The procurement team at $40-billion Procter & Gamble knew in 1999 that to remain competitive in an increasingly global market, online procurement practices needed to start and start soon. And in 1999 there were plenty of software providers hawking appropriate and not-so-appropriate tools at P&G, but the Cincinnati-based firm didn't get caught up in the dot.com rush and performed its due diligence. It eventually settled on the right set of tools to bring savings while supporting its existing long-term sourcing strategies.

The $24 billion spend at P&G is spread across a variety of business groups. Not surprisingly, the purchasing operations are highly decentralized throughout various global locations and business units. Each of P&G's five primary business units has its own purchasing organization. Those business units include fabric and homecare, paper and baby care, beauty care, healthcare and food and beverage.

The three remaining business units are the global business services organization, which buys mostly indirect materials and IT equipment; the market development organization, which buys promotional and marketing materials; and the corporate function group, a three-year-old global advisory group that oversees infrastructure needs throughout the company. The materials purchased by those business units are broken down into six major areas: chemicals, packaging, raw materials, manufacturing services, marketing/promotional materials and services, and indirect/MRO.

Although the procurement operations are decentralized at P&G, the company buys across business units where sensible. Company officials say cross-business buying usually happens in one of three ways. First, P&G may appoint a global buyer for a certain commodity that is used by several business units, but can be handled by a single buyer. Secondly, a larger business unit may buy for a smaller one if the larger is able to get a better price based on its volume. Lastly, for more complex commodities, P&G may appoint a commodity council made up of representatives from various businesses to coordinate a commodity buy. Buyers are trained to continuously evaluate the cross-business spend and propose adjustments or changes when appropriate.

"We are always trying to get best value and that is both cost and product performance," says Steve Rogers, director, worldwide purchases mastery at P&G. "In the consumer goods industry, if you are not improving your products and lowering your prices, the consumer will resist you."

P&G has set several sourcing strategies in recent years, the first of which dates back to the early 1990s and focuses on globalization of its procurement activities. "This initiative means looking at our business globally and understanding where it makes sense to buy globally and how to orchestrate that," Rogers says.

The second initiative is a combination of sourcing strategy and supplier relationship management and development, which go hand-in-hand at P&G. Cross-functional buying is the third initiative that emphasizes involvement of various departments in the purchasing and R&D process. The fourth push at P&G is to expand purchasing's involvement in new spend pools. And lastly is aggregating the indirect spend to avoid the classic "everyone is a buyer" mentality.

Rogers says the online sourcing efforts are not considered a formal initiative on their own, but rather they are viewed as the tools to further the other strategies. "[The e-procurement initiative] is an enabling program but we don't call it a buying strategy. E-tools help our people do their job better."

P&G officials say the benchmarking process is what opened the company's eyes to the need for online sourcing and procurement. After a purchasing benchmarking project in 1999, several senior execs at P&G saw the message from other Fortune 500s loud and clear: Get on the Net!

"We had an ERP system going in at that time, but we weren't doing any sourcing on the Web," says Rogers. "We weren't thinking about connectivity or reverse auctions or e-RFQs. We were behind. And we promote personnel mostly from within so we weren't getting the outside perspective we needed."

With that in mind, Rogers and his team talked with some of the leaders in online procurement to get more details on the tools available and how to best implement them. At number 31 on the Fortune 500 list, there weren't many bigger companies to benchmark, but P&G sought out innovative sourcing leaders like IBM, Intel, Deere, and Harley-Davidson for ideas on moving procurement to the Net. From there, Rogers' group recruited one person from each business unit for a three-month task force to look deeper into the e-procurement waters and develop a detailed strategy before signing on with a software provider. "We went to conferences, talked to suppliers and told them using the Web was going to be important and we needed to get moving."

The next step involved P&G moving its routine purchases to online catalogs using the catalog product on its SAP ERP system. But rather than start with an early win by putting the more advanced U.S. suppliers online first, P&G started with some of the more challenging markets to bring online such as Peru and Eastern Europe. Getting catalogs up and running in those less developed markets with lower bandwidth and power available was a much more daunting task.

"We learned that if you can punch out to your supplier's catalogs and let them manage the content, that is much easier than trying to manage the catalogs internally," Rogers says.

