InformationWeek
Defining The Business Value Of Technology
November 10, 1997
Electronic Purchasing: What's Your Bid?
FreeMarkets' real-time online bidding technology lets clients drive down costs and improve product value
For manufacturers that use FreeMarkets' request-for-quote (RFQ) and online bidding technology, IT isn't just an enabler. It also lets them drive down the cost of procuring parts, and lets them offer customers the best value on finished goods. After researching and pre-qualifying suppliers for a client's RFQ, F
reeMarkets hosts an online event in which suppliers bid against each other in real time.
"While most of the Internet-enabled procurement industry is focusing on transactions, we're simply trying to help people make better purchasing decisions," says FreeMarkets president Glen Meakem, who co-founded the company with executive VP and fellow ex-McKinsey consultant Sam Kinney in March 1995.
FreeMarkets' blue-chip customer roster includes manufacturing leaders such as Caterpillar, General Motors, Procter & Gamble, United Technologies, Westinghouse, and Whirlpool. The business benefits of making better purchasing decisions include lower prices and time savings for buyers. FreeMarkets estimates that its clients save, on average, 17% in procurement costs. Some customers say they're saving as much as 20% to 30% in product procurement expenses by using FreeMarkets' combination of services, which include research and consulting as well as management of the online bid process on a private IP network from CompuServe
Network Services. At the core of the service is FreeMarkets' BidWare PC software.
Customer Control
"They bring suppliers together and let them beat each other up on price to benefit the buyer," says Russ Maney, an analyst at Forrester Research in Cambridge, Mass.
So what's the appeal for suppliers to participate in FreeMarkets' online bidding? Vastly expanded markets, particularly for smaller companies. Master Molded Products Inc., a small manufacturer of injection-molded thermal plastics in Elgin, Ill., has been successful in several FreeMarkets online bids over the past 18 months. "It's a unique approach to reaching large customers," says Larry F
erguson, Master Molded's VP of sales and marketing. "You can reach the right people at the right levels-people you couldn't reach through normal means."
A good example is FreeMarkets' first customer, Frigidaire. "This was a great opportunity for new suppliers to make inroads into our company. It put everyone on equal footing," says Fran Pattonrick, a former purchasing manager for Frigidaire. "We thought we had cost problems, and we were looking for ways to find new suppliers and cut costs." The company saved about 20% on parts with FreeMarkets, he says.
No Hassles
FreeMa
rkets' technology also illustrates how customers can use IT to simplify management of other business processes related to the online bid. "They have very good data-management capabilities," says Burns. "Our bid consists of thousands of part numbers, and they put that into a usable RFQ."
Burns' division, which makes industrial turbines and generators, did an online RFQ bid through FreeMarkets six months ago and plans several more before the end of the year. Through the FreeMarkets bid, the company spent about 30% less than what it had traditionally spent for a supply of customized hardware, including nuts, bolts, screws, and fasteners. Burns says two-thirds of the savings came from competitive pricing on the bids and one-third from Westinghouse Power Generation's own operational efficiencies gained by spending less time researching suppliers and conducting negotiations.
The online-bidding process also forces suppliers to consider other factors besides price, such as the size of the order. "Non-price terms
are standardized," says FreeMarkets' Kinney. "If the buyer says the minimum order quantity is 25, then that's what it is. If the supplier says they can't do less than 50, that's their tough luck." Other important qualification criteria for suppliers include a solid management team, an adequate manufacturing facility, geographic proximity, and, in some cases, ISO 9000 quality-assurance certification.
FreeMarkets' approach to online procurement differs from that of industrial-purchasing Web sites such as General Electric's Trading Process Network (TPN). It also differs from that of Internet-based purchasing software vendors such as Ariba, CommerceOne, and Elekom. Those efforts generally aim to automate and streamline customers' existing purchasing relationships, cut operations costs, and free purchasing managers to focus on more strategic activities. By contrast, FreeMarkets is focused entirely on the bid process.
But there's another important distinction. FreeMarkets' RFQs are not typically set up for sh
ipments of commodity parts that are listed in suppliers' catalogs. Instead, the specialized RFQs handle parts that must be custom manufactured by the suppliers or their subcontractors.
While many online and Web-based procurement services focus on purchases of standard maintenance, repair, and operations (MRO) supplies, FreeMarkets' customers seek much more specialized components that go into the products they manufacture. These include fasteners, iron castings, machine parts and stampings, and plastic injection moldings. In some cases, the stack of engineering blueprints and material specifications for such an RFQ can be 20 inches thick, says Kinney.
Westinghouse Power Generation's recent FreeMarkets-based bid, for example, sought industrial fasteners that are engineered to precise specifications for use in highly complex turbines and generators. "It's when there is no catalog-when the parts are unique-that you need a special market-making technique like what we offer," says Kinney. "There's no online mal
l where you can buy that stuff or comparison shop."
Lots Of Potential
While that may seem like a huge jump, Meakem bases his confidence on the increasing awareness of E-commerce among U.S. businesses -particularly manufacturers. "We were on the bleeding edge two years ago," says Kinney. "When we called some of these companies and explained online bidding, their response was, `Huh? Why would we want to do that?' Since then there has been so much market momentum behind E-commerce."
Kinney adds, "Even $500 million is next to nothing compared with the total spending of our customers. One single RFQ event could b
e for that much."
