Centralized system creates big volumes, saves money
By By William Atkinson -- Purchasing, 12/22/2000 2:00:00 AM
When Roy Anderson became director of purchasing at John Hancock Mutual Life Insurance Co., Boston, Mass., in late 1997, one of his first responsibilities was to create a centralized contracting and procurement function. "At the time, we were very decentralized," he explains. "All of the cost center managers in the company purchased their own products and services, except for very basic office supplies."
In order to implement centralized contracting and procurement efficiently, Anderson realized he needed technology that could collect data, as well as a methodology for being able to order electronically via a catalog format. "I always believed that purchasing was an excellent candidate for the Internet," he explains. "Most suppliers are on the Internet, and if you can work with the technology, you can reap the benefits of greater utilization and flexibility."
In mid-1998, the company elected to implement a Web-enabled environment. "Currently, about 60% of our volume is being generated front-end via the Web," says Anderson. However, once entered, the orders can take any number of routes to get to suppliers. In some cases, items go out to suppliers via the company's EDI system. "These include office supplies and office equipment," he says. In other cases, sales data are sent directly to suppliers via OBI. "For forms management and direct print items, users enter the appropriate information, and this feeds a print-on-demand system," he continues. A fourth route involves going directly to suppliers' Web sites and placing orders there. "We do these for purchases that end up having small dollar value, such as stationery products and flowers," says Anderson. "In these instances, we collect the data that we need back on the invoicing side."
Some suppliers, Anderson says, were already set up to accommodate e-procurement. "For example, the supplier where we purchase our books and magazine subscriptions was built based on a Web-enabled environment," he notes. In other cases, the company may go through a sourcing process for a commodity and identify the best supplier in terms of overall value, only to find that the supplier lacks an Internet-based solution. "In these cases, we work with that supplier to try to get them set up in our catalog system," he continues.
One of the driving goals for the company in terms of procurement is to lower the cost structure for suppliers doing business with Hancock. "In other words, I want suppliers to see us as their best customer, because we are so cost effective in terms of doing business," says Anderson. "In this way, we expect to be able to get the best pricing."
While e-procurement has been moving forward in the company for the last two-plus years, there have been some challenges. "The largest has been an internal culture change," admits Anderson. "We have worked hard to move users away from the concept of picking up the phone to call orders into suppliers, to a system where they must receive approvals first, then process orders via the online system."
The second challenge has been working with suppliers to make sure their catalog content is easy for internal customers to use, so they can find the products they need.
Third has been the accuracy of source data-trying to obtain and update content and data from users who've been ordering manually for years and who have certain key bits of information residing in their heads that have not been entered into the automated system. Example: "If someone used to order Part #123, but the number has been changed to Part #789, it may still be listed as Part #123 in the system," he explains. "As such, the user would know enough to order Part #789, even though it would be listed as Part #123 in the system. However, when Part #789 is delivered, the system would indicate that Part #123 was ordered, but Part #789 showed up." Anderson is working on ways to keep this kind of information updated.
One way the department is helping to address this challenge is to focus on each commodity separately and work with it until it is fully automated and all the bugs have been worked out. Anderson likes to use the "simplify-eliminate-automate" approach here. "First, we do what it takes to simplify the process as much as possible," he explains. "Then we eliminate everything that is extraneous. Finally, we automate the results." Purchasing, IT, users, and suppliers work together on these projects.
Currently, the company is in process of moving toward the next generation of Web applications. Anderson plans to incorporate bid-quote activity, as well as auctions and electronic billboards, into the company's off-catalog-based activities.
The results have been significant. Since implementing e-procurement, the purchasing department is handling nine times more volume than when it started with the same number of people. "We're still improving in this area, adding even more volume," Anderson says.
The reduced supplier base and leveraging of volume has also allowed the company to save between 10% and 40% on the commodities it purchases.
Finally, with the data the department is able to collect via the automated system, it's able to work with users on demand management strategies. "I tell users that I can save them 10% to 40% by negotiating leveraged agreements, but that users themselves can save 100% by not buying things that they don't need," he explains. "Our goal is to get users to purchase only what they need."
The most rewarding result for Anderson, though, has been the realization by so many people in the organization that the procurement department has value and can make a significant difference in cost structures. "It feels good to know that you can have a positive effect on profitability," he says. "The Web environment really allows you to make this happen."
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