Chapter

7

Procurement and Outsourcing

Qi Xu

Professor of Donghua University Tel: 021-62378860 E-mail: [email protected]

Outline

Section I Case: FreeMarkets Online Section II

Procurement

Section III

Outsourcing

Section IV Section V

FreeMarkets Online



FreeMarkets is an online market making firm that enabled industrial buyers to link up with their potential suppliers in a live electronic bidding



The end result of such interaction among a network of suppliers was procurement cost savings of about 15% for the buyers



The company was founded in 1995 and was on the verge of breaking even in 1998



It was expecting to receive commissions and fees of nearly $6 million for arranging procurement of $200 million worth of industrial components and parts



FreeMarkets

背景介绍



95

年成立匹兹堡，创始人

Meakem

。  工业采购是一项非常巨大的业务，仅在美国 每年有超过

6000

亿的工业品采购。  制造业在选择供应商时面临着很大的 问题 ： 许多企业的采购技术水平很低，而能帮助它 们进行决策的信息也很有。要识别真正高质 量的供应商，并建立起合理的市场价格体系 相当困难。 

FreeMarkets

开发了交互式竞价系统。

The Move to B2B Commerce

B2B is Huge...

Business-to-Consumer Business-to-Business 2002 $843B 1998 $43B 1999 $109B 2000 $251B 2001 $499B

Source: Forrester Research, Inc.

2003 $1.3 Trillion

Highly Fragmented

  

Most product categories are highly fragmented, with numerous suppliers each offering different level of quality, service and pricing options Buyers incur significant cost in the actual purchase process

 

A buyer must invest internal resources to manage the process of collecting, analyzing and acting upon all the information in the market In addition to purchase price companies spend over 10% in additional procurement costs On the suppliers side, there are significant costs in using the manufacturing reps



These commissions range from 4% to 7% of purchase price

How Does FreeMarkets Online Create Value for its Customers?



Consulting/Purchase outsourcing



Distribution Intermediary



Network Enabler/Software Provider



Putting together specs, drawings, lot sizes, documentation and RFQs

报价请求 

Identifying potential savings opportunities



Identifying and qualifying suppliers



Educating and training buyers



Conducting the Competitive Bidding Event (CBE)



Providing post bid analysis and support

How Does FreeMarkets Online Create Value for its Customers?



Consulting/Purchase outsourcing



Distribution Intermediary

Traditional B2B Trading Exchanges

Industrial Buyer Manuf. Rep.

Manuf. Rep .

Manuf. Rep .

Supplier 1 Supplier 2 Supplier 3

Internet Based B2B Trading Exchanges

Industrial Buyer Supplier 1 FreeMarkets Online Supplier 2 Supplier 3

How Does FreeMarkets Online Create Value for its Customers?



Consulting/Purchase outsourcing



Distribution Intermediary



Network Enabler/Software Provider

Which suppliers benefit from this model?



Low cost, quality suppliers will benefit as they drive competition out of the market



The FreeMarkets model would be beneficial for large more efficient suppliers



It will also provide opportunities for a host of small suppliers, especially if they are located overseas

The Revenue Model



A hybrid of service fees and sales commissions

佣金 

FreeMarkets charged monthly fee from the buyer based on the size of the market making team dedicated to the event



Winning supplier paid sales commissions; this was paid in installments as suppliers shipped products

胜出的供应商支付销售佣金，这一费用在供应商 发运产品时分期支付

Problems with the revenue model

 

Buyer side:



FreeMarkets invests substantially in a project



Consulting revenue is independent of the value created



Does not lead to another intensive purchasing study for the customer



Gross margin on consulting is about 22% Supplier side:



FreeMarkets does not represent the supplier



FreeMarkets success depends on their ability to identify many potential suppliers



Suppliers pay commissions to the company that reduced their margins

Vertical vs Horizontal Focus?

垂直集中和水平集中？



Vertical:



Advantage: FreeMarkets can capitalize on its deep knowledge of supplier industries



Disadvantage: Hard to scale-up



Horizontal:



Advantage: Ability to generate multiple contracts from one buyers



Disadvantage: FreeMarkets does not bring much expertise to the transaction

By the end of 1998…



FreeMarkets was pursuing the horizontal market expansion



In 2000, the company started licensing its software

The company went public in 12/99...

