A few years ago the Power Generation division of global giant Siemens, faced with a looming glut of power-producing capacity in the market, began to emphasize its service business, offering parts and support for existing plants and equipment. Problem was, too many manual processes encumbered the unit's direct materials supply chain. In need of more nimble processes to support the fast-moving service business, the Power Generation division began looking for a solution that could streamline this side of its spend. Finding no suitable solution for addressing direct materials, the division opted to work with Siemens' own Procurement & Logistics Services (SPLS) unit to develop a solution internally. Now, just a few short years later, not only has Siemens developed solutions that address both direct and indirect spend, SPLS also is marketing its solutions to other enterprises, holding out the prospect of additional revenue for the company.
In doing so, Siemens joins a number of other so-called "brick-and-mortar" companies that are reaping the benefits of internally developed supply chain solutions but also offering those solutions to the outside world at a price, of course. iSource Business first covered these "brick-and-click" companies two years ago, in its November 2000 issue, in an article written by Russ Banham titled "The New Moneymakers". In the article that follows, we'll take a look at one of the companies that figured in that original article, IBM, and also examine the efforts of two relative newcomers to the "brick-and-click" world, HP and Siemens.
Evolution and Lessons Learned at IBM
First, an update on IBM. Big Blue began re-engineering its internal procurement processes and systems in the 1990s under the guidance of its then-chief procurement officer, the legendary Gene Richter. Since then, the company has moved nearly 95 percent of its purchasing online, e-enabling nearly 30,000 suppliers and pumping more than $40 billion in spend annually through its SAP-based e-procurement system. As a result, the company claims it has reaped billions in competitive advantage including process savings and cost reductions from using the new system. After industrial conglomerate United Technologies Corp. expressed interest in tapping into IBM's expertise in 1998, Big Blue decided to set up a unit under its Global Services division to market the company's outsourced procurement offering.
In the four years since then, IBM has evolved its offering to keep up with changes in the marketplace, expanding its services to now include everything from an initial spend assessment, procurement strategy design and software implementation to strategic sourcing and its new Leveraged Procurement Services for managing indirect spend. IBM has maintained its partnerships with e-procurement platform provider Ariba and supply chain specialist i2, and it has entered into new partnerships with providers like Ketera (formerly MarketMile), the American Express-based venture, to offer a range of sourcing expertise and services, from opportunity assessment to supplier selection and event management. While IBM doesn't break down revenue for Global Services, the unit overall remains a $35 billion moneymaker for the company, up from $29 billion just four years ago.
Looking back over the past few years, William Schaefer, vice president of procurement services at IBM Global Services and head of the outsourced procurement effort, notes with some satisfaction that while the supply chain solutions and services market has had its ups and downs, Big Blue has demonstrated that the "brick-and-click" concept is viable. "We would be proof that this idea of taking an internal competency and turning it into a commercial business can be successful, and it can grow," says Schaefer.
Not that the ride was entirely smooth from the get-go. "We've learned an awful lot in the intervening years about what it takes to be successful," Schaefer readily acknowledges. First, he points out that taking a group of supply chain practitioners people more used to being on the buying, rather than the selling, end of a transaction and turning them into sales- and service-oriented consultants involves learning new consulting and project management skills.
"I came into a commercial role with a practitioner's background as someone who managed procurement within IBM," he says. "I thought, 'We're smart people, we know how to do procurement, and we can tell other people how to do it. It's pretty simple.' What I learned was to value the consultative and commercial skills that I probably didn't appreciate as an internal user."
Schaefer says he discovered that good consultants are, first of all, good listeners. They don't try to force clients into a particular process. Rather, they seek to understand a client's problems and unique needs, and they must be flexible in formulating solutions. This requires consulting and project management skills that the IBMer says are probably undervalued by those in an internally focused organization. Of course, Schaefer is quick to add, the solid skills that experienced supply chain practitioners bring to the table are critical as well. The blending of those consultative and practical skills is what he calls "the secret sauce" that makes this type of offering work.
Other lessons learned have included the need to bring in marketing professionals to translate the supply chain practitioners' concepts into a message that is comprehensible and compelling for others outside IBM or outside the supply chain function. Also, Schaefer says the ability to form strategic alliances with complementary partners, as IBM has done with Ariba and Ketera, can prove valuable in extending an offering beyond an enterprise's own core competencies.
