Spend a little, save a lot!

CEOs once saw purchasing as a necessary evil. Now they're counting on their CPOs to boost shareholder value.

By Anne Millen Porter -- Purchasing, 4/4/2002 2:00:00 AM

Stockholders have this nasty little habit of expecting-not only profits-but also profits growth-every year. But today's business climate makes this very difficult for CEOs to deliver.

Dr. Greenspan and his cronies at the Fed have so thoroughly exorcised the inflation demon from the U.S. economy that average consumers rarely consent to pay full price for anything anymore. Just ask the formerly upscale department stores that now find themselves running one-day sales virtually every week. Ask the moms and pops forced into early retirement by the likes of Wal-Mart and Home Depot. The relentless march of technology innovation over the past two decades has furthermore conditioned American consumers to expect greater, rather than lesser, value for every dollar they spend on things like computers, video gaming systems, cars, and appliances.

So, without the option of achieving acceptable profits growth through higher prices-without the option, in many cases, of keeping product or services pricing even level-top corporate managers are turning their attention to cutting costs. And they're calling on their purchasing and supply management organizations to deliver big dollars directly to the companies' bottom lines.

On page two of his eight-page letter to shareholders (December, 2001), The Walt Disney Co.'s chairman and CEO Michael D. Eisner promises: 'Our Strategic Sourcing (i.e., buying stuff) initiative will save the company at least $200 million annually beginning this year through the implementation of more sensible purchasing policies.'

And Eisner is not alone in setting great expectations for cost savings from his purchasing and supply management organization. Other examples:

• DuPont Sourcing (Wilmington, Del.) has an annual 4% target for reducing outside spend.

• Procurement at IBM is expected to consistently deliver 'a 5% sustained competitive advantage, net of price increases or decreases, across its entire portfolio of external purchases.'

• Executive managers at NCR in Dayton, Ohio want procurement to deliver supply-side savings equaling 4-7%/yr in each the next four years.

• The supply management group at Deere & Co., Moline, Ill., will attempt a 3.5% cost reduction in 2002 as part of its 'drive for 5' goal of achieving a 5% total cost cut in a five-year period.

• Top brass at BellSouth, the Atlanta, Ga.-based telecommunications giant, asked the company's sourcing function to bank $1 billion or more worth of savings in three years' time. When the group delivered $1.1 billion in the first year, management merely upped the ante to $1.5 billion.

• W.W. Grainger (Chicago, Ill.), the well known national distributor of industrial MRO supplies, is looking to reduce its supply-related costs by some $5 million in 2002, this on top of a $25 million reduction recorded since it began to attack its 'total cost of ownership' back in 1998.

• For Maytag's global procurement group (Newton, Iowa) the annual savings goal stands at 6%.

• Top management at Raytheon, the Lexington, Mass.-based defense contractor, is counting on procurement to deliver productivity gains totaling 5%/year.

• JCPenney's purchasing organization (Plano, Texas) has a goal of banking more than $100 million in savings.

The litany goes on and on.

Six steps to lower spend

Fortunately, while demanding large, repetitive cost reductions from their purchasing and supply management functions, corporate leaders are also recognizing that delivering big cost reductions year after year requires them to do much more than simply demand price reductions from suppliers. Indeed, a recent PURCHASING Magazine poll finds the following six common practices among companies that are routinely delivering 3-7%/yr savings on the spend sides of their balance sheets:

• They have created authoritative, center-led purchasing and supply management organizations sometimes with direct-line reporting to the CEO,

• They use formal, standardized strategic sourcing and other purchasing decision processes,

• They recruit high-caliber people for sourcing and support them with professional development resources,

• They use formal, validated methods of documenting cost savings,

• They track performance to goals closely and create clear incentives for purchasing executives to deliver bankable cost savings, and

• They invest in information technology that supports their strategic supply management initiatives.

A common thread running through this list of practices is investment.