Privately held FreeMarkets employs 35 people and makes money from both the small fees paid by the buyer and the larger sales commissions paid by suppliers. The company won't specify the amount of those commissions, but Kinney says they are in the low single-digit percentage range. Next year, the company plans to begin licensing its BidWare software, a PC package based on Intuit's Quicken model, to both buyers and sellers to conduct their own online bid events. For now, FreeMarkets manages those events on the CompuServe network.
Although the online bid event is the centerpiece of FreeMarkets' business, the company also provides a variety of offline services leading up to the event. FreeMarkets consults with buyers to identify purchasing areas where they can save the most money.
The company helps the buyer prepare the RFQ, and then helps research qualified suppliers, evaluating criteria such as product line, geographic location, and financial health. "If you don't have the right people
bidding on the right things, online procurement is garbage, no matter what fancy technology you're using," says Meakem.
While FreeMarkets' supply-management employees use the Web to research suppliers, much of their work is decidedly low-tech. "It's like an executive search to find suppliers," says Meakem. "We research public sources in the library and work the phones." In one case, an employee had to drive 100 miles to Kent State University in Kent, Ohio, because its library had the nearest database of glycerin suppliers, which FreeMarkets needed for research on behalf of a food-processing company preparing an RFQ.
The FreeMarkets approach may appeal to buyers that haven't yet fully automated or Web-enabled their internal procurement processes. Westinghouse Power Generation, for example, is just now converting its enterprise-resource- planning functions to SAP R/3, and is considering whether to integrate R/3 with FreeMarkets' online bidding in the future.
Offline Commerce
For Proctor & Gamble, the FreeMarkets service has had limited value. "It has to be used for certain kinds of products, in certain kinds of market conditions, at certain times," says Jody Thompson, senior purchasing manager at P&G in Cincinnati. "It's best when there is a lot of competition in a market." Thompson says P&G mainly relies on traditional manual procurement processes.
At its core, business-to-business electronic commerce is all aboutmatching buyers and suppliers so that transactions can take place. Forrester Research has identified three models for on
line procurement: catalog, auction, and bid.
Catalog, which involves one buyer and one seller at a time, is the largest segment, accounting for 60% of the $8 billion market. Noted examples include companies such as AMP, Cisco Systems, Dell Computer, and National Semiconductor selling to corporate buyers, resellers, and distributors via the Web. Intermediaries, such as GE TPN, that post sellers' catalogs, also fit into this category.
The auction model also involves an online bidding event, but buyers compete for a successful bid from a single seller. Web startups such as FairMarket in Boston and FastParts in Chicago are testing this model, which has seen success in the business-to-consumer market through OnSale Inc. and, more recently, Internet Shopping Network's FirstAuction auction site.
The bid model, which involves real-time bidding for multiple suppliers' products, is the only one of the models that will increase its market share in the next five years, according to Forrester. But all three approac
hes will grow dramatically as the overall business-to-business E-commerce market more than doubles annually to reach $327 billion in 2002.
The combination of bidding lower prices while paying a sales commission to FreeMarkets might not seem at first like a compelling value proposition to suppliers. But FreeMarkets has recruited more than two dozen suppliers to date, including the Haarmann & Reimer chemicals division of Bayer Corp., as well as smaller companies. The attraction for these companies is simple: an opportunity to increase sales. "The hard sell is to the buyers," says Meakem. "Once you have them, suppliers will come."
FreeMarkets hopes to ride the wave of popularity for E-commerce that's increasingly placing more and more control and pricing leverage in the hands of buyers.
"Large industrial buyers generally have very poor information," says Meakem. "We focus on the buyers, giving them better information and pull
ing suppliers to them."
While specialized manufacturers may not think of themselves as being in the information business, FreeMarkets is showing them how strategic and timely information can help smart companies find the best value.
--with additional reporting by
Marianne Kolbasuk McGee
or businesses looking for the slightest edge to keep ahead of their competition, innovation in deploying and managing information technology is at the heart of differentiation. A small, virtually unknown Pittsburgh company called FreeMarkets OnLine Inc. has grabbed hold of this tenet with online IP network-based technology that advances the decades-old bidding process for procuring industrial parts. Using an innovative online bidding process, FreeMarkets is helping companies find the lowest-priced products, which rewards the most efficient suppliers.
FreeMarkets' online bidding process is an example of what online commerce trend futurist George Gilder calls the "increased sovereignty of the customer in the information economy." It not only expands buyers' available universe of potential suppliers, but it also forces those suppliers to be more efficient so they can bid the lowest possible prices.
Online bidding not only reduces purchasing costs, but it also saves buyers from the hassles of lengthy and potentially acrimonious negotiations with suppliers. "It's a great consolidation tool, a lot quicker and cleaner than doing it on our own," says Kevin Burns, VP and general manager of operations at Westinghouse Electric Corp.'s Power Generation division in Orlando, Fla. "For us, it's fully transparent and non-emotional."
With satisfied customers like Westinghouse Power Generation, FreeMarkets has a huge potential market to tap; the Westinghouse division purchases $1.2 billion in goods annually. And Meakem predicts that by year's end, FreeMarkets will have handled $100 million worth of procurement contracts for all of its customers. He projects the company will handle $300 million to $500 million in 1998.
For now, though, the
Westinghouse division is happy to work with FreeMarkets in a mainly offline fashion, and FreeMarkets actually doesn't see a lot of potential in SAP integration. "In terms of procurement, ERP systems usually generate data about replenishment needs, while our technique tends to be very episodic," says Kinney. "RFQs of this type are still generally done on paper. Putting them online would be extraordinarily expensive from a bandwidth point of view."
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