The World Wide Web As A Strategic Sourcing Tool
Brian G. Caffrey
Brian G. Caffrey, President Solutions Consulting Group, Jackson Heights, NY 11372, 718/457-3246.
82nd Annual International Conference Proceedings - 1997
The Issue. Strategic sourcing means much more than merely having a plan for carrying out sourcing activity. Strategic sourcing involves locating potential suppliers and then evaluating, developing and managing their capabilities in a manner consistent with the enterprise's plans for meeting customer expectations and needs. Through innovative use of the tools that the Internet and its associated technologies -- in particular the World Wide Web -- have provided, purchasing can increase its contribution to a company's competitive position.
Locating Potential Suppliers. There are volumes of supplier promotional literature and printed catalogs coming into purchasing departments on a daily basis -– sometimes seemingly endless stacks of them! Add to this sourcing directories, numerous trade journals, general business publications, and periodicals and it is easy to understand why purchasing's mailbox is so much larger than most of the others in the mailroom. There is so much paper-based information to be controlled that some purchasing organizations employ librarians to organize and file it, keep it up-to-date, and assist the professional purchasing staff in finding the right materials when needed. Even armed with the proper literature, it can be a laborious process to search through it, identify potential suppliers, and initiate contacts via telephone. Computerized directories on CD-ROM and in proprietary data bases made the search process easier, but it can still entail using several directories and then beginning the game of "telephone tag" once potential suppliers are identified.
The World Wide Web has made locating potential suppliers even easier. Buyers have a choice of several online directory services. A few of the most popular ones are:
- Thomas Register: http://www.thomasregister.com
- IndustryNet - http://www.industry.net
- WizNet - http://www.wiznet.net
- MacRae'S Blue Book Directory - http://www.d-net.com/macraes/pip00001/pip00001.htm
- Electronic Buyers' News Interactive Sourcing Guide - http://catalyst.cmp.com:443/ebn/catalog/Webdriver?MIval=main.
Rather than using a dedicated sourcing directory, a buyer can also search for a specific product or supplier directly by using one of the popular Internet search engines such as Excite, Infoseek or Yahoo. A word of caution: key word searches for generic items can sometimes return tens of thousands of "hits" -- almost as bad as not finding any information at all. You can also guess at the URL (Uniform Resource Locator or, simply, Internet address) for a specific supplier site by entering http://www.companyname.com into your browser.
Once a potential supplier is located, e-mail can be used more effectively than a telephone for the initial contact. E-mail combines the best features of telephone communication with those of postal mail. Like a telephone call, message transmission is virtually instantaneous and, like postal mail, the sender can include as much detail as necessary to convey the necessary information. In turn, the recipient has the ability to review the message when it is convenient to do so and as much as necessary in order understand the message. In this respect, e-mail is also similar to voice mail, but it is MUCH more powerful. Spreadsheets, reports, and product specifications complete with technical drawings can be sent with the push of a button.
If the variety of online sourcing directories and search engines has you thinking "This still sounds like a time-consuming process", you're right. It can be. "Is there a better way?", you ask. There certainly is -– a purchasing Web site. Although most companies are still using their corporate Web sites as purely outbound marketing tools, this is sure to change as they learn of the wealth of benefits that it can bring to the management of their supply chain. The benefits run the gamut from improving the quality of inter-departmental and supplier communications, while reducing the amount of required staff effort, to improving purchasing's global sourcing efforts. A properly constructed Web presence can even function like an elaborate network of IPOs (International Purchasing Offices) -- at a mere fraction of the cost -- identifying potential suppliers in regions that could have been overlooked using more conventional sourcing methods.
Think of a corporate purchasing Web site as an elaborate interactive supplier greeting pamphlet. You can let potential suppliers know what you expect of them, as well as what they can expect of you. You can detail the types of goods and services that purchasing procures and outline the process that potential suppliers should follow to contact purchasing. Even better, you can:
- provide an online form for potential suppliers to complete as part of a pre-qualification process;
- take the answers from the form and plug them into a spreadsheet for automatic analysis and derivation of information like financial ratios, profit margins, and financial performance projections;
- upload the supplier information and analysis into a potential supplier data base; and,
- index the data base to facilitate future searches for potential suppliers.
