Air Products and Chemicals Inc., a $5.7 billion producer of industrial gases and chemicals headquartered in Allentown, Pa., decided nearly a quarter century ago that it made sense to centralize its purchasing function. In 1979, the company created a central purchasing organization aimed at leveraging its buying power (total spend today is around $3.6 billion) and consolidating its purchasing expertise.

The problem, according to Diane Sheridan, vice president for energy and materials, was that given then-current technology, the company's many and far-flung facilities made it difficult to measure and enforce compliance with purchasing guidelines. That, in turn, put a drag on Air Products' ability to exploit fully its buying volume and take advantage of big purchasing agreements.

"We have almost 18,000 employees," Sheridan says. "One of the challenges we've faced as an organization is that we have many locations—over 500 in 30 countries. Some are manufacturing plants; some are depots; some are fill facilities; some are garages. Some of them have a lot of people; some aren't manned at all, or one person may man several locations. From a purchasing strategy perspective, it's a challenge to leverage our global purchasing power and make our global or regional agreements available to these multiple locations."

Nearly every technology initiative Air Products has taken since it centralized purchasing has been done with a view to meeting that challenge—and to streamlining the purchasing process itself. Today, the company is on the front lines of e-procurement, but it hasn't lost track of its reasons for being there in the first place. Those guiding principles have given Air Products an unusually well-structured portfolio of e-procurement tools and a disciplined approach to using them. As Mark Connar, director of supply management for equipment, materials and services points out, technology is merely a tool and enabler of business strategies.

Air Products' first steps on the trail to e-procurement began in the mid-1980s with a home-brewed system that let employees requisition supplies electronically against established purchasing agreements, then deliver a purchase order to the supplier via EDI or fax. The system worked well—in fact, it's still in use today—but it had a serious drawback: it could be used only where there were concentrations of buyers. That left the company's small sites out of the picture.

In the early 1990s, Air Products adopted procurement cards. The p-cards, in this case an Amex program, simplify the company's indirect spend, but their major benefit lies in the efficiencies they bring to back-end processes. "If you look at the benchmarking data, it costs something like $50-$70 per transaction to process a conventional purchasing order," Sheridan notes. "With a p-card, the figure is more like $5."

Currently, about half of Air Products' U.S. transaction volume (though a far lower proportion of its dollar volume, since p-card purchases are generally low-value transactions) go through p-cards. In Europe and Asia, the program is off to a much slower start. There's some resistance to the concept among suppliers, she explains, and in many parts of the world the infrastructure needed to make the program work simply isn't in place.

By the late 1990s, it was becoming apparent that the Internet would play a growing role in procurement, and early in 2000, Air Products rolled out its first Web-based purchasing tool. Another home-brewed system, the tool provided direct Internet connections to 10 suppliers of indirect goods and services—outfits like Boise Cascade and W.W. Grainger—and handled background chores such as keeping track of passwords and authorizations. Tim Tulio, manager of e-procurement systems, calls it "a poor man's PunchOut," referring to Ariba's technique for accessing catalogs on supplier sites.

The system worked well, Tulio recalls, and helped solve the access problem for employees in the company's sparsely staffed remote offices—anyone with an Internet connection could use it. But it also had some serious limitations. "There weren't a whole lot of suppliers at the time who could support Internet ordering," he says, "and we thought the program wasn't truly a good user experience in terms of providing a single platform to launch orders from."

Almost immediately, the company went looking for a more comprehensive solution, and by late 2000, it selected and implemented Ariba. "We're using Ariba in a hosted environment, which allowed us to move quickly. Our first thrust was to continue to develop Ariba, add catalog content and get users comfortable with the tools—something that's ongoing," according to Tulio. First implemented in the U.S., Ariba is now up and running in the U.K., and plans are to roll it out country-by-country, as implementation costs and benefits justify the moves.

Ariba is the key component of Air Products' APDirect Buyer, Air Products' self-service portal for indirect goods and services buying by company employees. It also handles electronic bidding and auctions for direct goods. "We quickly determined that reverse auctions could lead more into sourcing, which is where we are today," Tulio says. "It's not just reverse auctions; it's really the whole sourcing process, of which reverse auctions are one possible outcome."

To extend its buying power even further, Air Products has joined two multi-company exchanges. One, Elemica, is made up of around 20 chemical companies, both suppliers of feedstocks and other direct goods as well as Air Products customers. "We often buy and sell from each other," Tulio explains. "Instead of creating one-to-one connections with these companies, we only have to create one connection to the hub, then Elemica takes care of connecting all the other partners. It's a very efficient way to exchange purchase orders and invoices."

A second exchange, set up last year, the Leveraged Sourcing Network, combines the buying power of Air Products with that of 10 other companies for MRO items. Set up by A.T. Kearney, the program is still developing, but Connar views its prospects as bright. "Not all suppliers jump on the bandwagon right away, although as the group develops and we get more spends under management, we're finding a lot more excitement in the supply community," he says. "It's not just a leverage play from the suppliers' standpoint, but really a win-win, where they see significant growth in business."

