Tempe, AZ November 14, 2001 America West Airlines is adopting an e-sourcing platform as part of the carrier's ongoing program to reduce its expenses, and the company's experience to date with reverse auctions offer some pointed lessons for companies looking to adopt new technologies in the face of challenging financial times.
The times are indeed challenging for the airline industry, which has seen business drop off precipitously since the September 11 terrorist attacks in New York and Washington. America West, the eighth-largest U.S. air carrier, made news yesterday when it became the first airline to apply for U.S. government loan guarantees to help the company overcome the industry's slump.
But America West had been exploring its e-sourcing options for months before the September events, and the airline announced today that it will use MaterialNet's Custom Procurement Management System (CPMS) for online sourcing. Initially, the airline will use e-sourcing to buy products and services such as hotel rooms, crew transportation services, in-flight products, cleaning services, computers and equipment. Future plans call for the airline to expand its use of CPMS to purchases in other areas.
Delivered on an application service provider (ASP), CPMS provides a Web-based suite of e-sourcing tools that includes auction, electronic request for information (eRFI), order management and award notification, document management and analytic capabilities.
The initial agreement, terms of which were not disclosed, covers one year's use of the CPMS, with an option to renew for another year. MaterialNet won out over 15 e-sourcing competitors that the airline declined to name.
The airline ran trial reverse auctions with CPMS in August and September, working with a limited number of suppliers, and the pilot Web site set up for the trials is ready to be rolled into a permanent site once America West's logo and color scheme are added, according to Michael Inman, director of general purchasing for the airline. "It's just a matter of branding at this point," Inman said.
America West, which says it currently is losing $1 million a day, is measuring its return on investment (ROI) in the simplest of terms: price before an auction versus price after. However, the airline does not have a specific target for percentage savings that it expects across the board, Inman explains, because of the variability of factors influencing the outcome of the reverse auctions the airline is holding. "Every auction is different," Inman says. "You can have a good auction with two suppliers if those two suppliers are very competitive. You could have a bad auction with 20 suppliers if you just had one that was very competitive and the rest were high priced."
The airline has seen varying levels of ROI on the auctions that it has run to date. "We've had events that have saved us 3 percent, and we've had events that have saved us 60 percent," Inman says.
The key to ensuring a "good" auction, says Inman who has been using the online auction tool since the mid-1990s when he worked at an automaker is to do your homework before the actual event, identifying suppliers and preparing the suppliers for the auction. "There is ... more time and effort going into the pre-event than into the event itself," he explains.
America West is also realizing process cost savings. Again, Inman explains: "A buyer might spend three to four weeks setting a target and the suppliers will respond, and they'll set a lower target and the suppliers will respond again, in effect having their own reverse auction but holding it off-line. It does take weeks for that process to happen. In an online event, we've found that suppliers can get to their bottom price in a matter of 20 to 30 minutes."
Inman declined to speculate on the percentage of incumbents that were winning auctions versus new suppliers, although he did say, "Incumbents are usually very competitive."
The airline's suppliers have responded cautiously to the introduction of the reverse auction tool, although that has worked in America West's favor to some extent, according to Inman, since the tool essentially works as a deterrent to price increases. "Suppliers are scared of it," Inman says frankly. "We had one supplier come to us for a price increase. We went out to auction. We actually wound up with the same supplier. [The supplier] came in, was the low bidder, and was about 10 percent under what the current price was. I doubt that supplier will ever come to us with a price increase again."
As a result, although the airline could probably run about 600 reverse auction events per year, Inman doubts the company will wind up doing that many. In first three months of pilot programs, for example, they did 30 events.
How does the airline handle pushback, when suppliers don't want to participate in a reverse auction? Here's Inman: "We explain to them that this is part of our sourcing process, and we understand if they don't want to participate. However, if they want the opportunity to win our business, we're the buyer and this is the path that we're going to go down. And if they want to win our business, they are going to have to participate online."
What about the airline's relationships with its suppliers? "It's just as easy to have a relationship with the low-cost supplier as it is with the high-cost supplier," Inman says. "Yes, you get additional benefits from those high-cost suppliers, but in these times, what we're trying to do is take a look at what our minimum requirements are and find the best solution for those minimum requirements. If we can get some extra bells and whistles, great, but we're trying to develop relationships with suppliers who want to be with us long-term, and those suppliers are going to be low-cost providers."
Nevertheless, online auctions are just one component of the airline's sourcing toolkit. "Strategic sourcing and offline negotiations are invaluable when you don't have a competitive supply base, or when you have a commodity that doesn't lend itself well to the auction process perhaps each supplier offers different payment terms or different levels of service even though you have a minimum," says Inman. "Sometimes suppliers have a built-in level that's there regardless of what your requirements are. Those types of things should probably be negotiated offline."
AmericaWest is the second recent announced customer win for Lake Success, N.Y.-based MaterialNet since the company recast itself as an e-sourcing solution provider, having started out as an e-marketplace for the metals and mining industries. MaterialNet launched CPMS in August, and in September Minnesota's state government signed up to use the suite.
MaterialNet will be pursuing additional customers in the airlines industry, according to Joe Pecoraro, chief operating officer for the solution provider. "We are pleased that a leader in the aviation industry such as America West recognizes the value that CPMS brings to their organization," Pecoraro said in a statement announcing the agreement.
America West is the second major airline this month to announce that it is turning to e-sourcing in a drive to cut costs. Last week Delta Air Lines said it would use e-sourcing tools from solution provider B2eMarkets.