e-Procurement Case Studies
David Hannon, Associate Editor -- Purchasing, 12/6/2002 2:00:00 AM
AMERICA WEST
Airline cuts costs in tough times
The airline industry is doing whatever it can these days to reduce costs. Business in the post-Sept. 11 environment is slow and until things pick up airlines have to keep expenses as low as is feasible.
Michael Inman, director of general purchasing, at Phoenix-based America West Airlines says America West got a headstart in the cost-cutting race when it started looking into e-procurement initiatives in 2001 for its indirect or "general" spend. In May 2001, it began doing some pilots with reverse auction provider FreeMarkets Inc. (Pittsburgh, Pa.) and online airline exchange Aeroxchange.com. Eventually, the company settled on MaterialNet.
America West's purchasing is divided between general (indirect) and technical (direct) spending. With the exception of two or three products, the reverse auctions have focused on indirect spending areas such as travel, plastic bags, first aid equipment and just about anything that doesn't actually keep the airplane in operation. Inman declined to say how much of the indirect spend is being auctioned or what the total savings seen has been, but said "we do it when it makes sense."
Inman is careful to point out that the reverse auction tool does not radically alter the sourcing process, but simply puts it into a higher gear.
"One of the good things about the reverse auctions besides the savings is the high-level visibility it provides," Inman says. "So now our CEO can walk by the auction room and in 10 minutes watch the price of a certain commodity drop $600,000. Purchasing could do that before, but that could take weeks. The executives can really grasp that purchasing is driving the cost down - or the market is driving it down. All of a sudden, purchasing is getting the accolades. We have been doing this job for years, but now it is much more efficient." And efficiency is key for a purchasing organization that has lost roughly 30% of its staff in the past nine months to layoffs.
And sometimes it doesn't even require an auction to speed things along. Inman says that after completing a reverse auction for hotel services, America West simply took the average savings from that auction and asked hotel providers in other regions to match those results. In the post-Sept. 11 travel industry, hotels were hungry enough for business, that they were willing to match that rate.
Reverse auctions skeptics say the process puts too much emphasis on price and not enough on quality. Weighing the intangibles in an auction can be a tricky business. Inman says one supplier in an early pilot auction was miffed that despite tendering the lowest bid in the auction, was not awarded the contract. After explaining the other factors at work, the supplier better understood the process.
To avoid these situations, Inman explains the MaterialNet product includes Value-Adjusted Pricing. The software automatically weights the suppliers based on quality and performance and reflects that in the final price. "For example, the Value-Adjusted Pricing allows us to add a 0.25% rating to a supplier that will work with us up front on a design or load in payment terms. As long as we're able to put a dollar value on the intangible, and this software allows us to do that." Inman says his own background in the automotive industry has helped him in the supplier pre-qualification process.
One thing the software cannot help you decide is what to auction and what not to. Inman says the market tells him if it is a suitable for an auction. "Everything with a price component can be auctioned. If you have two suppliers, that may not sound like a good auction, but if you started with 50 suppliers, all that really matter in the end is the last two suppliers. The trick is selecting a competitive two. I have had suppliers tell me they did not want to participate in an auction. Over time, some of those suppliers have changed their mind and come back and said they want to participate due to the market changing."
America West is not using e-procurement to consolidate its supply base. In fact, quite the opposite. For much of 2001 and into 2002, the company has been working to expand the number of suppliers it works with to get more competition in the various indirect spend areas.
Beyond the reverse auctions, Inman says the company is looking into the eRFI tool from MaterialNet to broaden its online sourcing efforts and centralize more of its sourcing activity online.
AMERICAN EXPRESS
Centralizing sourcing at a financial services firm
A couple short years ago the purchasing practices at global financial services firm American Express were not unlike those of a lot of other financial services firms - dysfunctional. That was the opinion of Tom Meador, senior vice president of real estate and procurement, at New York-based American Express, who decided the spending reigns needed to be pulled in. The arrival of a new CFO and a companywide re-engineering project has resulted in a newly trimmed down procurement organization at American Express, implementing online buying and spending analysis tools.
"It was culturally dysfunctional," says Meador. "We had no processes that were consistent, there were no positive relationships with the business units and the bypass from average spend was pretty severe. It was a common story."
