Improvements in purchasing systems transcend cost savings, and companies are seeing the benefits extend to every corner of the business.
Managing procurement has never ranked as a glamorous endeavor. It doesn't elicit the excitement of a new technology rollout or the satisfaction of landing a new customer with deep pockets. Yet in today's cost-conscious and productivity-driven business environment, efficient procurement can serve as an engine for economic gain.
Brett Mauser is well aware of that fact. Five years ago, the director of global procurement for Dayton, Ohio-based NCR Corp. faced a mountain of paper, disparate systems, overlapping requisition processes and costly buying patterns. For an organization that spent $3.3 billion annually and conducted business in more than 100 countries, "there was an enormous opportunity to drive improvement," he explains.
Today NCR, a provider of transaction and data warehousing products, is a model of efficiency. By linking order management, inventory controls, warehouse management, contract management, purchasing, travel and entertainment (T&E), accounts payable, and other activities, NCR has created visibility and accountability. Moreover, the Web-based invoicing and electronic data interchange (EDI) system that the company put into place has helped streamline buying. More than 70 percent of the company's suppliers now use this mode. The switch to online invoicing lowered costs from $14 per invoice to near zero. At the same time, the number of invoices flagged for review or manual handling has plummeted from 70 percent to 20 percent.
The introduction of e-procurement in the late 1990s helped move catalogs online and create a more streamlined way to purchase goods. Unfortunately, "many companies that purchased first-generation procurement systems didn't achieve the kind of cost savings they had expected," says Andrew Bartels, vice president and research analyst at Cambridge, Mass.-based Forrester Research. Many of these systems helped organizations consolidate vendors and improve compliance on the buy side, but they did little to link all the enterprise systems that touch procurement. "It was impossible for a company to get its arms around the entire process," he adds.
That's changing. Many systems now approach a closed loop and provide a comprehensive view of procurement activities. They also help companies standardize processes and improve workflow. "Procurement is evolving. Today, the effective use of systems can drive enormous gains that ripple throughout a company," says Chris Brousseau, a senior manager in the supply chain practice at Accenture in Palo Alto, Calif. Bartels agrees. "Companies are coming to realize that procurement doesn't hinge on a single technology or process. It's a complex cycle that involves a number of important activities." Companies need input from various functions, including finance, to build an integrated procurement system. Not only must an enterprise select a system that ties together discrete procurement activities, but it must also tap into tools that provide reporting and analytics. When companies can view data and drill down into systems, they can make better decisions and effect improvements that only now are possible.
NCR learned these lessons when it began the transition to an integrated procurement system in 2000. A thorough analysis of its operations by McKinsey & Co. revealed to NCR that it had more than 50 Oracle e-procurement systems in place around the world and that each system handled procurement differently. To remedy the redundancy, NCR moved to a single-instance Oracle 11i purchasing system and connected it to payables and finance applications. In addition, it plugged in a financial transactions module from 170 Systems Inc. Finally, NCR created a standardized six-step process for handling procurement transactions, and it settled on four methods of buying: purchase orders, T&E cards, purchasing cards and specially designed processes controlled by commodity directors.
The net result? The system has helped NCR achieve a 7 percent annual cut in spending. In addition to eliminating paper invoices and purchase orders, the company has reduced the number of suppliers from 28,000 to 10,000, negotiated better vendor pricing and improved its cash flow. "We have the ability to view what the days payable outstanding is by examining the supplier agreements we have in place and the payments flowing through the system," Mauser says. That, in turn, has helped NCR negotiate better payment terms with suppliers.
Yet the gains extend far beyond direct cost savings. The new strong analytics tools NCR has acquired include capabilities for modeling and predicting cash flow. "We now work closely with treasury to understand cash forecasting needs in different countries," Mauser says. "We're able to avoid moving currency around from one country to another -- and paying the resulting costs -- in order to meet procurement needs. We're also able to improve reporting on VAT-related transactions and recover taxes that we previously missed."
Reporting and analytics have also helped streamline pricing. For example, one NCR supplier had established radically different pricing structures for five different organizations within the company. Once the analytics tools flagged this disparity, "we were able to aggregate spending and reduce the cost structure by 20 percent simply by pointing out that we were paying different prices for the same item," Mauser explains.
Forrester's Bartels says that effective procurement practices can trim pricing by 5 percent to 20 percent through better sourcing agreements and volume discounts. Eliminating paper and cumbersome processes can also lead to double-digit gains. And although measuring the monetary benefits of better reporting and analytics can be difficult, insights into cash flow and payment terms can result in substantial gains. "There are opportunities for improvements in many areas," he says.
Another company moving toward a closed-loop procurement system is West Penn Allegheny Health System, a Pittsburgh, Pa., not-for-profit institution comprising six hospital campuses with more than 2,000 beds. In the past, administrators, nurses and other healthcare professionals ordered items by checking off a list at the end of the day. The system was slow and prone to errors, says David Zimba, vice president, corporate contracting.
West Penn Allegheny recognized that it needed a more advanced system to handle its $350 million supply chain and to keep certain medical products on hand at all times, so in 2005 it installed electronic storage cabinets throughout its facilities. Now, when nurses and others need an item -- whether it's medication or surgical equipment -- they log in using a fingerprint scanner, enter information about what they've taken out and close the cabinet. The cabinets automatically forward the data to a materials management system from McKesson, which connects to parts of the supply chain such as contract management and contract analysis as well as a general ledger system and a sourcing module from Ariba.
