Specialty chemicals firm unifies with e-procurement

By By William Atkinson -- Purchasing, 12/22/2000

For many companies, the move toward e-procurement is based on a desire to reduce costs or streamline processes. However, for Rohm & Haas, Philadelphia, Pa., a specialty chemical company with 21,500 employees worldwide, e-procurement is an integral part of a strategic shift in the way purchasing is being handled.

"In 1999, we acquired Morton Chemical, and our electronic materials business was expanding," explains Jeff Heller, procurement process manager. "In the course of integrating these businesses, we wanted to use our larger corporate leverage to obtain more favorable contracts for the goods and services we purchase." To this end, the company assembled a cross-functional team to create commodity contracts across the whole enterprise.

At the same time, the company assembled a "best practices" team to identify the best way for purchasing to be handled. While the team ad-dressed a number of areas, two were paramount.

First, at the time, the newly integrated company had ab-out 10 different purchasing systems in place, all the way from basic "paper and phone calls" to sophisticated electronic global systems. "We realized that we needed to create a single system," explains Tom Chapman, purchasing manager for equipment and services. Although the company spends only about 10% of its dollars in indirect materials (equipment and services), this area represented about 70% to 75% of its transactions. "This is one reason it was so important to create a single system," continues Chapman.

Second, the team formalized some of the business rules that had been created for purchasing a number of years earlier, one of the most important being the role of purchasing. "We made the decision that the role of purchasing would be to select suppliers and negotiate contracts with pricing and terms," explains Heller. "We realized that we did not need to be involved in transactions, and we did not need to decide whether certain purchases were appropriate or not. That would be up to the users and their supervisors."

At the same time the teams were creating contracts and identifying best practices, the purchasing department was looking at the idea of e-commerce and how this technology might fit into the other two initiatives. The fit was quickly obvious. "In looking for ways to implement the contracts we had just negotiated, we realized that best practices and e-procurement were one and the same," explains Heller. "That is, we realized that e-procurement was the best way to implement all of our contracts and implement the best practices we had designed."

This up front work turned out to be a blessing for the company. While some companies implement e-procurement first, then create supplier contracts and internal processes later, Rohm & Haas had these two structures in place before implementing e-procurement. "This was critically important to our success," emphasizes Chapman. "In the contracts area, the biggest challenge when implementing e-procurement relates to setting up the catalogs. Since the catalogs have to correspond to contracts, in terms of pricing and other issues, you really can't begin to set up catalogs in an e-procurement system if you haven't negotiated the contracts."

"The other thing we did right was creating business rules and processes," continues Heller. "Once you know what processes you want, you're ready to select the e-procurement system that will best support your needs." For Rohm & Haas, this turned out to be Ariba. Prior to setting up contracts and business processes, selection of the best e-procurement system provider for the job would have been virtually impossible.

By implementing Ariba, Chapman says the company experienced payback in less than a year. Savings involved efficiencies achieved by having users place their own orders through the e-procurement catalog system, eliminating costs associated with having purchasing place the orders. "There's really no point in setting up a system like Ariba only to have users continue to submit requisitions to purchasing," explains Chapman.

Contracts were also set up in such a way that Rohm & Haas would receive rebates for placing orders electronically. "When selecting suppliers and negotiating contracts, it's important to ask for discounts for e-commerce," emphasizes Chapman. "On occasion, you may need to educate suppliers on the benefits they will realize by having customers place orders this way, such as being able to eliminate re-keying order information."

In setting up its contracts with suppliers, Rohm & Haas worked with a number of scenarios. "Some suppliers told us that use of e-procurement was expected and included that in the price," says Heller. "Others gave us a discount when we asked. Still others wanted to wait and see what the real benefits would be before agreeing to any discount. Part of this was due to the newness of the concept. In addition, a lot of salespeople aren't completely familiar with where the business is headed."

Another big benefit: The company now has a single tool for capturing all procurement information. "We are really thrilled about this," emphasizes Chapman. "Now, our strategists can look at data in a single system and make their decisions based on that. Before, when we had 10 different systems, everyone was scratching their heads trying to compile information from so many different places."

In the future, the company plans to expand its e-procurement initiatives, with one area being reverse auctions. "A while back, we conducted an auction for our IT programming services," reports Chapman. "It ended up being very successful."

Chic Saile, manager of IT, finance, quality, and asset management, explains the details of this auction. "At the time, we were using 158 different IT contractors from 39 different suppliers," says Saile. "We also found we were paying different rates for the same skill sets from different suppliers." The goal was to shrink the number of suppliers down to three or four and obtain uniform rates for the same skill sets.

The company sent out RFIs to the 39 suppliers and, based on their responses, was able to reduce the number to nine for inclusion in the auction. "We engaged eBreviate to handle the auction for us," says Saile. Rohm & Haas invited the nine suppliers to its offices to learn about the company's plans for the auction. Representatives from eBreviate also attended to provide additional technical information. This was followed by a one-day training session, where suppliers had access to a "model" auction with which they could experiment. "They were able to log on from their own location and had a hotline number to call if they had questions," says Saile.

The day following the live four-hour auction, Rohm & Haas selected four suppliers and awarded the contracts. Total savings: about $5 million. "Besides the savings, what was really incredible to me was the fact that we were able to do this in half a day," adds Saile. "Normally, a process like this would have taken six months."

While this specific auction was a success, the company plans to wait a while before moving into the reverse auction area on a more consistent basis.

"You have to have good information on what you want to bid," explains Heller. "Given the history of the multiple systems we've had in place, we just don't have sufficient information to put together a comprehensive bid package. Once we get a couple of years into our Ariba system, we'll know exactly what we have purchased, be able to define specific commodity areas, and then be able to prepare some bidding on these."