SRM + E-AUCTIONS: Tools in the toolbox
Delta uses e-auctions as a tool, SRM as a process.
By Karen Prema -- Purchasing, 4/6/2006 6:00:00 AM
With the rise of new technology focused on sourcing and supplier management, buyers are more often faced with the decision of which tool to take out of the toolbox. Typically, it's thought that the decision comes down to e-sourcing tools or supplier relationship management (SRM) tools. But, SRM and e-auctions are not exclusive. They often work hand-in-hand. Which tool and strategy a procurement organization selects depends on the individual contract, commodity and a multitude of other market factors.
Delta Air Lines of Atlanta is a good example of this process. While the company continues to plan its emergence from Chapter 11, procurement's strategic role (and the tools it picks to support that strategy) has perhaps never been more important.
Delta's procurement manages $9.4 billion in spend and nearly $6.2 billion of that was spent on fuel in 2005. The remaining $3.2 billion was spent on direct and indirect materials, which is where Delta has been targeting its reverse auction strategy.
"You should leverage [e-auctions] where there is a very healthy and robust supply base to make sure you get the best deal," says Bob Currey, general manager of sourcing innovation and supply management for Delta, in a recent interview with Purchasing.
Delta's early experience with e-auctions came in negotiating contracts for hotel rates and has progressed to other indirect spend areas like office supplies, using technology from Verticalnet. Currey says to, "absolutely reverse auction those products" based on supplier competitiveness as well as supplier switching cost.
But it's not just indirect materials—Delta has used e-auctions in more complex spend categories. Currey recently detailed an e-auction Delta held for IT professional services. Prior to the auction, RFPs were sent to 30 suppliers of IT services, listing the descriptions of requirements for the contract.
Each supplier had the opportunity to hear the expectations in detail, an opportunity to ask questions and respond to the RFP. Based on the responses of the 30 suppliers, Delta selected 15 to participate in the online reverse auction.
For direct spend areas at Delta, there is typically a more narrow supply base or even some cases where Delta is single-sourced. Some parts on an airplane will be replaced only one every 15 to 20 years.
Sidebars: REVERSE AUCTION CASE STUDY Pier 1 Imports leverages e-auctions INDUSTRY PERSPECTIVE Supplier segmentation: Invest or foster competition? SRM CASE STUDYÂ Toro moves from e-auctions to SRM strategy |
"If you have to go to Boeing to get those parts, because they are licensed and there are no alternatives in the supply base, then an RFP isn't an option," says Currey. "That's when SRM is so important to us. In some cases we may need [those suppliers] more than they need us."
Delta focuses its SRM strategy on its top 200 suppliers. In these close relationships, Currey works with suppliers in ways that will create incremental value. For instance, where better prices may not be accomplished, purchasing at Delta might look toward working with its suppliers to manage inventory better or areas of warranty recovery.
Currey makes an important distinction, however, in separating supplier performance from SRM. While both are part of supplier management, supplier performance can be defined and measured with key metrics. "The great thing about this is it forces us to define success," says Currey.
Supplier performance is tied to a scorecard while SRM strategy depends on what tier that supplier is in. "Because I know they are in the top tier, I have a scorecard for those suppliers and top management meetings," says Currey.
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