionality, financial stability, market presence, future vision and total price of the competing companies. The RFP process is quantitative and uses weighted averages to determine relative impact in formulating the decision. Purchasing leads this process and works very closely with the business and technical stakeholders to determine the best solution.
To measure supplier performance, purchasing has developed a quantitative measurement tool called apex, for "achieving performance excellence."
apex is a corporate initiative which has been implemented across major portions of Delta's supply base and strives to measure, develop, grow and improve suppliers representing 80% of Delta's recurring spend. Suppliers in the program include those that provide aircraft parts and maintenance support products, aircraft services, dining products, technology products, transportation, and corporate supplies.
apex focuses on key performance indicators that are fundamental to most any business: service level (on-time delivery of goods and services), operational impact (flight delays), quality, unit price, leadtime, and responsiveness (a measure of customer service).
Purchasing continues to develop and maintain quantitative measurement tools that address Delta's product and service requirements. "The airline industry is one of the most dynamic business environments in the world," says McHale. "This makes Delta's ambition to become The Greatest Airline in the Eyes of Our Customers' a significant challenge, one that can only be accomplished with world-class suppliers."
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