The Matrix

[From iSource Business, February 2001. Click here for pdf version with charts and graphs.] Maybe it was a friend bragging how easy purchasing has become since her company went to e-procurement. Maybe your CEO demanded that you find ways to lower costs. Maybe it was the total market saturation of terms like "B2B" and "market saturation." But whatever the reason, your company bit the bullet and has toggled the corporate switch to "e-procurement." And you're the DRI (directly responsible individual) who is charged with making the magic happen. So, now what? Where do you start? What tools fit your situation?

Well, it's kind of like buying a computer. Or a car. Or a pair of shoes. Or pretty much anything. What do you need this thing to do? If it's a pair of shoes, defining use is fairly straightforward. Dress or casual? Running or cross-training? The problem is that when it comes to e-procurement tools and systems, there are enough variations to make selection more taxing than a simple trip to Foot Locker, and the consequences of a bad choice are a lot worse than an ill-fitting pair of Adidas.

"What is The Matrix? Control." Morpheus, The Matrix

The good news is you can crystallize the entire e-procurement issue into one key point: Assessing your spend. Break down what you spend and where you spend it, and the battle's half over. All this leads to a greater ability to know what e-procurement tool best suits specific spends in your company. Dr. Sridhar Tayur, professor of Operations Management and Manufacturing at Carnegie Mellon University and founder and CEO of SmartOps.com, a provider of tactical planning supply chain solutions, says, "e-Procurement has to be done carefully by understanding the different dimensions in which a particular firm operates. Different models of procurement make sense for different groups of people." OwensCorning Global Sourcing Technology Leader John Gellatly says that when his company made the switch to e-procurement, "One of the things we did was go to the sourcing leaders and say, 'You tell us where you need help. Where do you not have any leverage with those suppliers? What contracts are up and which ones aren't?'"

The Answer Is Out There

Frankly, a significant amount of research remains to be done in the area of what spends go where. Tayur explains, "Many [analysts] are still waiting to see if some logical pattern emerges, and if some of the 'experimentation' being done now leads to insights." But that's the microeconomic aspect of research; the macroeconomic, "big picture" aspect has already been formulated. If you're formulating a master's thesis, you might have to hold off a while longer. If you're switching to e-procurement, you can go ahead and get started. Judy Priest, manager of procurement services with CoreHarbor, a B2B e-commerce, puts it this way. "My feeling is that you start with an overall strategy and approach, looking at all your different spending categories, and decide which way you want to approach each one."

So there are precedents and expertise to reference when you go e-procurement. And since a single, crisp, computer-generated image is worth a thousand stumbling words, iSource has made choosing from the available tools graphically easy. Even with the graphics, however, it's important to keep in mind that the examples given are just that examples. They may have to be modified to fit your circumstances. And now, with apologies to Keanu Reeves, we present, The Matrices.

"... no one can be told what the Matrix is. You have to see it for yourself." Morpheus, The Matrix

Norbert J. Ore, vice president of purchasing and strategic alliances at Chesapeake Display & Packaging, a specialty packaging and merchandising services, breaks out his company's spends along two axes, with cost on the vertical axis and risk on the horizontal. As Ore explains, the first (lower left ) quadrant is where low-cost, low-risk items are positioned. These are "basic off-the-shelf MRO, office supplies and those types of things." The cost of these items is low, and the risk associated with them is low. (Few corporations can be brought to their knees by a shortage of paper clips, for example.) According to Ore, this quadrant includes "random things or miscellaneous purchases made over the Internet." There is also use of purchasing cards and electronic sourcing.

The bottom right of Ore's quadrant model is where items that are low-cost but high-risk are found. Ore explains, "That could be OEM [original equipment manufacturer] machinery parts or anything that would shut a plant down, or shut the operations down. I would frankly see a lot of computer components and that type of item being relatively low-cost and high-risk." Ore also says this quadrant includes electronic RFPs or RFQs, electronic sourcing and purchasing cards.

Ore's upper-left quadrant is that of high-cost, low-risk items. "That's going to be the commodities we might buy that are readily available. It's basically the bid-and-buy." This quadrant generally includes direct material obtained by reverse auctions. While new computers might be important to maximize efficiency, it's probable that business would continue even if there is a problem in outfitting the staff with new Pentium IIIs.

