InformationWeek
Defining The Business Value Of Technology
July 26, 1999
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Byles says the average cost reduction on operational supplies generated by online purchasing applications is 5% to 20%. For large, global companies, which typically spend hundreds of millions of dollars a year on nonproduction supplies, that can mean huge savings, making the cost of the systems almost trivial.
For example, Unilever Corp., the $48 billion Anglo-Dutch maker of food, home, and personal-care products ranging from ice cream and tea to shampoo and deodorants, built its own online procurement system for centralizing the purchasing of computer equipment throughout its network of 300 subsidiaries operating in 88 countries. The application allowed Unilever to consolidate all its contracts with vendors, giving the company far greater purchasing power and driving down the cost of most gear by 20% to 40%.
Unilever spends $160 million a year on computer products, which adds up to $32 million to $64 million in savings annually. The application cost just $200,000 to create, according to Martin Armitage, the director of global infrastructure for Unilever.
Companies also gain returns from a reduction in their purchasing department workforce--but often only by a couple of people--as well as a reduction in expenses associated with the supplies and services used in the traditional purchasing process, including paper, faxing, and express mail delivery.
This is just the beginning, IS executives say. Online procurement systems bring tough-to-calculate productivity gains by unburdening workers from tedious, time-consuming, and inefficient manual methods of processing purchase orders. Employees can work more quickly and focus their attention on more strategic tasks.
Efficiency Gains
But his first ROI calculation based on these numbers came out so high he knocked the cost estimate of the previous manual system down a notch or two just to be conservative. But even given such leeway for the innately inexact estimation of time costs, Diamant-Berger and other IT professionals say the ROI of online procurement systems easily outshines most other enterprise software investments.
Redshaw, for example, says Ariba's Operating Resource Management System is showing a return on investment three times the benchmark FedEx uses for approving an IT project, which the company declined to disclose. FedEx had already automated much of its ordering process through electronic invoices and E-mail approval--which means the ROI from Ariba's product arises mostly from the savings generated by its online cataloging function. That function centralizes and consolidates the purchase to a select few vendors, eliminating the need for employees to pick up the Yellow Pages or drive to a store to search for the items they need.
Photo by Jack Kenner
Immediate Savings
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Still, few applications provide a more immediate cost savings than procurement systems. Torrey Byles, president of Granda Research, says after wages and taxes, daily nonproduction-related spending on such items comprises the largest segment of costs in many companies. "That's why this software category is so hot," he says. "One application can reduce one of your company's greatest expense points."
Federal Express Corp. of Memphis, Tenn., has installed Ariba's Operating Resource management System. Toby Redshaw, FedEx's VP of global supply-chain integration, says the system helps his company save with "opportunistic buying." Since online procurement centralizes all purchasing policies, such as which vendors employees must use, he can switch all purchases of certain items to vendors that are overstocked or running one-time discounts on their inventory. "I can aim the buying spigot very quickly to where it is most advantageous," Redshaw says.
Calculating savings from volume discounts is simple math, but money saved from the reduction of time spent by employees on the purchase process is one of the most difficult costs to quantify. Baseline estimates for the amount of time spent--read wages lost--using manual ordering methods can greatly effect the outcome of an online procurement system ROI. For example, Schlumberger's Diamant-Berger initially estimated that each order processed cost $50 to $150 in wages for the time spent to fill out paperwork, route purchase orders for approval, get executive approval, and other administrative tasks. He estimated Commerce One's system would reduce that to $10 to $20 for each order.
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