e-Sourcing Today

A Perspective on the Role and Scope of e-Sourcing and the State of the e-Sourcing Marketplace

Today we are going to discuss…

Agenda

Importance of Purchasing Decisions

Strategic Sourcing vs. e-Sourcing

Describe the e-Sourcing Marketplace

Business Case: Merrill Lynch

e-Sourcing Lessons Learned

Taking e-Procurement Globally

Importance of Purchasing Decisions

Purchasing decisions directly effect a company’s bottom line, pressuring companies to continually enhance procurement operations

Significant Impact of Purchasing Decisions

Purchasing decisions critical to corporate

profits

Purchasing decisions

increasingly complex

Economic pressure to lower costs

Changing consumer and corporate

buying patterns

Fortune 1000 spend on external

suppliers = $3.5T1

1Goldman Sachs. Technology: B2B Software 2/23/2001 Source: Goldman Sachs, Stephens, Inc., Deloitte Consulting

Source: Deloitte Consulting. Realizing the B2B Procurement Vision: Trends, Challenges, and Best Practices in e-Sourcing and e-Procurement 2001

Improved Procurement

Improved Customer Service and Satisfaction

0 20 40 60 80

56

54

% O

F R

ES

PO

ND

EN

TS

WIT

H “IM

PO

RT

AN

T

OR

VE

RY

IMP

OR

TA

NT

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LE

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ED

64

65

77

77

78

79

77

Improved Customer Relationships

Improved Supply Chain Performance

Improved Information/Reporting

Revenue Growth

Improved Supplier Relationships

53

New / Differentiated Service Offerings

Strengthen Existing Competencies

Reduce Overall Costs

Improving Procurement Operations

A recent Deloitte Consulting study revealed that improving procurement operations continues to be a top priority

e-Procurement is rapidly becoming a required set of business practices

92% of respondents to Deloitte Consulting’s procurement survey said they have implemented, are implementing or plan to implement an e-Procurement solution

Companies targeted indirect goods and services categories for e-Procurement

These categories offer quick benefits with little risk

Source: Realizing the B2B Procurement Vision: Trends, Challenges, and Best Practices in e-Sourcing and e-Procurement, Deloitte Consulting, 2001

Strategic Sourcing Defined

Procurement operations can be improved by focusing on either Strategic Procurement or Operational Procurement processes

The Procurement Process

Source: Deloitte Consulting

Instead of awarding a bid to the lowest cost supplier, strategic sourcing calculates supplier value to the purchasing value chain

Strategic Sourcing Value Drivers

Redesigned processes (order, purchase, consumption)

Build new alliances / partnerships / out/in-source

Consortium buying

Consolidation of spend and vendor base

Improved negotiations and contract

Use of component-based pricing

Develop pricing standards and “rate cards”

Standardized specifications and value engineering

Understanding business requirements and needs

Enhanced compliance to standards

Increased Leverage

Uniform Pricing

Reconfigure Specifications

Partnerships / Alliances

Source: Deloitte Consulting

Reduces the total cost of ownership through:

• Consolidation of spending and vendor base

• Product standardization

• Partnering for volume discounts and improved negotiations

• Procurement and vendor process improvements

Improves supplier relationships and purchasing processes

Considers and compares factors other than price in purchasing decisions:

• Supplier reputation

• Production capability

• Delivery schedule

• Product quality

Improves the overall performance of a company’s value chain

Requires considerable resources, time and capital to manage and execute

• Process is manual

• Tracking and success measurement is manual

• Typical sourcing project takes 3-7 months

Logistical and reporting requirements steal time from value-add activities, e.g., market research

Difficult to share / analyze information and optimize decisions

• Data collected in several repositories

• Tools not designed for sourcing analysis

• SME’s geographically scattered

Difficult to maintain and leverage institutional knowledge

• Knowledge deteriorates over time and personnel changes

• Requires archiving and sharing

Benefits Challenges

Strategic Sourcing Challenges

Although strategic sourcing confers benefits, it has challenges

Source: Deloitte Consulting

e-Sourcing Defined

e-Sourcing tools are evolving to support the entire sourcing process (more than just on-line auction tools)

