Chapter Chapter 77Procurement andProcurement and

OutsourcingOutsourcing

Chapter Chapter 77Procurement andProcurement and

OutsourcingOutsourcing

Qi Xu

Professor of Donghua University

Tel: 021-62378860E-mail: xuqi@dhu.edu.cn

Section IISection II ProcurementProcurement

OutsourcingOutsourcing

Section ISection I

Section IIISection III

Section IVSection IV

Section VSection V

Case: FreeMarkets Online

OutlineOutline

FreeMarkets OnlineFreeMarkets 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 CommerceThe Move to B2B Commerce

2003$1.3 Trillion

2003$1.3 Trillion

2002$843B2002

$843B

2001$499B2001

$499B

2000$251B2000

$251B

1998$43B1998$43B

Business-to-Business

Source: Forrester Research, Inc.

1999$109B1999

$109B

Business-to-Consumer

B2B is Huge...B2B is Huge...

Highly FragmentedHighly 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 How Does FreeMarkets Online Create Value for its Customers?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 How Does FreeMarkets Online Create Value for its Customers?Value for its Customers?

Consulting/Purchase outsourcing Distribution Intermediary

Traditional B2B Trading Traditional B2B Trading ExchangesExchanges

Industrial Buyer

Manuf. Rep. Manuf. Rep. Manuf. Rep.

Supplier 1 Supplier 2 Supplier 3

Internet Based B2B Trading Internet Based B2B Trading ExchangesExchanges

Industrial Buyer

FreeMarkets Online

Supplier 1 Supplier 2 Supplier 3

How Does FreeMarkets Online Create How Does FreeMarkets Online Create Value for its Customers?Value for its Customers?

Consulting/Purchase outsourcing Distribution Intermediary Network Enabler/Software Provider

Which suppliers benefit from Which suppliers benefit from this model?this model?

Low cost, quality suppliers will benefit as they drive competition out of the market The FreeMarkets model would be beneficial for la

rge more efficient suppliers It will also provide opportunities for a ho

st of small suppliers, especially if they are located overseas

The Revenue ModelThe 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 modelProblems with the revenue model

Buyer side: FreeMarkets invests substantially in a project Consulting revenue is independent of the value cr

eated Does not lead to another intensive purchasing stu

dy 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 id

entify many potential suppliers Suppliers pay commissions to the company that re

duced their margins

Vertical vs Horizontal Focus?Vertical vs Horizontal Focus?

Vertical: Advantage: FreeMarkets can capitalize on its dee

p 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

垂直集中和水平集中？

By the end of 1998… By the end of 1998…

FreeMarkets was pursuing the horizontal market expansion

In 2000, the company started licensing its software

The company went public The company went public in 12/99... 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?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 E-Marketplaces: The Initial (95-99) business model(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 Consider Instill Corp.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.comConsider 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-MarketplacesE-Marketplaces 電子集市的電子集市的类型类型

•Private e-Markets 　私有型•Consortia-based e-markets 　联盟型•Content based e-markets 　内容型

Evolving Market TypesEvolving Market Types

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

提供提供价值的价值的演化演化

Evolving Market TypesEvolving Market Types

Consortia-based e-markets Covisint (automotive); Trade-Ranger (oil); Omnexus (c

hemicals); 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 TypesEvolving 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 ExamplesE-marketplace Examples

Private TradingExchanges (PTX)

Independent VerticalExchanges (IVX)

Independent HorizontalExchanges (IHX)

Consortia TradingExchanges (CTX)

A Framework for eProcurement(1)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)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.)(e.g.) Risk:Risk: Commodity Products 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 ePrAnalysis about Framework for eProcurementocurement

(1) Indirect Material Typically low risk and hence the focus is on conten

t based hubs( 目录产品 ). The objective is to use an MRO-hub that specializ

es in unifying catalogs from many suppliers Examples: MRO.com, Grainger on-line catalogs

GraingerGrainger

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 ePrAnalysis about Framework for eProcurement (2)ocurement (2)

(2)Strategic Components Typically high risk components that can be purch

ased from a small number of suppliers The objective is to use private( 专用的 ) or consort

ia-based( 行业的 ) e-marketplace. The focus is on an e-marketplace that allow collab

oration with the suppliers

Analysis about Framework for eAnalysis about Framework for eProcurement(3)Procurement(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 PortfoA Framework for eProcurement: A Portfolio(lio( 组合组合 ) Approach) Approach

Inventory Risk

(Supplier)

Inventory Risk

(Buyer)

Price, Shortage

Risks (Buyer)

N/A

Commitment Level

Option Level

L H

H

L

初始合同

量大

一般选择水平和基本供货水平不会同时都高

E-Procurement: The realityE-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 realityE-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 Positive Aspects of Trading Exchanges (Companies who use 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 Positive Aspects of Trading Exchanges (Companies who plan to Exchanges (Companies who plan to use exchanges):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 Negative Aspects of Trading Exchanges (Companies use 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 Negative Aspects of Trading Exchanges (Companies who plan to Exchanges (Companies who plan to use exchanges):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

Strategic Alliances

Section IISection II

ProcurementProcurement

OutsourcingOutsourcing

The third Party Logistics

Section ISection I

Section IIISection III

Section IVSection IV

Section VSection V

FreeMarkets Online

functions

TECHNOLOGY

operations

How to Capitalize on the real Business Opportunities?

Outsourcing ...Outsourcing ...

ORGANIZATION

TM -46

OutsourcingOutsourcing

An “easy way” to increase profits

What is outsourcing?

What is outsourcing?

TM -48

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.

Why Outsoucing?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 OutsThe Driving Forces Behind Outsourcingourcing

Two drivers focus

• on core business value

• Shareholder

Dr. Chen, The Trends of the Information Systems Technology TM -50

Outsourcing As an Economic StrategOutsourcing As an Economic Strategyy

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 outsourcingExamples of outsourcing

Nike, Cisco, Apple outsource most of their manufacturingEach 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’)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 Outsourcing Benefits and RisksRisks

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 IBM Global Services Value FrameworkFramework

Outsourcing Services

Outsource Management, Operational and Support Processes

Finance & AccountingHuman ResourcesProcurementCustomer Care

InfrastructureServersWeb HostingNetworkDesktopStorageGroupwareDisaster RecoverySecurity

Application Management Services

Custom & LegacyPackaged

BUSINESS

IT

Integrated Technology Services

Business Consulting Services

Infrastructure & Systems Management Services

Technical Support Services

Maintenance Services

Human Capital Solutions Customer Relationship

Management Financial Management Supply Chain &

Operations Management

Strategic Change e-business Integration Transform and Operate

Solutions

Networking & Connectivity Services

Business Continuity and Recovery Services

Technical Training Services

WHAT SHOULD I DO ?

56

HELP ME DO ITMANAGE IT

FOR ME

IBM, A Business In Trouble

Individual business strategies

Brand erosion

Becoming irrelevant

Fragmented marketing investments

Lack of marketing expertise

Lack of marketing management system

1993

Client Experimentation

LearningPromoting

Network Development

Network Development

Relationship DevelopmentRelationship Development

Capability 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 A Framework for OutsourcingOutsourcing

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 OutsourcingA Framework for Outsourcing (Fine & Whitney)(Fine & Whitney)

Product Dependent:knowledge, capacity

Indep:

knowledgeDep: capacity

Indep.:

knowledgecapacity

Modular Outsourcing risky

Outsourcing opportunity

Outsourcing can reduce cost

Integral Outsourcing very risky

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&AQ&A