In 2001, when Delta Air Lines Inc. was grappling with rising fuel prices, terrorist attacks and fare wars, the $15 billion airline carrier set an aggressive goal of cutting 3% from its $10 billion annual spending on direct and indirect goods and services within three years. While its fuel costs alone total over $6 billion, the biggest logistical problem it faced was negotiating better deals with
the 6,000 other suppliers that provided the other 40%.
How did Delta do? The short answer is that it achieved its goal and then last year it saved another $200 million on top of that. The 'how' boils down to Delta's decision to automate, with the help of VerticalNet LLC, a Malvern, Penn.-based software vendor."It starts with the process, and the tool supports the process," says Bob Currey, Delta's general manager of sourcing innovation and supplier management.
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Currey's team used VerticalNet's program and negotiation manager solutions to guide them through each step of the strategic procurement process, including creating standards for bid creation and contract negotiations. Delta previously spent hundreds of hours collecting, normalizing and evaluating its supplier data, much of it in disparate, non-standard forms. It negotiated by phone, fax and
e-mail, and it used spreadsheets to create RFPs. With VerticalNet, the RFP process went electronic, providing standardized data on suppliers and expediting selection. A savings of 2% in the cycle time alone can snowball into a 14% reduction in the end cost of a new product, according to the Boston-based Aberdeen Group Inc.
E-sourcing, which includes Web-based catalogues, auctions and electronic requests for information, quotes or proposals (RFx's), is more than just establishing an electronic venue for buyers and sellers to meet. It is about changing the power balance in favor of the buyer.
For instance, with e-sourcing negotiations, suppliers can see in real-time how their bids are holding up against competitors, setting up the prospect of a bidding war. Companies can actually drive down prices by as much as 20%. "It ensures that the negotiating part of the process isn't your weakest part, but is in fact your strongest part of the sourcing process," says Robert Rudzki, president of Pittsburgh-based consulting firm Greybeard Advisors LLC.
Cambridge, Mass.-based Forrester Research Inc. evaluated 12 vendors against 127 criteria, including: spending analysis; supplier discovery and assessment; RFx and auctions; sourcing decisions; and pricing and market presence. Sourcing specialist Emptoris Inc. of Burlington, Mass. edged ahead of perennial leader Ariba Inc. of Sunnyvale, Calif. in supplier assessment, spending analysis and sophisticated bid optimization. No. 3-ranked VerticalNet scored well on spending analysis.
Since each criterion has a different weight, companies can customize the Forrester scorecard against their own particular needs in order to select the vendor most appropriate for them. SAP AG and Oracle Corp. are the laggards, failing to offer the crucial spending analysis modules that allow companies to drill down into specific categories.
Nevertheless, the tools are only as good as the processes behind them. "The one mistake that we made early on, and I've seen a lot of companies make, is [to] view these tools as the silver bullet that's going to unlock all of these savings," says Currey. "The tool is just like a wrench in a mechanic's hands. It's only as good as the guy using it."
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