A farewell to 'buy-side'
Solutions that stress collaboration and strategic sourcing suit users such as Sun Microsystems
By Marty Weil, Contributing Editor -- Manufacturing Business Technology, 2/1/2001 7:00:00 AM
When you talk to the major vendors in the market space formerly known as buy-side procurement, the strongest consensus you find among them is an agreement that traditional buy-side procurement solutions no longer meet the evolving demands of today's manufacturing marketplace. Top-tier vendors like Oracle Corp. and i2 Technologies-as well as rising stars like BlackHog, Rapt, and Webango-indicate that, as on-line procurement has gained momentum over the last 18 months, the traditional buy-side/sell-side paradigm used to describe procurement solutions has gone the way of Tyrannosaurus rex.
Market forces have driven development of more nimble, intelligent, and collaborative procurement solutions that add value to procurement within the manufacturing enterprise. In this dynamically changing environment, the idea of implementing an on-line procurement solution merely to reduce the costs of indirect goods is buried in the dust like old bones. Collaboration and strategic sourcing are today's high-flying procurement ideas-and, with leading companies in varied markets like Sun Microsystems and PRI Automation adopting these solutions and achieving powerful results, we're likely to be hearing about them for a long time to come.
Welcome to the evolution
"When people talk of buy-side procurement, I think it's a misnomer-at least in the space we deal in, which is direct materials," says Jeff Donnelly, president and CEO of Sunnyvale, Calif.-based BlackHog. "In this space, procurement really is a collaborative process between buyers and suppliers."
Based on this conclusion, BlackHog has developed a collaborative procurement system designed to provide benefits and functionality to both buyers and suppliers, while also facilitating communications between them.
Donnelly contrasts BlackHog's solution with traditional buy-side solutions, which, he says, are typically extensions of an enterprise application.
"For example, you might have an ERP [enterprise resources planning] system and get a 'buy module' to automate your buying activities," he says. "The real problem with that-according to what we hear from our customers-is that these solutions do not give good tools to the suppliers for organizing their information. Typically, they're set up just to have suppliers respond to the requests from the buying organization. The flip side of this is sell-side solutions. These allow suppliers to automate the selling of their product, but without tools for buyers."
According to Donnelly, BlackHog has looked at the relationship between buyers and suppliers "from the middle out"-allowing them to collaborate and communicate more effectively and migrating out to the point where the solution can integrate with the legacy systems of both buyers and suppliers. "So it's a whole new type of application built from the ground up to reside on the Internet," he says.
Christopher Houck, director of solutions marketing for Dallas-based i2 Technologies, sees e-procurement taking an evolutionary path. "Over the past year, we've really seen the emergence of companies doing more with the Web in terms of procurement, and they're doing it differently than it was done at the outset," he says. Houck notes that the early buy-side hype, centered on the purchasing of non-strategic indirect goods, has faded as on-line procurement has matured. He also believes that the procurement model is changing as companies move to buying strategic and direct materials.
"The original solutions mirrored B2C [business-to-consumer] paradigms, in which users would browse and buy with some purchase order approval required. But with strategic and direct goods, the demand is for higher levels of integration with enterprise systems, allowing buyers to take action like calling off against contracts, rationalizing spend, and automating replenishment."
John Proverbs, director of product marketing at Santa Clara, Calif.-based Webango, sees the buy-side category entering what he calls the third wave of development.
"The first wave was really the automation of internal transaction processes, the idea of SAP and the ERP space," he says. "Then the focus shifted to automating transaction processes across borders over the Web, by which Ariba and Commerce One established themselves as leaders. Now we're into the next step-the third wave-which is being marked by two principal developments: the advent of exchanges and marketplaces, and the emergence of strategic sourcing."
Proverbs concurs with Donnelly in citing the emergence of collaboration between buyers and suppliers as one of the defining characteristics of this third developmental wave.
"The marketplace is changing as well, in that companies aren't looking for a one-off solution-an auction, an RFQ, a tool that solves a short-term, one-time need-but rather are seeking procurement solutions that solve multiple business problems simultaneously as opposed to having lots of little solutions," Proverbs says.
According to Proverbs, strategic sourcing solves issues of selection, contracting, contract management, supplier relationship management, and performance across a long life cycle to create sustainable competitive advantage.
"The whole notion of procurement has become increasingly strategic in all organizations," says Ben Kiker, a vice president at San Francisco-based Rapt.
"The reason for this is the tremendous amount of risk in procurement activities. Businesses recognize this. It's getting the attention of executives, who are quickly coming to understand that it's not good enough to simply automate buying processes to improve efficiencies. The greater need is to proactively identify and mitigate risk."
Intelligent procurement
Kiker describes the evolution of procurement in terms of the development of layers.
"Ten years ago, companies were making huge investments in the transaction layer [i.e., ERP and databases], aggregating those to one area," he says. "Over the last five years, that investment has shifted to the workflow layer-areas like supply chain management [SCM] and customer relationship management, involving companies like i2, Oracle, and Siebel. Now the shift is to the intelligence layer, and that is what Rapt is focused on."
