The results: In addition to saving US Filter more than $980,000, or about 8.5 percent, on the purchase of the six chemicals, the auction helped the company identify strategic suppliers. US Filter was successful not only in reducing costs but also in moving forward with our strategy of reducing the supplier base and establishing a preferred supplier hierarchy, MacReynolds says. The terms of the auctions provided for a two-year relationship with the winners, after which US Filter anticipates putting the items out to bid again, with the expectation that more suppliers will be willing to participate in the next auction. In the meantime, US Filter is posting another five chemical bids and is examining which additional raw materials, finished products and services could be sourced through reverse auctions.
No More MavericksPerot Systems' Ramstad says companies should also view e-procurement as a tool that contains the supply base by reducing, if not eliminating, maverick spending. An e-procurement system can reduce off-contract buying by channeling purchases to a fixed set of suppliers. The key is ensuring that internal customers buy into the new system, according to Alan W. Daniel, procurement tools manager at Dallas-based Texas Instruments Inc.
Texas Instruments, a global semiconductor company and a leading designer and supplier of digital signal-processing solutions, first began looking at supply base rationalization in mid-1998. Since then, the company has reduced its MRO suppliers from about 5,000 to 750 through a process of evaluation that focuses on overall performance indicators, including price, quality and delivery. The company expects to channel 90 percent of MRO purchases to 200 or fewer suppliers by the end of this year.
Daniel emphasizes that e-procurement is just one tool the company uses to meet its supplier rationalization objectives. Texas Instruments uses both electronic catalogs hosted by key suppliers and American Express purchasing cards. As we consolidate suppliers and choose the right suppliers, we pick the procurement tool based on what is the best tool to connect the user with the supplier, Daniel says. Electronic procurement is a piece of the overall purchasing strategy. It's not the strategy in itself. Think of it as an enabler.
As is the case at US Filter, end-users at Texas Instruments place orders from approved suppliers' electronic catalogs directly through the Internet, channeling a substantial portion of transactions to a reduced number of suppliers. Six of Texas Instruments' suppliers currently have electronic catalogs available to the company's employees, but already more than a third of the company's purchasing transactions are made through the e-procurement system provided by Intellisys.
Despite this success, Daniel warns that e-procurement will only help a company contain maverick spending if end-users find the electronic purchasing process easy to navigate. The main reason for maverick spending is that the process by which someone needs to acquire something is so difficult that they go around the system, he explains. The real point of these e-procurement tools is that they need to be easy to use.
Bringing Suppliers On Board
In addition to end-user buy-in, purchasing managers implementing e-procurement as part of a rationalization strategy must also make sure suppliers are willing to participate in the new electronic systems. To many suppliers, e-procurement may sound like one more way for buyers to squeeze lower prices out of them. The knee-jerk reaction among some suppliers may be resentment and refusal to participate in e-marketplaces, according to Bill Sheehan, vice president for business development at SupplierMarket.com. To ease such reluctance, Sheehan points out to suppliers the benefits of participating in the SupplierMarket.com reverse auctions, including access to more open information about competitors' bids than is typically available in an offline bidding or negotiating process, the opportunity to find better matches for the supplier's current capacity, and potential exposure to new customers. Suppliers can also take comfort in the fact that only about half of SupplierMarket.com's auctions end with the lowest bidder winning the tender. The other half go to suppliers who offer better quality and geographic or other advantages. This is not a beat-up-the-supplier.com' price game, says Sheehan.
Peter Dunning, president and CEO of FacilityPro.com, touts the benefits that suppliers and buyers enjoy through e-procurement. Two-year-old FacilityPro.com provides end-to-end procurement solutions for MRO supplies and services in the highly fragmented facilities-management market. We are trying to reduce the amount of friction in the supply chain between the buyers and the suppliers, Dunning says. If we can reduce the process costs on the procurement side and on the selling and fulfillment side, everybody wins.