February 1, 2005, 12:00 AM

The new reality of Sourcing

(Page 2 of 3)

The spend analysis system complements the other part of the Emptoris system used by Ahold to manage its sourcing relationships. In the past, managing suppliers and getting them to adhere to procurement contract goals required extensive communications through e-mail and telephone. With hundreds of questions that may need to be answered for any one sourcing engagement, Ahold now has a single web-based portal for managing communications with all suppliers. "Suppliers log into one spot and answer questions on what they can provide," Picarillo says. "If a supplier doesn`t understand a question, I can provide a single answer that all suppliers can see on an electronic bulletin board." Suppliers will also receive an automated e-mail message alerting them about new information available in the Emptoris system, he adds.

Scoring suppliers

The web-based system also makes it possible for many Ahold managers throughout the corporation to simultaneously participate in scoring suppliers` performance. "Now managers from different divisions and different grocery brands can help evaluate suppliers," Picarillo says.

For example, Ahold may ask managers in different divisions to rate on a scale of one to 10 a particular supplier`s ability to fulfill orders completely and on time. "So for each category we can ultimately select suppliers through the scoring system," he says.

Effective sourcing programs don`t always hinge solely on getting the lowest prices or fastest delivery times. With about half of Ahold`s indirect supplies under the services category, such as washing windows or maintaining heating systems of stores, the company also tries to source part of its services needs from local suppliers. "Hiring local people is important to us," Picarillo says. "So we can view all bids ranked by lowest price, or we can hit a button to include at least 10% local contractors also ranked by price."

Although Ahold`s use of the Emptoris system so far has focused on sourcing indirect goods, it`s now starting to also use the system for private label products. "We want a national-brand equivalent of macaroni-and-cheese, so we`re looking at quality and service as part of RFIs (requests for information) and pricing as part of RFPs (requests for proposals), and creating both the RFIs and RFPs online," Picarillo says. "We`ll take them from initial bids into negotiations on the web."

Cultural change

As retailers learn to benefit more from web-based sourcing, particularly in private label programs, they`re also learning to deal with changes in long-held methods of planning products. "There`s more than technology here," says AMR`s Sarnevitz. "There`s a whole cultural element, where merchandisers agree upfront on design platforms. That`s a major change in culture, because it adds structure to the design process."

Using the web to improve private label programs can be particularly helpful with apparel products, where there can easily be 120 steps from conception to delivery to a retailer`s distribution center, says Fred Isenberg, vice president of sales for New Generation Computing Inc., an e-sourcing software provider whose clients include Dick`s Sporting Goods Inc. and childrenswear maker and retailer Little Me. "After starting with a concept, a group of buyers will shop the market and look at trends, colors, fabrics, treatments, and figure out a fashion look and think of what will sell," he says. "That takes time."

With buyers and headquarters managers having access to the same information posted on the web, managers can review the buyers` schedules to assure that materials are being sourced in time to meet production schedules and to approve details and images of materials, expediting the purchase order process. "You can`t place a P.O. and go to production if you don`t have approvals," Isenberg says. "The goal is to reduce steps in the supply chain, and visibility and management by exception are key."

With better visibility and control over lead times, retailers also can book manufacturing capacity for particular materials or sections of goods farther in advance. When sourcing denim apparel, for example, retailers have traditionally left it up to suppliers to schedule production of jeans and jackets with special fringed trim. But that would leave the retailer running the risk of seeing consumer demand for fringed denim decline by the time products appeared in stores.

Now, because the web lets retailers constantly monitor production schedules and the availability of materials from multiple suppliers, they can postpone the addition of final denim treatments until later in the sourcing process. So if customer demand for denim fringe is less than expected at the beginning of the sourcing project, the retailer can replace fringe with, say, silver buttons to keep current with customer demand.

The concept of separating the sourcing of final treatments has spawned a new market-serving web business. Next Trim LLC`s NextTrim.com recently launched as both a source of information on available apparel trim, labels and hang tags as well as a competitive market survey service showing the treatments that retailers are placing on their apparel products. "Trim has been an overlooked piece of the supply chain, but a source of a lot of problems because of changing customer demand," says Jonathan Markiles, founder and CEO of Next Trim.

Next Trim`s goal is to help retailers push decision making on trim later into the production process, letting them view available information on what their competitors are doing within the same web site where they can view available styles.

The right questions

With all the advantages web-based sourcing can bring to retailers, its effectiveness still relies on the basics of negotiation and common sense, experts say. "This technology is just an enabler to help us source," Ahold`s Picarillo says. "It doesn`t substitute for the sourcing process itself. We still have to ask the right questions about materials, pricing and performance, and verify answers, just as we do in the non-web way."

A retailer`s ability to negotiate with leverage, in fact, can go a long way toward making web-based sourcing systems effective, says Kevin Potts, director of product marketing for Emptoris. "Larger companies like Ahold have been developing their negotiating processes over the last 10-15 years, so it makes the technology adoption much better," he says. "Smaller companies can benefit from this if they can negotiate with suppliers."

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