The new reality of Sourcing

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.

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.

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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."

A web-based system can also lead to oversights that can hurt the sourcing process, Picarillo says. In one case, he notes, Ahold managers invited only two suppliers to bid on a project because only two had been entered into the Emptoris system. "So we told them to go find more suppliers, as we always would have in the past," he says.

But getting suppliers to participate in a web-based sourcing system can also be a challenge, Picarillo adds, because some resist sharing pricing and other information on the web. "We have to talk them through it," he says, adding that Ahold will let suppliers view mock sourcing sessions to show how they prevent unauthorized access to a supplier`s information by its competitors. "That drives up their confidence."

Ahold`s managers went through about three initial days of training to learn the Emptoris system, followed by meetings twice a month on best practices in using the system to exert better control over the sourcing process. Although some training is done with Emptoris personnel either at Emptoris or at an Ahold facility, much training and ongoing best practice programs are conducted on the job site through web-based conferences.

The training and occasional setbacks, however, don`t take away from the system`s value to Ahold, Picarillo says. At a cost of $1 million to implement, plus about 15% of that per year in ongoing maintenance, the system has already far exceeded its cost in payback through the $350 million in savings. The savings will continue to expand, as Ahold extends the web-based system to its entire indirect goods sourcing as well as to its $1.5 billion-a-year private label sourcing, where it expects to save 5-10%.

Extending the system.

Emptoris may introduce later this year new web-based capabilities that let retailers score suppliers for their ability to provide a broader range of products or services, enabling the retailer to further cut costs by increasing buying power with a smaller universe of suppliers, Potts says.

Meantime, Picarillo will also investigate whether the Emptoris system can be effective in helping to improve the sourcing of branded goods for re-sale. Although it probably wouldn`t apply to major brands that Ahold will always carry under long-term contracts, it may apply to tertiary brands that would compete with cooperative marketing deals and delivery schedules as well as price, he says.

Although the system`s effectiveness would have to be proven for such branded programs, Picarillo says he has no doubt that web-based sourcing will continue to bring rewards. "We made a determination that we would not be as efficient without this web-based technology," he says.

paul@verticalwebmedia.com