Suzanne Bily is purchasing manager for Unified Foodservice Purchasing Co-Op, the procurement and distribution organization for Tricon Restaurants. Her job is to make sure that not one of the some 8,200 pizza restaurants that are part of an instantly recognizable chain ever run out of tomato sauce. Bily, who is a CPA by trade with several years experience to her credit, has of course many other responsibilities. But first and foremost, let there always be enough tomato sauce.
It's a simple enough goal. Hitting it, however, is not as easy as it seems. Deciding how much business to give any one supplier a process called supplier business allocation is an incredibly complex matter and in Bily's case is compounded by the fact that these restaurants are located in just about every American city and town. Bily has to weigh exactly how much business to award each supplier, against several criterion which include product availability, specification, freight expenses and distribution patterns. Price is a consideration too of course, but ultimately it doesn't matter what you pay. You have to ensure supply, she says.
Until recently Bily had few tools at her disposal to help her make these decisions. Basically she had to create her own model for each sourced product or service. It's a very difficult process, takes a lot of time and has a lot of room for error, she says.
These frustrations are now in the past though. Unified Foodservice Purchasing Co-Op has begun using one of the new e-business applications for strategic sourcing that have just started to appear in the market; in UFPC's case it's a system called ProcureMind developed by MindFlow Technologies in Plano, Texas. ProcureMind's business model provides tools to help users choose the right supplier based on corporate criterion and goals, manage costs, of course, and collaborate with other corporate divisions and suppliers during product development. It's a fairly new product, and Bily, who estimates a savings of $2.4 million using the system so far, is excited about it. I cut my supplier business allocation process from four weeks to three days and increased the number of negotiation rounds from two to four.
Missing LinksBesides the initial cost savings of automating the procurement process one of the main benefits of e-procurement is that it frees up procurement staff to pursue more strategic sourcing opportunities, says Judy Priest, director of procurement services for CoreHarbor, an ASP that hosts the Ariba B2B platform. She would know. Priest, who in a past life was a procurement manager at both Coca-Cola and Pepsi, remembers spending most of her day chasing down missing requisitions, following up with suppliers on missing orders, pricing purchase orders, fielding questions from requisitioners and suppliers, tracking down delinquent payments and, in my spare time, negotiating strategic agreements.
But here's the rub: most of the e-procurement tasks Priest once oversaw can now be automated by one of many excellent systems on the market except the strategic sourcing piece. With all the hoopla over the transaction capabilities of the Aribas and Commerce Ones in this new era of e-procurement, this point often gets lost.
Slowly this is changing though in bits and pieces. Auction services that allow companies to quickly set up competition among suppliers are proliferating. FreeMarkets is just one example. TelecomRFQ, a B2B marketplace for telecom services, is another.
Not that any procurement professional would scoff at these advances. I can remember in my career when pricing was changing very rapidly, and we could not keep up, says Gayle Hayes, director of solutions product management for i2 Technologies. Daily business issues would get in the way. We would know that the pricing was falling, but it was not as high a priority as keeping production running steadily. Now, a company can do a RFP as often as needed.
So yes, certain tools in the market are getting better. But systems that help users evaluate and rank suppliers on specific criterion other than price, then help a user design a sourcing strategy based on these results now that's another story. There are perhaps a handful of systems available that can do that.
Some of these systems such as ProcureMind are built around a question and answer type of format designed to quantify a company's sourcing goals and priorities. It may ask if R&D is important, for example. If so, then a supplier that rates high in R&D ability is given top ranking by the system. Then, the system would help a user run through all the possible sourcing and business allocation scenarios: i.e. supplier A needs to get X amount of business because he is strong in R&D even though he may be more costly, while supplier B will manufacture certain components because her facilities are ISO 9000 certified and quality control is important to the company. Supplier C, meanwhile, is awarded the bulk of business because it is the lowest-cost provider. Eventually a sourcing strategy is designed to meet the company's R&D and quality control goals, while at the lowest possible cost.
Another example is Emptoris' ePASS, which programs buyer business rules for a particular user. Let's say a company wants to give supplier A $500,000 in business in order to fulfill a yearly contract with them, says Avner Schneur, president and CEO of Emptoris, a Burlington, Mass.-based provider of the ePASS system. Or a company wants supplier B to win $200,000 worth of business, but only in a particular category. Such examples, Schneur says, are a reflection of the way people really do strategic sourcing.
But even the newest of e-procurement products do not meet the needs of some companies. American Express, recently under Joseph Yacura's leadership, wound up developing its own e-sourcing system to handle aspects of supply line management not covered by any of the existing e-procurement systems. Our view was that most of the technology out there today is only handling a portion of the supply line activity. Statement of work development, determining life cycle cost models, supplier qualification all that has to be in place before you place an order, he says. These aspects of supply line management do not exist in most of today's e-procurement systems. The typical range of capability of the current systems can be described as purchase to pay.'
