E-Procurement Explosion

Dec. 21, 2004
Expected to reach $3 trillion in transactions by 2003, online purchasing is saving millions for savvy manufacturing companies.

"We are saving millions of dollars while others are still analyzing and trying to decide if they should get started," says Michael Mendoza, global e-sourcing leader at Owens Corning Inc. "You can do it right, or you can do it wrong. The only thing you can't afford is to not do it." The "it" is online purchasing, often referred to as e-procurement. This fast-growing way of doing business with suppliers promises not only lower prices for goods but also savings from the automation of the traditionally labor-intensive processes of ordering and payment. Owens Corning, the $5 billion global manufacturer of advanced glass and building materials systems, has used e-procurement to cut its cost of bottled water jugs by 60%, its cost of stretch wrap by 25% and its cost of rock salt by 22%. Overall, the Toledo, Ohio-based firm has documented savings of 10% on its annual corporate purchasing spend of $3.4 billion. Other big companies report similar benefits derived from online sourcing of materials. "E-procurement has been instrumental in our cost-reduction efforts," says Robert Piconi, general manager of supply-chain strategy and architecture at Lucent Technologies, Murray Hill, N.J. The company uses e-procurement for about 15% of its indirect materials. "Every dollar we can save through e-purchasing is like receiving $5 to $7 of revenue," Piconi says. Hewlett-Packard Co. (HP) slashed by 30% the amount it pays for the logos it places on all of its products. And when HP, headquartered in Palo Alto, Calif., used an e-procurement process to purchase electrical power in the San Diego region, its quarterly energy bills fell from $550,000 to $330,000, and the variability in those quarterly bills dropped from $50,000 to $2,000. Despite these impressive savings, e-procurement remains the purview of a relatively limited number of suppliers and an even smaller number of manufacturers -- usually those with at least $750 million in sales. Even so, Gartner Inc., an IT research firm in Stamford, Conn., projects the dollar value of materials purchased online will balloon from $75 billion in 2000 to an estimated $3.17 trillion in 2003. An even bigger shift overlaying this growth in online purchasing is the move toward obtaining not only indirect materials but also materials needed for production. "A year ago, e-procurement was focused on indirect materials, automating processes and streamlining operations, with the big emphasis on reducing the transaction cost," says Karen Killeen, e-procurement analyst for Gartner Group, New York, (a division in Gartner Inc.). "The focus is beginning to change from reducing the cost of the transaction to reducing the cost of materials purchased for production." The sourcing of direct materials online offers manufacturers the biggest potential savings because indirect materials typically represent just 20% of the corporate purchasing tab. Numerous Advantages The advantages of using both public and private trading exchanges -- as well as reverse auctions -- are numerous, analysts say. "You are able to get a volume discount," says Daniel J. Meckstroth, economist with the Manufacturers Alliance/MAPI, Arlington, Va. "You also can consolidate buying and cut down on the number of purchase orders. And you get lower costs because you run everything through an electronic system where there is no touch. It's a way to automate business processes, reduce paperwork and lower the cost of goods by 10% or more." In addition, any reduction in the cost of purchased goods -- both direct materials and indirect materials -- often goes straight to the bottom line. AMR Research reports that companies, on average, can trim purchased goods costs by 15% to 20%, with the savings varying based on the type of goods purchased -- 5% for purchased energy, 15% to 20% for chemicals and adhesives, up to 32% for corrugated paperboard, 19% for metals and machinery components, 36% for temporary labor and 40% for MRO items. Yet the cost savings from purchased goods is just the tip of the iceberg -- and the most visible -- of the advantages of e-procurement. "The first advantage is clearly the lower prices (about 20%) that we are paying," says Corey Billington, vice president, supply-chain services, HP. "But we are now also 20% to 25% more efficient because procurement people are no longer expediting purchase orders and performing endless clerical and administrative tasks." Lucent's Piconi agrees. "When I think about the strides we have made in speed, efficiency and employee productivity [in the past 18 months], it is incredible. With e-procurement, you get a standard interface [for purchasing] and eliminate redundancies. It is tremendously efficient -- particularly from a time standpoint -- because you eliminate paper approvals and procedures. There is a substantial reduction in transaction processing costs." Thanks to