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The Big EC

The Big EC

Slapping lazily at the hot air, overhead fans churn above the desks of bored clerks shuffling paper in slow-motion from one pile to another. Dozing in the protected environment of a non-demanding bureaucracy, they are more likely to process one permit than half a dozen between now and lunch. Their managers have no more concern with productivity and best practice benchmarks than they do with profit margins.

That snapshot of the languid style of administration in Australia's more northerly municipalities would once have been uncomfortably close to the mark.

But today's municipal administrations work at a peppier pace - none more so than Brisbane City Council (BCC). And thanks to electronic commerce, it is rapidly getting brisker.

Almost everything about the BCC is big, from its billion-dollar budget to its staff of more than 7000. It is Australia's largest local government and the 800,000-plus citizens it services form Australia's largest municipality. Sheer size has a habit of spawning huge, unresponsive bureaucracies. In contrast, the BCC is sculpting itself into a trim collection of business units and profit centres whose attention rarely strays far from the bottom line. At the heart of the BCC's business model lies the National Competition Policy. The model dictates that if services can be purchased more cost-effectively from the private sector than from internal council entities such as the council's supply services branch, so be it.

Electronic commerce is one business enabler the BCC has deployed to stunning effect in its pursuit of savings and efficiency. Harnessing Electronic Data Interchange (EDI) and Electronic Funds Transfer (EFT) to the twin tasks of ordering supplies and paying creditors has generated spectacular results, according to Geoff Hall, Supply Services Branch director. They include:a 25 per cent fall in inventory investment and a dramatic decline in the number of council-operated warehouses;order lead times cut to one day from five, generating a one-off saving of $650,000;huge reductions in warehouse staff; and, annual savings of $18,000 in generating and sending payments.

The BCC spends $310 million annually with thousands of suppliers ranging in size from Australia's largest trading companies to small local operations. Half those purchases are now paid for via EFT and the council has 100 trading partners who accept purchase orders through EDI plus another 3500 connected via EDI fax.

"Electronic commerce is a business enabler that gives us a competitive edge," says Warren Freeman, the council's Supply Services Branch controller of purchasing and inventory management. The branch has taken the lead in the use of EFT and EDI, which Freeman labels "fundamental to best practice in supply chain management".

At one end of the scale, the council gently encourages its potential trading partners to view electronic trading as a commercial advantage by including it in tender evaluations. "We don't put a weighting on it, but it is one of the factors we consider along with local preferences and quality," Freeman says.

The council takes a harder line in other areas where it imposes EDI on suppliers as a non-negotiable condition of doing business with it. Falling into that category is any trading partner in the council's vendor-held stock program which has emptied the BCC's once-bulging warehouses by keeping the stock on the vendors' own shelves. Thanks to the vendor-held stock program, council has combed from its shelves vast numbers of easily obtainable items such as power tools, stationery and plumbing fittings. Such commodity items now sit in "virtual warehouses" on the council's mainframes which are linked via EDI and Telstra's TradeLink (council's value-added network of choice) to their physical location on the shelves of suppliers.

Council staff loading a new supplier see a screen menu asking them to click between sending the order by paper, fax or EDI. If they choose the electronic route, the system orders the goods direct from the appropriate trading partner in a guaranteed time frame. That makes EDI and the Telstra TradeLink mandatory for any trading partner who wants to take part in the vendor-held stock program. "It may be heavy-handed but if they want our business, that is the way they have to go," Freeman says.

The law of diminishing returns prevents the council from relying totally on vendor-held stock. Among the stores it doesn't want held externally are high lead time items such as specialised water fittings that require a foundry process or "insurance" equipment which would be needed immediately in an emergency breakdown situation. The supply branch also stocks pre-assembled kits as a form of value-added service for its customers.

"With water meters, for example, we take the box, connecting pipes, O rings and make the pieces into a kit so the customer can order one thing instead of 15 or 20 items," Freeman says.

Even with those exceptions, powerful dividends are being returned by the EDI-powered virtual warehouses. By early next year the council will have only one physical warehouse compared to the 16 it was operating seven years ago.

Electronic commerce isn't the only force behind the downscaling but it has been one of the fundamental drivers for it, according to Freeman.

"We can now concentrate on distribution and vendor-held stock rather than high investment in inventory and excessive holding costs," he says.

Only 14 vendor-held stock agreements have been struck and they represent a relatively small portion of total council purchases ($13 million or 4 per cent). Yet they have generated a one-time saving in inventory investment of about $2 million dollars; reduced lead times for ordering from three or five days to about half a day; and, shrunk printing and mailing costs. In addition to the $2 million inventory investment saving, a one-off saving of $650,000 has been realised thanks to purchasing lead times which are typically one working day under EDI instead of the previous three to five days, Freeman says.

"Basically, the amount of stock you hold in a warehouse is based on a combination of usage rates and the lead time to get more supplies. By reducing the lead time from five days to one, we can hold four days less of everything," says Freeman.

The council has discovered the real savings in electronic commerce flow from integrating EDI and EFT with its core information systems. "Otherwise electronic commerce systems are just peripherals," Freeman says. As an example of how efficiencies are generated, he cites the way EDI interacts with Mincom's MIMS, the council's central information management software system, to smooth the purchasing process.

A MIMS module holds the council's hierarchy of delegation authority for transactions. So when one of the 2500 BCC staffers who can log onto MIMS submits an electronic purchase order, MIMS checks if the user is authorised to make a purchase of that size. If not, the system automatically refers the requisition up the hierarchy until it reaches someone who does have the appropriate level of authority.