Risky Business

Ore's final box is the realm of the high-cost, high-risk (and possibly high-stress) goods and services, or as Ore explains in his company's case, "strategic alliances, people we want to develop a very strong working relationship with, that we want to start to tie technology together, so that we can minimize the cost of processing through technology and so on. In our business, paper is our largest commodity, and generally there's not a lot of risk associated with the buying of paper. The specifications are well-identified, and the ability of the producers to meet the specifications is well-documented. These are large-volume items, where the suppliers would have a hard time distinguishing one from another. (Click here for graphs and charts.)

As the name implies, strategic alliances are those in which a high degree of reliability and expertise are required. Ore says, "We buy a tremendous amount of printing materials and lithography that would fall in that category, where speed and quality are much more important than individual price ... There's a lot of technical know-how, the supplier has to have the right equipment to run the job on, capacity is a big issue and we have to have suppliers that have the capacity available and can respond quickly."

Using Ore's approach allows purchasers to go beyond the "How much will this cost me?" issue and on into the "How much risk am I comfortable taking on?" issue. "I think an awful lot of what we do is about cost management, but it's also about risk management, and contracting is about managing risk. How much risk do we want a supplier to take, and how much do we want to maintain ourselves? If we have a firm, fixed-price contract then we've transferred the predominant portion of the risk to the supplier. The other end of the spectrum would be a cost-plus contract, where we've really maintained almost all of the risk ourselves." One other general characteristic of Ore's quadrant model is that the lower two quadrants are where you find indirect materials, while the upper quadrants are direct materials.

Axes and Allies

Where Ore's model used risk and cost axes to quantify spends, Tayur breaks down procurement along two different but equally illuminating axes (see opposite page). Plotted along one axis are non-key (or commodity) components and key components, which Tayur describes as "somewhat customized components." Separating components in this fashion allows purchasers to use different strategies of procurement, such as making sure that the price paid is the best possible one and quality is still maintained. As Tayur explains, "The importance of quality versus price will be different depending on whether it concerns a non-key component or key component."

Tayur's other axis plots the degree of fragmentation of the supply market. A fragmented supply base is one in which there is a large number of small suppliers. Conversely (and obviously), a concentrated supply base has a small number of large suppliers. Referring back to the price/quality issue, Tayur explains, "In the first case, you are more likely to get a good price break, while in the second case, you can work closely together to get good quality." Just as the establishment of a new gas station on your block means the other stations have to watch the interloper's gas prices, and possibly lower their prices to compete, the more suppliers there are competing for your purchasing dollar, the more likely you are to find a supplier willing to lower its profit margin to win your business.

Thinking Inside the Box

Extending perpendicular lines from the two points on Tayur's axes until they intersect forms four boxes: (See illustration.) Box 1 consists of a fragmented base and non-key components; Box 2 has a fragmented base and key components; Box 3 has a concentrated supply base and non-key components and Box 4 has a concentrated base and key components. Like checking the "You are here" kiosk at Disney World before setting out with the family unit for Space Mountain, determining which box your company's spends fit in will help determine which e-procurement tools you use, without any bewildered wandering about cyberspace on your part.

According to Tayur and others, Box 1 (fragmented base, non-key components) is the realm of online auction companies such as FreeMarkets. As Tayur puts it, "Companies like FreeMarkets provide that service to a large array of companies for products as well as services. For auctions, the traditional rule of thumb is one-time (or rather, not frequently recurring) transactions, items that are somewhat unique, and items whose value is not known for sure." The virtues of good old capitalistic competition show through here. Competition improves the breed, whether it takes place among desk chair suppliers or a leap of leopards.

Tayur goes on to note this segment is changing: "Companies use auctions to purchase MRO items, although these items are by no means 'unique' (tons of companies selling light bulbs) I guess the recurrence part is still somewhat true. You hold an auction for your annual light bulb needs, not when you need two or three light bulbs every other day. In marketplaces, many of today's auctions are for excess inventory. But I think as people become more comfortable with auctions, that will change, too." As the market investigates the opportunities in the auction tool, its use could expand into other areas of your quadrant spend. The biggest point to remember is, "What works for you?"

Living in a Box

Switching over to Box 4, diagonally opposite Box 1, we see a concentrated supply base and key components. Business in Box 4, as Tayur puts it, is "not about running auctions, but about creating a collaborative interface where you can actually pass designs back and forth and customize whatever the product is being produced and procured." Ariba and i2 are key players in Box 4, where, as Tayur explains, "a little bit of customization of the product is required, design is important, various choices are available to create a particular design and the advantage of doing everything electronically is that people can do the whole process much faster."

