Web, outsourcing revolutionize buying

By by James Carbone -- Purchasing, 8/24/2000

If you ever meet Jose Mejia, chief supply officer of Lucent Technology's Supply Network Solutions organization, don't refer to the people who work for him as buyers. Call them supplier managers or business managers.

"I don't like the word 'buyer.' It makes people think of the old purchasing paradigm," says Mejia, who heads a 1,400-person group that used to be called Global Procurement. That paradigm is one in which buyers' primary function is to send out request for quotations (RFQs), pick the supplier with the best price, and then place the purchase order.

While that activity is common at many companies, the procurement function at Lucent is changing. It's becoming less transactional and more strategic, says Mejia. Supplier managers not only choose suppliers and evaluate their performance, but also work closely with Lucent's new-product development team as well as sales and marketing.

The changes occurring at Lucent reflect the changes that are occurring in purchasing due to the rapid growth of outsourcing and Web-based electronic commerce. As more OEMs use contract manufacturers (CMs), there will be less of a need for buyers at OEMs to handle purchasing transactions and more of a need for purchasers to be supply chain managers. Web-based e-commerce is resulting in the automation of purchasing transactions and is reducing procurement cycle time. It used to take buyers days to send out an RFQ for a bill of materials. Now many Web-based procurement tools enable a buyer to get responses back to RFQs, evaluate responses, and place POs in hours. With less time needed for transactions, buyers can work on more strategic supplier issues.

E-commerce is the future

Gene Richter, former chief procurement officer at IBM, says e-commerce is the single biggest phenomenon affecting purchasing, and it will have a huge impact on purchasing in the future.

"In three years, all procurement will be done over the Internet," says Richter. "Every company will have 100% of their purchases on the Web. In fact, one major regret that I have is that I retired at the beginning of this giant e-procurement revolution." Richter recently retired from Big Blue after a 39-year purchasing career. He also worked at Ford, Black and Decker and Hewlett-Packard prior to IBM.

He says e-commerce between OEMs and suppliers will be commonplace. "Companies will hire recent college grads and old purchasing pros will talk about the days of EDI and faxes and the young buyers will look at them as if they are dinosaurs," quips Richter.

Purchasing managers in the electronics industry agree with Richter's assessment of the future impact of e-commerce on procurement, according to a recent Purchasing Magazine survey. The survey found that 78% believes that purchasing transactions will soon be automated and 64% says e-commerce will free buyers up to work on more strategic supplier issues.

The survey also finds that Web-based e-commerce will not result in mass firings of buyers. Only 18% of the purchasing managers surveyed think e-commerce will result in the need for fewer buyers. The survey also finds that in the next two years, 39% of purchasing managers expect to increase their number of purchasers and 53% say they will maintain the number of buyers in their departments.

"I don't think there will be fewer buyers," says Richter. "In fact, I think there will be more in procurement than there is today, but they will be doing different things."

The emerging role

Some buyers will be working with engineering on new product development. Their role will be to make sure their companies are aligned with suppliers who can not only design the latest application-specific integrated circuit (asic), but can build it in volume and at a price that won't reduce the margin of the OEM's end product. Others will be looking to identify emerging sources of supply. For instance, a memory buyer at a PC OEM may spend his or her time identifying a potential new dram supplier or a geographical location where dram manufacturing may migrate.

"With dram, the U.S. used to be the main source of supply," says Richter. "Then it went to Japan, then Korea and now maybe it is heading to Taiwan," he says. Buyers need to be able to identify these trends early and plan their sourcing strategies accordingly. Buyers who are successful at this will truly add value to their companies. Buyers who partnered with Samsung before it became the dominant DRAM manufacturer have earned the company's loyalty and undoubtedly are guaranteed parts when supplies get tight.

IBM, which does Web-based e-commerce with most of its suppliers, is redeploying its purchasing troops. "We are aggressively automating the transactions activities and diverting those resources and skills to more value-added parts of the processes, whether it is working with suppliers or working with internal development teams," says John Paterson, who took over for Richter as head of IBM purchasing. "Our goal is not to shrink the function, but to realign it to have no buyers engaged in administrative tasks because by definition those tasks are non-value-added," says Paterson.