Freemarket’s Stock Price

 从

95

年成立到

97

年底，公司已经为

15

家采购 客户处理了

38

宗不同的竞争性投标，从近

40

个供应商那里采购了

7000

万美元左右的产品， 节约比例从

1

个百分点到

43

个百分点不等。

Where is FreeMarkets today?



For the three months ended in 3/31/01



Revenue totaled $33M



Net loss(

净亏损

) totaled $43.7M



For the three months ended in 12/31/01



Revenue totaled $44.8M



Net loss totaled $2.8M

E-Marketplaces: The Initial (95-99) business model

  

The e-marketplace concept started as a new way to procure products. E-marketplaces



Expand everyone’s market reach

 

Generate lower price for the buyers Cut operational costs for buyers and suppliers Automating the procurement process will reduce processing cost per order from as high as $150 to as low as $5 per order

  

Focus on liquidity Transaction fee paid by the suppliers Serve as a virtual distributor

Consider Instill Corp.

 Instill.com

focuses on the food service industry and provides an infrastructure which links together operators, i.e., restaurants, distributors and manufacturers. This e marketplace provides value to its customers by offering not only procurement services, but also forecasting, collaboration and replenishment tools.



Instill.com

集 中于食品服务产 业，提供将饭店、 配送商和生产商 联系在一起的服 务。它向客户提 供采购服务以及 预测、协作和补 货工具等服务

Consider eSkye.com



In the alcoholic beverage industry,

eSkye

has tailored an offering that provides the supply chain with real value. eSkye now links retail stores, distributors and suppliers providing visibility into a supply chain where little data existed. eSkye adds value by automating the ordering process for the retailer while providing product flow information to distributors and suppliers.

在酿酒行业，

eSkye

公司提供真实的价值给整个供 应链。现在，

eSkye

将零售店、分销商和供应商联 系起来，提供缺乏信息的整个供应链的能见度。

eSkye

提供零售商能自动下订单的加值服务，同时 向分销商和供应商提供产品流信息。

E-Marketplaces

電子集市的类型

•

Private e-Markets

私有型 • •

Consortia-based e-markets Content based e-markets

联盟型 内容型

Evolving Market Types

提供 价值的 演化 

Private e-Markets



Valuechain.Dell.com (Dell), eHub (Cisco)

 

IBM, Sun Microsystems and Wal-Mart These companies use the marketplace to improve supply chain collaboration



Providing suppliers with demand information and production data

Evolving Market Types



Consortia-based e-markets



Covisint ( automotive ); Trade-Ranger (oil); Omnexus ( chemicals ); e2Open and Converge ( high-tech )



Objective of the consortia is



Aggregate activities and use the buying power of consortia members



Provide suppliers with standard systems that support all buyers and allows suppliers to reduce cost

– 汇集各种活动，并利用联盟会员的购买力 – 向供应商提供标准系统，支持所有买方，并使 供应商降低成本

Evolving Market Types



Content based e-markets

….

• Focus on Maintenance, Repair and Operations (MRO) goods • These are components that are not part of the finished product or the manufacturing process but are essential for the business • Examples include lighting, office supply, fasteners,…

E-marketplace Examples

Independent Vertical Exchanges (IVX) Independent Horizontal Exchanges (IHX) Consortia Trading Exchanges (CTX) Private Trading Exchanges (PTX)

A Framework for eProcurement(1)



Type of Component



Strategic Components

• • •

Part of the finished product Not industry specific; company specific Examples: PC motherboard and chassis



Commodity Products

•

Can be purchased from a large number of suppliers

• •

Price is determined by market forces Examples: Memory unit in a PC



Indirect Material

• 维修和作业等用的材料，如照明设备、办公用品等。

A Framework for eProcurement (2)



Level of Risk



Uncertain Demand (Inventory risk)



Volatile(

浮动的

) market price (Price Risk)



Component availability (Shortage Risk)

(e.g.) Risk: Commodity Products



Can be purchased either



in the open market through on-line auction, or



through the use of long term contracts to supply



Long term contracts guarantee certain level of supply but may be risky for the buyer



Inventory risk, shortage risk or price risk

实际需求与预测的 高或低

Analysis about Framework for eProcurement



(1) Indirect Material



Typically low risk

content

and hence the focus is on based hubs (

目录产品

).



