Executive Briefings

Air Products Cuts Down on Maverick Spend, and Saves Millions

Top management ought to be pleased when employees show personal initiative and think for themselves-except when it comes to choosing key suppliers.

"Maverick" is supposed to be a positive word. It means someone who rejects the status quo in favor of a new and innovative idea. But not in the area of corporate procurement.

Hidden in the depths of giant companies like Air Products and Chemicals Inc. are people who buy supplies according to their own whims. They ignore high-level dicta about authorized suppliers and prices, playing havoc with corporate budgets.

For Allentown, Pa.-based Air Products, with $7.4bn in sales, it isn't easy to police the procurement scofflaws. The company has multiple departments, engaged in the production of industrial gases and chemicals. Operations are in more than 30 countries, with 20,000 employees.

Air Products had been using a number of home-grown systems for purchasing, in addition to maintaining electronic data interchange (EDI) links with a handful of suppliers, says Tim Tulio, manager of e-procurement systems and support. But traditional EDI had some connectivity drawbacks, and the company needed a more uniform approach to procurement.

E-commerce started getting hot in the late 1990s, before the bursting of the dot-com balloon, and Air Products responded by commissioning a team to apply the technology to procurement and sourcing. Early efforts found the company doing business with suppliers directly via their web sites, for the purchase of non-technical parts. Vendors such as W.W. Grainger, Boise Cascade and Fisher Scientific fit that particular bill.

The program was fine when limited to a small number of suppliers, but it couldn't handle the volume and complexity that Air Products ultimately required. "It was like a poor man's PunchOut," says Tulio, referring to software from Ariba Inc., which lets buyers directly access catalogs on supplier web sites from their own procurement systems. It needed a tool that could support a full-fledged procurement effort.

Air Products looked at more than a dozen vendors before settling on Sunnyvale, Calif.-based Ariba. It found the company through Ariba's participation in a purchasing consortium managed by consultant A.T. Kearney Inc., known as the Leveraged Sourcing Network. Acquiring the Ariba Buyer software around 2000, Air Products first rolled out the system to several hundred users in the U.S. Ultimately it would be expanded to nearly 2,000 users worldwide.

The company began with everyday items such as office supplies, computers and peripherals, laboratory equipment, industrial products (from vendors such as Grainger) and business cards. Many vendors already had a presence on the Web, allowing Air Products to take advantage of the PunchOut feature for low-value, high-volume materials.

Stopping the Mavericks
A major goal in the acquisition of Ariba Buyer was to eliminate maverick spend. Air Products wanted its various departments to adhere to pre-selected suppliers, to keep a lid on expenses and standardize processes worldwide. Direct spend on raw materials, along with the purchase of energy and capital equipment, was centrally controlled. But maintenance, repair and operating equipment (MRO) was vulnerable to independent action, Tulio says. MRO accounts for between 15 percent and 18 percent of the company's total spend-not an inconsequential amount, given the organization's size and global scope.

"The biggest challenge is change management," says Michael Schmitt, executive vice president and chief marketing officer of Ariba. "Can you get people to buy off contracts, and suppliers to adhere to pricing? You've got to get buy-in." In fact, only 30 percent to 40 percent of Air Products' buyers were adhering to the company's spending directives at the time the company went with Ariba. Today, says Tulio, the number is closer to 90 percent.

Two years after acquiring Ariba Buyer, Air Products tackled the problem of strategic sourcing. Here, the issue was less one of compliance than of managing the company's massive purchases of land, buildings, energy and capital equipment. Again, Ariba won out, this time at the expense of rival FreeMarkets (which ended up being bought by Ariba anyway).

The sourcing tool offers two primary means for picking suppliers: reverse auctions and sealed bids. The first invites multiple suppliers to participate via the internet, with prices visible to all. The second makes each offer confidential, containing more detail about specific parts, service considerations and warranties.

Only a small percentage of the company's sourcing "events" are actually presented as reverse auctions. That tool is best suited for the purchase of direct materials such as pipe, plating and weld wire for plant equipment, says Tulio.

Sealed bids tend to be the better alternative for items that are less price-sensitive and involve complex specifications and fewer suppliers, Schmitt says. Certain electronic components may require a bill of materials with more than 100 parts, some of which are outsourced to secondary suppliers.

For such purchases, Air Products needs information at the line-item level, covering overhead, joint engineering and problem resolution, among other things. Ariba Enterprise Sourcing creates a template for those materials, listing common questions that can streamline the bid process and rank prospective suppliers.

A Benefit to All
Some suppliers consider electronic procurement to be little more than a tool for cutting prices to the bone. Schmitt says that isn't so. Auctions and other types of bidding give suppliers the opportunity to provide more information to buyers, who are equally concerned with criteria such as product quality, warranties, service and the chance to engage in joint engineering. "Most decisions don't go to the lowest bidder, particularly in direct sourcing," Schmitt says. Adds Tulio: "People are getting used to it."

Air Products keeps tabs on procurement and sourcing through a handful of key metrics, including the number of events run through the online system, and number of dollars saved through the events. Total savings from the software are in the millions of dollars, the companies say, with Air Products better able to plan, analyze, source, requisition and order key materials.

Tulio likes the fact that information is available to all, instead of residing on someone's hard drive in the form of e-mails. "This way," he says, "you have a complete historical record of transactions."

A major challenge on the sourcing side will be to broaden the system's use in the coming year. It has already run at least one major event in Asia, "with no special capabilities required," Tulio says. He also wants to further integrate the tool into day-to-day sourcing of big-ticket purchases with complex requirements. To improve compliance rates, Air Products will look to a small number of "in-house market-makers" to champion use of the system globally.

