e-Sourcing: Picking up where ERP and e-Procurement Fall Short

1. e-Sourcing:Picking up where ERP and e-Procurement Fall Short 64157 电子商务模式设计与应用 国立中山大学企管所 2002 Spring, Week 4-1 • 黃光彩 博士 • 太世科公司 • 2002/03/16 June 1, 2001

2. Today’s Painful Reality • The first time you hear about a big purchase is when you see the invoice. • Purchasing is considered “the enemy” by your business units. • Best practices are for people with “more time.” • Cycle time for sourcing projects can be as long as 6 months.

3. Agenda • What is Strategic Sourcing? • Automating the Enterprise • e-Sourcing • e-Sourcing Solution • Integration: Putting it all together • IT e-Sourcing

4. What is Strategic Sourcing? Strategic sourcing is a disciplined process which organizations implement to more effectively purchase materials and services from suppliers. The process generates savings by reducing product and operations costs through consolidation of purchases, elimination of duplicate and functionally equivalent parts, and rationalizing suppliers to the right number of partners.

5. 73% of potential purchasing savings are in sourcing. Resulting in savings of 2-4% overall going right to the bottom line Some commodity areas can save more than 20% Why Strategic Sourcing? Areas of Potential Purchasing Savings Source: CAPS, The Watch Group, A.T. Kearney analysis

6. Evolution of Strategic Sourcing Solutions Enterprise Software Vendors Large enterprise, sophisticated purchasing group Large enterprise, unsophisticated purchasing group Sourcing Specialists Sophistication of Enterprise Small and medium sized business Point Solution Vendors • Basic, hosted • software • No consultants • Limited software • Many consultants • Enterprise-class • software • No consultants Solution Capability

7. Why an Enterprise Automation Software Solution? • An Enterprise Automation Solution: • is a new class of product that complements (not replaces) existing enterprise systems. • can be integrated with other enterprise systems for maximum value (more on this later). • gives unprecedented visibility into the sourcing process including sensitive expenditure data. • supports a consistent, disciplined process for sourcing. • empowers the people you have. • promotes enterprise-wide collaboration.

8. Where does Strategic Sourcing fit? e-Purchasing Design Collaboration e-Sourcing e-Procurement Contract Negotiate Buy Off Of

9. Strategic Sourcing is distinct from Transaction Execution Sourcing Project Analyze Orders/Spend Ordering 1. Requisition 2. Approval 3. Order Expenditure Analysis e-Procurement Vendor Management Assess Marketplace Spot Purchasing Assess Value & Vendor Performance Select Strategy Create & Manage Contracts Processing 1. Issue PO 2. Receive and Verify 3. Approve Invoice 4. Payment Settlement Build RFP & Analyze Responses ERP Decide & Select Supplier(s) Negotiate with Suppliers Supplier Selection e-Sourcing Demand Generation Strategic Sourcing Transaction Execution

10. Automating the Enterprise SFA / CRM ERP e-Procurement e-Sourcing Top-line Sales Revenue Operating Costs & Efficiency Bottom-line Cost Savings Only e-Sourcing focuses squarely on bottom-line cost savings (the 73% of purchasing savings opportunity). It is estimated that every $1 saved in sourcing is worth $5-25 in increased sales.

11. Automating the Enterprise SFA / CRM ERP e-Procurement e-Sourcing Percent of Transactions 90% 10% Percent of Spend 20% 80% • “Most applications are focused on the 90% of transactions that only represent about 20% of my costs. E-Sourcing, however, is focused on the 10% of my transactions that make up about 80% of my costs. You tell me – which is more important for my business?” • Roy Anderson, Director of Purchasing, John Hancock Financial • Services (20 years of corporate purchasing experience)

12. Automating the Enterprise Usual Order of Implementation 2 1 3 4 Nature of Automation info consolidation and customer communication accounting and order processing paper catalogs and requisitions negotiations and decisions Big Technical Challenges systems integration, personalization EAI, reliability and scalability e-catalog normalization, B2Bi standards decision support, spend data acquisition Big Business Challenges cultural change to adopt new business processes (often driven top-down), politics of standards adoption SFA / CRM ERP e-Procurement e-Sourcing The usual order of implementation follows the emergence of these advanced technologies. e-Sourcing automates more than putting paper on the web; it automates human negotiations and decision making.

