Editorial from the October 2006 issue of Managing Automation

Sourcing Innovation(It Only Starts With Cost Cutting)

by Hallie Forcinio, Contributing Editor

Posted on Wednesday, November 15, 2006 12:52:25 PM                                     

The world of direct material sourcing and procurement has shifted. Replacing the traditional single-minded focus on cost cutting is a more holistic approach that considers quality, risk, and product innovation as well as cost.

"Cost savings are great, but what's really happening is a transformation to compete in a global economy," says Dan Willmer, vice president of spend management at Ariba Inc. (Sunnyvale, CA), a provider of spend management products, including tools for contract management and contract compliance, plus a contract workbench to help suppliers and buyers hammer out terms and conditions.

As a result, new emphasis is being placed on process optimization and collaboration both internally and with suppliers. "Execution is not enough," explains Patrick Scholler, director of the Procurement Competitive Edge Group at HP. "We need to go to the next step -- optimization -- not only within functions but across functions," he says.

There's also pressure to change how business is conducted because of compliance mandates, reports David Hope-Ross, senior director of procurement applications at Oracle Corp. (Redwood Shores, CA). With regulatory requirements in place like Sarbanes-Oxley and RoHS (the EU's Restriction of certain Hazardous Substances in electrical and electronic equipment), attention must be paid to creating the audit trails that ensure compliance.

Establishing the Odds

One highly regulated company, Ensign-Bickford Aerospace and Defense Co. (Simsbury, CT), a maker of weapons systems components, relies on software from IFS North America Inc. (Schaumburg, IL) to automate the tracking of material in and out of its facilities as required by various federal agencies. With the IFS procurement tools, the company also can assign incoming inventory and costs to specific projects.

"The software helps identify items used across multiple projects," says Trygve Ronningen, vice president of sales for IFS North America. Consolidating orders boosts volumes and expands Ensign-Bickford's buying power, since higher volumes generally mean lower prices.

To counter rising costs and price volatility, especially for energy, many manufacturers are turning to options-based contracts and index-based pricing. These types of negotiations can guarantee the supplier a certain level of business and the buyer a certain price or price range for a specific timeframe. It also overcomes some of the weaknesses inherent in traditional forecasting.

One company that has embraced this concept is HP, which has drawn on the methodologies of Wall Street to create a procurement risk management (PRM) solution that helps its managers make better decisions about future demand, supply, and pricing.

"PRM uses financial engineering to manage the uncertainty in the procurement process," Scholler explains. Five robust math and statistical tools in the homegrown PRM solution crunch numbers from hundreds of potential scenarios to determine the likelihood of various outcomes. Knowing the probabilities involved in any given scenario gives managers the confidence to make commitments to a supplier about volume levels and prices.

HP has filed five patents related to PRM and uses the software throughout the company. In 2005, the solution earned the firm a Supply Chain Innovation Award from the Council of Supply Chain Management Professionals. To date, it has saved HP an estimated $100 million on roughly 100 contracts with a combined value of approximately $10 billion. "Our question now is, 'Can it be adapted to non-procurement situations?' So we're looking at other applications in the company," Scholler says. HP has also incorporated the methodology into its services offerings, allowing other manufacturers the chance to test its benefits.

Page : 1 2 3   ... NEXT