Focus on the Value

As chief procurement officer at the Atlantic Richfield Co., Lawrence Aldridge helped save the company $50 million by fundamentally changing the way the petroleum giant managed their supply chain. All it took was a little innovation and a lot of data.

[From iSource Business, March 2001] Atlantic Richfield Co. (ARCO) brought Lawrence Aldridge to the United States from his native United Kingdom in 1997 to create and head a new group within the company that would coordinate procurement activities across the corporation and source goods and services more strategically. Stymied by the lack of off-the-shelf tools on the market at that time (this was four years ago, after all), Aldridge's purchasing organization developed proprietary data management software tools. These tools were so innovative and powerful that when BP Amoco purchased ARCO last year several members of Aldridge's team set up their own company, licensed the software and then joined with e-procurement solutions provider eBreviate to market the tools to other corporations.

Aldridge joined ARCO as a consultant in 1984 and went on to hold positions in Asia and the Middle East before accepting the U.S. chief procurement officer position. He holds an undergraduate degree in quantity surveying and an M.B.A. from Hull University in the U.K. A fellow of the Royal Institute of Charter Surveyors, Aldridge is also a member of the Chartered Institute of Purchasing and Supply, essentially giving him the equivalent of a certified purchasing manager (C.P.M.) title.

In an interview with iSource Business, conducted shortly after he left his CPO post at ARCO following the acquisition by BP Amoco, Aldridge discusses the impact of e-procurement on the supply chain and the importance of data for strategic sourcing efforts.

iSource: How is electronic procurement affecting the supply chain?

Aldridge: There are a couple of aspects to electronic procurement. One is the way that it's changing the transactional process. As the technology develops, we are seeing the empowerment of the user and the elimination of the transactional work in purchasing. You will increasingly see a move toward more center-led organizations that will manage and coordinate activities across the company.

That's the transactional piece. The other piece  and one of the biggest challenges facing organizations that are moving toward strategic sourcing  is the data. Within large corporations you cannot find how much you spend with any given supplier. You don't really know what you're spending it on. That information, if you can get in a realistic time frame, serves two functions: It gives you the information you need for strategic sourcing, and it enables you to monitor and manage leakage outside of deals. Under most systems that exist today you are not actually gathering that information in a form that allows you to do either one of those two things. At ARCO we felt that we needed to make an investment in some form of system that would give us that information.

iSource: How is electronic procurement changing the way companies need to think about their supply chains?

Aldridge: There are a couple of things that are forcing companies to change. The first is that people at executive levels have woken up to the fact that the money they spend on goods and services is important. So you're seeing a lot more attention given to the procurement function. You see within ARCO a CEO who is interested and focused on driving value through his supply chain. He recognizes not only that the supply chain contributes savings that drop straight to the bottom line, but that relationships with suppliers and the way that you manage those relationships can have a direct impact on your business performance.

In terms of the way that e-commerce is changing the way you think about strategic sourcing and supply chains, it's enabling a move toward strategic thinking around procurement. The resources that are engaged in transactional processes are now being freed up to focus more on strategic efforts.

iSource: What are the main challenges that companies face today in managing their supply chains?

Aldridge: Human resources are a major issue. We have woken up to the fact that if we do things differently, we can really leverage our spend. The problem is that the individuals we use to execute strategic sourcing have to have the right skill sets. Certainly one of the challenges that I have found is actually getting the right resources. It has become a little easier now, but it was a real nightmare in the last six months or so. With all the resources being drawn into the B2B space, and with all the consulting companies recruiting people with strategic sourcing experience, there just weren't the skills sets to go around.

iSource: What skills are most important in procurement these days?

Aldridge: You are looking for somebody who understands that this is a business. They need to understand the business aspects of what you do. Analytical capability is probably the biggest deficiency I have found  the ability to look at these issues from a process analysis point-of-view. And then the way people approach negotiations tends to be very unstructured. They go into meetings without understanding what they are trying to negotiate and without the knowledge base to be able to manage the negotiation effectively.

Lastly, and probably most important, are the interpersonal skills to really effect change. When you are effectively challenging existing paradigms in a corporation, you need to have the right interpersonal skills so your approach doesn't seem threatening to incumbents. You need the ability to articulate a business case to those incumbents so you can convince them that this change is something that needs to happen.

iSource: How will e-procurement affect the buyer-supplier relationship?

Aldridge: There will always be a need to break down the supplier base and understand which companies are really strategic. There will be a more active management of the relationship with those [suppliers] that are strategically important to a corporation at the expense of those that aren't strategically important. Where goods are commoditized the relationship between the supply community and the user will diminish.

iSource: In the past year various brick-and-mortar companies have announced numerous purchasing consortia. What do you believe will be the impact of such consortia?

Aldridge: The consortia concept is not a new one, and it has a place within a procurement organization. Consortia can play some part in a procurement strategy, but it's only a part. It's not like you can do everything through a particular consortium.
The bigger challenge they are going to face is how the FTC is going to view some of them. The FTC is really going to start looking at them if they begin getting complaints from suppliers.

iSource: What trends in e-commerce do you believe will have the greatest impact on the supply chain?

Aldridge: The biggest impact is going to be data visibility, the fact that you are going to get meaningful, real-time management information. You really will understand where your dollars are going. That visibility just hasn't existed before.

iSource: Has e-procurement changed your own philosophy regarding supply chain management?

Aldridge: Yes it has. We are now redesigning how to execute transactions. We are also looking at how to can gather data in electronic form as opposed to trying to collect it manually. And all the time we are looking at ways to simplify and make the relationship with the supplier electronic, whether it is through e-RFIs, e-auctions or just EDI. There are all these aspects that today we are constantly looking at that five years ago weren't considering in anywhere near that depth.

iSource: Is e-commerce turning procurement into a core competency?

Aldridge: I don't think e-commerce has driven that. I think strategic sourcing has driven that. At the end of the day, e-commerce is just a tool for better procurement. It's going to give more bits of information. What organizations have started waking up to is an awareness that understanding the supply chain, understanding suppliers, understanding spend and doing analytics around that [will let] them use supply to drive their business.

The one thing I would say is that many CEOs see e-commerce as being a plug-and-play approach, [thinking] that they can get rid of the whole transactional piece just by plugging in an Ariba or a Commerce One. It's not quite that straightforward.

iSource: If you were just starting your purchasing and supply management career, considering the current environment and its varied opportunities, what would you pursue?

Aldridge: If I were just starting out I would really focus on strategic sourcing and supply chain management, because that's where the real money is going to hit the bottom line. I think that you need to have an awareness of e-business and how it's going to relate to those activities. But I would focus on how the discipline drives business value rather than on the technology. If you focus on how what you do adds business value, that is something that will always be in demand.

The ideas and opinions expressed in this article are those of Lawrence Aldridge, not Atlantic Richfield Company.