The objective is to use an MRO-hub that specializes in unifying catalogs from many suppliers



Examples: MRO.com, Grainger on-line catalogs

Grainger

   

W. W. Grainger has been selling industrial supplies for 72 years In 1995 Grainger established Grainger.com, an on-line catalogue for more than 220,000 products from 12,000 suppliers In 1999, Grainger experienced revenue growth of $102M through its internet channel The MRO supply industry is growing at a rate of 3-4% a year. From 1996 to 1999 Grainger internet sales grew 32% a year and 20% in offline due to customers that were lured to Grainger from the web site

 Grainger 从事工业品销售 72 年  1995 年， Grainger 建立了 Grainger.com

， 包括由 12000 家供应商提供的 220000 种产品 的目录  1999 年 , Grainger 通过互联网实现了 1.02

亿美元的收入增长  MRO 供应产业的年增长率为 3% 至 4% 。从 1996 年至 1999 年， Grainger 的因特网销售 每年增长 32% ，其中 20% 是由于线下客户被 吸引到 Grainger 的网站

Analysis about Framework for eProcurement (2)



(2)Strategic Components



Typically high risk components that can be purchased from a small number of suppliers



The objective is to use private(

专用的

) or consortia-based(

行业的

) e-marketplace.



The focus is on an e-marketplace that allow

collaboration

with the suppliers

Analysis about Framework for eProcurement(3)



(3)Commodity Products

    

Products go directly into finished goods

•

High risk Many potential options to choose from Long Term Contracts

•

Buyer and supplier commit to certain volume (called the commitment level)

•

Supplier guarantees a level of supply for a committed price Flexible, or Option Contracts

•

Buyer pre-pay a relatively small fraction of the product price up-front, in return for a commitment from the supplier to satisfy demand up to a certain level (called the option level)

•

The buyer can purchase any amount up to the option level by paying additional price for each unit purchased Spot Purchasing

A Framework for eProcurement: A Portfolio(

组合

) Approach Option Level

一般选择水平和基本供 货水平不会同时都高 初始合同 量大

H L Inventory Risk (Supplier) Price, Shortage Risks (Buyer) L N/A Inventory Risk (Buyer) H

Commitment Level

E-Procurement: The reality



Companies conducting greater than 20% of procurement transactions online have reduced their transaction processing cost by nearly a third (Hackett Benchmarking)

在线采购交易超过

20%

的公司交易处理成本降低了

1/3(

以惠普为标准

)



Product savings and process cost improvements effect operating cost by 10% (Credit Suisse First Boston Technology Group)

产品节约和处理成本的改善对运营成本的影响为

10%

E-Procurement: The reality



To capture this benefits purchasing organization needs to invest heavily in:



Changing internal procurement processes



Integrating e-marketplaces in internal systems



Purchasing B2B applications software



Paying e-marketplace transaction fee/subscription fee Source: Forrester Research

Positive Aspects of Trading Exchanges (Companies who use exchanges):



Reduce costs or labor (31%)



Better access to products/vendors (24%)



Increase speed or efficiency (29%)



Access to more customers (21%) Source: AMR Research

Positive Aspects of Trading Exchanges (Companies who plan to use exchanges):



Reduce costs or labor (43%)



Better access to products/vendors (26%)



Increase speed or efficiency (23%)



Access to more customers (10%)



Source: AMR Research

Negative Aspects of Trading Exchanges (Companies use exchanges):



Security trust (17%)



Start Up cost (5%)



Loss of face-to-face relationships (12%)



Lack of standards (5%)



Immature technology (5%)



Integration issues (7%)



Source: AMR Research

Negative Aspects of Trading Exchanges (Companies who plan to use exchanges):



Security trust (16%)



Start Up cost (15%)



Loss of face-to-face relationships (11%)



Lack of standards (6%)



Immature technology (6%)



Integration issues (4%)



Pricing pressure (6%)



Source: AMR Research

Section I Strategic Alliances Section II The third Party Logistics Section III FreeMarkets Online Section IV Procurement Section V Outsourcing

How to Capitalize on the real Business Opportunities?

