Creating an electronic ordering system.

Thanks to innovative re-engineering and an online purchasing system, Liberty Mutual has cut its purchase orders in half and expects its total procurement costs to drop 19 percent.

A few years ago, Liberty Mutual took a hard look at its procurement process and decided it was far too cumbersome and costly. Now, thanks to improved processes and an electronic ordering system, the company has reduced cycle time in its procurement process by 99 percent and product pricing by more than 25 percent.

Like many other companies in the early to mid 1990s, Liberty Mutual, a diversified financial services company, moved to a strategic business unit alignment to enable each line of business to enhance its competitive position. But to really streamline purchasing, we had to reengineer our procurement process, an area that until a few years ago had not received much strategic focus. Here is how an investment of less than $500,000 in systems technology generated millions in savings.

Despite the reorganization along business-unit lines, the administrative departments were still centralized in 1993. Because we acquired products in bulk, all items were delivered to our centralized warehouse in southeast Massachusetts. To obtain supplies, our field offices placed four-part, written quarterly requisitions for "standard" items. Each field office had a large storage room to support the stockpiling of supplies made necessary by the long intervals between orders.

A team assigned to study the process found the purchase order, approval and payment process was cumbersome and costly. For office supplies alone, we used 15 to 20 suppliers. We issued hard-copy purchase orders to suppliers to replenish the warehouse and did a three-way match for receipt and invoice payment. Our product pricing was very competitive because we purchased in bulk. But our order, storage and redistribution processes incurred high administrative costs, long lead times and limited product choices. We never charged the units directly, because all costs flowed to the central procurement budget.

In light of this, the task force made six primary recommendations: Reduce the administrative costs of procuring and delivering products; improve product quality, choices and delivery times; charge users directly; reduce the supplier base; shift order process responsibility to the users; and eliminate storage space in the field offices and the central warehouse.

We assigned an implementation team to develop a front-end electronic data interchange order and payment system with appropriate financial controls and reporting, communicate the new strategy to Liberty's more than 20,000 employees and create policies and procedures to support the new processes. The team members included representatives from purchasing, information systems and administrative systems, financial-accounts payable, treasury and internal audit, as well as four members of our primary supplier. We planned to complete the project in 90 to 120 days. But first, we needed to overcome some major problems.

THE OBSTACLE COURSE 

Operating platform. Because Liberty operated in a Macintosh environment, there were no software products available that could serve as an appropriate front-end ordering system. And we needed to develop an application that would allow the electronic order and payment information to flow from Liberty's desktop environment to the supplier's mainframe environment, and back. Our solution was to develop a customized software program in-house.

Perceptions. Our end-users were not accustomed to paying for supplies. Under the original system, the corporate overhead allocation for supplies was charged only to the division level and was based on headcount, regardless of what an operation actually used. Therefore, the users had no incentive to be conservative in using supplies, nor were they aware of the cost. The decision to charge the units directly for actual usage meant that to many the "new" system would appear far more expensive than the old. But we addressed this issue in our training efforts, stressing the overall savings the project would bring.

Culture and credibility. Since the old requisition process allowed each office to place orders only quarterly, most requisitioned more than they needed to avoid running out of supplies before the next cycle. As a result, many divisions had very large stock rooms. Persuading them to eliminate or reduce these central storage rooms was very challenging. They also were not convinced a "stockless" program would let them obtain supplies when they needed them. But once we eliminated the old system, the electronic method was the only one they could use, and we made absolutely certain we delivered the products on time. Once users placed their first order and saw it arrive within 24 hours, most were won over.

Controls. Streamlining the process meant eliminating multiple written approvals. The financial department had to be comfortable with the planned controls, and the fact that they could be built into the system edits and function effectively. This also was a matter of time and demonstrating to finance the efficiency of the new system.

MADE TO ORDER

We built the direct order processing system in three separate phases. We finished the first phase (office supplies) within 90 days and implemented it in three weeks. It was a complete vertical integration, from the time a customer placed the order on his desktop through product delivery, invoicing and payment.