13. Agenda • What is Strategic Sourcing? • Automating the Enterprise • e-Sourcing • e-Sourcing Solution • Integration: Putting it all together • IT e-Sourcing

14. A Process Viewpoint Sourcing, thenRequisition to Pay Process Delivery Warehousing Traffic Logistics Inventory Sourcing Requisitioning Payables Buying

15. What is e-Sourcing? Sourcing is the identification, evaluation, negotiation, and configuration of new products/suppliers. Typically used for the negotiation of blanket contracts, strategic goods. An online sourcing tool that allows buyers and strategic sourcing specialists to obtain closed bids (and/or conduct reverse auctions) in a way that: • Gives consistent automated RFx creation, management and analysis • Increases efficiency by standardizing work processes • Qualifies new vendors and updates data/information on existing suppliers

16. e-Sourcing Process Execution & Compliance Sourcing-Ready Suppliers Œ Needs Definition & Aggregation   Enterprise Compliance & Analysis Supplier Management Ž  RFx & Negotiation • Market discovery • RFI / RFP • RFQ, Reverse Auction • Negotiation • Decision Support Tools Contract Establishment Market Making & Event Support

17. Defining the e-Sourcing Framework.

18. Sourcing cycle provides the greatest opportunity for procurement savings. Sources: CRPS, The Wacht Group, AT Kearney

19. However, sourcing remains a long, tedious process at most organizations. Source: Aberdeen Group

20. Multiple Internet models target the sourcing cycle. • Requirements/supplier identification/evaluation • OpenRatings, Thomas Register, TPN Register, WorldPreferred.com, etc. • e-Marketplaces • BizBuyer, Chemconnect, e-Steel, National Transportation Exchange, PlasticsNet, PartMiner, Ariba (SupplierMarket.com), etc. • Auction/exchange software • Commerce One (CommerceBid), Moai, OpenSite, Ariba (TradingDynamics), etc. • Aggregation/outsourced purchasing • AlphaDog, Demandline, EDS/CoNext, ICG Commerce, etc. • Sourcing solutions/services • Agile, eBreviate, Emptoris, FreeMarkets, Mindflow Technologies, ShareMax, Webango, etc.

21. How Internet sourcing can benefit your organization. • Reduction in prices of materials/services (5% - 20%) • Rapidly establish competitive bidding space • Access new suppliers • Expand geographical reach • Shorter procurement cycles (25% to 30%) • Automate the RFP/RFQ process • Streamline order-to-pay processes • Reduce administration costs • Improve buyer productivity • Reduce/eliminate paper-based processes • Improve ability to create/manage optimal supply base • Improved market data • Minimize demand peaks

22. Early “sourcing” solutions focused on dynamic pricing. • Traditional pricing: Prices set by hypothetical forecasts and cost plans. • Dynamic pricing: Prices established in real-time by existing market conditions (i.e., actual supply and demand.) • From buyer’s point of view = Reverse Auctions • Effective for standard/commodity products • Oil, gas, electricity, broadband, excess assets, inventories, etc.

23. Business negotiations need to determine the Lowest Total Cost solution. • The most effective companies will be those that can establish the most efficient global supply chains at the lowest TOTAL COST. • Includes sum cost of price, quality, technical expertise, delivery, etc. • Negotiations and sourcing decisions based on multiple parameters to deliver the lowest total cost supply chain.

24. Key negotiation functionality required for effective support of true B2B interactions. • Multivariable negotiations • Negotiations based on multiple parameters beyond just price, including quality, delivery, warranty, and financial terms. • Multi-stage negotiations • RFI – RFP – RFQ – Award • Multi-threaded negotiations • “Back and forth” buyer-supplier interactions • Synchronous supply chain negotiations • Ensuring purchases are not made without due consideration of availability/cost of services required to use and deliver these products

25. Selecting an e-Sourcing framework. • Company: large enterprise • Strategy: purchase a negotiated commerce or e-Sourcing application. • Company: mid-size • Strategy: outsource sourcing of particular products to procurement service provider. • Company: small • Strategy: leverage dynamic trading platform and supply network of e-Market/exchange.

26. Strategic Sourcing Categorization HIGH “Leverage” Purchases Capital Plant “Strategic” Purchases Direct Materials Dollar Value “Marginal” Purchases Indirect Materials “Tactical” Purchases Indirect Materials LOW LOW HIGH Transactional Volume

27. Purchase Category - Examples

28. Approach– Capital Purchases HIGH Capital Purchases ERP Procurement Dollar Value LOW Transactional Volume

29. Approach– Direct Purchases HIGH Direct Purchases ERP+Connection Dollar Value HIGH Transactional Volume

30. Approach– Marginal Purchases Dollar Value Marginal Purchases LOW LOW Transactional Volume

31. Approach– Tactical Purchases Dollar Value Tactical Purchases Web Buyer LOW HIGH Transactional Volume

32. Web Buyer Function – Tactical Purchase • Portal to communicate how to purchase supplies and materials. • On-line web-based ordering for many of these (using Web Buyer style) primary use is for “tactical purchases” (usually consumables) • Cost savings created by: - Lower transaction costs - Compliance to leveraged agreements - Data to create better deals and monitor compliance - Supplier base consolidation - Broad deployment globally

33. Agenda • What is Strategic Sourcing? • Automating the Enterprise • e-Sourcing • e-Sourcing Solution • Integration: Putting it all together • IT e-Sourcing

