What's in a name?
Even as users see gains, vendors say lack of clarity keeps supplier relationship management from taking off
By Jim Fulcher, contributing editor -- Manufacturing Business Technology, 11/1/2005 7:00:00 AM
Many companies can't resist what Purchasing Director James Polak calls the siren song of supplier relationship management (SRM): e-procurement. But when his company, PPG Industries, considered SRM, Polak says PPG implemented spend analysis first.
"We knew spend analysis enhances e-procurement, and is a necessary first step for a successful SRM initiative," says Polak of the Pittsburgh-based manufacturer of specialty chemicals, coatings, and glass products. Admittedly, it was a rough project until, as Polak puts it, the first millions in savings rolled in. Today, it is significantly easier for PPG to consolidate spending across the corporation, using fewer vendors, and in return receive higher-quality materials at lower overall costs.
Since implementing Ariba Visibility Solutions in late 2003, PPG has saved well beyond $10 million, Polak adds.
"Once you make the investment and get up and running, it's amazing how much money can be saved," Polak says. "The solution gives us better visibility. We knew we couldn't improve spend management if we couldn't see it."
Considering the success that notable customers such as the aforementioned PPG, as well as Exxon Mobil, and Merckhave achieved, it's no wonder Ariba is widely known. But it's also widely known that Ariba's sales haven't panned out as expected over the years.
"Ariba isn't cash-flow positive, but it should be," says David Dobrin, president of Cambridge, Mass.-based B2B Analysts. "Ariba's got a better mousetrap, no competition for its core value proposition, and customers with tremendous levels of success."
Still, the question is this: If even Ariba, which seemingly launched the e-procurement movement, still isn't profitable, does it mean that companies buying SRM applications don't get value from their solutions?
The answer is that solutions do offer value, and rates of adoption are slowly increasing for various disciplines within SRM, says Tim Minahan, chief services officer at Boston-based AberdeenGroup. SRM encompasses spend analysis, sourcing, contract management, supplier performance management, and procurement execution—and different suppliers offer niche functionality targeting specific aspects of the entire pie.
"While companies such as SupplyWorks, Procuri, and SAS have had good success, it's across different areas," Minahan says. "None of them cover the whole SRM footprint."
SRM as a concept
Ariba got its start as an e-procurement vendor offering systems to automate the purchase of indirect goods, such as office supplies. The company later developed a spend-management platform—applications for analyzing purchasing patterns, securing the appropriate items from approved vendors, and ensuring dealings with suppliers adhere to corporate policies and contract terms. The company also acquired FreeMarkets, a former competitor that helps companies find the best deals on direct materials used for production.
"This is a whole new way of [operating], and Ariba is the only company offering an end-to-end solution," Dobrin says. "If it really worked, users could coin their own money—but that isn't happening."
Reasons abound for exactly why it hasn't come to pass. On the one hand, manufacturing companies are going through a profound change: globalization, says Sundar Raghavan, a VP with Ariba. Customers sell in new markets and use global suppliers, but they must be cost-efficient, which should make SRM an appealing proposition.
The problem, Raghavan notes, is that SRM, as a concept, is quite broad in scope, and end-to-end solutions are complex. Manufacturers seem reluctant to implement big initiatives involving new concepts, especially if they have to wait six to nine months for returns to trickle in, even while facing increased pressure to reduce the number of IT solutions. However, companies that understand that source-to-procure-to-pay is a closed-loop cycle—and have taken the time to implement Ariba solutions—save millions of dollars, he says.
John Madrid, an executive VP for sourcing vendor Procuri, agrees that a chief impediment to sales of SRM solutions has been the term supplier relationship management itself. That name sprang up as a catch-all marketing label rather than one that describes actual processes, he claims.
"It's a very broad term that doesn't use the obvious lingo," Madrid says. "I've been to SRM conferences where none of the speakers define SRM because it's such a complex concept."
Consequently, solution suppliers have changed their approach. For example, SupplyWorks—known for on-demand solutions for procurement and replenishment of direct materials aimed at discrete manufacturers—doesn't even use the term supplier relationship management anymore, says Jeff Herrmann, chief marketing officer and chairman. "We quit using the SRM label because it isn't well defined and doesn't explain business processes the way manufacturers see them."
Instead, SupplyWorks now focuses on its prospects' pain points. The overall goal is determining how to partner with suppliers to reduce cycle times and inventory, Herrmann adds.
"Manufacturers use our solutions to communicate and collaborate with suppliers as a means to automate replenishment—as well as manage supplier performance," says Herrmann. "They do address supplier relationship management, but they see it as part of supply chain execution."