Then there has been the inevitable "not built here" issue, the question as to whether procurement strategies developed at IBM, a technology company, could really be applicable to enterprises in other industries. Schaefer agrees that, as he says, a one-size-fits-all approach doesn't work." However, he notes that IBM has found significant commonalities in buying patterns between seemingly disparate companies. "We learned that at one of our major retail clients," he offers by way of example. "In the early days they said, 'IBM, we appreciate you've saved a lot of money, but how can you help us do a better job of sourcing for our stores.' Well, it turned out that we're maybe not the world's best buyers of mannequins. But we were able to help them dramatically on things like lighting, for example. We have facilities and they have facilities, and buying lighting for an IBM is similar to what it is for a store. So there probably is much less uniqueness than you might think." Still, IBM's consultants strive to learn as much as possible about a particular customer's industry so they can "talk the customer's language" as a first step toward understanding the client's unique needs before moving on to the commonalities.
Schaefer says IBM continues to explore new services and new ways to offer its supply chain services. "I always am on the learning curve," he says. "And that's because the marketplace in procurement is still in its very early stages. There is tremendous opportunity as we consider things like the outsourcing and other ways of delivering value in procurement."
Inside Out at HP
Naturally enough, companies other than IBM are pursuing those opportunities as well, and perhaps not surprisingly, several of those companies, like IBM, come from the technology sector, including HP, the enterprise that resulted from the Hewlett-Packard/Compaq merger. As at IBM, the HP story starts from the inside and works its way outside the enterprise.
Back in the spring of 2000, Jeff McKibben received the mandate to investigate online procurement for HP, then still Hewlett-Packard. McKibben, director of the worldwide e-procurement program for HP, quickly came to two conclusions. First, online procurement at the time primarily focused on the indirect or maintenance, repair and operations (MRO) spend, while McKibben saw HP's greatest opportunity for savings and efficiencies on the direct materials side, where the pre-merger HP spent upwards of $23 billion annually.
Second, different divisions within HP were pursuing "dozens of different initiatives" to use the Internet to enable procurement processes, but those projects were not necessarily well leveraged from one business unit to another. McKibben and his colleagues realized that if the company could pool the resources and energies devoted to these initiatives, they likely would be able to generate better and faster results.
Not that HP wanted to completely centralize decision-making within its supply chain. On the contrary, the company wanted the best of both worlds: "We thought there was a lot of strength in having the decisions made by those in the best position to make them," McKibben says, "so we wanted to maintain that distributed execution and decision-making. But we also wanted to retain some kind of global visibility, not just across our lines of business but across our extended supply chain as well."
The strategy that HP's e-procurement team developed called for consolidating the dozens of initiatives underway into four projects, all to be implemented on a single, uniform platform using a private, online collaboration hub. The four projects include: order and forecast collaboration, which covers such areas as exchanging purchase orders and the sharing of part forecasts with trading partners; inventory collaboration, or using Internet technology to enable supplier managed inventory and processes; auctions, which called for aggressively increasing HP's use of auctions, not just for strategic sourcing, but also for spot sourcing during periods of shortage and the disposition of excess inventory; and strategic sourcing, or aggregating information across the supply chain for commodities that the company needed to manage in a more strategic way.
McKibben and his team used a carrot-and-stick approach to drive adoption within HP. For the stick, they turned to the company's chief information officer, relying on the CIO to put a freeze on new tool development for procurement within the company. For the carrot, the e-procurement team pledged to provide the business units with a solution that would deliver real business benefits against real process needs.
On the build-versus-buy question, HP took a middle road. Back in late 2000, a survey of the solutions market failed to turn up an application with the breadth of functionality HP wanted, so the company pushed forward with a homegrown solution called KeyChain, which essentially is a private online hub that serves as a platform for implementing the four projects mentioned above. Subsequently, HP partnered with Dallas-based i2 Technologies to help build out KeyChain as an enterprise-scale solution and to provide several key components, including order and forecast collaboration, as well as inventory collaboration. For spot sourcing and disposition of excess inventory, the company has looked to Converge, the high-tech industry exchange that HP helped found in May 2000.
Since beginning the effort, HP has brought 17 business units onboard with KeyChain, putting an estimated 20 percent of the company's pre-merger purchasing transactions through the system and integrating with about 300 trading partners to date. The company expects to have 300 users on the system by the end of 2002. Among the benefits accrued, HP cites a 30 percent increase in productivity among the company's purchasing staff, an average of 10 percent cost savings through online sourcing efforts, a 50 percent reduction in purchase order cycle times (from two days to one) and a 300 percent improvement in cost recovery on excess inventory. The company estimates its bottom line savings to date at $113 million. Goals for the future include enabling 40 targeted HP sites on the system and putting 80 percent of the company's transactions through KeyChain by 2004.