e-procurement, he says Lucent will achieve -- or surpass -- the 60% to 70% reduction in transaction processing time it set forth in its business plan. Dallas-based semiconductor manufacturer Texas Instruments Inc. has trimmed its cost of processing a purchase order from $80 to $25. Deere & Co., Moline, Ill., has cut its purchase order administrative expense from $97 to $22. And 3M Co., Minneapolis, slashed the price of processing an invoice from $120 to under $40, with its error rate dropping from nearly 30% to zero. Changing Relations One dubious area related to e-procurement is supplier relations. At Owens Corning purchasing agents conducted more than 170 online auctions in 2001. "We can negotiate with vendors in a quicker and more effective fashion," says Mendoza. "The [online] auction condenses the negotiating process from two to three months to 90 minutes and gives us the opportunity to quickly bring a lot of suppliers -- both new and old -- together." And because the process allows everyone to see what the current bids are, "the suppliers know how their bids stack up to the competitors," he adds. Of course, to many suppliers who end up bidding on business that once was a given, the online "reverse" auction represents little more than a ploy on the part of OEMs and other large manufacturers to slash to the bone costs for everything from pumps to gears to fabricated sheet metal. In the view of many suppliers, the process ignores product quality, forcing suppliers to either bid way below their actual cost to get the work, or else lose it to the competition. But for the companies conducting the auctions, the technology translates into reduced administrative costs and a reduced cycle time of purchasing. And in a time when large manufacturers are feeling squeezed to reduce costs to stay competitive, the online auction looks like the hands-down winner. "A lot of the advantage and time savings [for companies] comes from the decreased need to re-enter information, from streamlining the interaction with suppliers and from having a central repository for data with everything contained in one system," says Steve Ricketts, vice president of marketing at Emptoris Inc., a sourcing solutions firm in Burlington, Mass. With that comes a better data exchange, with real-time information, between trading partners that increases each party's ability to manage the procurement process. "Everyone is trying to come up with a more effective cost structure to control spending," says Lucent's Piconi. '"But if you don't have an efficient e-procurement platform, it is hard to understand where you are and hard to control costs. You can't take action unless you know where you are bleeding. "When all the data is in one place, you can see problems quicker and easier and take the right action." In addition to the cost savings and efficiencies, the switch to e-procurement, says HP's Billington, allows corporate purchasing professionals to do more strategic things and spend less time expediting. "That is the key," says Billington. "You can now focus people on value-added activities. Procurement professionals can now find different sources and work with suppliers to reduce costs and to develop new products." MAPI's Meckstroth agrees. "It frees purchasing executives to focus on strategic issues that can drive more costs out of the system. They can rate suppliers, review supplier performance and work with suppliers on strategic issues such as product development, six sigma or material costs reductions." What's next for e-procurement? The consensus is that the use of e-procurement will help create a seamless supply chain through strategic sourcing. For that to occur, though, there will have to be an affordable software package for small and medium-sized manufacturers. "Companies with less than $750 million in sales are looking for someone like Microsoft to provide an e-procurement solution for the masses," observes Louis Columbus, a senior analyst specializing in e-commerce at AMR Research's Irvine, Calif., office. Eventually, the widespread use of e-procurement will result in a stronger and smoother supply chain for all manufacturers. Says Mountain View, Calif.-based Albert Pang, e-software procurement analyst for research firm IDC, "That will be the biggest benefit, because you are talking about taking a lot of inefficiencies and human interventions out of the supply-chain process."

E-Procurement Methods A variety of practices are used in e-procurement. Some common purchasing methods include: Private trading exchanges are owned or operated by a single company in order to trade or purchase materials with the owner's suppliers and customers. Public trading exchanges offer a common technology platform for auctions, spot buying and catalogue order. They are either owned by independent investors or industry consortia. An online reverse auction is a process by which suppliers are asked to place competitively lower bids to provide materials or services.

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