If you’re a mid-size or larger company that manufactures products sold to retailers, you’ll want to take a hard look at electronically connecting to your direct material suppliers. That would be your next move, and maybe you’ve already done it. The money you’ll save over time in connecting with your direct suppliers will dwarf what you’ll save with the retailers, which may actually be a net cost, not benefit, to you. The process of identifying costs and benefits of electronically connecting with these suppliers is pretty straightforward, and you may be able to get some help in analyzing the opportunity from 3rd parties like SPS and CommerceHub.
One aspect of your business that’s probably a little, or a lot, messier than dealing with direct suppliers is indirect materials purchasing. These products are known as ‘MRO’- maintenance, repair, and operational- supplies, the ‘stuff’ you use to maintain your equipment and facility. My previous employer is an MRO generalist with a huge catalog of these items distributed to millions of customers. We developed great insight into the challenges of electronically buying and selling MRO products by being early in the game and, in many cases, being the first EDI-enabled MRO supplier for many partners.
Our experience was pretty interesting. We faced challenges ranging from partners who wouldn’t follow standards to marketplace technology immaturity, and everything in between. It wasn’t always pretty, but as standards and technology evolved we developed the capability to connect to pretty much everything and everyone. We have well over a thousand connections with customers buying MRO supplies from us. That may sound like a lot, but it means that far more customers purchase from us using more ‘traditional’ methods like ordering over the phone, using the Grainger.com website, or walking into a branch location. Since the same benefits (improved speed, accuracy, etc.) touted for EDI/eProcurement in general are also relevant to MRO transactions, why do most buyers still do it the old fashioned way? Why wouldn’t you want to automate purchasing with an MRO supplier with whom you trade hundreds or thousands of transactions a year?
The benefits our electronic partners enjoy are indeed significant. Automating product selection, order placement, invoicing, and payments can create a very slick, extremely efficient process. It’s not achievable by everyone, though. You should consider automating MRO buying, but there are aspects of the MRO process you need to think about before taking that path. They include:
- The products. There aren’t universal standards in place for item descriptions, units of measure, packaging, and so forth. Since efficient EDI depends upon the flow of mutually understood information between parties, item level detail can be problematic.
The second issue with MRO products is with exactly what they are and how they’re used. Direct materials generally have well established lead times, and manufacturers know when they need to procure these products in order to meet production schedules. In many cases, MRO purchases are unplanned or needed immediately. That doesn’t necessarily preclude their being ordered electronically, but if a production line is down due to a burned-out motor, chances are you’re going to send a guy in a truck out to find a replacement rather than transmitting an EDI order to a supplier who may or may not have the product on the shelf.
- The process. The use of EDI or eProcurement technology should be evaluated with respect to its impact on the purchase-to-pay process. That ties into the previous point about immediate need purchases, but also is related to something as obvious as the proximity of your business to your supplier. If you’re across the street from a store and the most effective way for you to buy is to walk into the store and place a verbal order at the counter using a credit card to complete the purchase, introducing EDI into the process will only complicate matters.
- The people. It could be the best, most-efficient, cost effective process automation project ever, but if the users and management don’t understand why you’re doing it, how it works, and how it changes their world, it won’t succeed.
- The system. The project may make sense for all the right reasons, but maybe your ERP doesn’t support electronic order creation. A common issue is that development work or configuration on your system may be required, but the work isn’t considered a high priority.
There are indeed challenges, but I can assure you it’s possible, and often desirable, to leverage the work you’ve done to connect with retail hubs and direct suppliers by using EDI to buy MRO. Although we worked through issues with many partners, our success rate was very high overall. The experience of our project managers and analysts in working with MRO purchasers was instrumental in identifying potential problems early enough in the projects to create mutually acceptable solutions. Following are some suggestions on addressing the problem areas identified above.
- Once you decide on a direction, work with an experienced partner for your first implementation. Find out who your largest indirect material suppliers are, investigate their electronic offerings, and make a selection.
- Proceed slowly. I’d recommend implementing outbound orders first, then after proving the concept you can consider moving along into the other transactions such as purchase order acknowledgments, invoices, and EFT. Biting off more than you can chew is a big risk you can easily mitigate by knocking out transaction sets one at a time.
- To address the item information issue, you need to either synch your information with your suppliers, or get access to an on-line catalog that can be viewed by users. There are options available for this. You can arrange for a ‘content catalog’ from your supplier that includes all, or a subset of all, products and prices. You would then need to get this information loaded into your system or otherwise make it available so that the orders you send will have the information in the format needed by your supplier’s system. You’ll also need a process to apply updates to the file, since it’s not ‘live’ data and will need to be refreshed periodically.
Alternatively, if you’re not averse to doing something different, marketplaces are available with on-line content and a plethora of other purchasing functions. Some suppliers, like Grainger, have robust eProcurement offerings that include access to their on-line catalogs. Again, the key is to have information match on both sides of the transaction so that full automation is possible.
- Process impact needs to be thoroughly analyzed prior to moving ahead. The absolute worst thing to do is to go through the pain of a project only to end up with a slower, less effective process or, even worse, a process that is ignored. Since everyone does things differently, it’s impossible for me to give a lot of guidance here other than this is where the experience of your own people who understand current state will be helpful. Once you’ve made a tentative decision to move forward, your initial partner should be able to help you examine the potential impacts.
- Change management for your people could be a ‘make or break’ effort. Communicate what you’re doing, what your goals are, what effects you anticipate on the process and the organization, and be as transparent as possible. Enlist help from your ‘experts’ and use the project as an opportunity to grow the skills of your people.
Training is another crucial step. Since the process will change, those people involved in it, directly or indirectly, need to know the new steps and procedures well in advance of the ‘go live’ date. And lastly, let’s not forget that there may be some training required for the person who will be supporting the EDI aspect of this new process. Although you’ll generally just create one outbound map for all MRO suppliers, there are still tasks like partner setup, troubleshooting, and functional acknowledgment reconciliation that will need to be handled.
- Investigate system impacts. This may actually be on your critical path, so you ought to check this one out first. Many ERP systems are set up so that relatively straightforward configuration is needed to create outbound electronic orders. However, getting the work done may conflict with other priorities. Additionally, development may be required to support ancillary functionality, such as the processing of content catalog files and so forth.
Our technical team included people who were masters at building functionality and then finding additional value-added uses for it. They turned me into a big proponent of leveraging what’s already there to expand and enhance our capabilities. If a partner has mandated EDI for you and you’ve bought the system and developed the expertise to use it, you really ought to evaluate whether you can utilize it to automate some of the ‘messiness’ associated with buying supplies from your MRO vendors. It won’t be easy, but if you do it right it’ll really streamline your operations.