Meanwhile, in the course of 2001, even as the company was moving forward with KeyChain, HP was setting up a combination research-and-development/go-to-market organization to commercialize internal assets, targeting specific sectors such as manufacturing, telecommunications and financial services with solutions initially developed for use within an HP division. This seemed like a natural move since as many as 25 percent of the visits by other companies' executives to HP's headquarters or facilities have nothing to do with the content of the manufacturer's products and services but rather focus on benchmarking the company, according to HP's Bruce Toal. Toal is worldwide marketing manager at the go-to-market organization's Manufacturing Business Industries Unit (MIBU), which is charged with offering solutions to other manufacturers. He says the organization offered HP a means to formalize the process of sharing the company's experiences, and it also fit in with HP's broader shift toward offering services in addition to technology products, a move that has intensified since the Hewlett-Packard/Compaq merger, Toal says.
MIBU's first task was to take a system developed specifically to address HP's requirements and turn it into a solution that would be generic enough to map to other companies' unique processes or infrastructure. The result, the Supply Chain Collaboration Hub (SCC Hub, initially called the Rapid Supply Chain Collaboration Hub), resembles KeyChain: it offers an enterprisewide integration platform on which to layer processes and solutions for streamlining the direct materials supply chain, according to Allen Johnson, manager of the MIBU solutions portfolio and alliances. Like KeyChain, the solution's individual applications address order and forecast collaboration, inventory collaboration, auctions, and strategic sourcing. Internally, the hub offers a means to integrate systems across business units and establish streamlined enterprisewide processes. Externally, the hub provides a portal through which a manufacturer can channel transactions with its trading partners, provide a window into its own processes and gain visibility into its suppliers' systems. An overlying management application called OpenView allows a company to monitor the individual components of its technology infrastructure. Johnson says the structure of the SCC Hub would allow a company to begin by addressing internal integration issues across its own units and then start integrating outside partners into the system, or by immediately integrating with suppliers, depending on how far along the company was with its own integration efforts.
In taking SCC Hub to market, HP initially tapped PwC to be its integration partner. But the two parted company after IBM's acquisition of PwC earlier this year, and HP has since revised its strategy to accommodate any of the major integrators with which a potential customer might want to work, including HP's own services organization. The initial target market for the solution comprises large discrete manufacturers in the aerospace, automotive and high-tech industries, including several dozen companies within HP's current customer base. Toal says that HP anticipates announcing its first customers for the hub around the end of 2002 or the beginning of 2003.
Both Toal and McKibben acknowledge a degree of skepticism among potential customers about whether a solution applicable to HP would be a fit for the supply chain of, say, an automaker or even another high-tech company, given the unique processes and technology infrastructure in place within each enterprise. But Toal points out that companies in many sectors increasingly are moving toward outsourced manufacturing and pursuing a supply chain quite similar to HP's model, and those companies are likely encountering many of the same issues that HP has already faced and resolved with its KeyChain solution.
For his part, McKibben says that when the go-to-market team brings him in to meet with a customer and discuss HP's experience implementing the solution internally, he emphasizes his own view as a supply chain practitioner. "I'm not a marketer," he says. "I try to share with them our real-life experiences," he says, adding, "This isn't easy, but there is a bit of an imperative to it. You need to invest in building this capability."
Inside and Outside for Siemens
While IBM and HP have established separate units to market procurement and supply chain services, Siemens has taken a different approach. Perhaps uniquely, this $82 billion multinational conglomerate has a separate supply chain services organization that is marketing a solution not only externally but also internally to the 13 business units that make up Siemens' diverse portfolio.
Operating in 190 countries, 155-year-old Siemens ranks number 23 among the world's largest companies, employing 450,000 people globally, including 80,000 in the United States, making it the largest foreign employer in the States. The company's lines of business include information and communications, automation and control, power, transportation, medical, lighting, and financing and real estate. Together, those divisions annually spend about $38 billion on products and services, with roughly half that figure going for direct materials and about one-third for indirect materials.