The procurement redesign plan centered around three major focus areas. The first was to revamp the purchasing organization itself including new leadership, new authorities for that leadership and new skill sets to the 200 people in the purchasing organization. The second area of focus was rationalizing the supply base and the goals in that area include cutting down from 40,000 suppliers to 10,000. In IT alone, the reduction went from 800 suppliers to 35. The third area of focus was bringing the spend online, starting with the use of a spend tracking product from Zeborg.
With American Express' procurement operations spread throughout the U.S. and around the world, managing the contracted spend was not easy and rogue spending was basically considered to be out of control. But a simple policy from the senior management giving purchasing more control made all the difference in the world.
"The chairman and the CFO sent out an announcement to the whole company that said we are making the procurement organization run the way it is supposed to and we are serious about stopping bypass," Meador says. "We set up penalty pricing systems, so our payables people have a list of approved suppliers. If a bill comes through for something that doesn't match that list, procurement is called and we sit down with the business leader and look at the contract and either approve it or move that spend over to the approved vendor."
Meador says prior to this executive-level backing, there was no accountability and no centralization. "The procurement people were considered impediments instead of supporters," he recalls. But the success of such a plan depends on having the data online and easily available to show to business leaders what is being spent and where to help them understand exactly how a certain move will directly affect the business' bottom line. For American Express, that data has come through a tool called ExpenseMap from Zeborg, which captures and ana-lyzes data on a company's spending patterns.
The advice came clear from Zeborg on how the tool was going to help procurement in its quest to drive the reengineering goals. "We said the procurement department at American Express has to become, in essence, a strategic information management department," says Arnab Gupta, Zeborg's CEO. "It had to become a consultant to its own internal user groups."
The team at American Express agreed with that assessment and has been happy with the visibility the new online tools provide. "[ExpenseMap] gives us the granularity on that data to let us show the business leader how that money was being spent and how much, who was in the unit doing it. So that lets the business leader see where he is spending his money, how he maintains the save and how he disciplines his own organization. You can add value by negotiating a better rate, but that business leader needs to see how that better rate will help his P&L. And tracking how that data saves on the P&L is more difficult than you might think."
Over the course of eight weeks, Zeborg took the spend data from the various accounting systems at American Express worldwide and organized it by commodity and linked it to the underlying vendor populations and user groups. And then the data is tied into an interactive platform to look at it from any vantage point. "It allows procurement to take a global approach to each commodity," Gupta says. American Express was so impressed with the capabilities of Zeborg that in October 2001, American Express made an undisclosed investment in Zeborg.
Medor says American Express sourced office supplies with an electronic reverse auction and it saw significant savings. But it then got an equal amount of savings on that commodity by working with Zeborg to analyze that data and minimize the price points for office products. "We would have left 50% of the save on the table if we hadn't taken that next step with the Zeborg brain power to help us with that."
Producing an immediate savings is only the first step, however. More and more e-procurement adopters want to know how these tools will help them years down the line after supply bases have been rationalized and contracts renegotiated. Gupta says most e-procurement adopters have two goals: one is immediate savings and the second is a long-term infrastructure to provide a platform for the future. Meador says the new tools create opportunities to implement new strategies and that is where the real value is. The ideas still have to come from the purchasing pros, but the software systems help carry out and sometimes even inspire those ideas.
"These tools start embedding good procurement behavior within the organization," Gupta says. "I am seeing that for the first time the global procurement office and the CFOs are starting to get an analytical understanding of the dimensions of procurement problems."
BARCLAYS
Financial services firm moves public exchange offerings private
The U.K. is going private. In a sign of the times, Barclays B2B, the wholly owned subsidiary of U.K.-based financial services firm Barclays PLC, is changing its focus from public trading exchanges to private exchanges.
"We're seeing a polarization between the public horizontal exchanges and private," says Clive Freeman, head of procurement solutions at BarclaysB2B. "Our view is public horizontal exchanges will either become public vertical exchanges with more focus on supply chain in a particular industry or users will want to migrate into private trading exchanges because they will see greater benefits from doing the same things."
Barclays B2B launched its public exchange in December 2000 and now has 200 suppliers and 3,000 buying companies on it now. But as those customers came onto the exchange, many began requesting the "next step" in exchanges - bringing all of their existing trading partners online in a private exchange.
