Choosing the E-Procurement Meal That Works for You

1. Fast Food: Keeping It Simple.

At Applied Industrial Technologies, price negotiation remains in the hands of the product managers in charge of each category. The focus of the company's e-procurement is on making internal processes more efficient through the paperless processing of orders, receipts and invoices. An internally developed inventory management application gathers requirements from more than 400 Applied service centres across Canada, Mexico, Puerto Rico and the United States, and then sends them to suppliers via EDI.

This isn't rocket science, but it meets the needs of the $US1.5 billion distributor of industrial components that stocks 2 million different items, including bearings, motors, pumps, valves, couplings and the other highly substitutable building blocks of manufactured products. And those blocks are provided by suppliers competing in an intensely price-sensitive market. Applied CIO Jim Hopper eschews newer technologies like XML in favour of tried-and-trusted EDI because, as he says, EDI "has been around for 20 years, works and is very cheap for us to administer. There's a ton of people who know EDI intimately but only a handful who know XML that well.

"We'll do EDI with anyone that has the capability," says Hopper, "and help them to get that capability if they haven't got it."

Similarly, Webasto Roof Systems, a $US300 million subsidiary of Germany-based automobile roof and thermo systems manufacturer Webasto AG, has been adopting e-procurement strategies to make its internal process more efficient, while keeping sourcing decisions and price negotiations offline. CIO Mike Thibideau credits e-procurement with reducing inventories by 15 per cent, generating $US1.5 million of cash flow and reducing annual inventory carrying costs by $US180,000. All that, and the system is still only 30 per cent implemented.

Using technology developed by enterprise system vendor QAD, Webasto's 150 direct material suppliers download all the information they need to know to ship the parts and materials for Webasto's sunroofs and convertible tops. "Because all they need is a Web-browser, it's less intrusive than EDI, and less expensive - especially for the supplier, who doesn't have to pay anything," Thibideau says.

Armed with knowledge about future requirements, he explains, it's much easier for Webasto's suppliers to fill those requirements just after parts are used and not before, hence the inventory savings. For example, suppliers of items as diverse as glass and electronic control modules can now log on to see how Webasto's production schedule affects demand for the parts they produce. Suppliers can then compare the inventory Webasto is holding to the minimum and maximum levels the company pre-set, and decide for themselves when to ship a particular part and how much of it to ship.

2. The Full Banquet: E-Everything.

At the other end of the spectrum are businesses, such as Reliant Pharmaceutical, that have gone whole hog, seeking savings from items where compressibility and substitutability make that possible, and settling for internal efficiencies where it isn't.

Reliant decided in 2002 to buy everything electronically - from cleaning supplies to the products that it sells. It's true that the relatively straightforward nature of its business made this easier; the drugs it sells are manufactured by pharmaceutical giants such as Novartis and Lilly, thereby eliminating direct materials as such. Even so, says Reliant CIO Ron Calderone, "100 per cent of our purchases now go though Ariba: lodging, travel, office supplies, sales literature, the products we sell, you name it".

Previously, for Reliant to process a typical purchase order required 21 "touches" - approvals, logging, classifying and the like - and took between one and three months to move through the system. It was also difficult to enforce any consistent company purchasing policy, and Reliant's back-office system provided very little procurement information with which to leverage price concessions from suppliers. In the first year of its Ariba implementation, says Calderone, 10 per cent of Reliant's purchases were electronic, contributing to an ROI of 65 per cent. He estimates the second year ROI will be 400 per cent.