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Since e-procurement solutions hit the market around 2000 and began delivering impressive savings in the purchase of indirect materials like office supplies, companies have sought to expand the use of technology to other areas of corporate spend. A variety of applications, including contract management and supplier management, were introduced and now leading vendors are integrating these, along with robust visibility and analysis tools, into an overall solution known as Enterprise Spend Management (ESM).
"ESM puts spend at the center of a company's sourcing and procurement strategy," says Steve Markle, product manager for strategic sourcing at Ariba, a spend management provider based in Sunnyvale, Calif. By helping companies integrate their processes into a single, cohesive system, ESM enables the "enterprise-wide visibility and control that companies need to efficiently manage and leverage their spend," he says.
Market performance reflects corporate interest in ESM as well as in point solutions. Sales of procurement and sourcing applications grew 14 percent in 2004 to $2bn, according to AMR Research, Boston. An additional 10 percent growth is projected for 2005. AMR attributes this strength to four primary drivers: spiraling material costs and the continued need for cost containment, the need for improved supply reliability, emergence of the executive-level chief procurement officer and requirements for financial and regulatory compliance.
Avner Schneur, CEO of Emptoris, Burlington, Mass., adds global competition to that list. "So much of what companies are doing now is in the area of outsourcing and they are looking to their chief procurement officer to help with this," Schneur says. "These chief procurement officers and organizations are turning to technology to automate processes and to give them greater visibility to cost drivers-both their own and their suppliers'-so they can find savings opportunities."
Research and case studies clearly demonstrate spend management's potential. Motorola, for example, reports that it saved over $600m as a result of implementing a strategic sourcing and procurement program based on Emptoris tools. To deliver an equivalent bottom-line impact through revenue growth, the company says, it would have had to generate more than $7bn, or $12 in sales for every $1 saved.
Moreover, the corporate world has only begun to tap this potential. The Hackett Group, a research and advisory firm based in Atlanta, reports that just 40 percent of world-class companies-those rating in the top 25 percent in terms of efficiency and effectiveness-have the necessary reporting tools in place to enable them to do spend analysis. Of these, only half possess the ability to view spending data by supplier across the enterprise's total spend. "Average" companies are even less likely to have these capabilities.
"There is a significant opportunity across the board for organizations to get a better handle on visibility to their overall spending behavior and then to see the details within that," says Chris Sawchuk, procurement practice leader at Hackett. Companies need to get all that information in one place, he adds, "where they can actually use it and start making decisions around it."
Often that is easier said than done, particularly in large, complex organizations that have grown through acquisition. "Spend information is hard to get because it is wrapped up in numerous systems and in weird places such as item descriptions down deep in purchase orders," says Paul Noel, senior manager for spend visibility at Ariba. "Or it is not being entered at all, but proxied by internally developed commodity codes." In the worst cases, he says, people are just receiving invoices and paying them, not really capturing what they are paying for. "Teasing all of that out and getting it into a common format has been the biggest challenge," he says.
Poor data quality also is the reason that many spend management installations fail, says Elisa Jagerson, CEO of PartsRiver, Menlo Park, Calif. "If you can't tell that Part X is the same as part Y because they are in your systems in different places or under two different names or numbers, there is no way to analyze what you are spending on X and Y." PartsRiver provides parts data management and spend analysis for transportation companies and other vertical industries.
In many cases, Jagerson says, PartsRiver customers realize 80 percent of the anticipated value proposition from an implementation just through the normalization of data and being able to tell what is what. Ryder System, Miami, "had a floor full of people managing almost two and a half million part numbers in 73 different databases" when the company started working with PartsRiver, she says. "When we were done, it was down to 80,000 part numbers in one database. The implication of that was a reduction in spend of at least $10m and another $10m savings in administrative and data management costs," she says.
In addition to using automated cross-indexing and intelligent matching tools to weed out data errors and duplications, human intervention often is needed to get clean data. "We have had some real breakthroughs in automating this process and doing it quickly, but it still requires a lot of domain expertise," says Jagerson. "We still need people with industry knowledge to sort it all out."
Ariba includes its customers in this process. "We pass the data through an initial cleansing and do all that we can in a generic way," says Noel. "Then we pass it back to the customer to see if what we found makes sense to them. Sometimes we just read something wrong." As an example, he cites a customer who frequently purchased an item it listed as a cart. "We thought this was some kind of wheeled handcart," he says. "As it turns out it was the customer's shorthand for cartridge."
Getting the data foundation right involves an investment of time on the part of the customer, he says, but it is a key step to making a spend management initiative successful.