Like other diversified companies managing global operations across multiple business units, Munich-headquartered Siemens faced the challenges of aggregating the spend across its divisions to leverage the company's overall purchasing power and implementing uniform supply chain processes. While individual business units pursued strategies to streamline their own procurement, the result was a mix of systems and manual and automated processes across the organization as a whole. In fact, technology consultancy Aberdeen Group, in an April 2001 study of procurement at Siemens, estimated the company was spending more than $100 to process high-volume, low-value purchase orders at a time when it was executing more than 50,000 indirect purchases every month.
To address those challenges, the company set up its Siemens Procurement & Logistics Services (SPLS) unit in 1999, with the charge to conduct procurement services and logistics for the enterprise's different businesses. The rub here is that from the start Siemens set up SPLS to be a profit center, charging the unit with marketing its services both to internal customers and to third-party companies. By 2002 the company was notching up $900 million annually, with more than half of those sales attributable to external customers.
Today, in a move to incorporate the Internet in its services offering, SPLS addresses both the indirect and direct sides of the spending equation through click2procure, a procurement toolkit that is part of Siemen's Buyside Marketplace, which in turn is an online buy- and sell-side marketplace for the company. click2procure employs marketplace technology from Commerce One that was selected in large part because of the ease with which it could integrate with the more than 250 instances of SAP enterprise resource planning (ERP) systems installed across Siemens.
click2procure offers a range of applications for automating and streamlining purchasing processes. On the indirect side, the site provides access to a catalog encompassing about 2.5 million line items from more than 130 suppliers, with 80 percent of those products and services falling into the MRO category. The solution provides a "req-to-check" system that simplifies accounting by consolidating all purchases into a single monthly statement, but it also offers reports that let companies analyze spending across multiple divisions. On the direct side, users can place purchase orders through the marketplace and then receive acknowledgements, advanced shipping notices (ASNs) and invoices back from suppliers. An auction tool offers electronic request-for-quote and online event-management capabilities, while the site also includes such tools for procuring and managing contract labor as electronic timecard submission, approval and payment.
Once a user (internally at a Siemens division or externally at a third-party customer) places an order through the Buyside marketplace, SPLS acts as an intermediary to send the order through the market site to the supplier. The supplier ships the goods to the end user and the invoice to Siemens, which pays the supplier and also bills the customer. SPLS handles the three-way match process only to ensure that high-value items are properly received and accounted for in the customers' backend systems. Most payments to suppliers are conducted online through a bank that acts as a clearinghouse so that Siemens doesn't have to go through the hassle of managing the authorization process for supplier payments.
Siemens business units or external customers can access the Buyside Marketplace under any of three models. SPLS can serve as an application service provider (ASP), or customers can opt for a managed application service that has SPLS implementing company-specific tweaks to the solution to adapt it to a customer's own processes, along with standardized interfaces to the customer's ERP system. Finally, an "OnRamp" option allows a customer to use its own e-procurement solution, rather than SPLS' Commerce One system, to transact through the Buyside Marketplace. In this case, SPLS continues to capture the spend as well as the data necessary for reporting, while the customer continues to leverage the technology and associated processes that it already has in place.
In explaining Siemens' decision to have SPLS market its services both internally and externally, Klaus Haidacher, the director of click2procure, and Ruediger Reitzig, the director responsible for the direct materials side of click2procure, note that Siemens has not mandated that its business units move to the Buyside Marketplace. "We have to convince every [Siemens] operating company that this is the right thing to do," Reitzig says. Therefore, providing its services to third parties is a proof-point for internal customers that SPLS is offering a competitive value proposition. "As an internal service provider, I would not have credibility [within] Siemens if I were not competitive enough to offer the service to the outside world," Haidacher affirms. Not incidentally, by bringing in outside customers, SPLS also has the opportunity to increase its overall purchasing volume, allowing it to negotiate better pricing for the products and services it offers through click2procure.
To understand the Buyside Marketplace's potential benefits, let's look at one implementation of the solution, within Siemens Power Generation.
Power Generation is an $8.6 billion business globally, with about $3.5 billion of those sales coming in the U.S. market. A few years ago the division surveyed its industry and saw trouble brewing. The company and its competitors had been so successful at selling power plants that the market seemed headed for a glut of power generation capacity. To maintain its revenues, the company elected to emphasize its service business, offering parts and service for existing plants and equipment. That's a fast-moving business, in contrast to the multi-year engagements involved in plant construction, so the Power Generation division had to think about how to restructure its supply chain to support the more dynamic, service-oriented model.