Step 1: Command central

Starting with organization, the companies studied by PURCHASING are becoming overwhelmingly center-led in their approaches to supply management. What is more, the leaders of these central organizations typically report either directly to their CEO, company president, or to one among the CEO's elite circle of managers, very often the company's chief financial officer (CFO).

At DuPont, Henri Irrthum, VP of global sourcing and logistics and chief procurement officer (CPO), heads up the company's sourcing competency. Irrthum reports directly to the group vice president of operations and services who is part of a small 'corporate core' comprising DuPont's CEO, COO, CFO and other high level executives. DuPont's leveraged sourcing personnel work on 'anything that can be leveraged across more than one of the company's 20 business units,' Irrthum says.

NCR Corp. kicked off its big supply-side cost reduction push by putting into place what Daniel J. Enneking, VP and CPO, calls 'a strong center-led global procurement organization' where 23 commodity teams have taken responsibility for the company's entire $4 billion annual spend.

Likewise, Bayer Corp.'s procurement and supply management group recently underwent reorganization to a 'center-led organization with a NAFTA focus,' according to Dr. Soheila Lunney, director and senior staff officer. The company recently brought in Robert Rudzki as CPO to lead the charge.

BellSouth, meantime, has undertaken a major reorganization from completely decentralized to a center-led buying authority. The company has a dozen or so business units covering local, long distance, international and wireless communications for both consumers and businesses, plus equipment sales, network support services, Internet access, and more. A precursor to BellSouth's one-year $1.1 billion savings achievement was a move in 2000 to 'establish a centralized procurement and supply chain organization with corporatewide reach,' says the company's VP and chief procurement executive Timothy D. Houghton. The visionary behind BellSouth's reorganization, according to Houghton, was vice chairman of domestic operations Gary D. Forsee. Prior to joining BellSouth in fourth quarter 1999, Forsee had been with AT&T, Sprint, and then Global One as CEO. He had made similar successful organizational moves in those companies, 'which is why he elected to centralize here as well,' Houghton says.

But transforming supply management from decentralized to center-led is no simple task. 'It took the better part of a year,' Houghton recalls, 'for us to recognize the power of presenting ourselves externally as one BellSouth.' During that timeframe, he says, 'a compelling case was identified to change BellSouth's supply chain. Project BEST (BellSouth Enterprise Supply Chain Transformation) was chartered in early 2000 with the goal of redesigning and implementing a common set of integrated supply chain processes across the corporation.' The reorganization was then facilitated, Houghton says, by an executive directive from the company's chairman and CEO Duane Ackerman, which stated that the supply chain organization would be the only organization authorized to make commitments externally for the company. 'Violations of this executive directive,' Houghton says, 'were reported to business units' chief financial officers for corrective actions.'

The Walt Disney Co. started its conversion to a center-led sourcing structure back in 1999 after its senior management conducted a highly successful strategic sourcing pilot with the help of an outside consulting firm, according to Bill Patrizio, senior VP of strategic sourcing and procurement. As Patrizio describes it, his organization now manages spending, running into the billions of dollars, on all items that are common to the entertainment giant's four business units: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products. These items include manufacturing services, marketing, technology, telecom, professional services, employee benefits, construction services, insurance, and more.

However, Patrizio says he had no executive fiat that placed him in control of this or that piece of Disney's total spend. 'Success gave birth to this new organizational structure,' he says. 'When I arrived in 1999, I was tasked with creating a strategy, an organization and a vision.' What he had going for him, however, was a tough economic environment. 'It hasn't all been about salesmanship. There has been a real necessity for us to drive good business results and we have not been private about our aggressive cost reduction goals. The work my organization has been asked to do is very consistent with the goals of our business units.'

Early in the conversion process, Patrizio recalls that some long-time suppliers did not believe Disney could make the transformation to a center-led sourcing structure. 'It was no secret that some of our long-time suppliers used a 'divide and conquer' approach to take advantage of our highly decentralized approach to buying.' As his group got started with strategic sourcing, Patrizio says there were suppliers that actually attempted to torpedo the process 'because they didn't believe we could act in a coordinated way, didn't believe we could deliver business to the contracts if they gave us better terms.'

