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The Hidden Gems of the Enterprise Application Space Part Two: Sorting and Selecting SRM Software

Written By: Predrag Jakovljevic
Published On: October 30 2003

Sorting the SRM Software Suppliers

Given the enthusiasm from early adopters, it is hardly surprising that a wide range of software suppliers is adopting the SRM acronym. There are several dozen vendors that are offering suites of SRM functionality and coming from different worlds, based on their origins. A great part of these logically hail from the SCM space such as i2 Technologies, Logility, and Manugistics, which regard SRM as a natural extension to their core supply chain planning (SCP) and procurement applications. These vendors have recently added functionality to support some sourcing business processes between manufacturer and supplier. As for most ERP vendors, which first extended their offerings to include supply chain activities, they have also added functionality and staked their claims in the SRM market. These vendors have the advantage of being able to tap into functionality from their other core applications like ERP, CRM, PLM, and SCM to support supplier-oriented processes, given they also have access to data in those systems to support such processes.

To add SRM modules to their own software suites, most enterprise applications suite vendors have launched portal initiatives that should tempt partners to share information about customers' demands in return for deeper product knowledge, training, and for more efficient ways of involving suppliers.

Then, as seen many times before in the enterprise software market, many specialist SRM start-up vendors have already jumped at the opportunity and have come up with by and large partial answers to the above market needs. A number of the still existing pioneering vendors that first offered specific SRM offerings a few years ago would include strategic e-sourcing/spend management providers like Diligent, Procuri, Emptoris, Frictionless Commerce, diCarta, Zeborg (recently acquired by Emptoris), Silvon Software, Healy Hudson, MindFlow, Perfect Commerce, B2eMarkets, Digital Union, Portum, Moai Technologies, eBreviate, etc., and vendors like SupplyWorks, Apexon, WeSupply, Eventra, RiverOne, Entomo etc., which focus more on the supply chain visibility, the tactical needs of manufacturing entities, the flow of information between the internal systems and trading partners as to keep the plants running, while supporting some strategic SRM activities.

PLM vendors like Agile Software and MatrixOne, which have recently added sourcing capabilities to their offerings, have also joined the SRM fray. Both indirect and service-oriented e-procurement vendors (A.T. Kearney Procurement Solutions, SupplyWorks, Elance, FreeMarkets, Ariba, Commerce One, CombineNet, VerticalNet, etc.) cannot be omitted either. Neither can the analytic/data mining providers like SAS Institute, Informatica, Salvos, and so on. If one is to nitpick, supplier portal providers like ClearOrbit and Izodia or on-line providers of the supplier invoice and payment services like Burnes E-Commerce, also touch on SRM.

Despite their different backgrounds, all the above vendors prove the point that the processes that make up SRM depend on a hybrid of technologies and require a significant implementation, data cleansing migration, and integration effort at most organizations. Still, two underlying results that an effective SRM project should achieve would be 1) the automation of the processes by which a company buys supplies, which can range in sophistication from automated generation of requests for proposals (RFPs) to more holistic order management systems, and 2) to provide the analysis that enables buyers to assess historical supplier data and base subsequent purchasing decisions on the results.

This is Part Two of a two-part note.

Part One discussed the emergency and promise of SRM.

What Can SRM Provide

As a recap, SRM allows companies to integrate with their most important suppliers to streamline order management, replenishment, fulfillment, inventory management, and engineering change management (ECM). The key words pervading so far have been sourcing, spend management, and contract management. Namely, the core procurement process has become fairly mature and most enterprise application packages provide solid support for the purchasing process.

To provide a more distinct value proposition, vendors are providing value-added functionality that helps with tasks outside the procurement cycle. The most significant one is strategic sourcing, which through rating and ranking criteria, a purchasing officer chooses the optimal set of suppliers to negotiate a contract with. It enables enterprises to evaluate potential mixes of materials and services and determine appropriate suppliers and terms and conditions to balance cost, quality, and risk. The applications can capture supplier information and serve as a medium for collaboration between buyer and supplier on the requirements of the purchasing organization.

Generally, the term strategic sourcing denotes many steps that precede the signing of a contract, including spend analysis, identifying potential suppliers, RFQ and contract negotiation, and monitoring and improving suppliers (which logically may happen both and after the contract signing). As companies continue to strive to reduce the internal costs of their products and services, more pressure is on the procurement group to source from the right supplier that can deliver as needed, at the right price, but also subject to many other measures some of which can be of a non-quantitative nature, such as product availability, specifications, freight expenses, warranty, terms of contract, distribution partners, and what not. The sourcing equation can become even more complex when federal and state government regulations and corporate mandates such as sourcing from minority-owned businesses are brought into play as thresholds that cannot be circumvented.

Spend management comes in the form of software and services and allows organizations to gain control of the entire purchasing cycle, since the organizations deploying spend management across their e-purchasing operations should have a much better idea of how their money is being spent. Moreover, they must ascertain how much money is spent and where, before they can identify opportunities to improve sourcing via, e.g., negotiations with the supplier to produce a mutually beneficial contract. Knowing how much is spent on different parts, suppliers and product categories is crucial, as well as how much money has been spent against a corporate purchase contract. These enterprises are then able to instigate consistency across the business, while reducing process times and cutting costs by consistently managing spending across the enterprise, which includes visibility across diverse divisions, geographies, enterprise solutions, and all spending categories (e.g., travel, staple goods and services, projects, MRO, and direct materials). Spend management also requires rigid principles and governance to enforce compliance, which means establishing methods of monitoring spending against the budget and providing appropriate alerting and escalation processes for dealing with spending that exceeds budget levels.

