Third-party purchasing power yields sweet success

By By William Atkinson -- Purchasing, 3/22/2001

When Imperial Sugar Co., Sugar Land, Texas, decided to take a look at its storeroom efficiencies a couple of years ago, it hadn't fully considered the potential of e-procurement to meet its needs. However, it wasn't long before the value of the technology became obvious. "We have 12 production plants across the U.S., each with its own storeroom," explains Dennis Jackson, director of purchasing. "In mid-1999, one of our vice presidents suggested we contract with third parties to run our storerooms for us, since this was not one of our core areas of expertise."

It didn't take long for the company to locate one provider to operate one of the storerooms. After that, though, things took a different turn. "We had contact with a provider called PGI, which was a purchasing group," Jackson continues. What Imperial Sugar liked about its concept was the potential for leveraging buys, given the fact the company was arranging purchases for a number of companies. When PGI was purchased in late 1999 by ICG Commerce, an Internet-based provider of e-procurement services, Imperial Sugar became even more interested. "We realized this was the direction we wanted to take with our $600 million a year in indirect spend," he explains.

As such, under the current arrangement, rather than the company turning over all of its 12 storerooms to third parties, the manual-based provider continues to operate the one storeroom, and Imperial Sugar has opted to continue to operate the other 11 on its own, reaping the benefits of leveraged e-procurement.

The ordering process is relatively simple: ICG has a cadre of suppliers available in a number of commodity areas. Clients (such as Imperial Sugar) can order products and materials from these suppliers directly through ICG's site.

There were a number of things that attracted the company to ICG, most of which related to flexibility. "First, we liked the idea that we could use a combination of their suppliers and our own suppliers," Jackson says. Some providers limit clients to just their own suppliers. "In the area of bearings, for example, we had done some narrowing of the supply base on our own, and it turned out, coincidentally, the ones we were using were the same ones being offered by ICG," he notes. "In other situations, we found that the suppliers being offered by ICG were better than the ones we were using. In still other cases, especially for products where we had specifications unique to our needs, we were able to get ICG to add some of our suppliers who could meet our requirements."

A second feature was the fact the suppliers ICG offered were selected based on a combination of price, quality, service and technical support, etc. "A lot of other providers with whom we talked focused only on low-price suppliers," Jackson explains. "That would have forced us to make buying decisions based on price alone, which would not have been right for us in certain situations, because we prefer to make decisions based on the total-cost scenario."

A third feature was that ICG's system was flexible enough for Imperial Sugar to continue to use its PeopleSoft system, which it had installed just two years earlier. Under the current arrangement, users place their orders on the PeopleSoft system. Then, every hour, the company downloads these orders from PeopleSoft to the ICG system, which routes them to the appropriate suppliers for order fulfillment. "Eventually, we will get to the point where we will be able to receive supplier invoices electronically from ICG, route them through our PeopleSoft system, and make payment to ICG," Jackson adds.

While most of Imperial Sugar's indirect material orders follow this two-step process (PeopleSoft to ICG to the supplier), the company does order its office supplies directly through ICG's Web site. Only a limited number of individuals in the company are authorized to make these direct purchases, though. In the future there may be additional opportunities for direct ordering, in which PeopleSoft will simply keep track of orders. "In other words, we might switch to a system where users order directly through the Web site, which will then feed PeopleSoft so we can capture information," explains Jackson.

The company has divided its indirect material purchases into three categories. The first is MRO items, which are set up on electronic catalogs. "We are in the process of mapping our catalogs to coincide with the catalogs that suppliers have available," explains Jackson. Since the plants have traditionally operated independently, each one might have its own name for an item. "We want to make sure we identify each item uniformly throughout the company," says Jackson.

The second category covers packaging. "Since this is spec-based, we have to arrange for more detailed bidding processes in this area," Jackson explains.

The third category covers indirect raw materials, such as chemicals and minerals like limestone, coke and coal that are used in producing the company's products. "Some of these will involve detailed bidding that is specific to us, while some are more generic commodity items," he adds.

One challenge in all three areas has been the "culture change" for users. However, this has not been as difficult as it could have been, given that employees experienced most of the culture change two years ago when PeopleSoft was introduced. "This was really what started the centralization and control features of procurement, so the addition of the Internet feature wasn't as big of a change for them," Jackson says.

As the system becomes more fully implemented, Jackson expects to reap a number of benefits, such as better pricing (due to leveraging from the increased volume of the other companies using the ICG system) and increased cost- and time-savings related to the ordering process itself.

One of the most significant benefits, though, will be the opportunity to shift his staff from its role as tactical buyer to strategic analyst. "I want them to become project managers," Jackson says. "They will be able to spend their time working with the plants on standardizing items, studying usage patterns, and so on. Since the plants have always operated independently, they did not share best practices with each other. Now, the buyers will be able to initiate such projects."

One such project has already added significant value. An analysis of three plants that were running about the same volume found that one was using 140 filter screens per year, while the other two were using 20 and 15 respectively. "When we realized this, we went to operations to discuss the problem," Jackson says. Investigation found that the plant using 140 was indeed replacing the screens much more frequently than was necessary. "With better training and some changes in their processes, they were able to reduce the number of filter screens they purchased and installed each year," he reports. "At $60 each, this helped us save quite a bit of money."