Call it the Kevin Costner Conundrum of e-Business: If you build an e-procurement system, how do you ensure that your suppliers and end users will come play on your brand new field?
Such was the dilemma facing AMETEK, a global electronics manufacturer that in August 2000 embarked on an initiative to implement an e-procurement system in an effort to aggregate its spend and better leverage its overall purchasing power to reduce costs.
Headquartered along Pennsylvania's Main Line in the town of Paoli, AMETEK notched up more than $1 billion in sales of its electronic instruments and electric motors in 2000. With two operating groups, 18 divisions, 45 manufacturing facilities, 8,000 employees, thousands of different suppliers around the world, and $60 million in annual purchases of indirect goods and services, the company certainly fit the classic profile of a company that could benefit from e-procurement's promise of spend consolidation and the resultant cost savings.
And indeed, the company set those two objectives for itself going into its implementation of e-procurement as part of a larger deployment of Oracle's 11i e-business suite, according to Sue Eckel, director of e-procurement at AMETEK. With a supplier record running to 14,000 suppliers, the company was looking for a substantial supply base consolidation in North America, along with cost reductions of about 6 percent in the first year.
But the very size of the company's supply base made the task of integrating supplier catalogs into the Oracle e-procurement system problematic. Therefore, catalog content was a key part of the discussion as Eckel and her team set about preparing the scope of work for the company's e-procurement initiative.
Early on, the company elected to look outside for a solution to the content issue. After reviewing several third-party content providers, AMETEK settled on a seemingly unlikely choice: ICG Commerce, based 45 minutes away from AMETEK in Jenkintown, Penn. "Unlikely" because ICGC is one of a breed of solution providers offering full-service sourcing and procurement rather than strictly a catalog content provider. The company employs a staff of procurement and sourcing experts, numbering in the hundreds, that track specific product categories, source goods and services, and negotiate contracts on behalf of ICGC's customers. ICGC then offers catalogs of these pre-negotiated products to its clients through an online exchange.
ICGC's offering appeared to go beyond AMETEK's needs. However, when AMETEK found that ICGC could offer access to 30-plus pre-sourced catalogs of goods and services containing upwards of 2.8 million stock keeping units (SKUs), "We folded them into our scope and said, 'OK, not only do we want catalog providers, but we want someone who does the aggregation and contract negotiation as well,'" explained Eckel, who was director of procurement for one of the manufacturer's divisions before taking on the e-procurement post full time in May 2001.
AMETEK kicked off its Oracle 11i implementation in August 2000 and went live with the system in May of last year, covering 37 sites in North America. It took the rest of the summer to roll the system out, and it wasn't until September that the company had a core group of users up and running with e-procurement. By March 2002, 1,300 active users were on the system.
As part of the implementation, AMETEK and ICG Commerce implemented seven catalogs - including electrical, industrial, janitorial, lab, office and safety supplies, and power transmission and bearings - that end users at the company could access through their Oracle e-procurement system using a "punch out" feature. AMETEK also connected to four catalogs not covered by ICGC, including a computer hardware supplier and a machine-tooling supplier, through TPN Register, a catalog and content management provider subsequently purchased by General Electric. Eckel expects to have a total of 18 catalogs available to end users by May.
The key to the success of the e-procurement implementation, of course, would be ensuring that users in fact put their spend through the system, a challenge that has been the "Achilles' heel" of many e-procurement deployments, according to Bob Kothari, eastern region general manager for ICG Commerce. Kothari cites industry statistics showing adoption rates for e-procurement systems of less than 10 percent after a year due in large part to end-user pushback. "When you get down to that individual user, you're changing their whole world," he explains. "You're changing how they're going to buy in terms of the technology. You are changing suppliers. That's a lot to handle for a lot of users."
To beat those odds, from the start of the project AMETEK undertook a program to educate end users on how to use the new Oracle system. As part of that education, ICGC trained users in how best to find what they needed in the catalogs and worked to make sure that users and suppliers got to know each other. Kothari says that such training is crucial for any e-procurement initiative to overcome "cultural resistance" to change within the organization.
In addition to the educational efforts, AMETEK has taken other steps to ensure adoption. For one, the company's CEO issued an official mandate in March calling upon the manufacturer's divisions to take steps to channel 100 percent of their spend through the e-procurement system. The company is also withdrawing purchasing cards from users out in the field and cutting off the capability to purchase expense items through the company's old system.
This focus on adoption has informed the metrics that Eckel's team is currently monitoring using the 11i's reporting capabilities. Each of AMETEK's 18 divisions has forecast a level of indirect spending that could potentially be procurable through the e-procurement system, as well as levels of spending in each of the catalog categories accessible through the system. With the Oracle system generating weekly spend and leakage reports, AMETEK's e-procurement staff is able to determine which divisions are spending how much off the system and calculate lost savings based on percentages determined for each category using a market basket study performed prior to the implementation. These data in hand, AMETEK and ICGC can work with individual divisions to determine the causes of off-system purchasing and to increase the amount of spend being directed through the system, for example, by explaining savings opportunities or demonstrating amounts that could have been saved had maverick buyers used the system.
In all, Eckel says AMETEK invested about $1.2 million to get the e-procurement system up and running, and she expects the company ultimately will be pushing $60 million in indirect spend through the system, including approximately $30 million in goods and services purchased out of the online catalogs. Purchases made outside the catalogs will still be processed through the e-procurement platform so AMETEK can handle payment through the system, and Eckel says she expects some savings on this segment of the spend through cash management controls, standardized payment terms and various process savings. But the real return - the hard savings that AMETEK is targeting - will come from the catalog buys, where Eckel's team can calculate the savings based on the market basket study. AMETEK is aiming for $4 million in savings this year, with virtually all those savings expected to come from the catalog buys, according to Eckel.
Did AMETEK see any supplier pushback during the e-procurement implementation? "No, actually," says the company's e-procurement director. "In fact, most of the people that we connect directly to are far more advanced in this area than we were. So it was easy for them." Eckel concedes that suppliers who lost business as a result of the implementation "weren't thrilled, but we haven't gotten any nasty letters or anything like that, so it's been handled pretty well." AMETEK is looking to reduce its supply base over time, but the company hasn't committed to a target number of suppliers yet.
One unintended consequence of the e-procurement program has been to raise the profile of purchasing within the larger organization at AMETEK, with the projected impact of the new online procurement system meriting a mention in the company's most recent annual report. "We didn't come anywhere close to an annual report mention before," Eckel says. "There is a huge awareness in the company that wasn't there before."