"We can't imagine doing it any other way now because it is just such a fantastic tool," says Freeman.

Costs of setting up the council's EDI and EFT infrastructure have been startlingly low. Its EDI link consists of a 486 PC running Telstra's EDI software and linked to the council mainframe from which data is downloaded several times a day. The total price tag, including hardware, software and development costs, was about $6000. "People want to come and see our 'system' and we have to say there isn't much to see," Freeman notes.

The MIMS system gives users a series of options when they go to print an order or requisition. They can choose EDI, paper or fax. If they press EDI, the order gets batched to the PC and then goes through the EDI systems to the supplier.

"There's nothing black magic about it," says Freeman.

Training imposts are equally low. Users on the system are given a half to one day course on how to place requisitions, and ongoing problems are handled via the BCC's help desk.

Just as EDI made an enormous difference in the vendor-held stock program, EFT has generated significant savings in the BCC's in its payments process.

Currently the council is paying 17,000 invoices a month, about half of which are processed through Westpac's Desk Bank EFT service. That is greatly diminishing the large costs in cheque production with which the council was once saddled.

"Council policy is to pay accounts 30 days from receipt of invoice so if you supplied 50 times a month, you'd get 50 cheques," says Freeman. "Because of the number of cheques we were producing, we were paying overtime for staff to arrive at 6:30am to initiate the cheque run." The deployment of EFT has reduced cheque production to the point where the early overtime is no longer necessary.

"We've worked out we saved $18,000 on cheque production and mailing alone last year," says Freeman.

In terms of cost breakdowns, each EFT payment is costing the council less than half the 93 cents it was costing to produce and mail one cheque. Even adding the cost of mailing or faxing a remittance advice about the EFT payment, the cost per EFT payment is only about 54 cents.

The council looks beyond its own horizons to measure the impact and benefits of electronic commerce on its business processes. It employs a benchmarking service to track its progress towards best practice by comparing itself to other organisations. "We are trying to place ourselves where we are either above average or the best in the sample," says Freeman.

Over three years of benchmarks, the council has consistently reduced the areas in which it rates below average and increased those in which it is substantially above average, Freeman says. The Supply Branch passes on summaries of the benchmark figures to the BCC's chief executive officer as well as the divisional heads of the businesses it supports. "The benchmarks vindicate our strategies in some areas and highlight those where we have to concentrate our efforts over the next 12 months" says Freeman. The cost of processing a purchase order is where the BCC is making its best showing, according to the benchmarking service.

Not coincidentally, EDI has been adopted as the council's preferred method of sending purchase orders. Some 37 per cent of all purchase orders are now being managed through EDI and another 30 per cent are being channelled through electronic fax.

An electronic commerce environment requires some cultural adjustment by users, the BCC has discovered. Impatient users can cause hiccups by doubling up on orders, for example. "They'll place one requisition and if the order isn't there in two days, they'll place another," Freeman says. "The result is a double delivery and you can get all kinds of permutations flowing from that - but generally speaking it hasn't become a widespread problem."More serious, according to Freeman, is the challenge of persuading staff to take a few moments to tell the mainframe they've actually received the goods it ordered for them.

"If you are sitting at a depot and requisition goods on the system, they'll be delivered the next day and you'll sign for them on delivery. Now you have to go back into the system, look up those requisitions and receipt them on the system to acquit the requisition," he says. "Convincing people they have to do that has been an issue for us. We have to chase up customers and ask them if they actually received the items we've been invoiced for."As a workaround, the BCC in future may simply check a 5 per cent sample of all requisitions as a pointer to any abuse of the system rather than trying to change human nature.

Other system problems include orders going to the wrong supplier, Freeman says.

"But they are minor things and overall the implementation of electronic commerce has been considered a resounding success by the BCC.""Keep It Simple Stupid" applies as much to EDI as it does to any other area of technology, according to Freeman. "A simple EDI trading agreement with partners is essential," he explains. "We have a basic document that says we will transmit data in this type of format three times a day. It also ensures there is a point of contact at the supplier's premises but basically it is just a few details you add on to the normal purchasing agreement."To work effectively, electronic commerce doesn't require organisations to forge stronger or more intimate relationships with trading partners than they normally would, according to Freeman. "There may be a bit of an increase in communications required but really no worse than when you are using paper orders."Now that it has a good idea where electronic commerce is creating savings and efficiencies, the council wants to maximise its benefits in those areas. So it plans to extend the EDI-enabled vendor-held stock program to include all stock items where benefits exceed costs. Quite apart from the vendor stock program, EDI will be used for as much purchasing as possible.

Also extended to as many creditors as possible will be EFT payments. They will be limited only by the cost of bringing a supplier onto the system and the volume of bills a particular supplier generates.

Left in the doubtful tray is the Internet. The council will explore the Internet as an option for transmitting EDI transactions; however, it has reservations about security. It is not convinced that tracing EDI transactions will be as easy on the Internet as in a value-added network environment.

As far as the present is concerned, says Freeman, "overall, our problems have been minor and the implementation of electronic commerce by council has been considered a resounding success".

Still Kicking

EDI is just the most recent addition to a venerable list of items that have outlived pundit's prophecies of imminent demise, includingMainframesAnalog anythingText-based interfacesCommutingWang Laboratories, Digital Equipment Corp and Bull ElectronicsHuman AgentsLive MeetingsShrink-wrapped softwareFax machinesPaperThe CIO role

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More about Brisbane City CouncilJust PeripheralsMincomTelstra CorporationWestpacWestpac

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