When Hurricane Katrina devastated New Orleans, it impacted some refineries and industries that are key to the production of foam. That impact struck the bottom line of Chicago, Illinois-based Estee Bedding.
Tim Enright, President of Estee Bedding, recalls that in addition to Katrina's impact, two other suppliers of a key product used in the manufacture of foam closed their doors for financial reasons. Suddenly prices for the product skyrocketed by 67 percent.
Lisa Reisman, Managing Director (US) at Aptium Global, says her company helps small and midsize manufacturers save money on their cost of goods--all of the materials and inputs that are used in a manufacturing process. Service provider Aptium uses a Lean Sourcing approach, integrating lean manufacturing and strategic sourcing principles to reduce a client's total cost and improve agility.
Estee Bedding, which manufactures wholesale and custom mattresses for sofa sleepers; army cots; rollaway beds; beds in hospitals, trucks, and dormitories; as well as mattress covers, pillows, and sheet sets, began enjoying the benefits of Aptium Global's expertise in December 2004 when it started buying inner springs from China. Unfortunately, the springs arrived rusty, and the cost to de-rust more than offset the cheaper price from the Chinese supplier.
Aptium stepped on board and subsequently conducted a pre-qualifying quality check of suppliers in its process of finding various domestic and international inner springs suppliers and found another Chinese supplier. It then conducted a rigorous audit of the supplier including product quality, logistics, capacity, and a physical examination of the supplier's plant. This sourcing strategy and subsequent change in suppliers lowered Estee Bedding's cost by 20 percent ($280,000 annually).
On the heels of that success, Estee Bedding and Aptium Global focused on determining whether they could achieve lower prices than Estee Bedding's incumbent foam supplier. They conducted a live auction online, during which the incumbent lowered its prices by 13 percent. Still, another supplier bid lower. Enright says, "The incumbent supplier was golden, so it kept 80 percent of our business, but we gave the new supplier 20 percent."
For 45 days, Estee Bedding enjoyed the price break. Then Katrina whirled through, and every supplier's price increased. Even so, Aptium's plan benefited the mattress company and Enright was encouraged. "If it hadn't been for the lower-price offer of the incumbent supplier, my prices for foam after Katrina would have increased 80 percent instead of 67," Enright states.
Estee Bedding and Aptium Global then undertook two other Lean Sourcing projects--one to reduce costs for second-tier supplies (such as corrugated cartons, plastic bags, and mattress covers), the second to enter a new market and import retail sheet sets.
Behind the Scenes at Aptium Global
Reisman, whose background includes over 15 years' experience in management consulting and direct-materials sourcing prior to founding Aptium Global, says the lower-middle-market manufacturers (with $30 - $200 million in sales) "tend not to use strategic sourcing or technology solutions very much. Their smaller purchasing staffs are more concerned about making sure materials arrive on time."
Aptium uses Iasta SmartSourceTM technology to help deliver its expertise and services more efficiently. "We knew that we needed technology solutions in place the moment we launched our company two-and-a-half years ago to support our services," says Reisman. "We started with Iasta in place on day one."
They considered other solution providers among companies on a short list provided by Reisman's husband, whose background includes "FreeMarkets, which was the granddaddy of this area of applications in the sourcing world." There were a lot of good companies and good solutions, she says, but after a demo and reviewing the offering, "choosing Iasta was a no-brainer."
Iasta SmartSource is available through licensing or in a Software-as-a-Service model, thus eliminating the high maintenance and ownership costs typically associated with sourcing technology. All components of the Iasta solution are Web accessible for clients as well as a client's customers and suppliers. Iasta.com, Inc., an Indianapolis, Indiana-based provider of e-Sourcing software and services for global supply management, brands its SmartSource solution for a client and implements the technology the same day a client signs a contract for the solution.
Iasta also provides Web-accessible or on-site training, coaching clients on best practices and how to get the most out of the application. It's fully supported on an ongoing basis both from a technical and usage-expertise perspective.
David Bush, Senior Partner and Vice President of Business Development at Iasta says sourcing through Iasta's application increases efficiency, improves a bid process, and reduces the sourcing-decision lifecycle, resulting in shorter timeframes between milestones and the sourcing process. He says the tool can cut a client's time to market in half or sometimes by two-thirds by decreasing the sourcing-decision process.
Iasta SmartSource handles the negotiation components of a sourcing decision. It aggregates all suppliers' information into common formatting, analyzes it, and then facilitates the negotiation process and the decision on how to award the project; and it all happens online. At that point, the project goes out of Iasta's realm and into the client's e-procurement system or ERP system to handle contracting and start working with the selected supplier.
Bush refers to the "Rule of 3's" in describing a sourcing process that's not automated. "When you have multiple delivery locations, multiple line items of price, and multiple vendors, that's a three-dimensional scenario where you can no longer eyeball the answer on how to award the business."
In addition, he explains that every business has constraints involved in the sourcing-decision process. For instance, perhaps a certain amount of business is designated to go only to minority suppliers or maybe a certain amount of business needs to remain with an incumbent supplier. "They can't necessarily just give the contracts to the supplier with the lowest price," says Bush.
"Our technology uses the industry's most powerful decision-optimization engine, enabling analysis of complex award scenarios with constraint-based mathematic modeling," Bush explains. After all the suppliers submit their information, the technology clearly indicates the best supplier choice based on the buyer's needs and requirements as well as the cost.