Sourcing is not a one time deal…e-Sourcing tools can help to institutionalize the process across an enterprise

Many companies who have implemented e-Procurement tools are realizing that hard dollar savings are linked to sourcing agreements

Many companies who are considering e-Procurement recognize that real ROI is dependent on combined e-Sourcing and e-Procurement initiatives

Emergence of e-Sourcing

Automation of transactional activities helps purchasing professionals to focus on strategic supplier relationship management

Source: Deloitte Consulting

e-Sourcing enables the sourcing functions of the purchasing process

SpendAnalysis

SupplyStrategy

RFXNegotiation,Contracting

OrderPlanning

OrderExecution

SupplierMonitoring &Improvement

Purchasing Process

Analytics and Optimization

Virtual project workroom

eRFx: RFI, RFQ, RFP

On-line negotiations

Auctions

Contract and Vendor management

Electronic catalogs

Document workflow

Parallel approvals

Transaction status

Electronic receipt and invoicing

Enabled by e-Sourcing

Enabled by MRP / e-Procurement

e-Sourcing Components e-Procurement Components

How Much

On What

With who

Supply allocation

Make v. Buy

Category Priority

Potential Source

Bundling

When

How much

Request

Approve

Order

Receive

Pay

Benchmarks

Measures

Feedback

Improvement planning

e-Sourcing is an evolutionary technology, enhancing strategic sourcing value-added benefits

e-Sourcing Value Proposition

Price Reductions

Auctions

Uniform price comparisons across suppliers

Increased competition through better reach

Cycle Time Decreases

Automated process

Repeatability / Reusability

Improved tracking and management

Improved Category Quality

Expanded potential supply base

Easy aggregation and assessment of potential suppliers

Better supplier / category match

Improved Decision Making

Standardized and visible sourcing process

Consolidated data management and analysis

Pre-built analytics

Streamlined and standardized communication channels

Source: Deloitte Consulting

E-Sourcing is an opportunity for companies to transform purchasing personnel from information gathers to strategic decision makers

Role of e-Sourcing

Strategic Buying• Establish and maintain

long-term relationships between buyers and sellers

• Focus on supplier selection and contract negotiation

• Reduces the cost of goods sold and general and administrative expenses

• Requires data analysis, contract negotiation, and relationship building

• Non-routine work

Transactional Buying• Process transactions

according to pre-established contracts

• Place orders with contracted sellers

• Reduces paperwork processing cost

• Requires no specialized skills

• Routine work

Foc

us

and

Tim

e of

Pu

rch

asin

g P

erso

nn

el

Current State e-Sourcing

Source: Deloitte Consulting

Sourcing Practice Analysis

EMERGENT

Ad

op

tio

n R

ate

0%

100%

Leading-Edge

Best Practices

Required to do Business

MATURE

Established category sourcing plans

Levered know ledge/ sourcing database

Rationalized product/spec base

Established contracts by category/supplier

Consolidated category spending

International/ national supplier searches

Preferred supplier listing

On-line negotiations

Standardized RFx processes

Program approach to sourcing

Cross-functional purchasing teams

e-Sourcing Enablede-Sourcing Requirede-Sourcing Enablede-Sourcing Required

Bundled supplier spending

Outsourced RFx processesAutomated

approvals

Vendor management and measurement

Total cost purchasing

Auctions

eRFx

Joint strategy/ product planning

Cross-company buying consortiums

Integrated RFx w ith order and contract mgmt

Category what-if analysis

Award & allocation optimization

Role of e-Sourcing

Ultimately, e-Sourcing enables organizations to move up the strategic sourcing best practice curve

Source: Deloitte Consulting

The e-Sourcing Market

Although the e-Sourcing market is in its infancy; its evolution is expected to occur rapidly

e-Sourcing Market Growth Stages

1. Deepening product functionality

2. Broadening product functionality

3. Competition from and acquisitions by ERP, SCM, and e-Procurement

4. More concentrated consolidation state

5. Emergence of a few winners and one leader

TODAY!

