The savings chase
Is SRM about impacting price, or streamlining the process?
By Dave Turbide, Contributing Editor -- Manufacturing Business Technology, 11/1/2002 7:00:00 AM
Manufacturing companies have been chasing cost savings since the industrial revolution brought workers into factories equipped with powered machinery. Automation has attacked the labor content to the point where, in most industries, labor is a relatively small contributor to product cost. That leaves purchased parts and materials as a target for new cost saving initiatives, which has companies including AMETEK Power & Industrial Products addressing what's become known as supplier relationship management (SRM).
"We believe the best way to achieve lower costs and inventory levels is to improve collaboration with our suppliers," says David McGinley, vice president of finance at AMETEK. The Wilmington, Mass.-based maker of electronic instruments, engine sensors, and condition monitoring equipment for turbine generators recently purchased the SmartHub/SRM system from Bellevue, Wash.-based Entomo to help AMETEK gain more control over the procurement side of its business.
"We expect the Entomo system to have an immediate impact on our procurement processes," adds David Zapico, division vice president and general manager. The company currently is in the process of consolidating materials planning and purchasing across six locations, creating a single point of view from disparate systems.
SRM encompasses much more than simple purchase order release and vendor performance measurement. Just as customer relationship management (CRM) grew from order entry to a comprehensive suite of applications aimed at effective management of the entire customer relationship, SRM takes the same approach on the supplier side.
"Procurement represents 40 percent or more of the cost of goods sold in most companies," says Nima Bakhtiary, president and COO of supply chain software developer RiverOne, which includes SRM in its product offerings. "The focus of cost-savings efforts today is on the procurement process itself, and not so much on the price paid to the supplier," adds Bakhtiary.
And that makes this current focus much different from what was done in the past. Over the years, companies have pushed suppliers to reduce costs and prices, sometimes to the detriment of quality or delivery performance. SRM, unlike the earliest incarnations of e-procurement systems, offers a range of functions that focus on developing mutually beneficial business relationships that nurture reliable, flexible supply chain partnerships. The tighter and more complex those relationships become, the more potential there is for SRM to bring major benefits.
Evolutionary path
It's not that procurement has been ignored in the rush to automate processes and reap cost savings. Virtually all enterprise resources planning (ERP) systems, and manufacturing resources planning before that, have included purchasing functions, but these modules often do little more than release purchase orders (POs), coordinate receiving with the inventory application, and pass invoices to accounts payable.
"Early purchasing applications as part of enterprise systems are generally clumsy," says Frank Prestipino, a vice president at Redwood Shores, Calif.-based enterprise suite vendor Oracle Corp., which offers SRM software. "With little or no real management capabilities—just transaction handling and basic measurements—there was little or no beneficial gain in this functional area. Without changing basic processes, adding automation tools was equivalent to putting lipstick on a pig."
Prestipino believes that self-service is one of the keys to a new paradigm in procurement. "The traditional approach is to keep all of the procurement activities in one place—in a separate department. Every requisition, PO, approval, everything goes through that one choke point. Adding efficiencies in the purchasing department didn't solve this problem. Automating the process, and distributing it throughout the company, breaks the bottleneck. Use automation to handle the basic tasks, use it to route issues to purchasing that need attention there—approvals over a certain level, for example—then you have the ability to measure and manage the process."
RiverOne's Bakhtiary recommends different approaches for different types of procurement. "One goal is to automate what the buyers are currently doing manually, but you have to redefine the process to get full benefit," he says. "Separate out the high-volume purchases from the low-volume purchases. For high-volume, you can automate quite extensively—eliminate the purchase order altogether. The process can be made quicker, with less management required, and with a lot less paper involved."
Enhanced procurement processes also can lead to higher revenue opportunities. "The supplier can offer to take care of the procurement, and also can deliver [drop ship] direct to the end-customer. He then becomes more like a contract manufacturer. In a multi-tier procurement situation—a supply chain—the OEM controls the cost, but the contract manufacturer controls the execution." Bakhtiary views SRM as the inverse of vendor-managed inventory (VMI). "This is a one-to-many connectivity situation," he says. "Suppliers are all different—with different systems—and many might not have the infrastructure to handle direct connectivity. That's where the Web comes in. All a supplier has to do is sign on to the Internet and it can fully participate."
When asked to summarize the state of the SRM market, Ann Grackin, a vice president with Boston-based analyst firm AMR Research, comments that "the ERP suite vendors that have taken an interest in SRM have generally extended their procurement management functionality and complemented it with analytics. The specialty vendors, on the other hand, see SRM as comprising three levels of management: strategic sourcing, sourcing management, or the operations [transactional] side. They differ in the emphasis they place on each of these areas."
