Sourcing gains discipline
Direct materials sourcing solutions become vital supply chain management apps for MSL, others
By Sidney Hill, Jr., Executive Editor -- Manufacturing Business Technology, 11/1/2001 12:00:00 AM
Manufacturers' Services Ltd., a $1.8-billion-a-year electronic manufacturing services provider based in Concord, Mass., has more than a dozen manufacturing facilities scattered around North America, Europe, and Asia that operate as individual profit centers.
These plants produce a wide variety of printed circuit boards for well-known companies such as IBM, 3COM, Palm, and Hewlett-Packard. But each plant employs the same method of evaluating and selecting component suppliers.
This standard supplier-screening process ensures that every Manufacturers' Services buyer—whether they are located in Charlotte, N.C., Valencia, Spain, or the Shenzhen region of southern China—always gets the best possible deal on each component purchase. And that doesn't mean just getting the lowest price.
"We rate suppliers based on the total cost of ownership," says John Boucher, vice president, global supply chain for Manufacturers' Services Ltd., which also is known as MSL. "That includes measuring them on a broad set of criteria, such as overall product quality, delivery performance, and the ability to support our business model."
That last factor is becoming increasingly important, not just for MSL, but for all companies that provide products and services to other businesses. "Our customers are constantly asking how we manage our supply chain," Boucher explains. "Specifically, they want to know how we leverage the information they give us about their products, which typically is a bill of material. We need to show that we can use that information to facilitate seamless business processes between our supply chain partners."
Streamlined processes
Such seamless processes, Boucher points out, lowers MSL's overall cost of doing business, which ultimately helps MSL's customers keep their own costs down. Mounting pressure to streamline supply chain operations in this fashion is fostering the growing popularity of strategic sourcing software, which is the form of technology that MSL uses to manage its vendor-selection process.
The strategic sourcing concept sprung from the e-procurement movement that started in the late 1990s, when companies like Ariba, Mountain View, Calif., and Commerce One, Pleasanton, Calif., introduced applications to automate corporate purchasing. The first wave of e-procurement systems focused primarily on the execution of purchase orders for office supplies and other "indirect" materials. In addition to speeding up such transactions, these systems gave procurement managers the ability to control costs by establishing and enforcing rules about who could purchase certain items, and which suppliers they could purchase those items from.
The next phase of e-procurement was dominated by systems that allowed companies to hold on-line bidding sessions, called reverse auctions, for production-related or "direct" materials. In a reverse auction, the buying company typically posts the items it wishes to purchase on an electronic messaging system that is part of a public or private trading exchange. Suppliers that have registered with the exchange then offer to sell those items to the buyer at specified prices. In most cases, the supplier offering the lowest price wins the business.
To facilitate these auctions, software vendors began developing applications that provided templates for building electronic requests for quotes (RFQs) and other documents commonly used in the buying and selling of direct materials. These vendors were the first to describe their products as strategic sourcing applications. They argued that these applications allowed buyers to turn sourcing into a strategic business process that included comparing multiple bids side-by-side and conducting live, on-line negotiations, thus securing the best overall deals. Many of these vendors also trumpeted the ability for both buyers and suppliers to acquire new trading partners via these Internet-based systems.
Wide-ranging benefits
Manufacturers of all sizes, and across many industries, are reaping substantial benefits from these various sourcing solutions. Danzco, a small manufacturer of custom equipment for the logging and mining companies in the Pacific Northwest, was able to sell off most of its production equipment and instead rely on subcontractors to make nearly all of its components after subscribing to an Internet-based sourcing service early this year.
The service, operated by an Atlanta-based company called ManufacturingQuote, offers much of the functionality found in a typical strategic- sourcing application. The service can be found on the Internet at MFGQuote.com. Buying companies get free access to the service, which provides RFQ templates that allow buyers to upload specifications and related documentation, including computer-aided design (CAD) drawings, to the MFG- Quote Web site. Qualified suppliers pay roughly $175 a month for the service, which allows them to review RFQs and post bids.
After discovering MFGQuote earlier this year, Ed Danzer, president of Danzco, quickly decided it would be his primary means of selecting subcontractors. "We are a very small shop, and we previously used only local suppliers," says Danzer, whose company is located in the town of Tenino, just outside of Olympia, Wash. "I would fax quotes to a number of local suppliers. Sometimes they would respond, and sometimes they wouldn't. In any event, I found it extremely difficult to get things done in a timely fashion. Now, I get anywhere from 20 to 50 bids on every quote I send out. And the local suppliers are a lot more responsive because they know they are competing on a national basis."
On average, Danzer pays 20-percent less for parts than he did before subscribing to MFGQuote, but he says the service provides more substantial benefits. "I have found some people I can rely on for regular sourcing of parts," he says, "so I don't have to do as much in-house. I used to have three full-time machinists. Now, I can get away with doing the machining myself for the small number of parts that I can't get through MFGQuote."
A supply chain issue
While stories like this are becoming more common as the use of strategic sourcing technology spreads, many industry observers believe they represent only a small portion of the value these applications can generate. The full value will become apparent, these experts contend, when more manufacturers follow MSL's example and begin viewing strategic sourcing as a supply chain management process.
"We saw direct materials sourcing as a supply chain issue from the beginning, back when Ariba and Commerce One first introduced their e-procurement systems," says Jeff Hermann, CEO of SupplyWorks, a strategic sourcing software vendor based in Bedford, Mass.
