Web's real potential lies beyond transaction
By SUSAN AVERY -- Purchasing, 3/23/2000
The global procurement operation at American Express, under the direction of Joe Yacura, has not processed a single transaction in the U.S. and much of Europe in four years. Use of the company's purchasing-card product and an e-procurement system based on Lotus Notes software has streamlined internal processes such that global procurement now focuses its resources on more strategic activities. Yacura is senior vice president, global procurement, at the New York, N.Y.-based financial services company.Recently, strategic activities within American Express global procurement have included development of a new Web-based system that streamlines other routine tasks typically performed by procurement professionals in communicating with internal customers: Generating statements of work, total life-cycle cost models, and supplier-performance metrics.
Now in beta tests, the Web-based system is intended for procurement's internal customers to use when they recognize a need to purchase software, desktop personal computers, temporary employees, etc.
Essentially, what the system does is capture electronically through a series of questions the details that procurement needs from internal customers to generate the statement of work, total life-cycle cost model and supplier-performance metrics.
At most organizations, internal customers typically telephone their requirements to procurement.
"It's probably luck of the draw [that determines] which individual in a traditional purchasing operation answers the telephone," says Yacura. "Each individual may address the request slightly differently. One may be more efficient than another."
Purchasing knowledge gained from experience, training and education is what Yacura is trying to capture, manipulate and deliver to end users with this new system, called KBS1, for knowledge-based system. "Industry has gotten better at capturing data, yet we haven't figured out how to convert this data into knowledge to make decisions," he says. "We're still using human beings to draw conclusions and take action. Whoever can figure this out will have a significant competitive advantage."
How the system works
To use the new system, internal customers log onto procurement's Web page on the American Express company intranet, where it asks users a series of questions regarding the purchase. Responses to the questions elicit additional questions based on the company's more than 500 business rules.
Suppose, for example, a user needs to purchase software. He or she may be asked the question: How many people will use the software? The user's response will lead to another series of questions, based on pertinent business rules. The next question may be on training. Suppose the user had responded that 50 people would be using the software. Additional questions posed by the system may include: Can the training be done online? On American Express property? Offsite? Another series of questions may probe the user for responses on the hardware platform necessary to run the software. His or her responses are recorded by the system, which has capability to generate a statement of work, or life-cycle cost model, or supplier-performance metrics.
(Performance metrics generated by the system depend on the purchase, Yacura says, and may include such criteria as cost, service, delivery, supplier flexibility and responsiveness, quality, product compatibility, innovation, etc.)
For each of the generated outputs, the user interfaces with the same application. For a complex acquisition, the system may pose 80-100 questions to the user.
Not to oversimplify, Yacura likens the thinking behind the system to a consumer buying a can of corn at a grocery store, and all of the responses to questions the human brain processes surrounding activities associated with making that purchase (i.e., the location of the store, number of cans to buy, type of corn, price, etc.) "Of course, when buying the corn we don't consciously think of each of these activities," he says.
Once the system is implemented, Yacura expects to expand its capability so that it provides users with a list of preferred suppliers that includes such information as contracted pricing, geographic scope, etc. From this point, they then can send the statement of work to the supplier electronically.
"We're also working to arm users with knowledge for negotiations with suppliers--i.e. market and industry knowledge on factors that may impact pricing, availability, delivery and quality--for supplier negotiation," he says. "It's a real benefit for operating globally."
Benefits to American Express from using the system include improvements in cycle time (now that internal customers have access to procurement knowledge 24 hours a day, seven days a week), improved quality, consistency (the system always reacts the same way), reduced costs and improved delivery, among others.
The system also may have application in other areas of the company. Yacura points to the finance department as an example. (At American Express global procurement is part of the company's finance operation; Yacura reports to the CFO.)
Figuring it out
Global procurement chose to build the system internally (with the assistance of a small technology firm in California) because Yacura couldn't find a similar product available commercially. "Most are 'purchase-to-pay' systems," he says. "But technology provides opportunity for procurement to take a step further." In building the system, his organization is essentially expanding on this continuum on both the front and back ends, creating a "sourcing-to-after-sales-support" system.
"This is where procurement's real value lies," he says. "Most companies are getting out of the transaction-processing business."
In the effort to move procurement to a more strategic role, Yacura says that organizations have to start thinking about knowledge and figure out how to effectively and efficiently deliver that knowledge.