Four years into it, however, these suppliers are whistling a different tune. 'We've pulled it off by pursuing a great deal of collaboration among the 'cast members' at Disney,' Patrizio says. 'We're at the point where our suppliers no longer have better information about our spending than we have.'

IBM (Armonk, N.Y.) presents, perhaps, the most extreme example of what a center-led supply management organization can accomplish over time. According to IBM CPO John Paterson, IBM buyers now control 100% of the company's total outside spending (up from 45% less than 10 years ago). And 100% of that spending is leveraged companywide. That is, every penny that is spent goes through one of 30 commodity councils that cover all spending categories. What's more, having achieved this substantial level of control, IBM is now pushing to the next level, what it calls 'enterprise leverage' whereby single rather than multiple commodity managers will deal with designated suppliers.

Step 2: Process, process

A rigorous, standard strategic sourcing process is another common weapon in the arsenals of supply organizations realizing healthy cost savings year after year. Much more than a series of fancy PowerPoint bullets, these processes apply much-needed discipline to the-

• Staffing of sourcing teams,

• Segmentation of commodities and suppliers into appropriate classifications,

• Identification of supply risks, (analyzing suppliers' financial positions, quality systems and technology roadmaps, looking at supply market dynamics, forecasting potential cost impacts of supply or demand variability over time),

• Assignment of appropriate sourcing approaches according to classifications, risks, and corporate risk tolerances (when to use RFQs, when to auction, when to pursue partnerships),

• Gathering of information (where to find internal and external data, what types, and how much information must be collected, how to analyze it),

• Rendering of supplier selection decisions (algorithms that weight bid/performance factors such as price, quality, delivery, terms according to corporate priorities and risk tolerances),

• Negotiating and writing contracts (for example, the process might dictate use of certain inventory-shifting tactics or expected payment terms),

• Planning and managing transitions to strategic suppliers,

• Creating and enforcing contract compliance strategies, and

• Monitoring and reexamining strategic supply agreements over time.

Very often, the creation and implementation of such rigorous processes involves investments-sometimes very large outlays-by senior management in outside consulting resources. For example, NCR's Enneking links much of the firm's past success at banking an average 5% buy-to-buy savings on its implementation of a strategic sourcing process with the help of a 'major management consulting' firm that specializes in strategic sourcing. 'Late in 1999, we changed our whole approach to sourcing. We began to employ a highly disciplined process for strategic procurement,' Enneking says.

But, while they may start with canned processes for strategic sourcing, all of these companies are also investing considerable time and resources in customizing their sourcing processes according to major commodity type and according to the specialized knowledge and expertise they have acquired in their particular industry segments.

For example, BellSouth's Houghton says the telecom firm based its two-year old strategic sourcing process on A.T. Kearney's seven-step approach, then customized the process by major commodity segment using its acquired knowledge in the telecommunications industry. 'Our strategic sourcing program applies a rigorous, proven methodology to categories selected during an opportunity diagnostic.' Each step in the process notes Houghton, outlines specific activities for sourcing teams to undertake.

JCPenney got help initially from McKinsey & Co., according to Patti Hanson, vice president and director of purchasing operations management. Then, when the company decided it was ready to strike out on its own, Hanson says, 'We kept certain elements of the McKinsey process but customized for our own industry and sourcing needs. We formed a strategic sourcing organization that would be separate from our operations purchasing group and could concentrate on examining our complex spend categories, conducting in-depth studies, forming relationships with client departments, convening cross-functional teams, and, basically, taking the time to do it right.'

In its initial strategic sourcing pilot back in 1998, Patrizio says The Walt Disney Co. engaged the help of 'a major consulting firm,' which came in with a 'proven methodology' for strategic sourcing. Then, starting with this proven methodology, Patrizio says his group took the process 'well beyond the paper-filled binders.'

