With electronic procurement only a few years old and e-commerce evolving on a daily basis, purchasing professionals seeking a good roadmap to guide their e-procurement initiatives might feel like conquistadors looking for a map to the City of Gold. Fortunately, a handful of pioneering companies have taken on the challenge of drafting that map while they blaze the trails that lead to the El Dorado of e-procurement.
One such company is Hartford, Conn.-based United Technologies Corp. (UTC). In fact, few, if any, companies are as far along as UTC in implementing an end-to-end e-procurement solution. Working with IBM Global Services to automate general procurement, and with the Net marketplace FreeMarkets to run reverse auctions for commodity inputs, UTC is on track to cut $850 million off its $14.6 billion annual spend by the end of 2000. The company’s supply base, which included 58,000 suppliers a few years ago, is due to shrink to 10,000 in 2001.
Along the way, the company has documented the challenges it has faced and the processes it has adopted to change its purchasing operations. The result is a map to which other companies can refer as they set off on their own journey down the road to e-procurement.
The Data Challenge
UTC may be an ideal testing ground for the adoption of e-procurement. The 57th largest U.S. corporation according to Fortune’s 2000 rankings, UTC reported a net income of $1.5 billion on sales of $24.1 billion in 1999. The company’s nearly 150,000 employees are spread geographically across 1,800 offices in 183 countries and organizationally over six divisions, including Pratt & Whitney aircraft engines, Carrier heating and air conditioning systems, Otis elevators and escalators, Hamilton Sundstrand aerospace systems, Sikorsky helicopters and International Fuel Cells.
With such a dispersed and diversified spend, UTC's first priority when it began implementing its e-procurement effort, was to get control of the vast amount of data on what it was buying, according to Kent Brittan, who became UTC's vice president for supply management in 1997. "If you're really going to leverage the spend across divisions, you need to know what you’re spending on what," Brittan says. "Going after the data is the first priority. That's where e-procurement starts."
The data challenge involves two aspects: collection and analysis. An important element of this data collection effort was putting compatible systems in place in each of the company’s divisions that allowed information to be exchanged within the company. "You need systems that talk to each other," Brittan says. At the same time, the growth of the Internet provided a medium through which the company could collect the information from its various divisions and offices around the world.
Once the data was in hand, the task became analyzing it. IBM’s Gary R. Saunders, who heads the project to provide UTC with general procurement services, ticks off the types of information UTC sought by analyzing the data: "What are the commodities? What are the prices paid and value? How extensive is the commodity? Where is the opportunity? What are the expected costs and benefits?"
The answers to these questions allowed UTC to see where the company could leverage its buying power across the organization. But more importantly, the answers served as the foundation for the company’s plan to introduce e-procurement.
Frank Coscia knows a thing or two about planning an e-procurement system. Before becoming director of operations for procurement services at IBM Global Services, Coscia ran the project office to reengineer IBM’s own general procurement processes. (See "The New Money Makers")
Based on IBM’s experience and its work with UTC and other companies, Coscia says that a plan to implement a comprehensive e-procurement system must include strategies for such disparate elements as strategic sourcing, information technology, change management, business processes and policies and procedures.