Procurement's New Role

Dec. 21, 2004
90s technology birthed big ideas in purchasing such as online auctions, which promised buyers big savings through transparent bidding but were seen as Internet based boxing rings by pummeled suppliers. Today, manufacturers are using technology to build an

Portals are hot. Spend management systems are in. Electronic data interchange remains a mainstay. Application service providers and "hosted" applications are strong. But Internet-based reverse auctions, once the rage, have lost some luster. So have some industry exchanges. Welcome to the world of online purchasing, 2004 style. While most manufacturers today are using the Web to conduct at least some of their purchasing, many are employing a variety of systems and processes to get the job done faster and more intelligently, while saving money. "The new role of the purchasing department is to get out of the business of launching purchase orders, and to get people out of the buyer role and have them spend their time on collaborating with suppliers and improving supply-chain strategies," says Pierre Mitchell, vice president of research for supply management at AMR Research in Boston. AMR predicts sales of procurement and sourcing software will grow at a 10% compound annual rate from now through 2007. What's driving the growth? Manufacturers are finding they can save big money on their spending via improved technology. "Our new technology is enabling us to get better line-item detail on what we're buying companywide, and we are able to negotiate a better rate because we can guarantee suppliers a certain amount of spend," says Pam Stewart, e-commerce solutions team leader in the procurement systems and integration group at Vought Aircraft Industries, a Dallas-based manufacturer of fuselage, wings and other structural parts for commercial and military aviation. "We get direct-feed links to our financial system, rather than passing paper back and forth for purchasing." In fact, both dollar-savings on spending and process-improvement gains are fairly common for manufacturers that are committed to using new software wisely to ensure a smarter approach to managing their overall spend. "Many companies are using portals to accelerate the entire purchasing cycle," observes Martin Piszczalski, president of Sextant Research, an Ann Arbor, Mich., IT research firm specializing in the automotive industry. "Everyone wants to move in the direction of doing all their transactions and payments online." Mitchell says a key goal for manufacturers today is to "ruthlessly squeeze out all waste in their entire supply chain." To that end, he says, companies need to first understand their spending, not just the headquarters-based spend, but also that of their various far-flung divisions and plants. "For synergies across businesses, one of the first places you look at is the purchasing area," Mitchell adds. To keep track of and analyze their spending companywide, a number of manufacturers are employing hosted, on-demand software from such vendors as Ketera Technologies Inc., Santa Clara, Calif. "This is a very lightweight, on-demand solution that doesn't require any big ERP package and that supports most companies' RFQ workflow," Mitchell notes. AMR Research reported in May that SAP is the leviathan in sourcing and procurement software with license revenue of $125 million in 2003. SAP, Ariba, Oracle, and PeopleSoft make up about half the market, according to AMR. Even so, a number of smaller software companies that offer packages with deep functionality and pay-as-you-go pricing are taking some solid bites. "There is functionality that you can't do through SAP's online sourcing," Mitchell says. "The last thing you want to do is let a lack of functionality of a software program slow up your global spend process." An increasingly popular approach among manufacturers is to adopt a software vendor that offers a pay-as-you-go system. Some manufacturers, Mitchell points out, are using multiple vendors simultaneously to handle different aspects of their procurement management. One company that is typical in its application of purchasing technologies is Kennametal Inc., a $1.9 billion manufacturer of carbide metal-cutting tools for a variety of applications and industries. "These new applications allow us to understand our global spend down to the line item globally on multiple systems, and to conduct the spend process globally and negotiate more advantageous contracts," says Jim Cebula, global purchasing director at the Latrobe, Pa., manufacturer. "We've picked the best-of-breed packages that we believe give us the maximum ROI." Kennametal, which has SAP for its ERP system, uses an on-demand e-procurement system from Ketera Technologies because it offers both pay as you go pricing plus the deep purchasing functionality the company needs to effect its purchasing strategies. "You're not paying for a very expensive ERP-based system," he says. "In essence, you pay by the drink." The tool manufacturer also employs an analytical software package from Cognos to analyze its spend. The system tracks and helps evaluate global spending so that purchases can be consolidated and better prices negotiated as a result. "We can negotiate with a company like a Dell Computer because we can demonstrate to them that we have control over our purchasing globally for items such as personal computers," Cebula says. The Cognos system also helps reign in wildcat purchases that, when viewed in the aggregate, contribute to a whittling away of a company's bottom line over time. "It's very easy to convince a maverick spender [to conform] when you show that person how much money the company can save," Cebula says. "We achieved $50 million in cost reduction in the last three years. This technology has been very successful