According to Kiker, the intelligence layer does not deal with the mechanics of transactions, but rather, "gives you the intelligence you need before you make the big bets.
"Over the last 10 years, buy-side solutions have been implemented to fix the process inefficiencies in the procurement process, but the real value is at the top line," he continues. "How do you balance supply and demand without leaving money on the table and giving up market share?"
Kiker cites Sun Microsystems, Palo Alto, Calif., as a good example of how this new approach to procurement is implemented. The complexity of Sun's product line has grown exponentially with the explosion of the Internet. Today Sun has 228 products that share 209 individual components-and all of those are interlocking, in that each one of those components could be used by up to 50 of those products.
"What's happened over the last few years is that, while everyone has been thinking it would be easy if you could reduce your product line down to three products, the opposite has in fact happened," Kiker says.
At Sun, there is a group of 15 planners focused only on those components [e.g., DRAM, power supplies, processors]-that are hard to procure, with long lead times and high erosion rates that can negate the delivery of their products. "In this environment, you have to make your bets months in advance of demand," says Kiker.
Sun has implemented Rapt's solution to help devise optimum buying plans for those components and products, according to Kiker. "What we do takes into account the law of diminishing returns," he says. "We find the point on the curve where spending more yields less."
In doing so, Rapt helps Sun determine the optimal buying plan by which it can capture the most amount of revenue from its customers with the greatest amount of product availability-yet minimize the potential amount of write-down it may have to take from obsolete components and parts. The return realized by Sun as a result of this planning process is impressive.
"They're seeing a $30-million improvement per quarter-total cash flow improvement," says Kiker. This means that Sun sees benefit not only in revenue capture-achieved by being able to increase total availability of products when customers want them-but also in margin improvement, by being able to write down less inventory.
Sean Rollings, a senior director of applications marketing at Oracle Corp., agrees that the provision of intelligence is key functionality in new procurement offerings. "One of the real advantages we see in our Internet Procurement offering is in the purchasing intelligence functionality that allows companies to transform purchasing agents from clerks to more strategic decision makers," he says. "Purchasing intelligence gives the procurement professional access to analytic data on the purchasing process that can be analyzed in real time to eliminate inefficiencies and respond to market conditions."
The right domain
PRI Automation's implementation of BlackHog points to another trend in this evolving segment: companies are looking beyond technology to vendor domain expertise. Mountain View, Calif.-based PRI produces complex robotics and wafer-handling equipment for semiconductor manufacturers.
"A lot of changes go on during the course of production, so one of the challenges we have is to improve delivery and quality while driving down costs," says Robert de Neve, vice president and general manager of PRI's OEM Systems division.
PRI specifically looked for a procurement package that could help it manage change. After reviewing a number of packages, it decided to use BlackHog's hosted solution.
"One of the things that attracted us to BlackHog was that its management team had excellent domain knowledge of our industry," says de Neve. "There are a lot of changes going on at any given time in our market, and controlling those changes while improving communications to the supply base for prototypes, pre-production, and production units is essential. BlackHog understood this."
After using the system as a beta site for nearly six months, PRI is starting to see benefits.
"First is the efficiency of our purchasing department," de Neve says. "Because of the efficiencies attainable through BlackHog, we'll be able to double our size and only have to add one or two new employees to purchasing."
De Neve also notes that the system is helping the company realize time-to-market improvements.
"We need to get our design into the OEM's factory, so prototyping and preproduction are critical," he says. "BlackHog helps us achieve our goals by being more efficient, faster, and more accurate. I see the solution as a communications tool more than a buy-side procurement system."
Proverbs believes that strategic sourcing providers face three key issues:
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Fragmentation. Buyer and supplier tools tend to be disparate and fragmented across the supply chain. The ability to integrate with legacy systems is a key factor.
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Knowledge capture. Internal information is hard to consolidate, often isolated on desktops or in the heads of employees. Implementing internal best practices to share or leverage knowledge assets is important.
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Market intelligence and best practices. These are hard to capture from external sources, let alone to share and implement as benchmarks. Doing this is critical to gauging performance, however.
Proverbs contends that Webango's solution addresses these challenges. "By automating all internal and external processes associated with strategic sourcing, we're able to help companies transform from tactical to strategic sourcing quickly, improve leverage, and enhance employee performance," says Proverbs.
According to Proverbs, the ostensible buy-side market leaders-i2, Oracle, and SAP-are not engaged in strategic sourcing as he defines it. "They're formidable in the ERP and supply chain spaces, and there's no doubt they'll be looking to move into the strategic sourcing space," he says. "In my mind, what they provide today is complementary to the services we offer, in that they are extending their applications to provide sourcing functionality that we or other new providers may not consider central to our solution."
What this may portend is further consolidation, as the big fish look to swallow up functionality when they move more aggressively in the strategic sourcing direction. "We're rapidly moving forward with the rollout of procurement solutions," says i2's Houck. "And we're looking to partner with other companies that offer unique functionality."
Sourcing gains discipline
11/01/2001
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