Key Market Growth Drivers

• Low-cost communication infrastructure provided by the Internet

• Ability to generate and guarantee bottom-line results

• Utilize partnerships to meet customer demand

• Depth of integration and standardization

• Perceived product differentiation

Stages of e-Sourcing Market Growth

1Stephens, Inc. Strategic Sourcing: Applications to Turn Direct Materials Procurement into a Competitive Advantage. 1/30/2001Source: Goldman Sachs, Stephens, Inc., Deloitte Consulting

Market expected to mature in three

years1

The e-Sourcing market is estimated to more than triple in size over the next four years

e-Sourcing Market Size

$0.30

$0.70

$1.40

$1.70

$2.00

$2.40

$0

$1

$1

$2

$2

$3

$M

illio

ns

2000 2001e 2002e 2003e 2004e 2005e

Year

Future Market Trends

• Applications will grow

• Markets emerge for outsourced procurement services

• Markets emerge for the aggregation and warehousing of supplier information

• Trading exchanges geared toward direct materials procurement will become a poor investment vehicle

• Increased pricing pressure for applications due to low barriers to entry

5-yr CAGR = 60%+1

1Goldman Sachs. Technology: B2B Software 2/23/2001Source: Goldman Sachs, Stephens, Inc., Deloitte Consulting

Size of e-Sourcing Market Growth

Requires considerable resources, time and capital to manage and execute

• Process is manual

• Tracking and success measurement is manual

• Typical sourcing project takes 3-7 months

Logistical and reporting requirements steal time from value-add activities, e.g., market research

Difficult to share / analyze information and optimize decisions

• Data collected in several repositories

• Tools not designed for sourcing analysis

• SME’s geographically scattered

Difficult to maintain and leverage institutional knowledge

• Knowledge deteriorates over time and personnel changes

• Requires archiving and sharing

Challenges Example Feature Solutions

Automated process with built-in PMO tools, e.g., milestone tracking and event alerts

Electronic submission over the web, including all bid attachments and specifications

Built-in analytic tools provide real-time answers based on consolidated data during the sourcing process

Project management e-rooms, template repository and historical archiving allow easy access, sharing, learning and reuse

Pre-built templates and existing documents speed up bid creation and RFX process

Source: Deloitte Consulting

e-Sourcing Solutions

e-Sourcing applications offer solutions to strategic sourcing challenges

To date, the market has been dominated by small, mostly private companies with no single vendor appearing to offer a complete solution…

e-Sourcing Market Players

…those companies able to maintain strong capitalization and enhance advance functionality (e.g., knowledge management, decision support) will lead the market

Source: CIBC, Deloitte Consulting

A Sampling of e-Sourcing Feature Functionality

Currently, e-Sourcing companies differ in their approach, depth, complexity, simplicity, and breadth of features

e-Procurement Supply Chain Management

Collaborative Commerce

Pure Players Analytics Auctions

Functionality: Expand e-procurement product offering to include e-sourcing

Vendors: Ariba

Key Features: Provide e-Sourcing applications to support depth and breadth of supply chain management solutions

Vendors: i2, Manugistics

Key Features: Leverage e-Sourcing as part of enterprise B2B solutions

Vendors: Agile, Atlas Commerce

Key Features: Provide only e-sourcing applications and services

Vendors: Frictionless Commerce, B2E Markets

Key Features Focus on decision support through sensitivity, gap, and scenario analysis, etc.

Vendors: Sharemax, Expert Commerce

Key Feature: Support on-line reverse auctions

Vendors: Free Markets, BayBuilder

Source: CIBC, Deloitte Consulting

Business Case: Merrill Lynch

e –Sourcing Lessons Learned

Taking e- Procurement Globally

How Do Organizations Take How Do Organizations Take e-Procurement Globally ?e-Procurement Globally ? A Merrill Lynch Case StudyMerrill Lynch Case Study

Project Background

Centrally led Purchasing Org. in U.S. … fragmented globally

Procurement standards & policies existed, but BU’s not always in compliance … policies varied widely by region

Requestors were frustrated, as orders often took months to fulfill

Suppliers were frustrated, as payment often took months to process

5 separate regional instances of Oracle Financials currently exist

Redundant purchasing programs exist (and others are being developed) across our various regional locations