The second phase (office forms) took an additional 150 days of development time, but because the module mirrored the first so closely, we did not have to do any field training. We simply sent a message to all users to upgrade the system by downloading the software. From there, screen prompts guided the users. In the third phase (stationery), we distributed a brief training guide that instructed users how to upgrade the application again and use the new modules.

The system is a client-server application that allows users to place orders directly from their desktops. It uses software on the server end of the application to transmit orders to the appropriate vendors automatically. These orders are qualified using cost center validation tables and negotiated price tables before transmission.

When the vendors receive the orders electronically, they transmit them to the warehouse closest to the order destination. Printed products may take two to four days for printing and delivery, while others take just a day. After delivery, the vendor consolidates the invoicing and periodically transmits a transaction set to Liberty for processing. The billing frequency depends on the vendor. Liberty's expense processing system pays the invoice and allocates the actual expense directly to the ordering department.

Our vendors developed and maintain customized catalogs that they provide electronically to Liberty, reducing in-house administration. The system maintains contract pricing rather than list prices, so users know their actual costs before placing their orders.

The company can add multiple vendors or product lines to the system modularly, avoiding the need for multiple vendor systems in-house. By using a print preview function, users can view stationery product orders before actually placing them, avoiding costly input errors. The system also monitors divisions' usage and ordering trends, vendor performance and expenditure patterns for budgeting purposes.

For each product area - office supplies, forms and stationery - we consolidated our supplier relationships to one primary supplier. We negotiate national contracts on a wide variety of items to ensure a good selection. For items whose volume does not justify a specific price, we simply agree with the vendor to use their lowest available price. Therefore, buyers are not restricted from purchasing something they may need, even if it is not a "contract" or standard item.

We completely eliminated paper requisitions for these products, doing away with almost 25,000 requisitions a year for stationery products alone. Plus, we emptied the warehouse and converted stockrooms to office space wherever possible. In some field offices, we took advantage of expiring leases to downsize the office and eliminate extra storage space.

Also, we got rid of nearly 50 percent of the purchase orders the procurement area once processed. Since we do not need multiple approvals and signatures for these products anymore, we have reduced our administrative costs. The focus of our purchasing is on managing the strategic supplier relationships; we review the invoice only to ensure the vendor is complying with contract pricing. Now that we pay only one supplier for each product type and submit invoices electronically, our accounts payable area has been able to redirect resources, completely automating the payment cycle.

Excluding our savings from disposing of excess space, as well as our employees' time savings, we expect the program to reduce our overall life-cycle costs by approximately 19 percent. Within the first year, product pricing alone declined 11 percent. At the end of the second full year, savings are well ahead of original projections. The latest report forecasts savings will be 31.5 percent ahead of the original plan.

THREE IMPORTANT LESSONS

Many people in the organization initially did not believe we could meet our goals for reducing cycle time and product pricing, but we did. In the process, we learned some valuable lessons about guiding a project of this nature through the company.

Communication is critical. The system's success largely depended on the training sessions we held with every division coordinator to ensure they understood the system, how to use it, what the benefits were, and where we would derive the savings. Communication and training efforts should be ongoing, so if an employee handling procurement for an area leaves, someone else can fill in the gap.

Satisfy financial control issues early. The early involvement of the financial disbursement and internal auditing staff as key task force members was instrumental. Their willingness to weigh the risks of changing historical control levels and methods against the significant gains we could achieve from newer, but less centralized, controls helped the team leapfrog from incremental improvements to truly significant changes. For example, the number of signatures needed under the old system was based on preapproved dollar levels. The new controls presume a level of responsibility and competence at all levels and leave issues of abuse within the standard personnel policies. Liberty handles abuses in the procurement process as it would any other abuse of the corporate trust.

Avoid limiting your vision. When we first asked employees how they wanted the process to change, we did not get very far. People often define their expectations and desires by what they know is possible, so it is important to benchmark other companies' cuttingedge methodologies. Your vision of the future should not be limited by your perceptions of reality.

Ms. Michele J. Flynn is a principal at Expense Management Solutions in Southborough, Mass. She was formerly vice president and manager, real estate and administrative services, of Liberty Mutual Group and was part of the procurement re-engineering team. Her phone number is [phone], or e-mail her at [e-mail].