The company's biggest victory might be the ability to gather procurement and sourcing data from multiple legacy systems of varying quality, getting the whole organization on the same page. Says Schmitt: "Having no centralized view creates a huge pain point."

"Maverick" is supposed to be a positive word. It means someone who rejects the status quo in favor of a new and innovative idea. But not in the area of corporate procurement.

Hidden in the depths of giant companies like Air Products and Chemicals Inc. are people who buy supplies according to their own whims. They ignore high-level dicta about authorized suppliers and prices, playing havoc with corporate budgets.

For Allentown, Pa.-based Air Products, with $7.4bn in sales, it isn't easy to police the procurement scofflaws. The company has multiple departments, engaged in the production of industrial gases and chemicals. Operations are in more than 30 countries, with 20,000 employees.

Air Products had been using a number of home-grown systems for purchasing, in addition to maintaining electronic data interchange (EDI) links with a handful of suppliers, says Tim Tulio, manager of e-procurement systems and support. But traditional EDI had some connectivity drawbacks, and the company needed a more uniform approach to procurement.

E-commerce started getting hot in the late 1990s, before the bursting of the dot-com balloon, and Air Products responded by commissioning a team to apply the technology to procurement and sourcing. Early efforts found the company doing business with suppliers directly via their web sites, for the purchase of non-technical parts. Vendors such as W.W. Grainger, Boise Cascade and Fisher Scientific fit that particular bill.

The program was fine when limited to a small number of suppliers, but it couldn't handle the volume and complexity that Air Products ultimately required. "It was like a poor man's PunchOut," says Tulio, referring to software from Ariba Inc., which lets buyers directly access catalogs on supplier web sites from their own procurement systems. It needed a tool that could support a full-fledged procurement effort.

Air Products looked at more than a dozen vendors before settling on Sunnyvale, Calif.-based Ariba. It found the company through Ariba's participation in a purchasing consortium managed by consultant A.T. Kearney Inc., known as the Leveraged Sourcing Network. Acquiring the Ariba Buyer software around 2000, Air Products first rolled out the system to several hundred users in the U.S. Ultimately it would be expanded to nearly 2,000 users worldwide.

The company began with everyday items such as office supplies, computers and peripherals, laboratory equipment, industrial products (from vendors such as Grainger) and business cards. Many vendors already had a presence on the Web, allowing Air Products to take advantage of the PunchOut feature for low-value, high-volume materials.

Stopping the Mavericks
A major goal in the acquisition of Ariba Buyer was to eliminate maverick spend. Air Products wanted its various departments to adhere to pre-selected suppliers, to keep a lid on expenses and standardize processes worldwide. Direct spend on raw materials, along with the purchase of energy and capital equipment, was centrally controlled. But maintenance, repair and operating equipment (MRO) was vulnerable to independent action, Tulio says. MRO accounts for between 15 percent and 18 percent of the company's total spend-not an inconsequential amount, given the organization's size and global scope.

"The biggest challenge is change management," says Michael Schmitt, executive vice president and chief marketing officer of Ariba. "Can you get people to buy off contracts, and suppliers to adhere to pricing? You've got to get buy-in." In fact, only 30 percent to 40 percent of Air Products' buyers were adhering to the company's spending directives at the time the company went with Ariba. Today, says Tulio, the number is closer to 90 percent.

Two years after acquiring Ariba Buyer, Air Products tackled the problem of strategic sourcing. Here, the issue was less one of compliance than of managing the company's massive purchases of land, buildings, energy and capital equipment. Again, Ariba won out, this time at the expense of rival FreeMarkets (which ended up being bought by Ariba anyway).

The sourcing tool offers two primary means for picking suppliers: reverse auctions and sealed bids. The first invites multiple suppliers to participate via the internet, with prices visible to all. The second makes each offer confidential, containing more detail about specific parts, service considerations and warranties.

Only a small percentage of the company's sourcing "events" are actually presented as reverse auctions. That tool is best suited for the purchase of direct materials such as pipe, plating and weld wire for plant equipment, says Tulio.

Sealed bids tend to be the better alternative for items that are less price-sensitive and involve complex specifications and fewer suppliers, Schmitt says. Certain electronic components may require a bill of materials with more than 100 parts, some of which are outsourced to secondary suppliers.

For such purchases, Air Products needs information at the line-item level, covering overhead, joint engineering and problem resolution, among other things. Ariba Enterprise Sourcing creates a template for those materials, listing common questions that can streamline the bid process and rank prospective suppliers.

A Benefit to All
Some suppliers consider electronic procurement to be little more than a tool for cutting prices to the bone. Schmitt says that isn't so. Auctions and other types of bidding give suppliers the opportunity to provide more information to buyers, who are equally concerned with criteria such as product quality, warranties, service and the chance to engage in joint engineering. "Most decisions don't go to the lowest bidder, particularly in direct sourcing," Schmitt says. Adds Tulio: "People are getting used to it."

Air Products keeps tabs on procurement and sourcing through a handful of key metrics, including the number of events run through the online system, and number of dollars saved through the events. Total savings from the software are in the millions of dollars, the companies say, with Air Products better able to plan, analyze, source, requisition and order key materials.

Tulio likes the fact that information is available to all, instead of residing on someone's hard drive in the form of e-mails. "This way," he says, "you have a complete historical record of transactions."

A major challenge on the sourcing side will be to broaden the system's use in the coming year. It has already run at least one major event in Asia, "with no special capabilities required," Tulio says. He also wants to further integrate the tool into day-to-day sourcing of big-ticket purchases with complex requirements. To improve compliance rates, Air Products will look to a small number of "in-house market-makers" to champion use of the system globally.

The company's biggest victory might be the ability to gather procurement and sourcing data from multiple legacy systems of varying quality, getting the whole organization on the same page. Says Schmitt: "Having no centralized view creates a huge pain point."