'We took their process, then we applied technology. We customized it to Disney, to our business units, and according to the various commodities, goods and services that we buy. Buying construction services is very different than buying marketing services. Boilerplate processes simply won't do.'

The major benefit of applying a rigorous and highly customized strategic sourcing process, according to Patrizio, is that it helps to win converts quickly in the transition from a decentralized to center led purchasing structure. 'We've institutionalized our method and have been rather aggressive in sharing our methods beyond the boundaries of the procurement organization,' he says. 'Most people can buy things, but few have an appreciation for the science of purchasing. It's our thinking that the more people who gain access to the rigor we apply to sourcing, the more they will believe in what we do.' Application of science is critical, he adds. 'We have to be very strong technically. We have to understand our demand requirements. We have to be world class in negotiations.'

Step 3: Top talent

Where talent is concerned, it's clear that top corporate execs in search of consistent supply-side savings are becoming increasingly attuned to the need to attract highly educated and/or seasoned business executives to head up their purchasing and supply management operations. After all, IBM's big transformation started the day it recruited two-time PURCHASING Medal of Excellence winner, Gene Richter, from Hewlett-Packard. Likewise, Deere & Company recruited Dave Nelson as 'in industry-recognized leader' from the medal-winning Honda back in 1998. Now Delphi Automotive (Troy, Mich.), which intends to bank $300 million worth of supply-side savings in the 2001-2003 period, has stolen Nelson from Deere.

But, with only so many purchasing folk heroes to go around, many more companies in search of consistent supply-side savings are drawing their top supply management talent from a different profession altogether, namely, finance. Disney's Patrizio hails from marketing and finance. BellSouth's Houghton brought with him 15 years of supply experience in the healthcare field, but his background is in finance. Ditto for John Milliski, DuPont's director of global finance, sourcing competency, and payment services who was brought in to sourcing specifically to build a bridge between the science company's procurement and finance organizations (more on this later).

An interesting statistic from a 2001 Center for Advanced Purchasing Studies (CAPS) study: Nearly half (49%) of senior purchasing and supply managers queried by CAPS hold advanced degrees and, within this group, 98% hold their advanced degrees in business administration.

There's also evidence that chief executives are finally getting religion about the need to pay their top purchasing talent well. Another interesting statistic from CAPS : The mean salary earned by senior purchasing and supply managers (bonus and benefits included) is now $167K with the high being $328K.

CEOs are also starting to understand that they need to provide adequate career-path incentives to the people they want to join their newly elite supply management teams. 'Ambitious, aggressive people attending the top MBA programs don't necessarily see purchasing as a function that will take them to the pinnacle of their careers,' observes Disney's Patrizio. 'Attracting great people to these roles means providing a trajectory out of purchasing, which is something we're doing here.'

According to PURCHASING's poll, these trends at the executive level are starting to have a profound effect on the way companies are staffing and rewarding the middle and lower ranks of their purchasing organizations. Comments made to PURCHASING's editors contain the none-too-subtle message that 'traditional' purchasing folk need not apply to the big-company sourcing organizations that are pursuing ambitious year-over-year cost reductions. Among existing purchasing staffs, the most capable will be trained for better things. The least capable will be phased out over time. Example: DuPont's Irrthum says a big part of the company's strategy for meeting its ambitious cost reduction goals is to 'renew the sourcing and logistics organization with skills more appropriate for doing business in today's global environment.' Likewise, a representative from Raytheon says the company intends to meets its cost savings targets, in part, by placing 'talent in the supply chain organization' and pursuing 'professional development.'

Bayer's Lunney says the firm intends to meet its big cost savings goals by 'putting greater emphasis on professional training and development for materials management personnel.' NCR's Enneking says the company is increasing its 'emphasis on commodity director training and development.'