"Last year, we moved more than 200 people from the back end of the purchasing process to the front end. We will move a similar number this year. We will continue that until we have eliminated those transaction tasks," he says.

Leveraging the Web

Paterson says a key challenge will be for buyers to find ways to use e-commerce to their advantage. "Buyers in the future will have to find ways to exploit e-procurement technologies to bring value to the buyer, supplier and customer. How do you stitch together-via the Net-all of these complex supply chains to bring more value at low cost?"

Another trend that will continue to affect purchasing is outsourcing. While the notion of outsourcing is not new, the degree and level of outsourcing in electronics continues to grow. Established, previously vertically integrated companies like IBM not only outsource board manufacturing but entire systems to contract manufacturers.

"In the past the successful companies were the vertically integrated companies," says Richter. "Now the successful companies are the least integrated companies."

OEMs traditionally have outsourced lower cost standard products where the OEM added little or no value. High-end systems tended not to be outsourced. However, in the future more high-end systems will also be outsourced as contract manufacturers become more aligned with their OEM's customers' business and become the manufacturing arms of the OEM.

"The narrowing of focus to do the critically few functions that you do best and outsource everything else is an enormous change for procurement," says Richter.

As OEMs outsource more, OEM buyers' role will change. They will have fewer traditional buying duties such as making sure parts get to the factory in time.

"Outsourcing places a whole set of new responsibilities on procurement communities at companies," says Paterson. "The ability and need to manage multiple tiers of the supply chain becomes important," he says.

"Engineering, manufacturing, capacity planning, materials management skills will be needed to manage the outsourced supply chain," says Paterson.

CM's expanding role

As outsourcing continues to grow and OEMs use CMs not just for boards, but for entire systems, purchasing's role will be more project manager than buyer. Initially their duty will be to evaluate and choose which CMs their companies should use. Evidence: A recent Purchasing Magazine survey found that 88% of buyers whose companies outsource either choose or are part of a team that selects the CMs their companies use. Sixty-six percent say they evaluate CMs' capabilities and 65% say they make site visits to CMs.

Selecting the right CM will be challenging in the future because CM capabilities can vary wildly and one size does not fit all. Some CMs just build boards, while others can build entire systems and have a high degree of supply chain management expertise. Some are good at high-volume, low-mix manufacturing. Others are good at high-mix, low-volume assembly. Some specialize in prototype builds. Some offer design expertise while others are strictly build to print. Quality levels produced by CMs can also vary and OEM buyers will evaluate the performance of the CM regularly.

OEM buyers will also have to decide how much purchasing responsibility to give to CM buyers. Major OEMs have commodity teams to manage relationships with key component suppliers for microprocessors, dram, asics and other critical components. The teams formulate a strategy for the parts and then negotiate agreements with suppliers. The OEM's contract manufacturers and then buy under those agreements.

But for other standard, less critical parts, OEM buyers will have to decide whether to present an approved vendor list (AVL) and tell CM buyers to buy off the AVL or to let CM buyers manage relationships with component suppliers. Either way, CM buyers will be doing most of the day-to-day purchasing on behalf of the OEM.

The Cisco way

An outsourcing model that will be used increasingly in the future by more OEMs and startups is the one employed by Cisco Systems, which makes networking equipment including hubs, routers and switches. Cisco uses five contract manufacturers to build the equipment it designs and two distributors to manage materials.

Day-to-day purchasing is handled by contract manufacturers and distributors, while Cisco maintains control of strategic sourcing involving long-term agreements with suppliers of critical components.

Distributors use bonded inventory, auto replenishment and in-plant stores at the CM sites. The CMs draw product from the stores.

Cisco communicates with its CMs and distributors through a series of extranets which allow them to be an extension of an ERP system, according to Mike Campi, vice president of global supply.

