Only the ‘Smart’ Buyers will Survive

E-procurement has arrived, and is definitely here to stay. A number of UK manufacturing companies have already tasted some success by implementing an E-procurement solution, but overall, UK and European companies are lagging behind the global e-commerce leaders. They must follow the examples being set in the United States and Asia, and begin to embrace this new technology before it’s too late. There are some very encouraging success stories out there today, even in Europe. Kongsberg Automotive of Norway, a global Tier 1 supplier of heated seats, gear levers and servo systems to car manufacturers such as Volvo, GM, and Renault, has an annual turnover of $160 million with manufacturing plants in Norway, Sweden, England, Brazil and Mexico. Due to the demand-driven nature of the car industry supply chain, Kongsberg were finding it increasingly difficult to adapt to the ever-changing demands of the car manufacturers. Per Hogberg, Logistics & Information Systems Manager for Konsgberg, explains, “In order to boost supply chain flexibility and visibility, we recognised that integration of our internal sites and external customers and suppliers was necessary. Our existing EDI system lacked flexibility, since it was designed to match only a fraction of customer interfaces. We therefore looked elsewhere for a solution.” Today, six of the Kongsberg plants are all part of one integrated SAP installation, which in turn is integrated with customers and suppliers through Viewlocity’s AMTrix software. This software “translates” the various program languages which EDI systems use. Customer orders are now sent as EDI-messages via AMTrix to the SAP R/3 (ERP system), where they are processed in order to generate materials requirements. These order requirements are then sent on to suppliers, either via AMTrix or by way of web access, enabling suppliers to respond rapidly. Kongsberg already procure their I.T. hardware (for all their global plants) over the Internet from one supplier, and have saved money as a result. But the real benefits have come from managing the ‘direct’ MRP purchasing and the supply chain. “By procuring our direct manufacturing materials from suppliers over the web, and with just one common system operating in all our plants, we have achieved much greater flexibility,” says Hogberg. Whilst it is difficult to quantify the business benefits which Kongsberg have achieved as a result of the new implementations, there are certainly clear benefits. “The company can now move production from one factory to another without problems. A faster flow of information from the new software helps us to better meet the demands of our daily delivery schedules. The company has also decreased its inventory levels, and the integrated supply chain now provides material controllers and purchasing managers with a comprehensive view for planning and forecasting,” says Hogberg. So the concept of e-procurement is a very simple one. Rather than purchasing your materials using traditional methods of telephoning and faxing suppliers (or more recently linking to your supplier via an EDI system), items can now be procured over the Internet instead. The amount of time wasted and effort expended by traditional purchasing methods, with staff following manual procedures, is considerable. So automating the procurement function seems a sensible decision. Just think of the possible business benefits if the procurement function is automated. Direct procurement staff can now be freed-up to focus on strategic sourcing, and can spend more time developing relationships with key suppliers. ‘Rogue’ or ‘maverick’ purchasing methods will also disappear, since users of the e-procurement system are ‘forced’ to use approved suppliers. Bob Wild, e-business consultant at Compass Management Consulting, believes that careful management of the purchasing function is required, “E-procurement is all about being a smart buyer. All the processes in a manufacturing business should be focussed on the customer, even the simple ordering of supplies.” Wild continues, “E-procurement is important because management controls the purchasing process and expects to implement best practice. Administration will be reduced and company policy will be adhered to. Maverick buying will be controlled, and discount agreements monitored properly. In other words, management through e-procurement can now properly control the purchasing function but still reduce the cycle times.” Making a decision to implement e-procurement software is just the beginning though. There are many other factors to take into account as well. So where should management start? What type of materials should be procured over the Web in order to realise true business benefits? Manufacturers’ experience to date indicates that companies, as a starting point, are targeting the area of ‘indirect’ or MRO (Materials, Repairs and Operations) items. Indirect materials include things like office equipment, stationery, and any procured items which do not directly affect the manufacturing process. MRO items include things like manufacturing spares and plant consumables. There are several reasons why companies have been targeting ‘indirect’ materials. As Lawrence Jones, head of E-Procurement for Origin UK explains, “Most manufacturing companies already have quite a tight management grip on their direct/MRP buying processes, since this represents a large proportion of their total enterprise cost base. As a result, the indirect procurement area in some manufacturing companies has been left to its own devices to a certain extent.” Imagine the following scenario. Some office stationery arrives late at an Automotive manufacturer’s plant. This will clearly not delay the manufacturing process. However, if a direct item such as a brake system assembly was to arrive late, then costs are incurred. Perhaps this further explains why manufacturers are opting for the ‘less risky’ element and are buying their indirect items over the Internet first. This is not the whole story though. Many manufacturers have already invested vast sums of money implementing EDI (Electronic Data Interchange) systems which link the purchasing function to its suppliers. So why would they sacrifice this investment? One advantage of EDI over e-procurement is it’s secure (closed) method of data transmission, but does it really provide management with the ability to assess the effectiveness of their operation and the performance of their suppliers? Unfortunately there is no magic formula for success. There are many different E-procurement software vendors/consultants out there today who are ready to offer manufacturers a ‘guiding hand’. The UK’s largest manufacturing companies appear to be adopting a mix of systems – Ariba, CommerceOne, Oracle and SAP. But is it just the large manufacturers who can afford these e-commerce systems? An SME may not be able to afford the big ticket prices demanded by certain software vendors, as well as the related consultancy costs. There are solutions emerging for SMEs such as off-the-shelf software solutions, but perhaps the best option is to join an aggregator who provides MRO/indirect purchasing capabilities as a hosted service, or simply selecting an appropriate ASP (Application Service Provider) to do the job for you. Patrick Meyer, Director of Corporate Communications at CommerceOne, predicts a definite move in the market towards Global ITEs (Internet Trading Exchanges), especially amongst the larger manufacturing companies. “Business buyers and suppliers will be linked through the Internet in fast-moving trading communities. Buying and selling become instant electronic events. The cost of generating purchase orders plummets, and cycle times drop from weeks to days, even hours.” Meyer further explains, “Imagine that instead of multiple one-on-one relationships [between buyers and suppliers], each with its own transaction requirements, an open business community flourishes. From a single connection, buyers can trade with sellers anywhere in the world. Suppliers can trade with each other, creating unparalleled economies of scale.” There are many examples of ITEs out there today, such as Covisint, the automotive e-marketplace for GM, Ford and DaimlerChrysler. In fact, the Ford group vice president of Purchasing, Carlos Mazzorin, predicted earlier this year that 70 to 80% of all Ford’s purchasing transactions are expected to take place on the web within the next two years. The European metals industry has its own independently-run e-marketplace called Steelscreen, which has over 600 members and is available in 10 different European languages! The Chemicals industry has a global e-marketplace called ChemConnect, where buyers and suppliers trade on-line for chemicals, plastics and industrial gases. The UK Chemicals giant ICI joined ChemConnect earlier this year, not wanting to miss out on the shared benefits. Michael Ensing, President of Dynamis Inc., a US-based E-business Consultancy company who have recently set up an office in London, believes that manufacturers, particularly in the automotive, electronic and food industry, will see significant opportunity in the areas beyond indirect/MRO e-procurement. “Although focussing on the direct materials will take more time, and will have a higher risk element, the business benefits will more than outweigh the costs. Direct material sourcing, supplier qualification and management, and supply chain execution using web based solutions will be the order of the day.”