Once cleaned, the spend data is used to create a multidimensional matrix or data cube that lets users explore and analyze from many different perspectives, looking for savings opportunities. Procuri, a spend management vendor based in Atlanta, calls its version of this Data Mart. "Using Data Mart, the data can be analyzed against whatever dimensions the user defines," says John Madrid, executive vice president of knowledge and services. "They are able to identify key opportunities for spend improvement based on any number of goals. Then, as they go and execute against the plans they have developed, they can continually see the progress they are making through the reduction or the consistency of spend in these areas."
The more spend that goes through a system, the greater the savings will be. At Motorola, for example, 80 percent of direct material spend was processed through the Emptoris solution in 2003 and that figure has been steadily growing. "We call this wider, deeper, faster," says Schneur. "The more spend that goes through the system, the deeper will be the savings, and if you also do it fast, the impact on the organization will be significant."
Typical savings opportunities come in understanding a company's enterprise-wide purchases from individual suppliers, allowing it to leverage total volume; and in seeing where it is buying the same thing at different prices.
Another opportunity is in contract management and compliance. "Anyone can go off and negotiate a really clever agreement, but they often can't close the loop at the performance level," says Bob Anson, senior director of supplier relationship management solutions at i2 Technologies, Dallas. That's the purpose of contract management tools. By monitoring compliance with contract terms, these solutions ensure that negotiated savings are actually realized.
Nextance, a contract management vendor based in Redwood City, Calif., offers a suite of products aimed not only at compliance, but at centralizing, analyzing and standardizing contracts throughout the enterprise. "Having contracts centralized and saved electronically enables you to compare transactions against contract terms," says Tiffany Riley, vice president of marketing at Nextance. "You can see where you are missing rebates, what supplier is not giving you the right price, where maverick spend is occurring. If you don't have visibility after the contract is signed and you can't manage your supplier to the contract, leakage comes in," she says. "Then, all the time you have put into spend management and strategic sourcing becomes wasted."
Additionally, when contracts are digitized and codified, spend management systems can limit buyers' purchases to only goods and prices that have been approved, says Pravin Kumar, vice president and general manager for transaction services at Ketera, a procurement systems provider based in Santa Clara, Calif. "If buyers can see only the products and prices that you have negotiated, then you keep your savings."
Kennametal Inc., a global supplier of tooling and engineered components based in Latrobe, Pa., implemented Ketera in 2002. "Using Ketera, we've lowered our costs and improved our compliance with negotiated corporate contracts," says Jim Cebula, director of global purchasing. By buying on contract and eliminating maverick spending, "we typically see a 10 percent reduction in cost," he says.
Some vendors offer specialized contract management tools just to handle logistics spend. "You cannot take a generic procurement platform used to buy staplers and apply it to logistics," says Greg Johnsen, vice president of marketing and sales at GT Nexus, Alameda, Calif. "Logistics is a different animal and customers need a specialized logistics spend management platform." The GT Nexus solution includes procurement functionality for negotiating and securing contracts as well as compliance monitoring. "Finally, you have to audit how you are being invoiced for that spend," says Johnsen. "And this all needs to be in one unified seamless platform."
Rate Explorer, a solution from Management Dynamics, East Rutherford, N.J., also provides a logistics-specific solution. "Rate Explorer benefits our customers by enabling them to very precisely monitor the activity under a contract and to provide more real-time control and instructions on how service providers should be selected and used," says CEO Jim Preuninger. Scarbrough International, a logistics provider specializing in customized international logistics solutions, implemented Rate Explorer to automate its ocean contracts and improve the efficiency and effectiveness of its customer quotation and carrier freight audit processes. Without a contract management solution, "it was an impossibility to keep up with the changing environment and the volume," says CEO Sean Scarbrough. "We never knew exactly what our costs were."
Spend analysis often reveals opportunities for companies to save money by consolidating their supply base. According to The Hackett Group, businesses could generate more than $50m is savings per $1bn of procurement spending and also significantly cut the cost of the procurement function if they focused more of their spend on fewer, key suppliers. "World-class procurement organizations have less than half the number of suppliers per billion of spending than typical companies," says Sawchuk.
When companies begin a spend management project, they often are surprised at the number of suppliers they use. "We have done spend analysis for more than 60 companies and we always conduct a survey first and ask the customer how many suppliers they think they have," says Ketera's Kumar. "They usually are off by an order of magnitude."