Although cost reduction drives Air Products' procurement strategy, the company's e-tools also have led to redefined roles for purchasing management. "These tools have allowed us to free our professionals from day-to-day, tactical activities—place the order, chase the order—and let them think more strategically," says Sheridan. The e-procurement tools, she points out, are very good data collectors, and with a bit of study, that data can suggest additional ways to purchase more efficiently and leverage Air Products' buying power.

The tools have given the company's purchasing professionals the leisure to engage suppliers and jointly seek out new savings, according to Sheridan. One area where that has produced results is capital expenditures, about a third of Air Products' total spend. Many of the capital items are engineered products, and by working closely with suppliers and its own engineering organizations, the company stands to reap further savings by consolidating parts, for example.

"Say we're looking at a particular set of valves that we purchase, and say we're buying a lot of them and they all have slightly different specifications," Sheridan says. "Is there a way, from an engineering perspective, that we can consolidate our specifications so that we can buy fewer types of them and thereby consolidate our spend?"

That kind of thinking has produced more than 100 sourcing agreements for capital items—Air Products calls them global engineering and procurement agreements. "When we can make one of those agreements, when we can do more than just bundle our spend and go right to our specifications and look at how we might consolidate them, we don't get 2% or 5% savings—we get 20% savings," she continues.

Performance metrics play an important part in the Air Products' procurement strategy. "We believe you are what you measure and you do what you measure," says Sheridan. "We have a very robust key performance indicator process. We all have score cards and action plans behind those score cards that we update on a yearly basis."

At the end of the day, what matters most is cost reduction. Since the company started measuring them in 1996, net savings due to procurement efficiencies have run between $35 and $75 million, year on year. That doesn't include cost avoidance (negotiating smaller price increases with suppliers, for example) or soft-dollar savings from productivity enhancements. When the procurement crew negotiates a multi-year agreement, only the first-year savings counts toward the net.

Air Products also measures compliance—the extent to which buyers purchase from approved suppliers. The current goal is 85%, and the compliance rate is running just two or three points below that. Sheridan expects to keep lifting the bar, but full compliance may be unrealistic, she admits, with new commodities and suppliers entering the system and emergency purchases being a fact of life.

Achieving high compliance has taken top management support for the program and extensive training efforts. E-procurement, Tulio notes, involves more than changing the way buyers place orders; it also involves big process changes, whole new ways of getting the job done. "Some people struggled with the change," Tulio says. "If it weren't supported from our top management on down, the whole program would not have been successful. Management couldn't just rubber stamp it, say it was a great idea; this was being driven, more-or-less mandated, by our senior management, from [Chairman and CEO] John Jones on down."

Training turned out to be a bit more complex than originally expected, Tulio admits. At first, the plan was to train employees in groups of 100, with heavy reliance on Web tools backed up by a help desk. For some people, that worked, but it assumed a level of comfort with the Internet not everyone had. For the less Web-savvy, the trainers put together virtual classroom settings using PlaceWare, a Web/telephone conferencing product. Seven hundred training programs were presented over PlaceWare in the space of a little more than a week, and those, Tulio says, worked for another group of people. Finally, the company is holding live classroom training for small groups at various locations

"Our initial thought was that these tools are intuitive," he continues. "The reality is that people need to get comfortable with them. We quickly realized that our strategy had to change, that different people need different training solutions, whether they are Web-based, classroom or small group training.

On the near horizon is a big, enterprise-wide implementation of an new ERP system from SAP. It will replace a mixed bag of smaller systems at individual plants and, like Ariba, will be a hosted application—in this case, hosted by SAP itself. Most of Air Products' more recent e-procurement initiatives have been taken with a view to eventual integration with SAP, and once implementation is complete, SAP will, in effect, become the core purchasing system.

SAP will also help Air Products manage its inventory better, and Connar expects that will have very positive effects on the company's efforts to lower spending. Multiple ERP systems so far have meant multiple inventory management tools and poor enterprise-wide visibility. The company is working on a single, SAP-enabled part-numbering system that will let it to get a better handle on inventories, rationalize parts and supplies and combine orders for replacements.

From an ROI standpoint, Air Products' investments in e-procurement are paying handsome returns—and, notes Connar, his company is "pretty strict" in the way it measure returns. "A lot of companies look at this kind of thing from both the transaction cost savings and the hard savings in terms of lower costs. We tend to have difficulty attaching benefits to the transactional phase. That's not to say they aren't there, but our company tends to say, 'Where's the savings to the bottom line?'

"We look at very short paybacks—less than two years—based essentially on reducing the level of maverick spend, coupled with sound strategies for putting good deals in place. You have to do these two things in concert: you have to roll out the tools and you also have to have the deals that support the tools."