Outsourcing ...

functions operations

ORGANIZATION TECHNOLOGY TM -46

Outsourcing



An “easy way” to increase profits

What is outsourcing?

What is outsourcing?

 The phenomenon that appeared in the late 1980s was

outsourcing

, which means turning over a firm's operations, or perhaps other functions to a vendor for a specified time - generally, at least for three years.

TM -48

Why Outsoucing?

 Outsourcing has become an option that most CIOs need to consider to satisfy their management that their operation is being run efficiently, effectively, and economically Dr. Chen, The Trends of the Information Systems Technology

TM -49

The Driving Forces Behind Outsourcing



Two drivers



focus

•

on core business



value

•

Shareholder

Dr. Chen, The Trends of the Information Systems Technology

TM -50

Outsourcing As an Economic Strategy



Core competencies



Which sources are less expensive



How much control is needed

Dr. Chen, The Trends of the Information Systems Technology

TM -51

Examples of outsourcing



Nike, Cisco, Apple outsource most of their manufacturing



Each could focus on research, marketing

 Nike 将主要精力放在产品的研发和推销上，这 个战略使Nike在90年代的年增长率达到20%。  Cisco公司采用“全球虚拟制造”战略，每年节 约56亿美元的业务费用。  Apple外包了它70%的部件。

Examples of outsourcing(Cont’)



Each has gotten into trouble

•

2001 – Nike reported unexpected profit shortfalls due to inventory problems

•

2000 – Cisco had to write down billions in obsolete inventory

•

1999 – Apple was unable to meet customer demand for new products

Outsourcing Benefits and Risks

 

Benefits



Economies of scale reduce manufacturing costs

 

Risk pooling – demand uncertainties are transferred Reduced capital investment

  

Focus on core competencies Increased flexibility Risks



Loss of competitive knowledge Conflicting objectives

•

Flexibility vs. long-term, stable commitments, etc.



Consider the IBM PC example.

IBM Global Services Value Framework

IT WHAT SHOULD I DO ?

HELP ME DO IT BUSINESS Business Consulting Services

    Human Capital Solutions Customer Relationship Management Financial Management Supply Chain & Operations Management    Strategic Change e-business Integration Transform and Operate Solutions

Integrated Technology Services

  

Infrastructure & Systems Management Services Networking & Connectivity Services Technical Support Services



Business Continuity and Recovery Services Maintenance Services



Technical Training Services

56

MANAGE IT FOR ME

  

Outsourcing Services Outsource Management, Operational and Support Processes



Finance & Accounting



Human Resources



Procurement



Customer Care Infrastructure



Servers



Web Hosting



Network



Desktop



Storage



Groupware



Disaster Recovery



Security Application Management Services



Custom & Legacy



Packaged

IBM, A Business In Trouble

1993



Individual business strategies



Brand erosion



Becoming irrelevant



Fragmented marketing investments



Lack of marketing expertise



Lack of marketing management system

Relationship Development Promoting Client Experimentation Learning Network Development Capability Development

1997: (Re-) Introducing the Business Dimension 

Internet rise to prominence



"Browser wars" dominate



IBM recognizes the opportunity for another perspective: Helping businesses do real business, using Internet technologies. Defines positioning as "e-business"

A Framework for Outsourcing



Reasons for outsourcing



Dependency on capacity



Dependency on knowledge



Product architecture



Integral products – components are tightly related

• •

Designed as a system Not off-the-shelf components

•

Evaluated based on system performance



Modular products –independent components

A Framework for Outsourcing

(Fine & Whitney) Product Modular Integral Dependent: knowledge, capacity Outsourcing risky Outsourcing very risky Indep: knowledge Dep: capacity Outsourcing opportunity Indep.: knowledge capacity Outsourcing can reduce cost Outsourcing option Keep internal

日本 的汽车制造厂商只生产25%的部件，大量的业务实行 外包，形成一个供应链条，大大提高了日本汽车制造业 的快速反应能力。 • 丰田具备生产发动机的能力和知识，全部发动都是自己 生产。 • 公司具有设计和生产传动装置等零部件的知识，但却依 靠供应商的生产能力，70%的部件生产外包出去。 • 汽车电力系统完全包出去，在能力和知识两方面都依赖 外部力量。

Q&A