in helping us to reduce costs." In the final piece of Kennametal's purchasing technology, the company uses Freemarkets, now part of Ariba, for online auctions. Another manufacturer using a spend management system is Vought. "Ours is a Vought-unique system," says Stewart. The system maintains a catalog of suppliers that a select group of employees can peruse to make purchases. "It enables us to standardize down to the product level so we can negotiate even greater savings," she adds. Typically, purchases made online are for office, safety, MRO, maintenance, and repair products. "We're working to identify items that we currently inventory that we shouldn't," Stewart says. "For things like light bulbs and coveralls, there is no need to maintain a stock of these items, because our suppliers guarantee next-day delivery. One of our goals was to take these purchases out of our legacy-based production purchasing system, which was not built for indirect items and is rather cumbersome." The online purchasing system provides a direct electronic connection with Vought's accounting system, eliminating the passing back and forth of paper purchase orders. Orders for production parts for airplanes, by contrast, are handled through the company's legacy system, which provides the necessary traceability for warranty and flight safety issues, she adds. Likewise, key aircraft parts "are not put up for bid in any online auction, because there are too many specifications and quality checks involved," Stewart says. "The supplier's manufacturing process must match our quality requirements." In the automotive industry, while Covisint, now part of Compuware, is still active, most OEMs are using their own portals to connect with key suppliers, especially when it comes to purchasing direct materials, e.g., vehicle parts. Once envisioned as the do-all, be-all trading exchange for the big auto manufacturers and all their suppliers, Covisint failed to live up to its hype. (Bob Paul, Covisint president, didn't return calls from IW.) "Covisint was supposed to be the industry's big trading exchange, but basically it turned out that there was no need for this -- they just couldn't justify their existence," says consultant Piszczalski of Sextant Research. "All the big automotive manufacturers and suppliers -- Ford and Dana Corp., for instance -- are using their own portals to connect directly with their suppliers." Another reason automakers didn't take to an industrywide trading consortium is that many of the larger players view purchasing as an integral part of their operations, not some sideline function that can easily be farmed out, Piszczalski adds. "The big OEMs view purchasing as so integrated with their operations that it's not something they wanted to have others do for them," he says. "They'd rather have a direct connection to their 30,000 suppliers by themselves." Similarly, online reverse auctions, which were de rigueur for many manufacturers a few years ago, have since left many companies with a bad aftertaste. "The whole auction thing fell into a bit of a disgrace, because companies were taking the lowest bid and instead of giving the business to that bidder, were using it to beat up their existing suppliers on price," Piszczalski says. Suppliers, in turn, felt taken advantage of, he adds. "Manufacturers had to work to regain the confidence of their suppliers," he says. "At the end of the day, supplier relationship management depends on the degree of trust companies have in each other." Still, he says, there remains no shortage of conflict between manufacturers and suppliers over prices. While MRO may be the same as it is for other companies, automotive manufacturers have special purchasing process needs. "Ford, for example, couldn't find a software package to handle their complexity and to handle the release accounting process to support volume purchasing of direct parts, so they developed their own system called Everest a couple of years ago," Piszczalski points out. With the new system, if a vendor is not in the central vendor database, they cannot get paid. Similarly, GM hired EDS to create its purchasing system in the late 1990s. As Piszczalski concludes, "When you get to the $50 billion-and-up companies, the software packages don't work." Many manufacturers, of course, continue to depend on EDI for placing orders and transacting business with volume suppliers. "We're a large EDI user," says Don Kosanka, vice president of information systems at Owens-Corning in Toledo, Ohio. "We do a lot of EDI transactions with our regular suppliers that are EDI-capable." For those that aren't, the company built a vendor portal to share purchase order information and other data. Perhaps best known for its ubiquitous pink insulation products, Owens-Corning purchases large quantities of raw materials such as sand to make glass for shingles. Even so, the company is striving to make better-informed purchasing decisions, Kosanka says. To that end, Owens-Corning last January began using a software package called ExpenseMap from Emptoris Inc., a Burlington, Mass., software firm. "The system consolidates our purchasing information and enables us to evaluate our spend, so that we can see where we can source materials at the lowest cost," Kosanka explains. As is the case at Kennametal, Owens-Corning is using the pay-for-use model, with Emptoris hosting the system online. Procurement/Sourcing License Revenue Share By Customer Company Size, 2002

Over $1B 44%
$250M to $1B 30%
$30M to $249M 17%
Under $30M 9%
Source: AMR Research Procurement/Sourcing Software Market Total Revenue, 2001-2007 (est)
2001 1.9 Billion
2002 1.7 Billion
2003 1.8 Billion
2004 2.0 Billion
2005 2.3 Billion
2006 2.5 Billion
2007 2.8 Billion
Source: AMR Research

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