Hermann likens the sourcing of indirect material, most of which can be selected from standard catalogs, to shopping for consumer goods. "On the production side, people are not shopping," he says. "They are trying to synchronize the flow of incoming parts with their production schedules. That is a supply chain problem."
Hermann says SupplyWorks has a software package that contains everything a buyer/planner or commodity manager needs to address that problem. It starts with a set of tools for issuing purchase orders and tracking the flow of goods from the suppliers' warehouse through the buying company's production process.
The package also contains an Internet-based communications platform that allows buyers and suppliers to collaborate on component delivery schedules. The final set of functionality includes tools for rating suppliers' overall performance and for locating alternative suppliers if that becomes necessary.
"We like to compare what our applications do to what customer relationship management [CRM] applications have accomplished on the customer-facing side of the enterprise," Hermann says. "The CRM vendors have built a substantial market by focusing on all of the things that are involved in dealing with customers, not just on taking orders. We think we can do the same with suppliers."
The SRM concept
Other software vendors taking this expanded view of sourcing including Ariba, which recently introduced a package called Ariba Enterprise Sourcing that includes capabilities for establishing and enforcing enterprisewide supplier-selection programs.
Dallas-based i2 Technologies—the vendor from which MSL purchased its strategic sourcing solution—also has adopted the SRM concept. "Most of the industry looks at sourcing as improving the contract negotiation process," says Gayle Hayes, an i2 executive. "We have a more holistic view."
Hayes argues that strategic sourcing is just one facet of SRM, which she describes as "an end-to-end process" that begins with selecting the correct component suppliers as a new product is designed. It then progresses to the contract negotiation phase and continues through manufacturing and the rest of the product's life cycle. Along this continuum, Hayes says, a well-designed SRM program enables a manufacturer to monitor its dealings with suppliers to ensure that those relationships continue to deliver the value that the manufacturer expected when making its initial supplier selections.
Naturally, Hayes adds, i2 offers a SRM software suite that contains a set of applications to address all of these issues. It starts with a Product Sourcing module that allows engineers to enter the characteristics of the parts they need for a new product and get a list of existing components that meet that criteria, along with a list companies that supply those components. Hayes says this module lets engineers "define a bill of material to achieve optimal results based on the company's goals for a particular product."
The i2 suite also has a Strategic Sourcing module that Hayes says is best used by companies that have multiple facilities running on different business systems. Companies can identify exactly which suppliers they are purchasing components from, and how well those suppliers are performing. The suite also contains functionality for building RFQs and other documents used to negotiate contracts with suppliers, and contract management tools that ensure all transactions with suppliers adhere to contract terms."You can use these features to determine when you are scheduled to receive a price break based on purchasing volume," Hayes says. "This ensures that you are getting all the savings you anticipated from your sourcing program."
Monitoring progress
The i2 Strategic Sourcing module is the central tool behind MSL's vendor-selection program, which has helped the company cut its total number of suppliers from more than 1,500 to less than 500, and reduce its inventory by more than $100 million.
The MSL project started with a supplier rationalization process that in effect identified all the suppliers from which its various units were purchasing components. This was done by feeding information on all components purchased at each MSL facility into the i2 sourcing module, which generated master lists of both components and suppliers.
In some cases, Boucher says, MSL found that two or more of its units were purchasing the same parts from different suppliers. The next step was loading the approved vendor lists that MSL received from each of its customers. Any duplicate suppliers that didn't appear on a customer's approved vendor list were immediate candidates for dismissal from MSL's list.
Before purging any suppliers, however, MSL used the scorecard features in the i2 suite to rate all suppliers' performance. "In some cases, we were able to tell our customers that we could lower the supply chain's total cost of ownership by purchasing a specific component from our preferred supplier, rather than theirs," Boucher says. "the scorecard gave us the data to support that conclusion."
Enforcing standards
Once the supplier rationalization was done, MSL was ready to institute its new sourcing process, which actually begins with MSL listing preferred suppliers in the quotes it sends to prospective customers. "This enables our customers to include components from our preferred suppliers in their original designs," Boucher says.
When MSL wins a job, the completed order first goes to a quote-management team at corporate headquarters. From there, the order is sent to a master production scheduler at the facility that is assigned to fill the order. The scheduler then loads the order into the local facility's enterprise resources planning (ERP) system, which is linked to the i2 SRM suite back at corporate headquarters.
Through this link, global commodity managers can impose restrictions on who individual buyers purchase components from, as well as the prices they pay for those components. "We set the standard cost in their ERP system, and they can't go above that without authorization," Boucher says. Having the i2 system linked to all of the local plants also allows individual buyers to canvass the other facilities for any excess inventory that could be used before they begin executing purchase orders for new components.
This is just one of the many supply chain management features that MSL has gotten from the i2 SRM package. Others include the ability to take a list of part numbers provided by a customer and immediately find the appropriate suppliers for those parts. Boucher says i2's massive parts database, along with some unique search capabilities, make that possible. "Previously, when we took a customer's part number, we had to create an interim in-house number that we could keep track of and then find a way to link both of those part numbers to the actual manufacturer's part number. Now the system can track both the customer's part number and the manufacturer's part number, and we don't have to do any translation in between."
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Ariba
www.ariba.com |
Commerce One
www.commerceone.com |
i2 Technologies
www.i2.com |
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ManufacturingQuote
www.manufacturingquote.com |
SupplyWorks
www.supplyworks.com |
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