Tayur's Box 3 is an area of a concentrated supply base and non-key items. There's a small number of suppliers, so competition is obviously limited, but since those suppliers deal in non-key items, quality isn't paramount. Thus, the action is somewhat subdued in Box 3. As Tayur explains, "There is not much you can do there, except perhaps make the operations very smooth."

According to Tayur, Box 2, with a fragmented supply base of key components, is largely unoccupied, a condition he thinks will change soon. "I don't think anybody has taken ownership of the space, because here we are trying to do two things: simultaneously get high-quality customized products, and we're also trying to get a low price, but we're dealing with a large number of small suppliers."

Tayur says FreeMarkets is one company that is pushing towards filling the Box 3 void by taking such steps as standardizing RFQs. However, the entrepreneurial spirit is also alive and well in Box 3. "There are a lot of smaller companies that also decided, 'Why wait for a third-party person to do it? Why don't we also create our own consortium?'" Tayur goes on to describe the State of Pennsylvania's Lighting Manufacturing Initiative, which united some 15 industries online, the first of which was the powder metal business. "These companies use the powder metal technology to provide tools and products in the automotive industry. And they're typically very small suppliers. Each company is so small they couldn't go to Ingersoll-Rand or GM. But as a group, they are large enough. So maybe the space that is still open will get filled from both directions: third-party providers like Ariba or FreeMarkets as well as the small suppliers who say, 'Wait a minute. Why should a third party do it? Let me do it myself.'"

Another Way to View the Spend World

When it comes to assessing spend, Deborah Wilson, C.P.M. and principal of Deborah Wilson Consulting, takes a different approach, slotting spends into tools based on characteristics that are a slightly different than Tayur's. In graph 1, spends are plotted based on their uniqueness level and dollar value. Under the heading of uniqueness, a spend may be a standard order (as custom microprocessors ordered from the original equipment manufacturer), semi-unique (office furniture configured for a particular building) or unique (one-time orders from brokers or a consulting arrangement). For dollar value, spends can be low-value (sticky notes), moderate value (workstations for engineering), or high-value (installing SAP).

Quantifying spends in this manner leads to choosing an e-procurement option more easily. Wilson delineates tools into five categories: broad-based collaboration, close collaboration, employee self-service procurement, public Net marketplaces and sourcing support.

Standard, lower-dollar spends, those that are identifiable by an internal part number, don't require as much precision as highest-value purchases and are generally carried out in high volumes fit well into broad-based collaboration tools. Examples of these tools include Agile's Digital Buyer RFQ software, i2's TradeMatrix, Internet Commerce Corp.'s ICC.net, Harbinger.net, ECnet and Viquity. Each enables very quick information-sharing and -gathering from a large base of suppliers, instead of a static display of information, and is generally operated on an extranet or third-party Web site. With these tools, large numbers of suppliers view the data and respond or exchange documents with their customers.

The Desert of the Real

Wilson explains, "People might think accuracy is always important, but let's say that you're Wal-Mart, and you have 100,000 different line items you stock in your store and you need to buy. Now, you know that whenever you generate a forecast for what products you're going to use and you show what inventory you have on hand, it's only going to be so accurate. You just can't sit down and get 100 inventory turns a year for every single part you sell. So these systems are really designed to help companies that have lots of different line items, and they want to communicate messages to their suppliers to order, or to reschedule and they want information back like lead time or pricing, and it doesn't have to be 'massaged.'"

If you are automating high-value spends with the company's most important suppliers then you will generally benefit from the category of tools Wilson calls "close collaboration," such as Supplybase.manager, Extricity, ERoom and IcomXpress. These tools provide a common workspace and automated processes so buyers and sellers can work together closely. General characteristics include document management capability (everyone on the team has access to a secure site containing project schedules, drawings, contracts, etc.), workflow (user notification of work and task management), secure access (team members only) and integrated systems.

Wilson explains the category this way: "You would use software like project management software or integration software to help you with your high-dollar spend. In a high-dollar spend, you're spending a lot of money proportionally to the revenue of your company. For example, if you're buying an SAP system, what you might do is use a program like ERoom. ERoom is project management software, and it allows people from multiple companies to come in, post messages, post documents, keep an archive of e-mails, keep a schedule of the project and milestones, and everything that's associated with a particular project. Consultants like to use that a lot, and so do design engineers."

According to Wilson, software integration systems such as Extricity or IcomXpress are useful for close partnerships with suppliers that are so important "I want to be able to look into their systems as if I were an internal employee, and see what their work in process is, or what their inventory is."

