How tools unlock supply value
By Elizabeth Baatz -- Purchasing, 4/22/1999
From materials-resources-planning software on mainframes in the 1970s and '80s, to enterprise-resource-planning software on client/server computers in the '90s, to the latest Web technology on the Internet today, technology continues to transform the purchaser's job.Just a few years ago, companies were installing complex information systems with little if any thought to their effect on supply management, and little if any input from purchasing. But things are changing. Consider the following examples:
* From upstate New York to San Paulo, Brazil to Amstelveen, Holland, enterprise resource planning (ERP) software is transforming the way that Xerox Corporation buys paper clips as the company prepares for the electronic-commerce world ahead.
* In Palo Alto, Calif., Hewlett-Packard is writing programs quickly and cheaply using the Internet's World Wide Web technology to help materials managers manage information faster and better.
* At IBM, the latest wave of Internet technology is expected to transform the relationships between Big Blue and its suppliers and elevate the contribution of supply management to company success.
Interestingly, some of these cutting-edge technology initiatives were barely a blip on the radar screen of the respective procurement operations only five years ago. At that time, the information systems people, at the behest of the CEO and CFO, were leading the charge to replace mainframe-based "legacy" materials-resource-planning software with PC-based client/server enterprise resource planning (ERP) software from the likes of SAP, Oracle, Baan, PeopleSoft, and J.D. Edwards. Purchasing people, like it or not (and many didn't), had no choice but to go along for the ride.
"The year-2000 phenomenon meant that companies had to replace their systems anyway," says Tim Lasseter, a Booz-Allen vice president based in New York who specializes in procurement. "Transactional systems that track purchase orders, inventory, and the like are simply part of a broader ERP implementation." ERP projects, many purchased from market leader SAP, tend to be extremely expensive. "Companies spend up to $3 million just for the software and tens of millions of dollars for people and consultants to get the system to work," says Lasseter.
For purchasing, results from the expensive and time-consuming ERP implementations have sometimes been less than satisfying, to say the least. "The processes that the purchasing guys have don't match what is burned into the SAP software, for example, and IT won't change the software," says Glenn Ramsdell, principal with McKinsey and Company in San Francisco. "In the end the materials-management module gets installed and the folks in purchasing use them reluctantly, if at all."
Most not happy with IT
Tom Tanel, a principal with Cattan Services Group in College Station, Texas, and a provider of seminars for procurement professionals, says most people with whom he talks are not happy with their IT systems. "Ninety percent of the folks in my seminars say they have an automated purchasing system, but very few hands go up when I ask who is satisfied with their system," he says.
But a new wave of technology initiatives may be changing all that, if trends at leading companies like Xerox, Hewlett-Packard, and IBM are anything to go by. Strategic procurement systems based on ERP software now are providing high-profile opportunities for procurement people to transform their jobs.
Also: Procurement departments, in partnership with their IT managers, now are in position to deploy smaller technology solutions on the World Wide Web for a fraction of the cost of large ERP implementations. Essentially, electronic commerce is putting procurement in the driver's seat.
Consider the changes taking place at Hewlett-Packard. "We have been excellent at weaving together heterogeneous systems, and we have been migrating our homegrown legacy systems to SAP and Baan software," says Scott Beth, director for information in the procurement operation at Hewlett-Packard. And now another wave of technology implementations is being overlaid on the ERP systems.
The next wave is using technology to manage supplier relationships, says Beth. "Everyone has focused on bringing down transaction costs with ERP systems, but we've given the procurement person very few tools, just e-mail and spreadsheets, to manage supplier relationships." Now, Hewlett-Packard is in the early stages of contracting with suppliers to provide productivity tools for procurement.
Indeed, purchasing productivity tools that automate the collection of supplier and material data, manage requests for quotes, and streamline extended enterprise communications are being developed in-house by big companies; young start-ups also are developing such tools at a furious pace.
For example, Aspect Development in the electronics industries and Harbinger in the petroleum industries provide automation and online catalogs to support the identification of materials and suppliers. A multitude of Web products from newcomers like Ariba, Commerce One, and Space Works as well as familiar names like IBM and W.W. Grainger also provide Internet products to automate and manage purchases of maintenance, repair and operations (MRO) supplies.
Meanwhile, FreeMarkets OnLine in Pittsburgh is making a name for itself in the procurement world by facilitating online bidding for industrial companies. And Digital Market in Sunnyvale, Calif., is providing Web-based software that allows supply partners to exchange proposal, quote, order and other information electronically without big investments in the old cumbersome Electronic Data Interchange (EDI) systems.