Disney's Patrizio has formed, as part of his organization, a finance group dedicated to the discipline of capturing information about cost savings. This group, Patrizio says, is populated exclusively with professionals from finance and accounting backgrounds. 'They monitor and measure our contracts to make sure the anticipated dollar savings are, in fact, being saved. They have walked in the shoes of our operating finance people. They know what it takes for our internal customers to believe the savings are real or realizable.'

Step 4: No soft savings!

Which brings us to the next practice common to the companies that have earned the right to crow loudest about the money they're saving on the supply sides of their operations. That is, they have created strict definitions and processes for determining when something is a savings that their CEOs can boast about to shareholders and stock analysts and when something is simply a cost avoidance or a reallocation of resources within the company or one of its business units.

At BellSouth, for example, Houghton says the organization is very careful to draw distinctions between savings that are 'budget impacting' and savings that are not. For a savings to be considered budget impacting it has to be specifically validated by the company's business unit CFOs. 'We have a formal process whereby a supply manager will present a business case to a review team comprising various business unit CFOs. The supply manager will show the company's starting point, the sourcing process, and the budget impacting savings that have resulted.'

Most budget impacting savings reflect price reductions, Houghton says. 'If we reduce the price on 100 pens from $1 to 80¢, we have a potential budget impacting savings of $20, but only if we buy 100 pens. We work with the supplier community to make sure we are really paying the new price points. If we manage to reduce our volume, that's a different equation.'

'We have a very robust method of monitoring and reporting costs savings,' says The Walt Disney Co.'s Patrizio. At Disney, the process starts with an accurate baseline estimate from which the company can measure future performance of its strategic contracts with suppliers. 'This baseline is the result of understanding both the volume we consume and the unit cost of a good or service. We work with the involved lines of business to make sure everyone agrees we are capturing the true cost benchmark,' Patrizio explains.

Then, with the baseline in hand, his team forecasts the company's future demand. 'We look at the delta between the baseline and the new projected volume and pricing. We say 'This will be the cost structure going forward.'' Once a contract is signed, Patrizio's finance people post to a scoreboard what Disney calls a 'recognized' savings. 'Based on where we started, this is our opportunity to capture savings that can be flowed through to our business units' P&Ls,' Patrizio explains.

As the weeks and months roll by, Patrizio's analysts go back and examine actual behavior of their contracts. 'We look at what our volume has been. We look at the actual costs we have obtained from the supplier.'

At the end of a year, in most cases, the group goes through what Patrizio terms a 'post mortem' where it converts 'recognized savings' to 'realized savings' based on a year of activity under the contract. If volume was higher than forecast, the realized savings might be greater than the recognized savings. Or it may go the other way if volume proves to be lower than forecast. 'The important thing,' Patrizio notes, 'is that 'realized savings' get flowed through to the P&Ls of our business units, and budgets are reduced.'

Throughout the process, he says, his people collaborate with Disney's business unit finance groups and have them sign off on savings that are being recorded. 'My boss, who is the CFO, reconciles the work of sourcing with that of the business units. We work collaboratively with the finance departments from our business units to validate our numbers. To do this requires a very arduous and disciplined process. If the money is going to come out of the business units' budgets, our methods need to be airtight. We need to have 100% credibility for the numbers we are recording,' Patrizio says.

DuPont Sourcing, according to Irrthum, pursues a similarly tight process for isolating the hard savings from the soft. 'Going back six to eight years,' he says, 'DuPont was no different from other companies. Sourcing was encountering credibility issues when reporting savings because it was not making a distinction between cost avoidance and real savings. If a supplier asked for an X percent increase and we negotiated that down to X minus Y, then could we call that a savings? We had a lot of discussion and debate around that question.'

One result of that debate was to put an experienced finance person, John Milliski, into the sourcing organization with the task of pursuing an active collaboration between the sourcing and finance functions within DuPont.

'We started by creating a standard set of definitions and principles,' Milliski says. 'We decided to say, quite simply, that the only thing that would count as a savings is an actual change versus what we paid in prior years. We know what we paid last year, so we started measuring our deltas off of that.'