Once the catalog concept was on the move, buyers were encouraged to experiment with e-RFQs and auctions with different spending items, focusing on direct spend. Pilots began with various tools, but P&G officials soon found the pilot programs needed some structure.

"We realized we didn't want everyone doing pilots separately for these tools and we needed to pilot a single tool corporate-wide," says Hendrik Czirwitzky purchasing group manager, global e-Procurement projects. "We did a corporate assessment to come to one e-procurement tools provider to standardize the whole thing. We piloted with several different providers, but it was like hitting a moving target. When you found something about the tool you didn't like, the provider would tell you there was a new release coming up that will address your specific concerns. At some point, you need to come to a decision otherwise you'll be piloting until the cows come home."

P&G didn't wait. Rather, it signed with online sourcing tools provider Procuri in November 2001, based mostly on the strength of Procuri's e-RFQ capabilities. Today, there are more than 300 active P&G buyers around the world using Procuri. Each business unit has a lead person on the project to spearhead the efforts and troubleshoot.

Rogers is quick to point out that there were plenty of bumps on the road to e-procurement. "The truth is this is harder to do than you think," he says. "But I think our suppliers would say once we began to understand the tools, we managed their use ethically and our suppliers think we are doing it appropriately after we got past the first three to six months in figuring out what was hype from the providers and what wasn't."

The move to an online procurement environment begs a tough question for adopting companies: competition or collaboration? There are Web-based offerings that help build both competition and collaboration among suppliers and adopters today are supporting both strategies. P&G execs decided to stress a case-by-case strategy in answering the competition/collaboration issue and not provide any steadfast rules for what buy should be put through which process and tool. The online tools a buyer selects vary depending on the strategy: it could be e-RFQ tools and it could be online reverse auctions, depending on the level of competition desired.

"We don't see competition and collaboration with suppliers as an either or situation, but it's a matter of degrees," says Rogers. "We are getting better at explaining that idea to our suppliers and telling them we want to collaborate, but they have to help keep us competitive."

Rich Funk, senior purchasing manager for the Global Health Care unit, says working closely with suppliers can help them understand the various online tools and their intended results, rather than using a "surprise-attack" tactic in bringing suppliers to online events. Forcing suppliers into reverse auctions is not the type of collaboration P&G has in mind.

Rogers breaks the online buying tools into five categories. The first category includes various e-sourcing tools such as e-RFQs, reverse auctions and online catalogs. The second group includes connectivity tools such as supplier portals and online planning systems. Third are knowledge tools such as LexisNexis for general supplier market data and P&G's PurchNet intranet site with benchmarking and purchasing-specific data. The fourth category includes supplier assessment and evaluation tools. And lastly are e-marketplaces and online exchanges. P&G has been involved with the Transora Web exchange for the consumer packaged goods industry since the exchange's incarnation. P&G was also an investor in Packtion, an online exchange for the packaging industry, which went down with the dot.com bomb in mid-2001.

How a company measures the success of an e-procurement event says a lot about its attitude toward its suppliers. P&G officials say there is more to e-procurement than bottom-line savings. Getting the right performance, in the right time frame, at the right cost, is a start for evaluating a P&G online event. Rogers says a cardinal sin in the reverse auction strategy is continuously auctioning the same commodity over and over to beat down prices from the same group of suppliers. The strategy usually serves only to unite suppliers against the buyer and not foster competition. Currently, less than 5% of P&G's spend goes through reverse auctions producing a 10-20% average savings.

Getting the backing of senior executives was a major plus in moving P&G online. Rogers says P&G's President and CEO A.G. Lafley put an emphasis on the e-procurement project early on and that spirit gave the effort more support companywide. Support for new initiatives can be a tricky issue in an economy that has forced the company to cut 18,000 positions worldwide.

"Our management trusts us," Rogers says. "If we explain to management why we want to do something and they can understand it and see the value, they will let us try things. It is not so much a support issue, but more an educational issue. Using online reverse auctions is a good example. If you get a good result in one commodity spend area, that doesn't mean you should auction every commodity or service. You need to educate management so you don't get that directive to auction everything when the smart thing to do is auction a small percentage of things and do e-RFQs for much of the rest."