The New Tools

"E-procurement used to be about dealing with low value, repeatable items that clog up your purchasing function," says Prasad Hedge, a partner with Denali Consulting. "Over the past couple of years, the tools have started to become more collaborative and not just transactional."

MSX International, an $US800 million business specialising in providing supply chain management and procurement services to the global automotive industry, is using newly available collaborative technology from Commerce One to buy items and services as varied as printer cartridges and contract labour for its automotive customers. The company issues RFPs (accompanied by CAD drawings and specifications), solicits bids and responds to suppliers' requests for additional information - all over the Web.

"It's the electronic equivalent of a bidding conference, using the Web to interact with a greater number of suppliers," says Troy Gazette, director of IT platform strategies for MSX. Answers to suppliers' questions can be broadcast to the entire pool of vendors, or not, depending on the automotive customer's own preferences.

Applying optimisation technology to procurement is another area that is hotting up, especially with multi-item lots. "Run a buy through an auction, and you might get an 8 per cent savings. Run that same buy through an optimisation engine, and you'll get another 8 per cent," asserts John Fontana, a principal with sourcing and supply chain management company Tigris Consulting.

One of the beauties of optimisation, he explains, is that it frees both buyers and sellers from the straitjackets of fixed bundles of goods or services against which bids are solicited. That means that online buyers and sellers can now do something they once couldn't. Sellers can bid for selected parts of lots, or include in their offering non-standard terms such as volume discounts, extended price validities or other goodies not explicitly covered by the bidding terms. Buyers, for their part, can evaluate those bonuses. In one sense, it's the answer to Ametek's problem of moving its wire buying online. Instead of forcing bidders to bid for every one of the couple of dozen wire gauges the company uses, bidders can bid to their strengths and sweeten those bids with volume discounts, or fix them for a period of time. It doesn't sound too difficult, but in practice, disentangling the merits of a dozen suppliers' different bids is surprisingly challenging - which is why companies have usually opted to enforce standardisation in the first place.

Both Procter & Gamble and Bayer have recently deployed optimisation technology from CombineNet that allows suppliers to submit these so-called expressive bids and buyers to evaluate them. The optimisation involved, says Dennis Begg, Procter & Gamble's associate director of purchase innovation, "is a combination of linear programming and mixed-integer programming, coupled to a very efficient solver". (A solver is a piece of software that works out difficult calculations.) Boiled down, for those that can remember Economics 101, it's similar to applying the law of comparative advantage to everyday purchases. "Auctions are a zero-sum game," explains Begg, "but by allowing suppliers to bid to their own strengths, and squeeze out their own inefficiencies, expressive bidding adds value."

Tom Phalin, director of logistics procurement at Bayer, has a straightforward endorsement of the bottom-line benefits of expressive bidding. Last year, the company sought expressive bids for its Nafta ocean-going freight business. "We weren't very confident that we'd see lower prices at all," he says. "But in the event, we reduced our ocean freight costs by 15 per cent, signing contracts with 11 separate steamship companies." This year, Bayer is repeating the process on a global scale.