3. À la Carte: Picking and Choosing Among E-Procurement Strategies.

Moving to emulate Reliant's comprehensive levels of e-procurement may seem daunting. In fact, it's easier than it first may appear. The traditional distinction between direct materials (those that go into the finished product) and indirect materials (those that don't) often obscures more than it illuminates. More enlightening are those factors that apply to both direct and indirect materials: substitutability (where one widget is as good as another) and compressibility (squeezing suppliers to force them to lower their prices). In short, if you can put it in a catalogue and describe it through standard parameters, then you can source it electronically.

Take items such as pumps, motors, switches, electronic components and valves. Those are clearly direct materials, but they also exhibit high levels of substitutability and compressibility. One manufacturer's motor or pump is likely to be very similar to any other one that meets your specifications, and therefore your suppliers are likely to be competing on price.

Bill Lawson, CIO at electronic instrument and motor manufacturer Ametek, reckons that asking Elliff's questions at his company has resulted in an average 20 per cent savings. His company now sources 12 commodity groups of substitutable and compressible items (among them machine tooling, electrical supplies and computer hardware) through an Oracle Exchange e-procurement portal. "We have access to around one and a half million SKUs [inventory items] through catalogues maintained by our suppliers," says Lawson. Even so, apart from obvious items such as electronic components, bearings and adhesives, which meet the substitutable and compressible criteria, Lawson is leery of embracing e-procurement for direct materials too quickly. The reason? Through direct negotiation, buyers can at present get a better deal, especially when grouping different items together into a single buy. "At the moment, we believe that direct material and components are best handled though relationships between our purchasing people and our suppliers," Lawson says. "The more important the item, the more true that is."

For example, Ametek uses a lot of copper wire - around $US12 million worth a year. Large and carefully negotiated deals with suppliers might embrace many months of supply, right across the couple of dozen or so wire gauge sizes that the company buys. In reality, purchase orders for wire are releases against a prenegotiated contract, at stipulated prices. That kind of sophisticated agreement requires the personal touch. A catalogue-based buy, oriented around a single catalogue item, would not allow for the same critical degree of elasticity and would lock Ametek into a potentially disadvantageous spend.

But even here, e-procurement is beginning to encroach on the buyers' preserve of finding and negotiating with suppliers. "We certainly engage in a lot of Internet activity to locate and qualify suppliers, although I wouldn't necessarily characterise that as e-procurement," Lawson says. "We might even hold an electronic auction. But after that, the transactions would be releases against a contract."

Some companies go even further towards using e-procurement for everything they buy, although again, the objective is often improved efficiencies, leaving sourcing decisions and price negotiations to the experts. At ImagePoint, which designs, manufactures and puts up outdoor signs for retailers such as McDonald's, Pizza Hut and Taco Bell, e-procurement already embraces both direct and indirect material spend but not yet services, says vice president of information services Steve Hammond. Aluminium, steel, fasteners, wood, plastic sheets - everything that goes into constructing ImagePoint's signs has been sourced through software from SupplyWorks since early 2002. Indirect materials - everything else, in fact - utilised the Web-based buying tools supplied by specialist indirect material suppliers, such as Granger, Insight and Staples. The incentive for moving direct materials onto SupplyWorks, explains Hammond, was better productivity in the buying department that allowed buyers to do what they ought to do - buy better, not shuffle paper.

Instead of printing purchase orders then faxing or mailing them to suppliers and then finally chasing the suppliers for order confirmations, ImagePoint's procurement requirements are fed directly from its elderly enterprise system into the SupplyWorks system. "The time that our purchasing agents used to spend chasing paper is freed up so that they can now spend more time working and negotiating with existing vendors, and qualifying new ones," says Hammond. "Their jobs used to be transaction-based. Now they are performing a higher value role."

Already, that higher value role is delivering a bottom-line benefit. The company is on track to achieve a 10 per cent reduction in its annual purchase spend of $US32 million. It is, points out Hammond, "a very sizeable return on our investment". In addition, the plan is to grow the business by 6 per cent to 8 per cent this year, but without hiring any more purchasing agents. Previously, the size of the business and the purchasing function pretty much moved in lockstep.