SRM components
Strategic sourcing is the process of locating vendors for direct materials, establishing working relationships with them, and managing those relationships. The intention is to build long-term relationships with these suppliers that are good for both parties; in other words, not just focused on price or a single requirement. Measurements and analytics monitor contract performance and compliance with agreements and terms.
Sourcing management includes all of the tasks that are involved in managing the "spend," and managing deals on a day-to-day and month-to-month basis. Once the mechanisms are put in place to automate as much of the buying process as makes sense, management tools provide reports on purchases by commodity or spend category, item, department, project, or business unit. Measurements monitor contract compliance (volumes and prices, lead times, and quality) and watch for so-called maverick buying—purchases that bypass the formal system and therefore do not take advantage of pre-negotiated discounts, terms, or authorized suppliers.
On the operations side, SRM enhances and expands the transactional tools provided by typical ERP systems. Workflow automation enables distributed purchasing authority and relieves the purchasing department of much routine paperwork. Measurements and analytics enhance the control and visibility of purchasing operations.
Each vendor, of course, has its own names for these functions and its own groupings and hierarchy. Analyst firms, too, have published their views of the emerging world of supplier management. Many are looking beyond the features and functions of the software and emphasizing that "SRM doesn't come in a box—it is a way of doing business better," as stated by Stamford, Conn.-based analyst firm Gartner in an April 2001 report titled "Enterprises Drive Competitive Advantage through SRM." Aberdeen Group, a Boston-based analyst firm, emphasizes "deep commodity expertise and market intelligence" as being as important as monitoring and analytics, according to Tim Minihan, Aberdeen's vice president of supply chain research. In fact, Aberdeen rejects the SRM label as being too focused on the technology. Instead, it uses the term Total Cost Management to describe a technology infrastructure framework supplemented by proven supply chain strategies and market intelligence.
Rule of the tool
There's an old adage that says, "If you have a hammer in your hand, the whole world looks like a nail." Accordingly, solutions providers will emphasize the types of solutions and the areas of business that they know the best.
ERP vendors that have evolved into collaborative enterprise suite vendors naturally start from the transaction management area and expand the functionality of their procurement offerings from that direction. The approach of specialty SRM vendors also tends to reflect their roots.
Philadelphia-based ICG Commerce, for example, started out as a consultancy and developed hosted SRM software as a way to leverage its staff and offer additional value to existing customers. "ICG's model goes far beyond sourcing and is predicated on helping customers identify and realize savings, and continuously improve," says Keith Hausmann, the company's vice president for sourcing and category management. "We believe that both tools and expertise are essential to generate measurable and sustainable savings."
Jeff Hermann, CEO of Bedford, Mass.-based SRM supplier SupplyWorks, emphasizes that an SRM system does not replace the purchasing module of an ERP system, but rather works with it to bring additional management functionality to procurement activities. "Think of SRM as a layer on top of ERP—a bolt-on, if you will—that can provide unified management of systems across multiple plants and multiple system types. We use the ERP purchasing system basically as a database, and part of the interface between our software and the rest of the ERP system."
Scott Wilkerson, a vice president for Commerce One, a Pleasanton, Calif.-based vendor in the SRM space, notes that while ERP addresses purchasing as part of automated transactions and business processes, the focus of ERP is internal. Even with SRM, he adds, the focus may be of a more tactical nature. "There are two kinds of customer looking at SRM: those still looking for process improvement and cost savings, and those that are trying to push the limit and really understand strategic sourcing and what it can do for the company," he says. "We obviously think the biggest opportunities are with the latter attitude. SRM is a very strategic area of business that is central to speed-to-market, quality, price, and competitiveness."
Evidence that SRM solutions can manage complex relationships is seen in the experience of The 21st Supplier, a Torrington, Conn.-based supplier of SRM services for companies that want to focus their attention on their top 20 suppliers and let someone else manage the rest. "It's the 80-20 rule," says business unit leader Bill Lindquist. "After you do a Pareto analysis and identify your top suppliers, you contract with us, and we are like a single supplier for the rest of the materials and components you need."
The 21st Supplier uses SupplyWorks' SRM software to enable collaboration between a manufacturer [i.e., the buyer] and its suppliers. The system integrates with the buyer's ERP system, and buyers and suppliers can look at the same screen at the same time, inputting dates and quantities and developing a supply plan together. In many cases, trusted suppliers can take over this process completely. "The SupplyWorks software absolutely determines what we are able to do for our customers," says Lindquist. "It is the mechanism we use to deliver the services we offer."
| Who's inside | ||
| Commerce One www.commerceone.com | Covisint www.covisint.com | Entomo www.entomo.com |
| FreeMarkets www.freemarkets.com | Oracle Corp. www.oracle.com | RiverOne www.riverone.com |
| SupplyWorks www.supplyworks.com | The 21st Supplier www.the21stsupplier.com | |