Serve Yourself

Spends for low-value, standard procurement items that are catalogable, and for which individual commitments have relatively low value are best purchased using employee self-service procurement tools. This category, composed of companies such as Commerce One Buysite and Marketsite, American Tech PurchasingNet SQL, Works.com, Clarus and Staples.com, automates the internal requisition process. They provide data to aggregate usage, and some systems also automate receiving and settlement. Characteristics include electronic forms; workflow; XML, e-mail, auto fax and/or EDI output of orders to suppliers; and most purchases are made from catalogs populated with customer-specific pricing.

To elaborate on two facets of this model, Wilson states "workflow" (a term just now gaining widespread use), is a situation in which a "computer automatically goes through a series of steps." Some are generally computer steps, and some are human steps. So, for example, in an MRO system, you would have a human step of an employee going in and searching through catalogs and deciding with what to populate their shopping cart. Next is the computer step of calculating the extended price and the total price and filling in the complete supplier information, followed by the computer step of sending that requisition to the manager designated on the requisition. This is followed by the manual step of the manager reviewing that requisition, and approving or disapproving it, and then you'd have the computer step of the purchase order being sent to the supplier. So workflow is a software program where you put in all those steps, and it executes whenever you launch the flow.

"In electronic forms, which are another characteristic of self-service systems, you have a form on your computer and you fill in the blanks, possibly typing something in or selecting something from a pull-down menu. But it's something with some intelligence so the results that come off that can be used in the system."

Publicly Traded

Spends that are low-value, standard procurement fit well in public marketplaces. In these marketplaces, volume discounts are offered on an order-by-order basis. An added advantage is the supplier base expands beyond strategic suppliers. SupplierMarket.com, NECX (VerticalNet), Frictionless.com and Partminer.com are examples of these marketplaces. They allow users to find, quote and purchase products and services online. They are generally e-commerce enabled and host supplier catalogs. Other characteristics include the ability to issue RFQs to the marketplace population. Cutting-edge sites of this type offer availability and order tracking, and loyalty is to the site rather than to the suppliers on it.

Spends that are high-value commitments, with multivariable decision-making usually fit in sourcing support tools, the fifth of Wilson's categories. These tools help procurement professionals source long-term agreements. Examples of such tools include eBreviate, FreeMarkets.com, Emptoris, Perfect and GM TradeXchange. Characteristics include decision-support tools, pre-qualified suppliers, large dollar commitments and complex agreements. Multiple suppliers can be chosen, and transactions are usually costly.

According to Wilson, "Emptoris and Perfect are both request for quote software, and are designed to consider more than just price. The really simple tools (your broad-based collaboration type tools) only consider price, because you just can't look at quality and delivery for everybody. But if you've got a couple of strategic relationships and high-dollar parts, then it's worth it to take the time and the money."

Due to the complexity and cost involved with the use of such tools, they are usually reserved for high-dollar items, although this may not always be the case. Wilson explains, "Now, that [the use of these tools for expensive items] may well be a function of where technology is today, I could see that actually changing, and it would be useful for low-dollar items. But right now, most companies are just using it for really large contracts or strategic sourcing agreements, because it takes some time to do, and they're expensive."

"The future is our time." Agent Smith, The Matrix

The upshot of all this much ado about matrices is there is probably a procurement solution that's a pretty snug fit for your spends, regardless of the size of your company. Tayur says, "The power of the Internet is that it can scale from the fairly small to the very big ... The specific tactics may be different. For example, people say the price of Ariba and i2 is just too high for smaller companies. So what we're seeing is a similar functionality being given to different segments of the market, but by different providers. I'm sure there is a baby i2 or a baby Ariba-type functionality by a company that is going to help the smaller companies in a particular industry."

Tayur points out that, regardless of the tool or spend, most of the goals are essentially the game. "Everybody wants visibility, everybody wants to be able to collaborate, to standardize the procedures of how to track things, and they want an easy way of hooking into a marketplace, and also running auctions, etc. So in some sense, people want similar things. The question is, how many bells and whistles do you need?"

The Sound of Inevitability

After you make the switch to e-procurement, your work is far from over. Now the challenge becomes maximizing all the tools you have at your disposal, which will require continued evolution of purchasers, not just purchasing. Gellatly says, "I definitely think the buyer of the future will become a day trader. Because it's not how much I know about soda ash or how much I know about bearings, it's how much I know about the process of getting those materials at the time I need them for the best price available.

"I've been with Owens Corning for 20 years, and you always looked at that next position as when somebody was going to retire or something bumped up. But now it's absolutely about how you can drive value. And you can start contributing the minute you walk in the door."

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