At the outset, the unit realized its existing procurement processes would not be able to handle the expected upswing in purchasing activity that would come with the shift to the new model, according to G.D. (Gene) Federowicz, director of procurement strategy for Power Generation in the States. "We knew we would have a huge demand in our parts and service business and that we'd need to have a system to react to [that]," Federowicz says. The option of hiring new purchasing staff to handle the increased transaction volume was not viable, he says, for one very simple reason: "Under our old manual processes, we couldn't hire enough people." In addition, phone- and fax-based processes would not be capable of keeping up with the rapid cycle times inherent to the service business.
At the time, back in the late 1990s and 2000, most of the activity in online procurement centered on indirect materials, but Power Generation was more interested in the direct materials side, where about 80 percent of its spend resides. Failing to find a third-party solution that addressed its needs, the business unit instead turned to SPLS, working with its fellow Siemens division to develop the direct materials solution that ultimately was implemented throughout Power Generation and also incorporated into Buyside Marketplace.
Power Generation piloted the solution last year and went live with the direct materials solution by mid-2001, ramping up in phases across its different lines of business. Even in the pilot phase, the company realized benefits from using the system. The parts group, for example, reported a 55 percent increase in productivity among its purchasing staff. As a result, although the parts business saw 30 percent growth last year, not only did it not have to hire additional buyers, the business was actually able to redeploy three of its 15 tactical purchasing staff to focus on more strategic activities. "That's one of the major payoffs," Federowicz says. "Get them out of the tactical, the transactional fire fighting. Get them into the deal making, the strategy. Get them working with suppliers to reduce their process costs. Those three [buyers] that we were able to put into strategic programs contributed $2 million in the first year."
The direct materials solution has also helped Power Generation reduce its turnaround times for getting parts out to customers from about a week to less than a day, a critical and high-value capability in the power plant business, where downtime adds up to lost revenue. "When a power plant goes down, there's a crush to get parts and pieces, and price is not an issue for the customer at that point," Federowicz explains. "They'll pay anything just to get that machine up and running, so we're creating a huge opportunity for increased high-margin sales."
In line with Siemens corporate philosophy, Power Generation has not set a mandate for how fast its different product lines must move their procurement to Buyside Marketplace. In fact Federowicz says that the unit has instructed its different subdivisions to take a close look at their processes and move to the marketplace only where it makes sense. Ultimately, however, the unit would like to see close to 100 percent of its procurement going through the system, and certain subdivisions, such as the high-volume parts group, could achieve close to 85 percent adoption within six to 10 months, according to Federowicz.
Beyond the benefits that Power Generation has seen on the direct materials side of its business, SPLS' solutions offer the potential for other savings as well. With 13 business units signed up to use Buyside Marketplace (including Infineon Technologies, a unit that became a separate company in 2000), Siemens is reporting an average reduction of 40 percent in the administrative costs for purchasing transactions, which translates into $40 to $60 per transaction, according to an Aberdeen Group study. The company's medical products division, for instance, reported savings of $1.3 million thanks to a 50 percent cut in process costs on its 60,000 annual orders for indirect materials. In addition, Siemens says that Buyside Marketplace's e-sourcing tools, such as reverse auctions, have helped cut the company's materials costs by 20 percent on average, as reported in the Aberdeen study.
In terms of outside customers, SPLS says it is targeting companies that are of the same size as Siemens itself or its business units, which in 2001 ranged in revenues from $2.5 billion to $12.9 billion. SPLS will be working as well to bring additional suppliers into the system as a way of expanding the commodity categories that it can offer to its customers.
From Process to Profit
With IBM, HP and Siemens' SPLS all offering different flavors of procurement and supply chain services, inevitably the question arises as to which of these ventures will survive and thrive. Of the three, IBM, through its Global Services division and through the recent PwC acquisition, has the greatest experience, while Siemens has generated a good deal of momentum by setting up SPLS from the start to service both internal and external customers. HP is perhaps less of a known quantity, but the company appears fully committed to moving toward a more service-oriented model, and the completion of the merger with Compaq with the addition and assimilation of that company's service organization could well hasten that shift.
What is clear is that companies will continue to develop technologies and solutions that address their own requirements, only to turn around and market those offerings to others. Xerox, for example, announced in October that it was partnering with Internet consulting firm eTrack Solutions to market cost-estimating software that Xerox had developed internally to drive down its manufacturing costs. With Wall Street demanding ever-increasing earnings, not even the largest companies can fail to fully leverage every opportunity to turn an internal process into profit.
