February 1, 2005, 12:00 AM

The new reality of Sourcing

How Ahold saves $350 million through web-basedsourcing—for starters.

From his perch as vice president of sourcing at BrainTree Sourcing, the division of Royal Ahold responsible for sourcing goods and services for six grocery brands and more than 1,200 supermarkets in the U.S., Dave Picarillo has an unusually sharp focus into what the big grocer spends to stay in business. "I can walk into any Ahold store and know exactly how much we spent on the tile I`m standing on," he says.

As Picarillo stands there and glances throughout the store, he can see the results of thousands of other procurement projects, from the windows washed by a cleaning service to the shelving to the bags that customers use to carry home their groceries. In addition, he oversees sourcing for Ahold`s Peapod e-commerce unit and U.S. Food Services, which operates 85 warehouses processing food and equipment deliveries to restaurants throughout the U.S.

No more spreadsheets

Just in the U.S., Netherlands-based Ahold spends more than $3 billion a year on indirect products and services--those that the company buys just to operate its businesses, not to re-sell to customers. But over the past three years, Picarillo has used a web-based sourcing system to exert tighter control over procurement. The result: He has saved $350 million on procurement items.

The web-based system, from Emptoris Inc., is replacing the traditional method of widely distributed teams of category managers relying on spreadsheets and phone, e-mail and other communication with suppliers. Because the old system was not tightly organized at the corporate level, it was difficult for Ahold to get a corporatewide view into what it spends, the quantities of materials it buys and the overall efficiency of its sourcing. Trying to review and analyze spending would require manually going through spreadsheets on each manager`s hard drive, a chore too broad to produce a complete, clear picture of spending, Picarillo says. "We had to do something to be more efficient as an organization," he says.

The Emptoris system provides a headquarters view into corporatewide purchasing and a central ability to analyze and improve the procurement process. "Before we were centralized on the web, we didn`t know how much we spent," he adds. "Now with our web-based spend analysis, we can come up with a number."

The retail industry has been moving toward web-based sourcing for both indirect goods as well as merchandise for several years, industry analysts say. But it is only recently reaching a critical point of moving beyond the basics of online auctions to using more complex sourcing systems. The new systems not only produce lower spending on goods and delivery expenses, but also shorten the time from product conception to reception in stores.

The payoff for those on the cutting edge can be substantial, experts say, as they realize how to leverage their increased control over procurement. "We`re seeing people getting 20% improvements in production and lead times," says Alexi Sarnevitz, retail industry analyst with AMR Research Inc. "Retailers no longer have to deal with given lead times from suppliers. They are taking a cumbersome process with limited visibility and multiple versions of the truth, and replacing it with a clear process flow, shared online calendar dates, and knowing at what stage every sourced item is in throughout the design and development process."

Just the beginning

And this is just the beginning, Sarnevitz says. As retailers gain more visibility and control in sourcing, they can hold suppliers more accountable and benefit from an ongoing process of learning how to streamline the entire sourcing process. "They`re taking the existing process, adding visibility and accountability to it, then rethinking the process," Sarnevitz says.

Web-based sourcing is often most associated with retailers` private label programs. The web makes it easier to manage the procurement of the many materials needed for production from multiple suppliers and factories. But web-based sourcing is also being used more for the procurement of indirect materials and services.

At Ahold, sourcing indirect goods is the first leg in a multi-part plan to streamline overall sourcing programs. The company started out with its sourcing of indirect goods to begin building efficiency and cost-savings into its broadest aspect of procurement-dealing with the more than $3 billion in materials and services it buys each year from some 40,000 suppliers.

One of the key goals of web-based sourcing, Picarillo says, is to make it possible for category managers to review more spending projects in less time. Because there is a limited amount of savings retail managers can realize in each program, the only way to gain more corporatewide savings in a year is to increase the number of spending program reviews, he adds. "The sourcing organization runs into diminishing returns," he says. "You can only squeeze so much blood out of a stone."

But Ahold also wants to realize more savings through sourcing programs without adding staff. "We`re appropriately staffed now, but we want to do more with the same amount of people," Picarillo says.

Ahold`s category managers have each routinely managed about five sourcing projects a year, but now manage up to 10. Because the Emptoris spend analysis system aggregates on the web data from multiple back-end software systems, including accounts payable, procurement and purchasing card systems, Ahold managers can now log on for a single enterprisewide view of spending data instead of trying to compile reports separately from multiple sources on the many costs related to sourcing materials. "We can even see labor costs in each warehouse," Picarillo says.

Opportunities

In addition to getting a clear picture of actual costs, however, Ahold can also run reports within the Emptoris system to look for opportunities to increase savings, by consolidating buying among a particular group of suppliers, for example, or by spreading the best practices of the most efficient buyers.

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