The goal, however, is not to get down to the fewest number of suppliers, but to have the right suppliers in the right number-those that are delivering the quality and performance the company needs at a fair price," says Madrid of Procuri. "Depending on the situation, it might be better for a company to select a supplier with a higher price that gives them better on-time delivery percentages or shorter delivery times." By monitoring and presenting supplier performance data, these solutions help companies identify suppliers that fit their need for a particular category or region. Supplier metrics also can help meet other goals, such as minority spending, adds Madrid.
And they can help answer "all sorts of interesting decision support and planning questions," says Anson of i2. "In our environment, a commodity or supply manager can look at all of this transactional information-by site, by time, by supplier, by site within supplier, by category, by part within a category-and can look at the same time at their delivery and quality performance data or their inventory data. Given all that, rather than just understanding where their spend went, they can ask other questions: Did I categorize my suppliers appropriately? Am I getting good delivery and product performance from people with whom I have a price advantage? To what extent am I gaining on price and losing on quality? If I have volume agreements with suppliers, where am I in terms of leveraging those incentives?" The overall result is an understanding of the total cost of ownership of a purchase, not just the purchase price.
When a supplier relationship is strategic, partners can take spend management to the next level, figuratively and literally. In complex, multi-tiered supply chains, says Anson, it is helpful to gain visibility to spend behaviors through multiple levels. "Only looking at spend with my direct partners may not give me the whole picture," says Anson. "I need to look at spend through the tiers, down to my suppliers' suppliers." Any competitive company already has beat down its direct suppliers on price, he says, "so the real issue in improving profitability is in helping these suppliers reduce their cost structure."
One way to do this, says Anson, is for an OEM to use its leverage to acquire commodities for its suppliers at a lower price. He cites an automotive manufacturer, an i2 customer, which manages the purchase of sheet metal used by its suppliers to make certain parts. This involves a complicated series of transactions in which the OEM buys metal from a foundry, sells it to a mill for processing, buys it back from the mill, sells it to the component maker and finally buys from the component maker the finished parts. "The ultimate objective is to maximize its total metal procurement leverage," he says.
Hewlett-Packard, Palo Alto, Calif., has developed an innovative way of working with its suppliers that helps ensure adequate supply for HP while guaranteeing suppliers that HP will make a certain level of purchases. Known as Procurement Risk Management (PRM) the solution applies financial risk management techniques to the supply chain. "What manufacturers typically do today is to send their forecast to suppliers," says Venu Nagali, leader of the PRM initiative at HP. "But that is only a forecast, it is not a commitment. By sending a forecast, companies are pushing the entire demand risk onto suppliers."
This is unfair, he says. "If demand is too low, they won't sell their product; if demand goes too high, they may not be able to supply you."
HP developed a software program that quantifies the uncertainties surrounding both demand and supply. This enables the company to know where it can make purchase commitments with an acceptable level of risk. "What we do at HP is risk sharing contracts with suppliers," says Nagali. "HP takes ownership of the risks that we can bear more cheaply and we ask suppliers to take a level of risk that they can mange."
So, HP commits to buying parts for a certain number of products at a specified price. It asks the supplier to commit to supplying parts for a number of products over that. "And there is a portion of demand with very high uncertainty were neither HP nor the supplier make commitments, either to quantity or price," says Nagali. Since implementing this program five years ago, HP has realized incremental savings of $100m. Suppliers have benefited as well, Nagali says, because HP's quantity commitments have lowered their risk.
In most cases, spend management savings go beyond savings in material costs. "If you unnecessarily buy two of the same part, you will have to inventory two, and that's a big expense right there," says Jagerson of PartsRiver. In addition, there are savings in administrative and data management costs, in warranty claims and in being able to submit warranty claims with the right data, and in better asset management due to parts availability. "These are all pretty big impacts that we are just now trying to quantify," Jagerson says.
The delivery model of the software itself also is a cost saver. Most spend management applications are being delivered as "on demand" solutions. Functionality is accessed over the web and users do not have to invest in consulting services, hardware or software license fees, making a return on investment much easier to reach.
This is particularly helpful to smaller companies, says Ed Lewis, CEO of Mitrix, a Mitsui USA Group company based in Irvine, Calif. Mitrix's solution is aimed at companies with revenue of $75m to $750m. "All our clients log into the same single instance of our application so the economics are dramatically different from licensed software," says Lewis. But being affordable does not mean the application is light in functionality. "We help smaller companies get their procurement processes under control and automated to a large degree, in a way that they can monitor it," he says.
"This is really one of the easiest things a company can do to realize quick savings, because there is no IT to install and no integration," says Jagerson. "Unfortunately, it is still not at the top of many companies' to-do list."
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