More discipline from e-sourcing

David Hannon -- Purchasing, 3/3/2005

"One of the things we learned in using e-sourcing is there is much more benefit in the digitization of the sourcing process because the online process brings more structure. It forces you to do a lot of up-front thinking and planning and not be haphazard about the process."

Those are the thoughts of Lance Eruysal, acting vice president of global supply chain for the industrial products group, a division of the fluid technology organization at ITT Industries in Seneca Falls, N.Y. He goes on to say that understanding what the incumbent supplier does for a buyer and what the switching costs will be are critical aspects of the e-sourcing process. E-sourcing forces the buyer to think through things very thoroughly prior to even considering a reverse auction. "It has brought us a lot more discipline and strategic thinking skills," he says.

ITT is a $6-billion diversified manufacturer. Its Fluid Technologies division represents about 40% of its business and its largest spend areas include motors and machined castings. Historically, ITT has not centralized its direct materials purchasing, but had let each business division handle it on its own. But the company did create a procurement council with representatives from different divisions sharing best practices.

One of the recommendations that came out of the procurement council meetings in 2001 was a review of some of the e-sourcing tools available on the market to help streamline the sourcing process and leverage its corporate spend better across divisions. Eruysal and other members of the council reviewed four or five of the available tools at the time for e-sourcing. From that analysis, ITT decided to run a pilot with e-sourcing technology provider Procuri. Eruysal says the goal was to use the tool to gather spend across the Fluid Technologies division.

"The use of Procuri started with a cross-section of buyers across Fluid Technology doing a bar event across 12 units," Eruysal says. "We leveraged our spend across the divisions, did the RFQ and held our first online auction event. Once everyone saw the power of that event, people got excited. The efficiencies, collaboration with suppliers, records and ability to clone events, and share across the company is worth the same—and perhaps more in some cases—as the cost savings itself."

The e-sourcing process has moved across the entire Fluid Technology division now and into other units of ITT. Eruysal led the rollout and says what began as a push-effort soon became a pull across business units when the benefits of the tool spread throughout the purchasing organization.

"Nothing helps like a couple of base hits and showing some successes," he says. "We have had relatively good success with the process—sourcing direct material as well as tooling and outsourced machined parts to cover breakdowns. The process provides a fast and easy way to handle the nonrepetitive material purchases. Our centralized nonproduct team is starting to use the tool also."

The ITT buyers who used a more unstructured approach to their sourcing efforts did not like the e-sourcing tool at first because it requires a more disciplined structure. Others objected to the increased workload on the front-end or said it took away the personal element, but as more buyers got used to the tool and process, they found the drawbacks were exaggerated and are within the control of the buyer.

ITT, like many other e-sourcing users, has learned by experience and shares best practices internally through regular meetings of the Procurement Council. Eruysal says the online environment forces buyers to do their homework up front and that the horror stories about failed reverse auctions or negatively impacted supplier relationships are only the fault of the buyer, not the technology itself or the model.

"[The reverse auction] shouldn't get to that point if you do the right research and make sure the suppliers are qualified, you have worked with your incumbent supplier, you understand your requirements and ensure you are trained properly in the use of the tool. People have pointed to the tool as the reason for any failed event or supplier displeasure, but this is not an excuse at all. Like any negotiation, proper planning and research is the best way to avoid any undesirable outcome."

ITT does not set specific goals in terms of how many online sourcing events it should hold or what percent of its spend needs to go through the Procuri tool. At the same time, Eruysal says, "If a buyer at ITT does not find a use for this tool in a given year, there is probably a problem. "