At the end of the day, the materials management system routes orders to the correct supplier automatically. Using the electronic storage cabinets, West Penn Allegheny has reduced the number of steps required to reorder from 20 to 6 and increased the accuracy of replenishment from 70 percent to 99 percent. "Health professionals have more time to address patient needs and deal with health-care issues," Zimba explains. In fact, customer satisfaction has increased from 71 percent to 92 percent during the same period.
The materials management system has also helped West Penn Allegheny achieve major administrative gains. Currently, 90 percent of purchase orders go out via EDI, eliminating paperwork and speeding up the procurement process, and the organization uses the system to match purchase orders, invoices and receipts. "We have greatly reduced the number of discrepancies. Our records are cleaner and more accurate," Zimba says. Before installing the integrated system, procurement managers found themselves buried in Excel spreadsheets. Today, the data is available from a dashboard that allows procurement managers to drill down and view the specific data they need.
Overall, about 84 percent of purchasing activity takes place through the procurement system, compared with about 50 percent before 2004. Nevertheless, the company has elected to retain a paper-based procurement process for specific circumstances. If an item or vendor doesn't appear in the company's 130,000-item database, the system forces the purchase onto paper and requires purchase approval from a department head or above. "A paper purchase is a disincentive because it is slower and less reliable. But it's there because someone may need to order something that's not in the database," Zimba explains.
It's a winning program. "This system has helped us improve our buying power and cut costs by consolidating vendors," Zimba explains. "We are able to examine data about the supply chain, including contract management, bidding and negotiation, and overall administration." The ongoing procurement initiative, which dates back to 1999, has helped the health-care provider achieve $75 million in direct cost savings within its supply chain.
Finance has played a key role in the process by overseeing the transition to a streamlined system. Today, the entire organization uses a single general ledger along with a common terminology and transaction codes across the organization. "We no longer have different departments ordering the same items under different names. So we know exactly what we're buying, how many we're buying and how much we're spending," Zimba says. "We have built a lean procurement system that's as simple and straightforward as going to the grocery store."
6 Steps Toward World-Class ProcurementHere's how finance can play a role in developing a more effective procurement infrastructure. • Link operations and financial systems together. "Successful procurement isn't based on a single technology; it's a complex cycle," says Andrew Bartels, vice president and research analyst at Forrester Research. Only by connecting various systems, including general ledger, is it possible to achieve maximum cost savings and efficiency gains. •Devise processes that support the technology. Without a good deal of analysis and planning up front, even the best system can disappoint, says Chris Brousseau, a senior manager in the supply chain practice at Accenture. "It's important to make sure that the features users need are there and that the workflow and processes create opportunities for improvements," he says. •Develop a common terminology and transaction codes. When an organization unifies catalogs, databases and indexes into a single system with a single set of codes, it's possible to streamline buying and pricing -- and gain insight into spending and usage patterns. •Provide sufficient auditing and restrictions without making a system cumbersome. Finance should play a key role in establishing controls and audit capabilities. However, too much complexity can bog down the process and prevent employees from doing what they need to do. "A balance must exist," Bartels says. • Tap into the power of analytics. Applications that provide a window into transactional and vendor data, including sales levels, performance and quality, can produce results far beyond cost savings. Procurement can ripple into every corner of the company and produce exponential gains. • Focus on change-management issues. Procurement "touches many people within the organization, and [revamping] strategic sourcing may disrupt long-standing supplier relationships," says Jason Gilroy, vice president of outsourcing for ICG Commerce, a procurement services provider headquartered in King of Prussia, Pa. He says that it must be made clear to employees that the change has management's full support, and they should understand the reasons behind it and the benefits to the company. |
According to Accenture's Brousseau, finance can also help procurement improve in the areas of accountability and auditing. "Practical and effective business controls are essential," he says. Yet processes and practices should be devised with the idea that buying shouldn't be difficult. "The whole point of a procurement solution is to make it easier for the end users to do the right thing, which is buying from suppliers that are under contract," he says.
As the complexities of designing and maintaining a procurement solution grow, some companies are turning to outsourcing to reduce capital outlay and trim IT costs. "Negotiating supplier agreements, implementing systems and processes, and bringing operating costs under control can prove challenging," Brousseau points out. While some companies outsource specific functions, such as e-procurement systems technology or contract management, others hand over the reins for the entire procurement operation.
One company that has embraced procurement outsourcing is Avaya Inc., a Basking Ridge, N.J., manufacturer of network and telecommunications equipment. The five-year-old spin-off of Lucent Technologies has opted to use ICG Commerce to manage everything from catalog and content aggregation to automation and workflow tools through a Web-based interface. More than 17,000 users enter purchase information through Avaya's Web-based system, then ICG Commerce creates a purchase order, finds the preferred vendor and handles buying.
Joe Siciliano, senior manager of procurement at Avaya, says that the company has boosted system adoption from less than 40 percent to 97 percent over the last two years. In addition, the organization has improved adherence to its purchasing rules in some areas from about 40 percent to almost 90 percent. ICG Commerce flags potential purchases that do not match the desired criteria and determines whether it's possible to purchase the item from a preferred supplier. This service has netted Avaya costs savings in the 10 percent to 15 percent range. "We have improved internal processes, cut out paperwork and achieved better pricing through discounts with preferred vendors," Siciliano notes.
Regardless of the approach, Bartels says that linking procurement, operations and financial systems -- often through an enterprise resource planning (ERP) application -- leads to enormous gains. Companies can take procurement far beyond cost savings and measure supplier performance across multiple dimensions, including pricing, dependability, availability, service and support. "It creates a more competitive and agile enterprise," he insists.