Hard savings, Milliski says, can occur in two ways. 'We can either reduce the amount we consume-through improved yield, value analysis, or some other method-or we can pay lower prices.' Collaborating closely with DuPont's finance personnel, Milliski says the company's sourcing organization has developed an online cost savings database with a set of standard tools (pull-down menus for data entry) where sourcing personnel track their project data and associated savings. 'Our finance people conduct in-depth validations of these sourcing projects to make sure the data in the system represent real savings,' Milliski says.

In terms of the drive to standardized reporting on cost savings, Milliski says there has been a definite learning curve to the process. 'Three years into it, we're getting past the curve. Our people are adhering to the principles that we've outlined for documenting cost savings. Our validation tests are showing fewer and fewer incorrect entries in the database.'

The final step in DuPont's process, Milliski says, is for the company's various business units to take 'net sourcing savings,' which means they incorporate documented cost savings into their formal business planning processes. 'The savings have to be included in their business outlooks or they must explain how they are planning to invest the money that they are saving,' he says. For example, if sourcing says it will save $5 million over the next couple of quarters, the business unit must either increase its outlook by that amount or say it is investing the savings in marketing, R+D or some other venture. 'Those are business-unit decisions in which sourcing does not become involved,' Milliski says. 'Still, it provides a final corroboration of our process because you can be sure the business units don't alter their business plans unless they have validated data from sourcing.'

Another important element in the process, according to Milliski, is that DuPont does not report cost savings until an initiative is actually up and running. 'Say, for example, we're working on a substitute raw material. The testing may go awry or quality problems could arise, so we typically wait until the substitution is fully commercialized before we record the savings.'

Also critical, he says, is that the database system nets out all of the costs associated with implementing a change. 'That means we may see a couple quarters of cost increase before the savings start to kick in.'

Over the course of a year, DuPont Sourcing might record 5,000 savings projects in its sourcing savings database. 'Normally, we compare what happened to price this year versus last year. But with some items, this can be very complicated because the savings may come in terms of product yield rather than price,' Milliski says. For instance, if DuPont finds a pump for the same price as a pump it had been using but which has twice the useful life, then sourcing would claim this as a savings.

To ensure that sourcing personnel report the correct data into the system, DuPont has devoted business analysts to support each of its three leveraged sourcing organizations (raw materials, energy and packaging; services and supplies; and logistics services). 'Each sourcing leader has access to a business analyst who helps evaluate the financial impacts of the initiatives they are working on,' Milliski says.

Overall, PURCHASING's polling finds few companies even approaching what companies like Disney, DuPont and BellSouth have achieved in making sure the successes of their sourcing organizations drop clearly and unequivocally to their company's bottom lines. More typical are scenarios where sourcing organizations are struggling to write definitions, sort through their data, and train their people to apply such finance-driven cost concepts correctly.

Julie Honza, JCPenney's manager of purchasing finance and performance measurement, says her group has, so far, had limited success in driving sourcing's 5-6% per contract savings through to business units' budgets. Reason: 'The budget reductions are very unpopular and we're not completely confident that we have the right data yet.' The issues, Honza says, can be very complex. 'Say, for example, we switch from paper to plastic bags, but then we end up buying more bags. Only a few commodity areas are clean and simple enough that we have been able to change budgets.'

The clock is ticking, however. While so many companies are struggling to reach the cutting edge, PURCHASING finds some sourcing organizations now pushing the envelope a step further. Example: IBM, which regularly documents its cost savings and reports them to Wall Street, says it is now measuring its savings not only against what it has paid in the past, but also against what it calls the 'absolute low cost.' To do this, IBM is hiring consultants to determine the absolute lowest costs in the world for particular commodities and then telling its commodity teams to go out and beat these global benchmarks.