The approach has a payoff for manufacturers: SupplyWorks' customers have reported 20-percent to 30-percent reductions in raw materials inventories, up to 25-percent reductions in supplier lead times, and 10-percent improvements in on-time delivery while reducing direct materials pricing by 5 percent, says Herrmann.
Sourcing's renewal
The other side of the coin is the upfront sourcing that's needed to begin working with suppliers. In recent years, companies have learned that price-only sourcing isn't a sound strategy because supplier performance, quality, and other variables may contribute to skew overall performance, says Procuri's Madrid.
"We see growing interest in total best-value sourcing because manufacturers realize the benefit of partnering with the best of the suppliers that offer the best price," Madrid says. "Manufacturers need a strategic plan to get the biggest bang for the buck from their suppliers. Every sourcing decision should reduce inventory, scrap, and so on."
Arriving at that capability, however, isn't as easy as implementing a software solution and going live. Procuri also helps manufacturers institutionalize best practices across the enterprise to elevate buyers' capabilities. The result is the ability to determine how to select the best supplier, pick that supplier, and then track its performance to ensure the manufacturer receives the type of performance it expects, Madrid says.
Sun Microsystems, for instance, has achieved notable results using Procuri's TotalSource solution. In fact, Procuri received Sun's Meritorious Supplier Award this year—an accolade to suppliers that go beyond expected performance.
Sun's estimated cost savings were $35 million, but in using TotalSource, as well as Procuri's strategy expertise, Sun was able to surpass that expectation and achieve $102 million in cost savings, says Joe McGrath, director, WWOPS Procurement & Operations Strategy Team at Sun. This savings—coupled with the fast, successful migration from a previous provider's solution—reduced Sun's overall costs and increased its sourcing competency, he says.
"Essentially, Sun's buyers significantly increased their capabilities," claims Madrid. "They now have improved abilities and skills to conduct sourcing and select suppliers. The buyers study the market and expect to save a certain amount of money through their sourcing decisions, but the results far surpassed their expectations."
Other companies have opted to follow the same path as PPG—that is, concentrating on spend analysis first. After all, as PPG's Polak puts it, it's nearly impossible to make improvements without better visibility and the ability to analyze spend.
"The best SRM decisions can only be made when a company knows who it buys from, how much it buys, when it buys, what it buys, and why," says Dennie Norman, business director for SRM solutions at business intelligence vendor SAS. "If a company wants to sit down with its suppliers and negotiate contracts, it needs a true picture of volumes and number of suppliers involved. The tricky part is that the needed data comes from ERP, procurement, quality, and a host of other solutions spread across the enterprise."
That data must first be aggregated, and subsequently cleansed before a company is able to move beyond visibility, Norman adds. The next step is looking beyond historical records to determine why events happened—which constitutes the analytical stage, Norman says.
"After that, they could do predictive analysis to factor in seasonality and promotions, 'what-if?' analysis to consider options, and other analytics to make better spend decisions," Norman says. "That way they can give more accurate projections to suppliers, plan appropriately, and further reduce costs."
SRM controls billions
That scenario has played out for several years at ABB, the Swedish supplier of power and automation technologies. ABB implemented SAS' SRM software in 2001. Today, it's used in almost all units within ABB, in roughly 100 countries, covering more than 75 percent of total spend to control billions in procurement, says Benny Östh, manager of ordering and shipping for ABB Power Technologies.
The spend-analysis capabilities in the SAS system give ABB a detailed picture of current procurement activity across ABB's international units. Orders are recorded or scanned into the system and automatically updated.
"Spend analysis is updated weekly," Östh says. "We see spend very early on as we record the orders, rather than as we receive invoices or agreements. As soon as we have agreed on a deal with a supplier, the projected spend is in the system, which gives us very fast and reliable insight to our business."
Almost all of the orders that different ABB units make are recorded into the system, which makes it easy to see procurement that is piling up. Consequently, ABB has a faster way to tell how much the corporation buys from various suppliers, so as to leverage better terms.
But it's not the system that yields better terms, but the knowledge gained from the system, Östh says. The knowledge must be combined with very clear procurement goals, a working strategy, and solid process management. The information the company gains from the SAS system allows it to glean more information about suppliers.
For instance, ABB can quickly determine the supplier of a certain item that's already qualified as a supplier to other ABB units, which reduces risk, Östh says.
"This [system] gives us a clear distinction between information and insight. Information is something you need to refresh often, and it gets old quickly. Hence, you have to make sure that it's very easy to replenish," Östh says. "Insight is the understanding you've developed over time and history. You need both to be the winner in the battle of tomorrow."
More than $10 billion saved
09/01/2006
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