The good news is that the market does appear to be moving in this direction. Certainly Ariba appears to realize the need for such functionality; hence its recent acquisition of SupplierMarket.com, a provider of online collaborative sourcing technologies. As things stand right now, e-procurement doesn't do enough for strategic sourcing, Priest says. But I do think with the next generation of e-procurement systems we will begin to see better sourcing capabilities including supplier selection and the RFP process.
For procurement professionals still concocting these formulas by hand, it can't happen soon enough.
The Heat Is OnNow more than ever before, the pressure is on procurement to add value to an organization, says Daniel Mahler, an associate with A.T. Kearney. Top management expects it, he says. This heightened sense of urgency is due in part to a new awareness of the value that a tight procurement operation can add to a company's bottom line. Indeed an A.T. Kearney study completed late last year shows that companies that are leaders in procurement and strategic sourcing strategies are usually rewarded with higher growth and revenue figures.
Over the last five years, I would have to say the greatest advance for procurement has been the awareness at the presidential/officer level of its significance in both meeting customer expectation in delivery and quality and that a dollar saved in procurement is a dollar saved in the bottom line, says Jack Wagner, who recently retired from Bell South after 17 years of high-level purchasing experience.
Procurement's new stature is also due to the increasing competitiveness in the market. Companies are more often relying on suppliers to contribute to the marketing and innovation of a finished product and expecting procurement staff to identify those suppliers earlier in the supply chain process. The A.T. Kearney study tells of one supplier that developed an innovative softener agent for a detergent product, which lowered costs by 30 percent and lowered the cost of the end product by 10 percent. IBM, as another example, places such an important premium on procurement activities that the company now routinely hires engineers to work in the division, Mahler says, the better able to identify the top suppliers for a particular product. In fact, A.T. Kearney found that 52 percent of the participants in their study plan to entrust most, if not all, of their engineering and design work to suppliers.
All of which means choosing the right mix of suppliers at the right price is more important than ever before. Fortunately it's not as though procurement staffers don't know what to do. Strategic sourcing techniques have been around for a long time, says Priest.
Hayes, for example, says that industry best practices to rate suppliers have been around for about 20 years. The acronym is TQRDCE, and it stands for Technology, Quality Responsiveness, Delivery, Cost of Ownership, Environmentally Friendly or, for some companies, Enterprise Enabled.
But without the added element of automation, much of the cost savings achieved through traditional strategic sourcing gets lost for one reason or another, Priest says. New employees come on board and are not briefed on purchasing processes, for example. Maverick buying is another reason. When suppliers don't realize the volumes they initially expected they tend to raise prices or lower quality of service to make up for profitability, she says.
But add the e-procurement factor to a strategic sourcing initiative, and the savings of 5 percent to 20 percent can be realized on an ongoing basis, she says.
Filling the Gaps
And while not every company is realizing the savings and efficiencies of a Unified Foodservice Purchasing Co-Op, yet clearly, advances have been made in this particular e-procurement niche. Transaction processing was the first benefit the Internet has had for procurement, says Tom Slaight, vice president of digital operations excellence for A.T. Kearney. Now it is starting to affect strategic sourcing activities in at least two ways: one, through information connectivity. The buyer has so much visibility into the supply market because of search engines and Web pages suppliers and other intermediaries have set up, and two, the Internet has been extended into transaction-sourcing supporting activities such as marketplaces, auctions, electronic RFQ and RFPs. Evaluation systems and collaborative services as well, he adds, are becoming more sophisticated.
A.T. Kearney tells of one leading chemical company that has reduced the design cycle time from 12 to three days using an exchange data management system to obtain comments on blueprints from suppliers. Also the cost of copies have come down some 75 percent. The sourcing process has definitely become streamlined, he says. I use to tell customers it would take five or six months to complete a particular sourcing category. Now it can be done in two to four months.
It can also be done far cheaper. Without a doubt the auction model has become the most developed of strategic sourcing e-commerce tools, saving companies untold billions thus far. Strategic e-sourcing is a way to shift power in the market from supplier to buyer, says James Zuffoletti, vice president and general manager of FreeMarkets, a Pittsburgh-based company that has executed online auctions for more than $5.4 billion of purchase orders to date. Among its dramatic success stories, FreeMarkets saved an auto parts manufacturer $4 million in four hours, after it received 775 bids from 26 bidders; United Technologies Corporation $5.2 million in nine hours on a specialty metals bid after 14 bidders submitted 318 offers; and Owens Corning $500,000 on its transportation costs in five hours, after receiving 512 bids from 32 different carriers.
But even without the dramatic savings, sometimes simple design changes in a sourcing tool or method can save days in a RFQ process. Wagner tells of one change where all of the technical data can be sent either on a disk or put on the Internet for suppliers to access. Suppliers response can then be transmitted electronically which saves time, cuts administrative costs, and helps speed the completion of analysis.
Not that there isn't room for improvement. The online auction model has received a lot of attention, and for good reason.
But there are so many other neglected links in the sourcing process, says Yacura. Warranties, upgrades, equipment monitoring they all need to be addressed. The whole idea is to automate as much as possible so we can fully leverage the knowledge of our people.