Step 5: Pay for performance

A whopping 77% of high level purchasing and supply management executives queried by the Center for Advanced Purchasing Studies now participate in stock option plans and 95% have bonus components to their total compensation packages. PURCHASING Magazine's 2001 Salary Survey, which samples the entire purchasing profession, finds 50% reporting bonus components to their total compensation packages.

The bonuses are, no doubt, tied to their meeting cost reduction goals.

In 2001, Deere & Co. added cost reduction as a component to its corporate bonus program [PUR: Feb. 7, 2002, p. 12]. DuPont, meantime, has an especially formal process for linking personal compensation to the successful completion of what it calls 'critical operating tasks', which, in the case of sourcing, often translate into delivering cost savings to the bottom line.

The approach, according to Irrthum, is companywide. 'Our purpose for existing is to increase shareholder value. From that purpose, each business unit creates appropriate strategies to drive shareholder value. Out of those strategies come critical operating tasks for the business units and for individuals within the business units. 'One of the keys to DuPont's sourcing success is that while we are 'center led', all sourcing strategies are developed and implemented with full collaboration with the business unit and regional sourcing leaders,' Irrthum says.

Once tasks have been assigned to the right people, those people become accountable and responsible for delivering on the tasks. For example, to increase shareholder value, sourcing may decide that its strategy is to maximize purchasing leverage in certain commodities. It might decide that the strategy for achieving maximum leverage is reverse auctions. The person responsible for reverse auctions will then have established metrics and anticipated savings, which will be monitored over the course of a year.

For salaried folks at DuPont, basic compensation packages consist of a fixed salary component and a variable (bonus) component. Both are affected by performance to critical operating tasks. Fixed salary moves in the form of increases based on how well a person performs to their critical operating tasks. 'We pay for performance. People who perform better than others get higher compensation,' Irrthum says.

Meantime, the variable component piece is based on two factors, how well the entire company performs and how well the individual performs. When awarding variable components, every exempt employee is evaluated on his or her critical operating tasks, which determines their bonus every year. 'It keeps everybody tied to the overall business strategy of delivering shareholder value.'

Step 6: Tech investment

None of the work being accomplished by big league cost savers could be done without steady investments in technology. High on his list of reasons for success in banking more than $200 million per year for The Walt Disney Company, Patrizio cites 'deployment of electronic procurement technology, electronic reverse auctions and commodity specific portal applications.'

And Patrizio is not alone. Virtually every company participating in PURCHASING's poll reports ongoing investments in electronic procurement and sourcing technologies. These technologies, they say, succeed both in freeing up human resources for strategic sourcing and in creating the information infrastructure they need to beat suppliers at their old 'divide and conquer's game.

What's more, the execs say that while e-procurement and e-sourcing technology is making it more possible to pursue strategic contracts with suppliers, it is also making it easier to track where money is being spent, which is leading, quite simply, to less money being spent.

For example, NCR's Enneking says the company has actually stepped up its spending on technology for procurement and sourcing while the economy has recoiled sharply in 2001 and early 2002. 'We're looking to take advantage of this economic environment to lower costs. The technology is allowing us to get some great deals (using auctions) and also to watch our discretionary spending very closely. Since we've begun to track our discretionary spending more closely, we've seen dramatic reductions in outlays for such things as travel, cell phones and pagers.'

Technology is also helping sourcing organizations to improve the performance of their supplier bases, which can lead to lower costs for corporations.

W.W. Grainger, for example, claims an overall cost reduction of more than $25 million since 1998 by reducing the 'Cost of Poor Quality' using activity-based costing. To achieve this, the industrial supplies distributor created a Web site to share performance data with its supply chain on a 24/7 basis so that 'issues could be addressed quickly and proactively.' By investing in the technology to do this, Grainger says it has improved suppliers' on-time shipping by more than 50%, reduced receipt variances by nearly 15%, cut warranty returns by more than 10%, and reduced its total cost of procurement by nearly 30%. Looking forward, through its 'Distribution Centers of the Future', Grainger promises to 'use technology and automation in order to further increase efficiencies and reduce errors throughout the supply chain.'