"We decided to take the extranet and apply it to the purchase order. We send assembly-level demand to the distributors and contract manufacturers. The CM will blow that assembly-level demand out to component manufacturers and distributors. We electronically consign that material to the distributors to the portion they manage," says Campi.

However, Cisco maintains control over sourcing. "We will take a bill of materials for a product and will make a decision on who gets what portion of the bill," says Campi. "We will pipeline asics and memory through the distributor. They are the planning and execution entity."

Campi says the challenge in the future will be forecasting Cisco's growth and whether it has the supply strategies to support that growth. "How do we work with CMs to make sure we have information linkages-preferably Internet-based, Web-enabled-that allow us to transact information more efficiently. How do we look into the inventory of supplier x and y for common parts and make sure we move them to where we need them?

The CM challenge

While OEM purchasers will concentrate on more strategic supply issues, CM buyers will handle more of the transactional role of purchasing. A key challenge for CM buyers will be reducing procurement cycle time as CMs build more products for OEMs, says John Briant, vice president of supply at contract manufacturer eftc in Denver, Colo. Contract manufacturers often bid on OEM contracts and the cost of bill of materials needs to be factored into the bid. That means buyers need to get information about components quickly so they can make timely sourcing decisions. "We don't want buyers to spend six hours on the phone with their top six suppliers. They need information immediately whether it's an RFQ or leadtime information," he says.

We work with our customer and supplier on their abilities to increase their speed," he says. eftc has worked with customers and suppliers on electronic data interchange (EDI), but in the future will use more Web-based tools to improve speed.

Large CMs may even have a greater need for electronic commerce tools and supply chain management software than smaller ones because they often have more customers, more suppliers and buy larger volumes. Many CMs have already started using the Web as a sourcing tool and will rely on it more. Buyers at CMs often have to send out RFQs to suppliers to price out a bill of materials so their companies can bid on OEM contracts. The faster they can get responses back from suppliers on RFQs and make decisions on which suppliers to use, the more they can help their companies be competitive.

Because they are buying more on behalf of the OEM, advanced use of information systems to manage the supply chain will be critical, says John Boucher, vice president of global supply chain management for Manufacturers Services, a $920 million per year contract manufacturer based in Concord, Mass.

"The differentiator going forward will be the use of advanced planning and supplier management tools such as Aspect, I2 Oracle and others," says Boucher. "The ability to aggregate many customers' internal part numbers and to do that crisply, accurately and quickly will be key," he says.

He also says, in the future, contract manufacturers and CM procurement specialists will be involved earlier in the acquisition of components for an OEM. He sees that contract manufacturers, which have traditionally been involved just in the manufacturing of the OEM's product, will have a role in the design process. "The procurement specialist will be involved in that process. That's the way we see it evolving."

Wanted: Smarter buyers

The changes in the business models will impact the skill sets that purchasers will need to be successful. "Buyers in the future are going to have to be smarter, more strategic, better trained people," says Richter. "They will be less clerical and more strategists. Buyers will need to be 'e-literate' meaning they have to know how to do business on the Internet. They have to be comfortable with a computer and prepared to live in that environment," says Richter. He says the best candidates for procurement will be people with technical undergraduate degrees and MBAs. That's going to become the norm," he says.

Purchasing skill sets will need to be upgraded because purchasing's overall responsibility in the company will increase, says Mejia of Lucent.

"Rather than just buying parts and being focused on last-minute savings, purchasing will become more focused on the final customer. It will be involved with the overall business strategy of the company and become a voting member in what gets done in development, sales and marketing," says Mejia.

A "buyer" may be concerned about purchasing a component, but a supply manager has to look at the big picture," says Mejia. "It's not about doing a supply agreement with a CM. It's not about doing a contract and making sure I have the right price. That's a piece of it. But it is also about influencing what the industry looks like. "Are we doing business with the right players? When one supplier buys out another what does it mean to us? What are the development implications? What are the operation implications? A buyer isn't concerned about those issues, but a supplier manager is," says Mejia.