And inside high-tech companies, Web tools have been developed in-house too. At Hewlett-Packard, new "e-rooms" on a secure Web page provide a place for HP's businesses to describe their manufacturing plans and update their demand forecasts several times a day. Suppliers then can adjust their deliveries to HP based on the broadcast that HP has put out on its Web page.
"The system is called 'Imagine' and we put it up in four weeks at a cost of only $30,000," says Beth. Results have been spectacular. "In a business line where we used to shut down production for a week at least once a month because of parts shortages, now we haven't seen a single line down over the last nine months," says Beth. Compared to ERP systems that cost multiple millions of dollars to deploy, this kind of Web application was inexpensive and easy to justify with a clear return on investment.
New systems linked to old
Of course, many of the new Web applications that leading companies are deploying in their procurement functions depend on an MRP or ERP technology base. At AlliedSignal in Morristown, N.J., for example, the first step before deploying any new technology has been the mundane task of cleaning up the data. The company started to work on a central data warehouse to capture components purchases as well as track suggestions for improvement from suppliers in 1993 and 1994.
"We developed our data warehouse in order to figure out where the leverage points are," says William Ramsey, vice president of materials management. "The warehouse resides on a mainframe and is always evolving." Now AlliedSignal is busy putting in SAP/R3 systems to manage logistics and the supply chain.
AlliedSignal's turbocharging systems division, which makes turbocharges for cars, trucks, and airplanes, is farthest along with their SAP implementation, says Ramsey. Spanning 11 countries, 18 sites, and nine languages, the system sets a standard for materials-planning processes and communication links to the supply base. According to the chief information officer of the turbocharging division, Jeff Smith, on-time product delivery rates jumped from 65% to 92%.
"We are looking at electronic commerce solutions now too," says Ramsey, especially in two chemicals divisions where indirect purchases are a high percentage of total costs. "We have pilots going on for MRO supplies purchasing," says Ramsey. "We know e-commerce is going to be incredibly important in the business-to-business world, but the change rate is very high and standards are yet to be set." Just as AlliedSignal has learned with its SAP projects, materials managers must make sure they understand the company's goals and implement technology to the goals, says Ramsey.
Don Bielinski, president of MRO distributor W.W. Grainger, agrees with Ramsey. "The marketplace is revolutionizing itself almost every three to four months," says Bielinski. In fact, Grainger has invested lots of money and time to be part of the revolution. The company has deployed software that it uses internally to help its own buyers find non-standard items in diverse databases outside of Grainger. Also, Grainger has been a leader at using new Web technology on its own Web sites that are being used to draw in new customers and better serve existing ones.
E-commerce brings leverage
"E-commerce is a chance for buyers to turn the tables on suppliers," says Ramsdell of McKinsey. "Many companies couldn't tell you who they buy from or how much they spend, but electronic commerce tools can help change this." For example, Ramsdell cites one company that buys electric motors around the world at 200 different sites. "They were buying motors at widely divergent prices with a differential as high as 20%," says Ramsdell. "Now with new tools, they can go to the supplier and say they want the same price worldwide." The company saved 24% on its total motors spend by having the data and technology to understand purchasing patterns.
New Web tools, in conjunction with a solid ERP system, are empowering some procurement departments to make long-desired changes. For example, at the Boeing Company an effort is under way to combine more than 60 systems and processes for buying MRO supplies into one streamlined technology-driven system. With every site scattered geographically using its own system and no reporting capability, Boeing was in need of a new system. With 12 people from the buying community, three from accounts payable, 40 from IS, and 18 consultants from Oracle, a new Web-enabled ERP system is being designed for deployment in Pugent Sound, Washington, in June 1999.
"For three years we've been sending buyers to classes to become strategic buyers, and now we are finally going to have the tools to put what we've learned to use," says Doug Perry, a senior procurement manager and service strategy director for computing procurement at Boeing. The company's supplier-performance management process, in which data was inputted manually, is becoming wired. Collecting data for 250 key suppliers on quality, delivery, technical assistance, and responsiveness, the company had no single system to prepare the data and help analyze what the data means. "We think the new system is finally going to allow us to have the data we need and leverage our contracts," says Perry.
Using ERP systems and new Web tools is a challenge that nearly every purchasing department is facing. At Dentsply International Inc., a York, Pa.-based manufacturer of dental equipment and supplies, a manufacturing platform from SSA called bpcs has evolved into the corporate ERP system. John Crenshaw, who came on board in the L.D. Caulk division six years ago as an ERP project manager and now has been named director of logistics, says, "There are many ways to configure your enterprise with the software. We are continually challenging ourselves to explore its capabilities and use the system better. It is an evolution," says Crenshaw. "In our pursuit of more effective supply chain relationships, configurable ERP and Web-based procurement tools are a requirement today.
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