(A data base of pre-qualified potential suppliers, as just alluded to, can be an excellent strategic tool for purchasing to use in managing the risks that are associated with supplier base reductions and sole-sourcing practices.)
Brother Industries - http://www.brother.com/E-procurement/e-procurement.html, Sony - http://www.sony.co.jp/CorporateCruise/Procurement/index.html, and Toshiba - http://www.toshiba.co.jp/procure are among the innovative organizations that are using Web sites to bring a new dimension to their worldwide procurement efforts. (Solutions Consulting Group's Purchasing & Supply Management Online Resource Index http://www.solcon.com/serv10.htm contains links to hundreds of useful online resources including sourcing tools and samples of corporate purchasing sites. Our Internet Search page http://www.solcon.com/search.htm also has links to popular search engines, data bases and other online research tools.)
Evaluating Supplier Capability. Some supplier Web sites provide information such as ISO certification status and others may even make a version of their annual report available; however, few contain enough information on their own to enable purchasing to make a supplier qualification decision. Certain financial information about prospective suppliers can be obtained from online sites such as Dun and Bradstreet http://www.dbisna.com and the SEC EDGAR Data Base http://www.town.hall.org/edgar but, again, the usefulness of the information may be limited.
In order to make informed sourcing decisions, purchasing may also need information about factors such as suppliers: quality control and quality assurance programs; process systems; organization; management; W/MBE development programs; environmental commitment; required lead time; delivery capabilities; product and service expertise; technical competence and stability; training and development programs; and, general industry reputation and status. Although detailed information such as this is generally not available online, purchasing can still use Internet related technology to gather the required information from prospective suppliers by providing them with an electronic audit questionnaire form (either as part a purchasing's Web site, as described above, or on an individual "as needed" basis) that, once completed and returned, can be used to begin the necessary analysis.
Joe Yacura, Senior Vice President of Global Procurement at American Express, has proposed that NAPM develop a sourcing standard and logo (for display on a supplier's Web site) that would let purchasing know the site contains data in a standard format to facilitate a sourcing decision. (See "Electronics Purchasing Comes of Age." Electronic Buyers' News, August 28, 1996.)
Supplier Development & Management. Superior communication is the key to superior supplier performance. Internet related technologies such as intranets, web browsers, e-mail, PDF (Portable Document Format) writers and viewers, "white-board" and collaborative editing utilities, video conferencing programs, and a host of others have dramatically improved our ability to communicate and have, just as dramatically, reduced the costs of doing so. Let's look at some examples of how this technology can be utilized for tasks that are typically associated with supplier development and management.
Supplier education and training programs can be delivered through a combination of interactive Web-based technology features such as: video conferencing; online presentations; message threading for online discussion forums; and, form-based tests of understanding. All can reduce the costs of supplier training and the last three are particularly useful if differences in time zones would make "real time" educational programs problematic. In fact, online educational programming can even be structured so that a particular program can be started at any time and taken at the student's own pace.
Linkages between buyer and supplier engineering departments, using the communication technologies mentioned above, can provide supplier education and can also create synergies that will benefit the buyer's engineering department as well.
Early supplier involvement in product development has proven its value many times in cutting costs, improving quality, reducing cycle times and hastening time-to-market. Brother Industries provides a good example of innovative use of Internet related technologies. By allowing suppliers access to its intranet, they are able to work collaboratively with the designers and end-users of their products.
Supplier involvement in redesign and value analysis projects can also result in new ideas, lower costs, higher quality, reduced cycle time, and more customer-responsive products.
EDI (Electronic Data Interchange), a more traditional way of electronically linking buyers and sellers, can eliminate much of the administrative trivia and paperwork from the buyer/seller relationship but it can be extremely complex, costly, and difficult to implement and maintain. It basically involves five main processes:
- extracting data from a system;
- converting the data into a transmittable format;
- transmitting the message;
- interpreting the message at the receiving end; and,
- downloading the data into the receiving system.