"The customers will sometimes have substantial discounts already negotiated with the very same suppliers they see on the open exchange at list price," says Freeman. "So they want to take advantage of that. And there are also some more sophisticated requirements dealing with internal procurement cycles that are easier to address in the private environment than in a public exchange."
The move to a private exchange model involves a change of platforms. Barclays public exchange was built on an Oracle platform and offers database search, catalogs that suppliers can update themselves and some fairly simple approvals. The new private exchange offerings are built on a Clarus platform and offer the buyer more sophisticated approval hierarchies by commodity type or value of purchase. There are also rules that say if an approval has not been returned by someone in a certain time period, it can be routed on to someone else.
Freeman says he feels that Europe missed the overall "hype curve" that the U.S. saw in big public exchanges in recent years. "We had about the same adoption rate for the big Ariba, Commerce One deals, but for the public exchanges and larger scale reverse auctions we didn't see the adoption rate. I think we see less cynicism in the user base than we see in talking to the U.S. suppliers because we didn't go through those big failures in the big public exchanges. We may be 12 months behind the U.S. in those areas."
MASTERBRAND CABINETS
Cabinet maker centralizes IS through e-procurement
Cabinet maker MasterBrand Cabinets did things its own way for a long time. Its history dates back, in one form or another, to 1926 and for most of that time, Aristokraft (which later became MasterBrand) built and sold its own cabinets and each of its divisions procured its own materials in its own way.
MasterBrand was created in 1998 when Aristokraft and several other cabinet makers were combined to create the largest division of parent company Fortune Brands with $1.2 billion in sales and more than $400 million in spend. That spend focused on things like particle board, plywood, hardwood dimension lumber, corrugated, melamine, wood veneers, and drawer slides. In 2001, with the economy in the state it was, MasterBrand decided it needed to become more strategic in its buying and share its ideas across the company.
"Up until early 2001, the company was totally decentralized," says Brad Andler, CPO at MasterBrand. "When I came on board, we began centralizing the sourcing operation into the Jasper, Ind. headquarters. We brought the purchasing functions in from six or seven different divisions of a total of 14 and created a strategic sourcing group." The group decided to manage the spend by commodity instead of by division.
But the major challenge - and benefit - to centralizing these divisions was tying the different information systems together, especially in procurement, where it would want to aggregate and analyze the spend data. "We knew that to continue with the strategic sourcing, it was im-perative that we understand our spend," Andler says, adding that MasterBrand opted not to go with an ERP system. "We looked at some ERPs and came close to signing on with one, but there were tools the ERPs did not give us." MasterBrand instead decided to look at the e-procurement tools available at the time and eventually settled on VerticalNet, signing with them in late October 2001.
MasterBrand started by bringing its largest or "high impact" direct suppliers onto VerticalNet first. From there, it rolled out the system to the rest of its direct supply base. To date, about 90% of its direct suppliers are on the system and plans are in the works to bring indirect suppliers on board.
"Our industry is not really sophisticated in technology, so many of our suppliers have not been required to participate in this level of technology before," Andler says. "So it has been as much of a training process as anything. Most are ready, willing and able. The ones that are not, we use that as another measuring stick to see if they're a long-term partner supplier for us."
Andler says VerticalNet provides an effective method of obtaining spend information from disparate systems, streamlining the process at the same time. Rather than spending hours trying to gather and understand data housed in systems across the multiple division, buyers get that information in one place, allowing them to manage the purchase price variance across divisions.
VerticalNet also provided a standard supplier performance evaluation system for the different divisions, using common metrics and scorecards. Suppliers are then allowed to view their scores online and the scores are tied directly to the supplier certification program, which serves as a motivator for them to improve service levels.
Getting online with suppliers has also let MasterBrand further its zero-defect policy by streamlining the flow of information and reducing the time for reactions to non-conformities.
"When there is a non-conformity, buyers log onto VerticalNet and enter the non-conforming specifics, tie that to a supplier and it electronically goes to the supply base," says Andler. "Now our commodity managers can access that information nearly real time and see that performance of the supplier, regardless of the division. That is huge in terms of leverage."
Monitoring suppliers more closely has also translated into better on-time delivery and the next step is making design information and drawings available through the VerticalNet portal to eliminate shipping costs for those items. And the online bulletin board makes communication with suppliers much easier, according to Andler.
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