34. Requirements for an e-Sourcing Solution • A complete, holistic solution includes: • Expenditure Analysis • Project Management • RFP / RFQ • Reverse Auctions • Contract Management • Vendor Management • Sourcing Workbench • Ideally, all modules are integrated and designed to work together

35. A Frictionless Sourcing Example Expenditure Analysis Project, Contract, and Vendor Management Collaborative, online supplier negotiations

36. RFP Proposal with Scoring Decision Support

37. E-Sourcing Software • QuickSource™ • QuickSource is the only e-sourcing solution designed for sourcing professionals by sourcing professionals. This comprehensive full-featured e-sourcing platform is local for automating, streamlining and providing visibility into the sourcing processes. Based on the industry leading e-sourcing technologies developed by FreeMarkets, QuickSource contains a robust set of features that allow buyers to create and conduct online auctions right from their desktops

38. E-Sourcing Software • QuickSource™ • Create re-usable templates for Requests for Information and Quotations (RFxs) • Collaborate with and manage suppliers • Create and run a wide variety of real-time, competitive bidding and negotiation activities • Conduct offline negotiations

39. E-Sourcing Software • QuickSource™ Add on Services • Market Operations Services • E-Sourcing Support Desk • QuickSource Supplier Training • QuickSource™ Rapid Implementation and Deployment • 15 Days to e-sourcing process • QuickSource website readiness • QuickSource team readiness • QuickSource launch preparation

40. E-Sourcing Services • FullSource™ (E-Sourcing Acceleration Program) • 19% average savings per contract for direct and indirect goods and services • 30-50% cycle time reduction in the sourcing decision process • Average return on investment of more than 20 to 1 • An average of nine more suppliers per negotiation for greater pricing competition

41. FullSource™ (E-Source Acceleration Program) • Industry-specific program management driven by a dedicated, experienced team who will help design and implement a unique e-sourcing program for each customer • Expert e-sourcing services in hundreds of spend categories • Information and knowledge about specific commodities and supply market dynamics • FreeMarkets' industry-leading, real-time, advanced e-sourcing technology • 24-hour technical and operational support in over 30 languages

42. FullSource™ (E-Sourcing Software ) • Transformation bidding • Index bidding • Net Present Value (NPV) bidding • Multiple Offering bidding • Rank-Only bidding FreeMarkets is the only e-sourcing solution provider willing to share responsibility with an organization to meet its strategic sourcing objectives.

43. FullSource™ Global Market Operations • FreeMarkets' Global Market Operations Centers (GMOCs) are located in Singapore, Brussels, and Pittsburgh to service customers across world markets • Coordinate and test events Develop and enforce market rules • Proactively monitor bidder connections and bidding activity • Provide surrogate bidding for any bidders that experience technical difficulties • Train and support all participating suppliers • Provide real-time event support

44. Asset Management • Fast, market-based pricing when selling surplus assets • Quick, easy access to needed assets for buyers • A variety of sales venues, including Online Asset Auctions and Onsite Asset Auctions • Support by dedicated customer service teams • Ability to create a fair, neutral marketplace with equal access for all participants • Public or private access to a global asset database and trading environment • FreeMarkets Online Asset Auctions • FreeMarkets Onsite Asset Auctions

45. Future Functions • FreeMarkets continues to develop end-to-end enterprise e-sourcing platform code named Sierra Nevada • Functions of Sierra Nevada • 1) Collecting and analyzing data • 2) Developing sourcing strategies • 3) Locating, managing, and evaluating suppliers • 4) Creating requests for information, proposals, and quotations • 5) Selecting price discovery methods and executing negotiations • 6) Analyzing price discovery responses • 7) Awarding contracts and tracking implementation • 8) Managing awarded contracts and supplier performance • Release of Sierra Nevada in summer of 2002

46. Intelligent Trading Networks.

47. OnSite: General Motors • Background: • #1 automobile manufacturer • Expenditures = $87 billion/yr. • 30,000 suppliers worldwide • e-Sourcing strategy: • 64 reverse auctions (Nov. ’99 – Sep. ’00) • Representing $500 million-plus of transactions • Including $10 million via forward auctions • 25 different commodity types • Primarily commodity/low-engineered parts • Events involved 470 suppliers

48. OnSite: General Motors • Results: • Typical savings of 3% to 30% • Reduced process cycles to 3 to 4 weeks. • WARNING: Bid transparency is not always to buyer’s benefit • Future plans: • Multi-variable RFQ/evaluations • Multi-currency • Extend to more complex products

49. Agenda • What is Strategic Sourcing? • Automating the Enterprise • e-Sourcing • e-Sourcing Solution • Integration: Putting it all together • IT e-Sourcing

50. Systems Integration • Many e-Sourcing modules can add immediate value without any enterprise systems integration. • However, large incremental value is realized with each integration including your ERP, e-Procurement, e-Catalog, data warehouse, and other enterprise systems.