Beyond paper clips

It’s one thing to use e-procurement technology to buy office supplies, through a process known as indirect procurement, because the goods aren’t needed for the assembly line.

But it’s quite another to use the technology for direct procurement, such as buying the parts for manufacturing a helicopter. The complexity, importance and risks are much greater.

That’s why Bell Helicopter Textron Inc. has already implemented online procurement software for office supplies but is taking a much more cautious approach with direct procurement of helicopter parts.

“Safety is a paramount concern in our business, and we’re heavily regulated,” says Matt Cordner, director of strategic planning for operations. “When we make changes like this, we have to be deliberate.”

The Fort Worth, Texas-based firm is in the middle of a two-year supply chain project with Dallas-based vendor i2 Technologies Inc., which will bring it to the doorstep of being able to procure online the parts and services needed to build the helicopters it sells.

In many ways, direct procurement looms as the Holy Grail of supply chain technology. The ability to instantly order what you need from a supplier that can instantly fill the order is supposed to lead to lower inventory, faster product cycles and all the other benefits touted in supply chain conference slide shows during the past three years.

Yet, what looks so good on slides has proved more treacherous than snorkelling in the Amazon. Smaller companies lack electronic order-processing capabilities, and large enterprises struggle to collect the information they need to place timely orders.

So companies are doing indirect procurement first, before tackling its tougher sibling.

Alain-Michel Diamant-Berger, director of e-commerce at New York-based Schlumberger Ltd., started with an indirect procurement implementation in 1999. He says he expects 77 field operation locales to be using the tool by the end of next year. After that, Diamant-Berger plans to look at direct procurement for the oil-field services giant.

His checklist for the system: It must be compatible with the existing procurement system from Pleasanton, Calif.-based Commerce One Inc.; it must link internal product divisions and external suppliers; and it must work independently of an enterprise resource planning (ERP) backbone, because Schlumberger doesn’t have a worldwide ERP system.

“It will be a big project, and that is why we want to finish one before we start the other,” he says.

Software providers are trying to help. In recent months, procurement, supply chain and ERP vendors have been trotting out “sourcing” products. The software creates an electronic request-for-proposals form, disseminates it on the Web and then scores the responses for the requesting organization. Ideally, the software should also pull information from supply chain applications and help the company to quickly replenish its stores.

Rocky Months Ahead

However, Karen Peterson, an analyst at Gartner Inc. in Stamford, Conn., warns that “most of these products are niche solutions or are still immature.” Consequently, she expects a spate of scalability and back-end linkage glitches similar to what users experienced with the initial implementations of indirect procurement software.

Peterson envisions a few more months of heightened expectations, followed by numerous failures and widespread disillusionment, before fully robust direct procurement tools become widely available.

To be really robust, the software will need to work on multiple architectural tiers of decentralized enterprises with the agility to communicate with every kind of supplier system imaginable.

Patrick Wildenburg, vice-president of business-to-business e-commerce at Delta Air Lines Inc. in Atlanta, agrees with Peterson. Vendors are three to five years away from building tools that allow companies to perform accurate demand-planning and seamless data sharing with suppliers, he says.

Furthermore, generic e-procurement software may not be good enough in some vertical industries that have complicated needs. Kevin Cronin, global e-business director at Summit, N.J.-based engineered plastics manufacturer Ticona, says he works in a “98 per cent order-specified business” and doesn’t envision any quick fixes.

Ticona, a unit of Germany-based chemical giant Celanese AG, has “a very complex ordering process with deliveries into different dates, shipping locations and line items,” Cronin says. “We’re at least going to need a tool that’s specific to this industry.”

More than that, he wants software that makes engineers an active part of the ordering process and says that’s where “the real value” lies for Ticona.

The same is true for Bell Helicopter. Cordner estimates that 70 per cent of his company’s costs are fixed once engineers submit their plans. “We need tools that make sure engineers are making the best decisions,” he says.

Users are learning that like the Holy Grail, direct procurement will prove difficult to find, but as in the legend, it’s a goal worth chasing. “We want to get there,” Cronin says. “But we’re going to have to pace ourselves.”

Other Challenges That Lie Ahead

Users also cite the following four challenges in the quest for online procurement of direct materials:

1. The need to manage the changes in organizational processes and human resources. Although Bell Helicopter Textron has 11 factory planning modules in place and all of its part numbers catalogued, employees will still need to learn to use the new system, says Matt Cordner, director of strategic planning for operations.

Cordner explains that while the cost of the IT project may be “multiple millions of dollars,” the company may spend “five to seven times more to change behaviour in this project than on software. The people costs of doing this are enormous, and I don’t think companies have fully grasped that yet.”

Cordner says Bell Helicopter will first target manufacturing commodities like fasteners and tools as it begins to wade into an online model for direct procurement. After that, he expects to work out trading agreements with other business units under the umbrella of Providence, R.I.-based Textron Inc., such as The Cessna Aircraft Co. or Textron Aerospace Fasteners. After that, Cordner says, “we’ll be ready for the outside world.”

2. The need for centralized systems management. The Hague-based Royal Dutch/Shell Group has undertaken a mammoth IT project it calls its MegaCentre. The project will link 60 different SAP AG ERP systems and a companywide SAP e-procurement system.

Houston-based MegaCentre program manager Carl Krite identifies a rarely discussed aspect of supply chain and procurement systems in multinational corporations like Shell: the need for rock-solid systems management.

Shell chose Houston-based BMC Software Inc.’s Patrol software for the job. It will have to monitor every server in more than 200 locations worldwide to make sure the applications run smoothly.

“It’s the glue that makes everything else work,” Krite says. “Without this piece, every outpost is still left to operate in an autonomous fashion.”

3. The lack of standards. Tom Warner, an e-commerce initiatives manager at The Boeing Co. in Chicago, has been active in establishing trading standards within Washington-based Aerospace Industries Association of America Inc. While the group has developed business-to-business trading standards for its members, there’s no guarantee that Boeing will use them, because the aircraft manufacturer is also active in other standards bodies and online marketplaces.

“What I’m trying to do is come up with trading standards that leverage technology that most companies already have in place,” Warner says. “I want to let my company do something [soon] rather than have it wait on a perfect solution.”

4. The difficulty of getting small suppliers on board. At Caterpillar Inc. in Peoria, Ill., Director of E-Business Mike Hackerson has partnered with IBM to get smaller suppliers the middleware and hardware needed to move from phone and fax connections to an online procurement model.

“If we don’t get in the trenches and help our partners build these systems, we won’t be able to migrate our own systems,” he says. “We have to get deeper into our supply chain if we want to realize the [payoff].”