A close-up view of a long-term vision

Two early adopters stick to their plans in e-procurement

William Atkinson -- Purchasing, 10/6/2005

In cosmology, six years is equivalent to about one-trillionth of the time it takes to blink an eye. In business, though, especially the electronic aspects of business, six years is a long time. When companies stay with a technology for this length of time, it means two things. One, the technology is working. Two, the company is taking steps to ensure its continued success.

Such are the cases at two chemical companies, Eastman Chemical in Kingsport, Tenn. and Philadelphia-based Rohm & Haas, which implemented e-procurement programs six years ago that are still going strong today.

Eastman, with 13,000 employees in 30 countries, began looking seriously at its procurement spend in the early 1990s. In the mid-1990s, it attempted to streamline its processes by funneling MRO purchases through its ERP system. However, this still required human intervention, cost about $115 million to administer, and still required 19 days for order fulfillment. In 1997, the company advanced to procurement cards. While this innovation reduced the involvement of purchasing, it also ended up generating expensive maverick spending.

In 1999, the company made a commitment to e-procurement, targeting its MRO spend. At the time, it was spending about $900 million on indirect (nonproduction goods and services) purchases. Its 15 worldwide sites were purchasing from approximately 8,000 MRO suppliers, using a combination of manual and automated processes. "Our goal was to streamline the processes of ordering and maintaining items that employees could purchase on their own," explains Beth Faber, senior procurement representative. "E-procurement offered a much lower cost than the traditional purchase order."

Within the first 10 months, the company realized an ROI of 125%, and shortly after that, it was able to reduce maverick spend by 60%. Further, the technology helped to cut the cost of goods purchased by 5-15% and was able to eliminate on-hand inventory for a number of commodities. It cut order cycle times for commodity items by over 70%, and, for inventory items, the average order cycle was reduced from two weeks to two days. As delivery times decreased, user satisfaction increased. "We were also able to reduce the number of people involved in procurement," reports Faber. "We didn't eliminate them, though. We redeployed them to more strategic areas."

Eastman has since expanded its use of e-procurement to purchase office supplies, computer supplies, lab supplies, and other MRO items. One key to the longevity of the program has been working with its suppliers and its e-procurement technology provider to standardize supplier catalogs and make the catalogs more searchable for users. "Like any other process, there were some challenges getting it up and running," admits Faber. "Now, though, everything runs very smoothly."

While Rohm & Haas adopted e-procurement to reduce costs, the company also saw the technology as an integral part of a strategic shift in the way it did business. The initiative began in 1999, when Rohm & Haas purchased Morton Chemical.

Following the purchase, the company created a cross-functional team to create commodity contracts across the enterprise to leverage its spend. It also created a best-practices team for procurement, which addressed a number of issues, but two of the most important related to creating uniformity and getting purchasing out of routine transactions.

At the time, the newly integrated company had about 10 different purchasing systems in place, all the way from paper and phone calls to sophisticated global electronic systems. The goal was to create a single system. Also at the time, the company was spending about 10% of its dollars on the indirect side, but these represented over 70% of its transactions. The team wanted to better define the role of purchasing, which would be to select suppliers and negotiate contracts (with pricing and terms), not to be involved in individual transactions.

It quickly became obvious that e-procurement made sense as a way to address both of these goals. "E-procurement was a way to automate our transactions and also get procurement out of the business of managing low-dollar transactions," explains Inez Curry, director of the procurement center for excellence at Rohm & Haas. The beliefs proved to be right. The company achieved payback in less than a year.

"E-procurement helps us manage our contracted suppliers on the indirect side," she continues. "When we set it up, we put contracted vendors and catalogs in the system. Users purchase from our preferred vendors via the catalogs. We don't even need to get involved in the transactions." As a result, e-procurement has ended up becoming a low-cost solution to handling the huge numbers of repetitive, low-dollar value transactions on the indirect side. "It also ended up being a good way to control the maverick spending that we previously had," she adds.

Another benefit is that the company now has a single tool for capturing all procurement information for items purchased via e-procurement. Before, purchasing had to comb through 10 different systems to gather data on each commodity.

Why has the e-procurement system remained a vital part of the company for so long? Curry identifies the two most important reasons. "First, the system is very easy to use," she states. "In fact, it is easier to use than an ERP system. Second, we continue to populate the system with new catalogs, so users have more opportunities to use it."

The company is committed to e-procurement for the long-term. For example, it is currently in the process of upgrading to an even more user-friendly system, which will further simplify the screens for users. "We have also been rolling the system out in Europe, and plan to roll it out in Asia next year," she adds. "We also plan to look at expanding its functionality to contract management, project management, and other sourcing tools."