Using the Internet to Streamline Direct Procurement.

Web-based systems allow OEMs and their EMS partners to collaboratively purchase goods cost effectively whenever needed.

Today's Net-speed economy is forcing electronics manufacturers to find innovative ways to streamline operations and cut costs. Fortunately, in addition to raising the competitive stakes, the Web allows companies to gain unprecedented operational efficiencies, including strategic advances in direct procurement.

Direct procurement--the acquisition of goods used for production or trade--can represent as much as 80 percent of a manufacturing company's costs. Many companies have implemented Web-based procurement systems for indirect materials (see sidebar) and now want to use the Internet to automate their direct procurement operations. Promising even greater operational and cost benefits, Web-based systems with intuitive user interfaces enable companies to streamline direct procurements, thereby creating and sustaining long-term competitive advantage.

A New Ball Game

In the past, original equipment manufacturers (OEMs) could fairly accurately project the number of units expected to be sold, knowing the sales of previous models and the market penetration of competing products. Using this data, they would decide the number of units desired, define specifications for components and choose suppliers that submitted the most competitive bids.

However, today's extremely short product life cycles have rewritten the rules of the game. Competing products can emerge overnight, making customer demand impossible to gauge. This demand uncertainty is forcing OEMs to embrace new procurement methods to remain competitive, with electronics manufacturing services (EMS) providers having to follow suit.

OEMs now must be able to respond dynamically to demand and are expecting their component suppliers to do the same. For example, instead of ordering a set level of 10,000 boards, OEMs are developing prenegotiated contracts with prequalified suppliers. They then submit orders right at their moment of need, typically in smaller volumes at more regular intervals.

Just as product life cycles are shortening, this new environment is also shortening procurement cycle times. As a result, manual processes relying heavily on phone and fax are no longer viable. Today's increased speed of business demands increased speed of communication between buyers and suppliers, with the Internet providing real-time data exchange.

New Tools for the New Economy

For years, companies have attempted to streamline supply chain operations through use of advanced technologies. However, solutions to date have yet to hit the mark. For example, companies have gained internal efficiencies by improving planning and purchasing operations with enterprise resource planning (ERP) systems and advanced planning and scheduling (APS) technology. But these systems fail to automate processes across the entire supply chain. Cross-enterprise systems such as electronic data interchange (EDI) improve data sharing across the supply chain, but at a high cost and by relying on a relatively inflexible format for data exchange.

Instead, a system is needed that runs on existing infrastructures, supports real-time data exchange, has a low entry cost and provides flexibility to manage process changes as they occur in the supply chain. Sound like a pipe dream? Not any longer, thanks to advancements in Internet technologies.

Today's Web-based systems allow partners to efficiently handle direct procurement operations collaboratively (Figure 1). The systems streamline procurement by providing partners with an automated framework for materials forecasting, request for quotes, reviewing bids, negotiating contracts, shipping and invoicing. Users access the systems through standard Web browsers, with the data sent securely over the Internet. No additional networking or computing equipment is required.

For partners with more advanced computing operations, the buyer and supplier can easily integrate their back-end systems to support real-time data exchange. Partners with more basic infrastructures simply log in to a buy-side portal to complete procurement tasks. In both scenarios, the Web-based system speeds purchasing transactions and boosts productivity.

Significant Operational Benefits

Web-based direct procurement systems let supply chain partners gain new levels of operational efficiency, productivity and cost reduction, including the following benefits:

* automation of workflow reduces lead times and errors, allowing parties to focus on value-added activities that contribute to profitability

* enhanced partner collaboration and information exchange prevent supply bottlenecks, reduce the amount of material in the supply chain and improve service levels

* lower buffer stocks let companies save dramatically on inventory costs

* faster procurement cycles shorten cash-to-cash cycle times

* key performance indicators (KPIs) and real-time global visibility of procurement activities allow partners to make highly informed purchasing decisions.

Best of all, manufacturers can gain these benefits without changing their processes. The systems adapt instead to varying operational needs, even allowing procurement methodologies to differ for each required component or individual supplier. For example, an OEM might provide inventory visibility to one strategic supplier, while implementing automatic ordering of a low-value component with another.

A company might also choose to automatically send purchase orders to suppliers, but review any purchase order of more than $1 million. Similarly, a supplier might want to review its system response before sending it to the buyer whenever the bid involves a lengthy shipping delay.

