Vincenzo Marino worked for a company that used robots on an automobile industry assembly line. There, he watched as workers sat idle while the plant waited for a crucial part that someone had forgotten to order. "Every time you make a mistake, the company loses time and money," observes Marino.
In 1989 Marino left to join Unitec, an outsourcing supplier specializing in supply chain management and logistics. The company has two offices in Europe, one in Augsburg, Germany, the other in Saubaudia, Italy. Marino, the CEO, was determined to improve the process.
Marino says his goal was to offer his customers the ability to consolidate their buying and make Unitec their sole purchasing office. The outsourcing provider would help its buyers avoid costly purchasing errors, consolidate purchasing to save money and simplify billing.
Marino started his outsourcing venture with the auto industry, because that's where his expertise lay. Now Unitec has added the printing, rubber and chemical industries to its client roster. Its typical customer has 10,000 or more suppliers.
In 1995, to avoid the growing mountain of paper, Unitec began to use an enterprise resource planning (ERP) application for its procurement activities. Marino, who is also a programmer, wrote the ERP program himself. Unitec was paperless in 24 months. Going paperless eliminated the need to store old receipts or archive the information on microfilm, saving the customers money.
Turning to the Web for E-Procurement
In 1997 the Internet promised an even better solution to supply chain management. Marino opened Unitec Services and Web in Italy, becoming an Italian Internet service provider (ISP) in the process. Unitec Netsourcing built a program to support e-procurement.
Originally, Unitec's outsourcing efforts separated the "buying" activity from the "supply" function. Unitec's customers had already selected the suppliers they wanted to deal with and had already negotiated the price. All this information was on a database. When the customer decided to outsource the supply function to Unitec, it handed over this database. Unitec then wrote letters to these suppliers informing them they would be receiving all future purchase orders from Unitec.
Unitec took over the supply side by handling the orders for its customers. In Europe, "buying is a core business for customers. Supplying is not. It's an administrative task," he explains.
The outsourcing provider noticed that many of its customers were buying common items. Unitec was able to aggregate these orders, negotiating a better price because of volume discounts. Some clients needed such small amounts they had to buy retail. But with Unitec as their supplier, they had the opportunity to add their orders to the larger ones, qualifying them to purchase wholesale.
In addition, its customers were also able to save money on transportation and billing by cutting out the distributors. Marino estimates Unitec customers today pay at least 50 percent less than the retail cost. The outsourcing provider shares any additional price savings with its customers. And they only receive one bill a month instead of thousands.
Translating Orders into the Buyer's Language Automatically
Customers can fax their purchase orders to Unitec. But many are utilizing the e-procurement option. They use the Internet to access their supplier database at Unitec and send orders electronically. If the supplier is domiciled in another country or speaks a different language from the buyer, the application will translate the order into the supplier's native tongue. "In Europe we have a new language every 300 kilometers," Marino jokes. Unitec employees review the translations to make sure the interpretation is correct.
The application allows Unitec to send purchase orders to suppliers real time. If the supplier does not have the technology to receive orders via the Web, Unitec will send a fax instead.
Warehousing the goods is a critical piece of the supply side operation. Unitec immediately pays the supplier, financing the purchase until it bills its customers.
Vendors - its suppliers circle the globe -- ship goods to Unitec's ubiquitous warehouses, which are set up to accept small quantities. The warehouses are typically just 100 kilometers apart. Unitec guarantees it can move goods from one warehouse to another within three hours.
The outsourcing provider explains that in Italy, industrial districts have concentrations of industry groupings. For example, Turin has a cluster of automobile manufacturers because that is the home of Fiat. Bologna is known for its furniture makers. Many of these companies have their own warehouses. "There's a lot of duplication. You can have 500 companies with 500 warehouses with 500 administrations," Marino explains.
Unitec has purchased some of these warehouses and taken over the administration of others on an outsourced basis. The company then combines the contents of all these warehouses into a single database, creating a "virtual warehouse." Owners of warehouse A can now sell their goods to owners of warehouse B through Unitec.
Cutting Warehousing Costs Up to 80%
Marino estimates companies can cut their capital costs in warehousing up to 80 percent. Information drives decisions, cutting actual transport. For example, a shoe retailer may have 90 pairs of Manolo Blanik shoes in stock in the warehouse. One hundred pairs is the minimum it must keep in stock. But if the retailer knows there are another 10 pairs available in the virtual warehouse, he won't immediately buy those 10 pairs. He'll just buy them from the virtual warehouse stock when he needs them.
Outsourcing the procurement process makes sense for customers in seasonal industries. They only have to pay procurement costs when they incur them. Marino says not having a fixed cost on the balance sheet is a business advantage.
Currently all of Unitec's customers are in Europe. Marino says in general Europeans are afraid of outsourcing. But they are researching the possibilities because "they know it's not a fad."
Marino adds that some Europeans are not as computer literate as people are in other regions. To them a computer is "a complicated piece of machinery." However, the CEO says the folks with this ostrich mentality do realize they are taking a risk if they ignore the possibilities of the Internet.
The University of Rome has noticed Unitec's Internet initiative. Next year the university is offering a master's degree in the new economy with Unitec as the paradigm.
Lessons from the Outsourcing Primer:
- Outsourcing supply chain management cuts thousands of supplier bills down to one.
- E-procurement creates accurate, real time orders.
- Europeans are more reticent about outsourcing than their American counterparts.
- Aggregating supply can cut costs by at least 50 percent.