Without an automated solution, manufacturers and other companies making sourcing decisions need people to do "a lot of heavy lifting in sophisticated Excel spreadsheet usage. Trying to shoehorn business-specific constraints into a spreadsheet is something Excel is not really meant to do," he says. The automated sourcing process is not only faster but also is more accurate.
Dairy Queen, Inc. began using Iasta SmartSource late in 2006 to increase its efficiency and accuracy of bid collection and award allocation for complex sourcing projects and lower its procurement costs. Will Costello, Vice President Purchasing, International Dairy Queen, Inc., says the Iasta software "enhances our analysis capabilities, enabling us to consider multiple supply-chain scenarios in dramatically compressed timeframes. The tools and services are invaluable."
Bells and Whistles Are Not the Only Consideration
Reisman says "the beauty of Iasta is its simplicity. It has an intuitive user interface, and it doesn't have 27,000 bells and whistles that small or mid-size companies don't need. A smaller manufacturer's smaller amount of spend is not as complicated, so the more sophisticated functionalities that large enterprises need in sourcing technology is overkill for the lower middle market."
Contract management and other bells-and-whistles features are available in Iasta's solution for companies such as Dairy Queen that do need these functionalities.
In addition to pre-qualifying potential suppliers' product or service quality, Aptium Global manages project timelines through Iasta and clients can go online to check status of the various stages of a Request for Quote process. The system also has a tool to break down cost-breakdown post procurement event.
Another important functionality is a place to share engineering drawings and other voluminous information attached to RFQs or bids. "Without this functionality, sending that volume of data via e-mail to 10 suppliers located around the world gets very complicated. The Iasta system gives you a vault where you can put all information, and suppliers can access it via a secure password and ID. It's invaluable to us," says Reisman.
Aptium Global also uses the Iasta technology to conduct Requests for Information pre-event or even when there's not a specific procurement event for a client. "We use it to begin the supplier-identification process. For instance, we might need to determine who in the world can supply resistance wires. So we send a generic kind of questionnaire--here's what we're looking for; get back to us and let us know your interest and capability of supplying these wires."
Aptium also uses Iasta's application to conduct an occasional reverse auction for its clients, particularly in areas where there is a lot of competition for a particular item such as a printed circuit board. Historically, reverse auctions acquired a stigma of putting suppliers through a no-win aggressive pricing war. Reisman points out that Aptium's business model prevents this from occurring.
"Since we work on a contingency basis, we only get paid when savings are °•implemented'--that is, when our client orders a supplier's parts; otherwise, we don't get paid," states Reisman. "So we have to make sure we very highly qualify suppliers and make sure they're really world class and top-notch. Our reverse auctions are a high-level vetting process, and we don't get goofy low-ball quotes that a lot of other companies experience."
Bush adds that many people have a mistaken perception that e-Sourcing and reverse auctions are the same thing. "That's not the case," he explains. "A reverse auction is only one piece--just one arrow in the quiver. There's a lot more to supply management and e-Sourcing than that."
There's also a collaborative functionality in the RFP and RFI components of the Iasta technology. A client can collect a large amount of data from suppliers, run it through different sourcing scenarios, and then go back to the suppliers with suggestions on what they should do or an area where they should lower a price in order to get more of the client's business.
As with any solution from a service provider, the technology and pricing may be a wow factor, but the provider's customer service approach is of paramount importance. Reisman says Iasta's customer service is "outstanding," with phones answered on the first ring and a team that's "very flexible and willing to work with us on anything we could need. And they work in our timeframe, not theirs."
That customer-service approach is crucial to Aptium Global's satisfaction. It is, after all, a service provider itself. One of its manufacturing clients, for example, is a tier-one automotive supplier producing automotive emissions canisters for customers such as GM and Audi. So the domino-effect impact of good customer service from Iasta to Aptium, then from Aptium to its clients and their customers, goes a long way. It's icing on the cake, but an important value of outsourcing to achieve efficiencies and cost-reduction in e-Sourcing.
Lessons from Outsourcing Journal:
- The lower middle market manufacturers (with $30 - $200 million in sales) tend not to use strategic sourcing or technology solutions, as in-house purchasing staffs are more focused on making sure materials arrive on time. Outsourcing is a cost-effective way to access automated sourcing solutions.
- The Software-as-a-Service model eliminates the high maintenance and ownership costs typically associated with sourcing technology.
- Every business has constraints involved in the sourcing-decision process, making it too complex to simply award contracts to the lowest-price suppliers. World-class e-Sourcing technology uses the industry's most powerful decision-optimization engine, enabling analysis of complex award scenarios with constraint-based mathematic modeling.
- Many people mistakenly believe that e-Sourcing and reverse auctions are the same thing. "But a reverse auction is only one tool in supply management and e-Sourcing.
- Choose an e-Sourcing solution that has collaborative functionality in the RFP and RFI components of the technology. A buyer can collect a large amount of data from suppliers, run it through different sourcing scenarios, and then go back to the suppliers with suggestions on what they should do or an area where they should lower a price in order to get more of the buyer's business.
- An outsourcing provider's good customer service is an important component of a solution and, in a supply chain process, has a domino-effect impact on many companies throughout the supply chain.