Setting up the necessary software at each end is just a part of administering the system. EDI generally relies on a third party, known as a VAN (Value-Added Network), to provide the message transport. VANs can add additional complexity, and some say needless cost, to the EDI process. Improvements in security technology now allow for secure EDI to be carried out over the Internet and through links between buyer and supplier intranets.
EDI is not for everyone. Due to its complexities, there are probably at least as many failures as there are success stories. It is best suited for high volume JIT, MRP II type production environments where a replenishment order can be automatically generated and transmitted to the supplier when called for by demand forecasts and where the benefits of increased velocity and reduced administrative overhead outweigh its costs.
Link Sourcing to Corporate Strategic Plans. In our definition of strategic sourcing, we said that the process must be managed "in a manner consistent with the enterprise's plans for meeting customer expectations and needs." Although the planning process, and the resulting strategic plan and implementation steps, can vary from company to company, there are elements that most plans will have in common. As part of the 1995 CAPS research study, Purchasing and Sourcing Strategy: Trends and Implications (© 1995 Center for Advanced Purchasing Studies), researchers identified the following as the most critical competitive capabilities for a firm in 1997:
- Low product prices as a result of being a low-cost producer
- Highest perceived product quality
- Ability to bring new products from concept-to-customer in the shortest time in the industry
- Product features that offer the highest performance
- Product support and best customer service with short lead times.
Even a cursory review of these capabilities reveals the value of supplier contributions, and the importance of purchasing's performance in managing the supply base, to an enterprise's competitive success. As we have shown, purchasing can use the Internet's emerging information technology tools to maximize the value of supplier contributions by:
- Reducing operating, ownership, and procurement costs
- Controlling risks
- Decreasing complexities of inter- and intra-company communications
The Future. Information technology has already enabled business to move at a much faster pace than ever before. To illustrate, just a few years ago, the best way to send detailed information such as a proposal package (consisting of the proposal itself, technical specifications, background and ancillary supplier information) was via an overnight delivery service. Depending on origin and destination, if the package had to travel internationally between continents it could take 2 or more days to arrive at a direct cost of approximately $100 for a typical 2 lb. package. Now the same amount of information can be encrypted with the recipient's public encryption key (to ensure data integrity and privacy in transit), digitally signed with the sender's private encryption key (to guarantee authenticity and non-repudiation), and sent via e-mail to arrive almost instantaneously at the direct cost of a local phone call. A simple example? Yes, but one with both powerful and complex technology enabling it.
Many forward thinking companies are actively developing strategic plans to integrate some form of Internet-based electronic commerce into their supply chain management practices to allow them to develop and/or maintain a competitive advantage. Such electronic commerce offers many benefits and may very well hold the key to future success in an increasingly global marketplace; however, it is not without formidable obstacles that must be overcome before it gains wide-spread acceptance. Nevertheless, considerable progress is being made.
In the Fall of 1996, CommerceNet and the World Wide Web Consortium (WSC), two consortiums of Internet suppliers and developers, announced the establishment of JEPI (Joint Electronic Payment Initiative), a project designed to bridge electronic payment methods such as the SET (Secure Electronic Transaction) specification and digital cash. The JEPI initiative, besides supporting SET, is also based upon two other electronic commerce protocols: PEP (Protocol Extension Protocol), which is integrated into a Web server's basic operating program, and UPP (Universal Payment Preamble), a negotiations protocol layer that identifies the appropriate payment methodology to the supplier. A number of companies, including Microsoft, IBM, Open Market, and CyberCash immediately announced their support for the new protocols. At the same time, CommerceNet and the Electronic Frontier Foundation announced the establishment of eTrust, a licensing and accreditation system designed to ensure privacy for electronic commerce users.
Information technology has been a key enabler in purchasing's evolution into a strategic business function by reducing the amount of time needed for non-value added activities and allowing purchasing to focus its efforts on activities that have bottom line impact. Although the previous paragraph may seem to contain more detail than you need to know, we included it to make a point: If purchasing is to remain as a strategic business function it must remain ahead of the information technology curve -- exploring and implementing new technologies that promise to add to its companies' competitive advantage.
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