As he figures, there are two kinds of knowledge. Tacit knowledge "is the information an individual has by virtue of his or her experience and the activities he's participated in. With this information, he's able to draw conclusions." Referring to the process of procurement professionals gaining expertise through education and training, Yacura's system takes this tacit knowledge and makes it implicit--available online for use by internal customers.
Still, Yacura stresses that the system is not intended to eliminate the human element from procurement. "Human beings are needed to build and monitor the system and to add incremental value to the procurement process," he says. "Every time a business rule changes, the system changes. It's a very complex system with implications worldwide."
Procurement's challenge is not the technology, says Yacura. "Technology is available and is about 40% of the equation. The other 60% is personnel and policy. The challenge is changing the culture and philosophy of procurement. We're asking people to share their knowledge, to make a change from being a source of knowledge to a conduit of knowledge."
Before building the system, Yacura spent a great deal of time talking with procurement's internal customers.
Creating global procurement
In the six years since Yacura took the helm at American Express, he's created a global procurement operation. Previously, all purchasing was done locally and procurement was viewed by many within the company as adding very little value to the organization. (There are 19 locations worldwide.)
Now, global procurement managers are highly skilled and well educated. (Yacura himself has worked in procurement at Pacific Bell and IBM and has earned three masters degrees.) Forty percent of the global procurement staff has at least an MBA. Many have more than one degree, including a couple of PhDs.
In discussing the professional qualifications of global procurement managers, Yacura says his organization's internal customers demand more from procurement today. "Six years ago, they viewed us primarily as transaction processors. Now, they look to procurement to help with business solutions. Procurement's internal customers are big users of information technology and telecommunications equipment and services, temporary employees (both highly skilled technicians and administrative workers) and corporate travel.
As such, these goods and services are among the company's largest. The IT and telecom spend is especially critical to the company's competitiveness; equipment purchased by global procurement is used to maintain call centers and the company's network of point-of-sale terminals.
"Global managers are responsible for all aspects of their area of responsibility," says Yacura. "We act as consultants or Wall Street analysts." The lead person on a commodity may be located anywhere in the world. The global manager responsible for, say, temporary-help agencies, will have counterparts in Asia and Europe.
Responsibilities of global managers include understanding supply and demand conditions, technology, pricing, standardization and quality. In addition, they "are chartered to interface with customers." As such, they regularly survey customers electronically and monitor a quality hotline.
For customers--and suppliers--global procurement also holds annual forums, and has been doing so for the past three years. These two-day sessions, held during the first quarter at eight to 10 locations throughout the world, bring together representatives of procurement's internal customer groups. During the first day, procurement shares with attendees its internal plans and strategy developed to meet customer requirements. Attendees break out into groups of six to eight individuals, name a spokesperson, and then "go at" procurement's plans for about an hour and a half. After, they provide procurement with a critique, which it will evaluate and provide customers with a plan of corrective action within 30 days. Then procurement will do the same thing with major suppliers in that part of the world.
Other online tools
Another way Yacura plans to share purchasing knowledge includes development of online "communities of interest" on such issues as supply line management, quality, contract law and the environment. Through these communities, global managers will lead discussions on these topics with others within procurement via monthly audio and visual conferences. As this knowledge is captured in the system, it will be categorized and packaged. Then, when a global manager needs to tap into this expertise, he or she won't have to contact the individual directly, the knowledge will be available online.
For processing transactions electronically, American Express global procurement is currently rolling out a browser-based application that uses a commercially available front-end system (such as Ariba, Commerce One) for end-user acquisition of office supplies, business cards, stationery, etc. This system will replace the current Lotus Notes system that procurement had been using for processing transactions. Yacura expects major American Express locations worldwide to be online within the next 18 months.
At the same time, global procurement has been using the American Express purchasing card for payment of "small-dollar, high-volume" buys. In use for four years now, the card has been issued to 4,000 employees. As buyers familiar with the card well know, it has built-in controls that have capability to limit cardholder access to a company's preferred suppliers. With the card, a procurement operation can change a cardholder's profile within its internal system. For instance, an end user who's authorized to purchase only from temporary-help agencies will have his or her order rejected when attempting to buy office supplies. Global procurement plans to continue using the card as its preferred method of payment with the new browser-based buy system.
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