Online procurement and payment is still a nascent area fraught with security risks and competing standards.
For a number of companies, however, it has helped them achieve significant cost efficiencies. Document management company Xerox, for example, believes it has shaved procurement costs by 40% over three years by standardising cataloguing and buying processes across its organisation.
Going forward, organisations that have web-based procurement systems in place will look to expand their buying strategies beyond the confines of their own enterprises. Having cut out significant administrative costs by automating requisition, authorisation and invoicing processes in their own organisations, they are now looking to extend these advantages to their partners and suppliers.
By joining a collaborative buying environment, where groups of purchasers unite their collective buying requirements in order to gain economies of scale, they hope to achieve even greater savings. However, some have been put off joining public e-marketplaces after a wave of closures. Others have considered building private trading networks, but have been daunted by the expense.
A key ingredient to ensuring the success of the collaborative buying process is getting third parties to ‘buy in’ to the system. Some analysts argue that ensuring participation is an easier task if there is one dominant party that can assist other suppliers and buyers to adapt their internal systems accordingly so they can join the collaborative network. Others believe that, in an entirely web-based environment, the architecture is so open that this should not be an issue.
In action: Xerox Corporation
Jim Lawler, chief procurement officer in Europe for document management company Xerox, believes there are three very different corporate approaches to handling collaborative commerce.
First, there are ‘firefighters’, who exchange data with their suppliers and partners sporadically; second, there are ‘firestarters’, who are actively building the necessary infrastructure for collaborative commerce; and finally, ‘firewalkers’. These are visionaries – companies that exploit collaborative commerce technology to improve their investor returns.
Lawler believes that Xerox’s collaborative commerce strategy lies somewhere between the second and third approaches. In 1998, the company, which is the sixth largest technology company in the world, began a long-term collaboration initiative known as Digital Extended Enterprise Partners, or DEEP.
Over an initial period of three years, DEEP’s goal was to streamline all of Xerox’s buying and business-to-business trading processes, beginning with its internal procurement systems and ultimately moving these efficiencies out to Xerox’s supplier network and to its suppliers’ suppliers.
When Lawler and his colleagues pitched the project to the board at Xerox, the aim was to reduce costs by $50 million over the three years. Lawler estimates that the project has over-achieved its initial targets by a factor of five. “There was healthy scepticism from the board like with any IT project,” says Lawler. “So many technologies have failed to deliver to the bottom line. [This time], the board are very comfortable.”
Xerox has 357 live supplier e-catalogues, which account for 35% of its procurement spend, or 62% of total transaction volume. Each supplier has a direct, web-based interface to Xerox’s SAP business-to-business purchasing system, which is then linked to its back-end SAP enterprise resource planning (ERP) system. By the end of 2002, Lawler hopes that 60% of total procurement spend will be processed through these catalogues.
Xerox encourages its suppliers to adapt their own catalogues to fit in with its front-end procurement system, in return for guaranteeing them that Xerox will do 98% of its buying of that particular product or component through them.
Xerox also uses an engagement process to encourage new suppliers to come on board, where its consultants sit down with suppliers and talk them through the technology challenges and change management issues they are likely to face. “We argue that if we do this together successfully, we’ll guarantee you the market – it may be a long experience but eventually you will have to replicate it 1,000 times over with other buyers, so it’s worth the initial effort,” explains Lawler.
Lawler believes that Xerox has surpassed its initial goals by treating procurement as a knowledge management tool. “It’s how we buy, what we buy, do we need to buy, and from whom,” he says. By aggregating and analysing data on suppliers, Lawler can see which suppliers are commodity suppliers and which provide more long-term value to Xerox. Suppliers can also access this information via the Internet, and, to a certain extent, share it with their own partners.
Lawler hopes that Xerox’s successes in e-procurement will provide a natural springboard to other collaborative projects, including employee-to-employee collaboration through e-working technologies. “The lessons we have learnt in e-procurement are relevant to collaborative commerce as a whole,” he concludes.
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In action: Dell Computer
When Dell set up an online marketplace for the procurement of computer components and raw materials four years ago, executives at the PC and server company may have underestimated the profound impact it would have on its bottom line.
Before the system was put in place, the PC manufacturer sold largely through a telesales channel with all the associated additional people and infrastructure costs.
Once valuechain.dell.com was put in place, Dell saw the direct effect of collaborative buying – increased margins and reduced inventory levels. By simplifying its procurement chain, Dell has reduced inventory levels from the traditional 90-day levels to 35 days.
Through collaborative buying via valuechain.dell.com Dell has also made $150 million cost savings since the network was first set up in 1998. Slightly more than 90% of its purchasing requirements now flow through the marketplace. So, how did Dell turn valuechain.dell.com into an over night success when so many other marketplace initiatives have failed?
First, Dell has the advantage of market clout. An inability to persuade suppliers to join a marketplace has scuppered many collaborative buying initiatives. As one of the world’s largest PC manufacturers – Dell is ranked number one PC supplier in the US and number two in Europe – Dell’s suppliers felt compelled to join valuechain.dell.com or risk being ostracised by a major purchaser of electronic components.
Second, Dell was prepared to help smaller strategic suppliers join the marketplace by supplying them with the necessary online infrastructure for collaborative buying such as an online product index and catalogue.
Dell’s marketplace now involves 300 suppliers. Through collaborative working practices, the suppliers have agreed to leave raw material purchasing until five days before shipment in order to achieve the lowest possible price for these goods. Dell believes this strategy allows them to manufacture the most cost-competitive products, which has the knock-on effect of stimulating customer demand.
However, the collaborative buying model is not flawless. “In a perfect world we’d have no inventory whatsoever because we’d be able to predict customer demand perfectly and build-to-order,” says Tommy Geary, head of business process for Dell in Europe, the Middle East and Africa.
Accurately forecasting PC demand in detail, or the likely peaks and troughs in sale cycles is virtually impossible, however. Even with the help of sophisticated supply chain and analytical software, consumer buying patterns are not predictable. “Software can often add complexity and MRP [manufacturing resource planning] systems can take ages to produce a forecast,” says Geary. Instead, Dell ensures suppliers have enough spare production capacity so that there is never a dearth of raw materials at peak manufacturing times.
Dell has built much of its collaborative procurement system on software from supply chain management vendor, i2 Technologies. It also has an MRP system, which feeds data through the marketplace. However, much of valuechain.dell.com’s infrastructure is based on software Dell has developed in-house or with outside consultants.
Although the group purchasing process is pretty finely tuned, Dell executives continue to work on refinements. “I’d like the hubs to be taken out so that we can pay suppliers when we’ve used the raw materials rather than when they come in the door. That would increase our cash conversion cycle,” says Geary.
Geary also wants to drive down even further the number of hours that excess inventory is held. “We hit the four-day target this year. A 50% improvement on that is the next challenge.”