By using the Internet and adapting to process changes, Web-based direct procurement systems provide a low, ongoing cost of ownership. Standard Web browsers also make the systems easy to use, while supporting rapid partner integration.

Strategic Support

Powerful direct procurement systems will streamline data exchange and deliver additional strategic benefits. However, not all systems are equal.

In addition to streamlining orders, Web-based systems offer manufacturers a global view of supply-chain activity. This critical data enables them to prevent stock-outs and avoid potential bottlenecks. The streamlined operations ensure their capability to meet demand and even allow them to pursue additional revenue opportunities.

To reap the greatest benefits, Web-based systems must provide a collaborative environment for both buyers and sellers. This framework will result in more efficient supply chains, providing all players with cost savings and new business opportunities.

Another benefit is performance measurement. If one key component is not available at product build, the expedient arrival of the other components becomes irrelevant. To avoid this scenario, advanced direct procurement systems will let companies track the reliability of their suppliers and make strategic purchasing decisions based on the resulting data. For example, if a supplier regularly misses shipping deadlines in the fourth quarter, a buyer could then select a different supplier during that period or take other actions to ensure the shipment arrives on time.

Manufacturers wanting to reduce their supplier base can also use KPIs to select premier suppliers based on their strong historical performance. Because Web-based direct procurement systems track each action across the supply chain, they can comprehensively measure supplier responsiveness.

Because direct procurement can account for most company costs, it also offers a golden opportunity for operational improvements. By moving direct procurement activities online, companies gain a global view of activities across the supply chain. Partners can then work together to further refine operational execution, with the direct procurement system easily accommodating any process changes.

The complicated and strategic nature of direct procurement demands a highly sophisticated Web-based system. To select a winning system, expect vendors to respond with a "yes" to the following questions:

* Can many partners be easily integrated into the system?

* Can a new partner quickly learn to use the system?

* Does the system provide global visibility of all procurement activities?

* Can processes be easily modified as they change on an individual supplier basis?

* Does the system support straightforward integration of buying and supplying back-end systems if desired?

* Does the system allow partners to view inventory levels?

* Does the system support automatic ordering and material forecasts?

* Is shared system management in place to support large-scale growth?

* Does the system support any number of notifications, alerts and rules based on predefined conditions?

* Are comprehensive performance analysis tools integrated into the system?

Conclusion

Global visibility plays a critical role in advancing procurement processes. By merging all procurement activities into one system, manufacturers can see the big picture and, consequently, immediately recognize potential problems. Instead of handling procurement through disjointed EDI, e-mail, and phone and fax operations, all communications are routed through a common buy-side portal. As a result, manufacturers can track the sourcing of all components from a single point, even setting alerts to receive advanced warning of supply problems. Due to the high costs of direct procurement, even a marginal process improvement would substantially boost a company's profitability.

Jeffrey Lawrence is director of supply chain strategies at Exemplary Software, Cupertino, CA;

Direct Procurement Challenges Exceed Indirect Demands

Many companies are already using the Internet to source indirect materials, those materials used for maintenance, repair and operations (MRO) as opposed to production. However, few companies have implemented systems to automate direct procurement. Why the disconnect? The sourcing of direct materials is infinitely more complex and strategic than that of indirect materials.

For example, if a company runs out of pencils, they can rely on their supply of pens or go to a local office supplies store. If the same company runs out of a key product component, they cannot ship the product to their customer, directly impacting their bottom line.

Simple e-commerce sites often meet the needs of indirect procurement. A purchaser goes online, adds items to a shopping cart and checks out. While a specific supplier may offer lower prices based on special relationships or volumes, similar conditions could easily be arranged with a large number of other suppliers.

However, when purchasing direct materials, buyers and suppliers often enter into extensive negotiations based on quantity, pricing and delivery dates. Certain materials will only be available from select suppliers, and all of the materials are critical to delivering a final product to a customer. As a result, direct procurement systems are inherently more complex than indirect procurement systems. Each order involves multiple steps, including materials forecasting, request for quotes, reviewing bids, negotiating contracts, shipping and invoicing.

Fortunately, advances in Internet technologies are now letting companies leverage the Web to also streamline their direct procurement operations, thereby promising exceptional efficiencies and cost savings.