Abbott Labs uses private electronic trading strategy
Reverse auction strategy may be extended to MRO, packaging, lab supplies and capital equipment.
By Christopher Reilly -- Purchasing, 7/5/2001 2:00:00 AM EDT
In late 1999, with the frenzy of e-business in full swing, Abbott Laboratories Inc., a research-based pharmaceutical, nutritional and medical products manufacturer headquartered in the Abbott Park section of Northern Chicago, Ill., was typical in its limited level of involvement with B2B e-commerce. But in the past year, Abbott has embarked on a strategy to reap the benefits e-commerce has to offer in terms of time and purchasing resources saved, supply-chain efficiencies and cost reductions.
The purchasing organization at Abbott is typical of many companies operating in the pharmaceuticals and biomedical products markets. The company's procurement function consists of 140 purchasing personnel at the site level, supported by a team of 80 central corporate purchasing professionals. E-procurement activities are headed by an e-business manager whose job it is "to evaluate the tools and technologies that are available and those that are coming online and determine where those tools can improve the productivity of our organization," according to Abbott's divisional vice president of corporate purchasing, Sarah Catterson. Purchasing conducts online transactions at the business-unit level, with guidance and support from the central procurement function.
In March of 2000, the purchasing group at Abbott realized it would have to make a significant spot buy for a particular chemical due to an internal production ramp-up, which provided a good opportunity to experiment with reverse electronic auctions. Using a pilot approach to online chemical transactions, purchasing at Abbott Laboratories decided to test the waters before jumping in with both feet.
According to Jim Snow, manager of corporate purchasing at Abbott, the company approached ChemConnect to set up a corporate trading room—a private reverse auction set up as part of ChemConnect's Worldwide Chemical Exchange—to handle bidding and negotiations for its big spot-buying transaction.
Private trading
Abbott Laboratories chose a private-trading-room approach to its online reverse auction, as opposed to using the larger, inclusive worldwide chemical exchange. There were two reasons for this: Abbott Labs wanted to work with existing, trusted suppliers, and it wanted to assure product quality.
"As a pharmaceutical company, we have to know that suppliers will meet our quality and delivery standards," explains Snow. "We have to ensure that suppliers invited to our corporate trading rooms are approved suppliers (or are at least may be approved by Abbott's standards)," Snow says, explaining that some non-approved suppliers may be invited to an auction if they are able to answer satisfactorily a supplier-quality questionnaire. If the prospective supplier is able to meet the quality criteria defined in the questionnaire, they must then pass an onsite audit.
Abbott began its online chemical trading pilot program with more than two weeks of pre-auction work, which involved establishing rules for the auction. For instance, Abbott had to determine how it wanted suppliers to bid for the chemical contracts, what price increments it would use, how to express terms of the deal, and the level of reserve pricing (the highest bid that Abbott would agree to accept). According to Snow, every auction has different rules, depending on the chemical, volume, price trends and other factors, which must be determined and agreed upon before the bid can start.
From the pilot program, Abbott Laboratories evaluated the transaction, determined that the system worked, and decided to adopt its relationship with ChemConnect as a regular strategic sourcing tool.
Having done this, the purchasing group began to identify which chemical products might be appropriate for the reverse-auction online trading model. Purchasing developed a "decision tree" with a list of factors to determine the chemicals it wished to purchase through the ChemConnect site. Factors included volume needed, total value, and particular chemical market conditions. For instance, if the chemical for purchase was a high-volume commodity, and if there were only two producers in North America, the chemical would be deemed inappropriate for the competition online auction model.
Next, Snow says purchasing looked at the supply base to determine if additional suppliers should be considered to participate in its auctions. The process of closely evaluating the supply base and Abbott's own online purchasing goals took several months.
Then, in November and December of 2000, Abbott boosted its online procurement efforts by conducting 15 more online reverse auctions through ChemConnect corporate trading rooms. Snow says that one of the transactions conducted during this time was a complex, multifunctional deal that involved separate corporate trading rooms for the same product. He explains that the company had need of a particular solvent in two of its business regions, "but we had a situation where we had a regional supplier that had a strong position on a solvent in one of those regions," Snow says. "So we configured three sequential online corporate trading rooms that allowed suppliers to bid on the solvent business in one region, the second, and then the total of the two regions." According to Snow, the intent was to allow one or two regional suppliers to bid for their regions or on the total business in both regions. "From that setup, we were able to extend terms of the contract beyond a one-year agreement to multiple suppliers covering both regions," Snow says.
Primary benefit of the corporate trading rooms is that they are designed to save buyers time. Where the normal RFQ bidding process can take several weeks to complete, the online auction can take a matter of days or even hours to finish. Online negotiations within ChemConnect's corporate trading rooms are timed, and in most cases, the actual negotiation stage is completed in less than an hour.
As far as productivity is concerned, Catterson says Abbott Laboratories has seen significant improvements. "Using the corporate trading rooms, we have reduced what might be estimated as an eight-week bid cycle down to two weeks," she adds. "This has allowed our purchasing agents to spend their time more effectively in areas such as strategic sourcing."
For Abbott Laboratories, the corporate trading room reverse auctions spanned a wide range of general or commodity chemicals and purchase commitments. Chemicals for which Abbott had existing contractual agreements with suppliers were excluded from the online buying. Also, most of the corporate trading rooms were set up to provide Abbott with annual bids from suppliers, and some of those resulted in long-term contracts, according to Snow.
In the near future, Abbott plans to extend its use of online auctions beyond the procurement of direct materials. Abbott is exploring online maintenance, repair and operating (MRO) buys, as well as auctions for packaging, capital equipment, laboratory supplies, biological products and other purchases.
Other benefits
Reducing the length of the chemical contract bidding and award process is certainly the most visible benefit of the reverse online auctions, but according to Abbott's top procurement professionals, other benefits have contributed to the company's success in the area of online chemicals buying.
One of these benefits was that Abbott was able to add new suppliers to its supply base. As Snow explains, during the decision-tree process of identifying which suppliers to include in auctions for various materials, ChemConnect was able to suggest additional suppliers to invite to the auction, increasing the number of competitors.
Catterson says a benefit of using private corporate trading rooms has been "significant price improvements as a result of our e-procurement efforts, and not just where the markets have changed," she says. While Catterson and Snow will not disclose the actual cost savings associated with the company's e-procurement efforts, Catterson points to changes in the particular chemical market dynamics, which contribute to cost savings through more transparent pricing and competition. "The corporate trading room has brought a new competitive environment or market dynamic to the supplier interaction stage of a bid process," she says.
Snow agrees, adding that, "Supply and demand dictates price, and the reverse-auction format allows supply and demand to move into a new arena, facilitating a more aggressive look into chemical markets at the time of auction."
How do suppliers feel about reverse auctions in terms of price? Catterson says that for many, early skepticism that auction technology would strip their pricing structures down to bare bones "has given way to panic."
"Price transparency has been a cause of concern among suppliers because they are seeing market dynamics that they haven't had to deal with before," Catterson says. With a paper-based bid system, she notes, suppliers would typically issue their best price and that would be the end of the deal. "There is no timely opportunity to see what is going on with the competition," Catterson says. "
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