Ariba Buyer is currently implemented throughout the U.S.

e-Procurement Objectives

Achieve greater efficiency and reduce the overall cost of procurement throughout Merrill Lynch

Standardize the procurement processes on a global scale, while simultaneously allowing for specific regional requirements

Implement an e-procurement solution that would incorporate best practices and provide an immediate ROI

Focus selection and design efforts on ease of use, flexibility, and scalability, all of which were critical considerations given the size and decentralized structure of the Merrill Lynch environment

Design and implement a solution in the U.S. that could be leveraged across Merrill Lynch’s International Regions

Manage the procurement processes of the organization within globally consistent policies and procedures

Easily enable all employees to buy from established, corporate agreements and reduce costs

Identify efficiencies that were achieved in the area of buyer intervention and customer satisfaction

Encourage a one company, one organization culture Offer seamless procurement services through a common portal Operate within a common procurement system platform

Once a global system is implemented, Merrill Lynch will be able to:

Defining Success

Merrill’s Global e-Business Strategy

Step 1: Manage our spend and optimize our regional procurement processes through the implementation of an e-procurement system (Ariba Buyer)

Step 2: Gain access to a more global supply base and reduce our enterprise-wide procurement costs by leveraging the value of other developing e-services (ACSN, e-markets, etc...)

Step 3: Enable corporate-level strategic sourcing, while simultaneously allowing for regional & local procurement requirements

Step 4: Extend our e-business efficiencies across other parts of the organization by integrating separate ERP instances and consolidating various applications into a single portal

Global Deployment Plan

CanadaQ2 - 2002

U.S.Q24 - 2001

U.K.Q2 - 2001

JapanQ2 - 2002

AustraliaTBD

Hong KongQ4 - 2002

The Application Architecture Dilemma

On one hand, only centrally managed systems can coordinate and serve a worldwide user base and provide efficient database management and economies of scale

However, users will demand personalized local service consistent with the culture, language, time zone, laws, currencies, and business practices of their own region

Globally defined information: Common Supplier Codes (DUNS Standard) Common Commodity Codes (UNSPSC Standard) Roles and Permissions

Locally defined information: Accounting information Approval hierarchy information User and address information Workflows & approval rules

Our Global Architecture

Some information is defined on both the global and local level: Catalog Content Units of measure & currencies Supplier information Commodity Codes

Varying degrees of ERP/legacy system integration Reporting will allow for global visibility and spend management Tax calculations will be handled outside the core system Custom reports will be generated to facilitate back-end VAT calculations

Our Global Architecture

It is critical that the organization perform a vendor consolidation exercise prior to implementing a global e-procurement system

Adopt the DUNS Standard for defining Common Supplier IDs Attempt to standardized business processes as much as possible

and pushback on region-specific business rules To optimize an e-procurement implementation, legacy systems

need preparation in several selected areas Supplier Data Account Codes Commodity Codes User and Hierarchy Data

Global Architecture Lessons Learned

Implementation Strategy

Organize a project team designed to handle a global implementation

Complete preliminary data gathering effort to identify / assess:

Organizational team / resources

Key suppliers and commodities

Required system interfaces

Regional funding requirements

Concurrent initiatives / programs

Determine high-level roll-out strategy and deployment plan

Perform functional requirements gathering / analysis

Complete a ‘pilot’ implementation for each region

Change Management

Understand that the technical implementation is the EASY part

Develop and follow a detailed communications plan

Anticipate organizational “push back” and be prepared

Ask the question … “Why can’t this work for you ?”

“Seeing” is very often “Believing”

“Best Practice” isn’t always achievable - find an effective compromise

Moving rapidly with an e-procurement initiative raises the need for a structured change management program

Our experience to date has identified several key lessons learned:

What We’ve Learned

Benefits don’t just happen; they must be deliberately targeted and managed

Organizational changes will occur - systems people become business partners

Implementing an e-procurement solution is not just a technology project Benefits and capabilities build over time as experience grows The “one size fits all” approach doesn’t always apply globally The quality of the delivered system reflects the quality of the resources

you apply Organizational resistance is often directed at the system, but the

resistance is really about process change

Questions & AnswersQuestions & Answers