Contract management is another key component of enterprise spend management, since contracts are the point around which much of a company's dealings with its suppliers pivots. Buyers and suppliers can spend an inordinate amount of time figuring out details about obligations and remuneration, incentives and contingencies. However, for companies handling dozens of contracts, ensuring that suppliers adhere to contract details is often too cumbersome to be executed. Most enterprises do not have formal systems in place to manage contracts, and thus, financial or purchasing executives often do not have visibility into contracts because they are kept in multiple different storage systems or, even, as hardly accessible hard copies.

Companies need contract management solutions that can reach across those repositories to help managers gain a comprehensive understanding of the trade agreements under which the enterprise operates. The lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the relationship with the supplier. At best, the users seem to be increasingly able to track contract expiration, which is only a minor part of total contract management requirements and potential benefits. In addition to simply standardizing contract language, payment terms and other requirements, the efficiencies are gained through analysis of all the contracts to discern trends and identify weaknesses in the process.

While many people have realized the power of e-commerce on the consumer side, there is still plenty of education to be conducted by all the SRM vendors as to prove how much leverage their applications can bring to corporate buyers.

User Recommendations

The initial step for companies thinking of investing in SRM is to develop their overall business strategy regarding their procurement channels. The most important point for prospective buyers of SRM technology or any technology is to do a very thorough analysis of their existing systems, where their corporations' business needs will be in the next few years, and how they intend to integrate the systems (given that mapping data from one place to another is the most arduous, expensive, and time consuming part of the whole process, and one of the major reasons for the failure of many IT projects) before even talking to any vendor. Manufacturers and service providers should give as much attention to their inbound side as they do to the entire supply chain in terms of more advanced on-line facilities beyond simple web portals or catalogues.

Also, SRM software should only be used to work alongside existing interpersonal relationships, and not to replace them. Many parts of SRM are just facilitating tools—while they do not replace people, they can nonetheless free people up to do the quality strategic relationship building. Suppliers can be valuable partners, but only if the buying organization is well put in place to manage all of its relationships, and if it makes the necessary investment in people, business processes, and facilitating tools. An undefined sourcing strategy, insufficient spend program support, and unrealistic expectations from the suppliers would be perfect examples of disastrously poor foundation practices onto which one should attempt to graft SRM software.

Implementing pieces of SRM can change the transactional nature of interaction with suppliers and get organizations about cross-enterprise processes and moving to a model based on partnering. Enterprises should start with one or two manageable pilot projects and take it from there. An audit of purchasing and accounts payable data audit and analytics are good places to start, often providing useful supply chain information that highlights other obvious areas for improvement. Invoice duplication, overcharges, contractually prohibited transactions occurrences, etc. are apparent red flags. A lack of clean and consistent data is one of the biggest barriers to effective spend management and sourcing, since a lack of standardized supplier naming conventions, lack of parent/child hierarchy in suppliers, lack of standardized commodity codes, etc. are all too common practices. Thus, while planning the long-term SCM technology architecture, enterprises should rationalize their data and refine their spending analysis iteratively. To rationalize the supplier master data, establish a corporate commodity-coding schema, and get contracts in line, by possibly leveraging specialized service providers (e.g., audit firms, etc.) would be first steps toward near real time reliable reporting to provide the corporate and supply chain visibility in the long run.

Companies can generally chose an SRM system that is either a focused point solution that addresses specific complex needs (e.g., spend analysis, sourcing strategy development, evaluation of suppliers and contract negotiation, performance and compliance monitoring) or a larger, versatile but less focused solution with deep integration to other parts of the enterprise applications. Most SRM tools and vendors are helping to automate bits and pieces of the sourcing, but hardly any single vendor has a comprehensive and integrated product yet. Choosing a solution will also depend on the company's market size, its vertical focus, and the most compelling parts of the inbound supply chain.

Enterprises should first investigate how the improvements to the inbound supply chain can be achieved by adding a layer of collaboration above existing enterprise systems to extend them reliably and conveniently to suppliers, for example, by allowing suppliers portal-style access to their transaction logs and scorecard information. While the needs of employees, suppliers, and business partners will vary, successful integration tools will need to provide access to such applications as inventory control, ERP, SCM, data stores, packaged applications, legacy systems and a myriad of other applications. The effort will be grueling, but the returns from an integrated information portal can be significant.

As with any such purchase, users choosing point SRM products should consider the integration infrastructure (particularly the issues around master data, such as suppliers, spending categories, parts, projects, contracts, etc.) and effort needed to combine these products versus the cost and functionality issues of choosing an integrated SRM product suite (if a complete suite is possible to find). Mission-critical issues like scalability, reliability, openness, manageability, and ease-of-use go without saying.

There are huge benefits of gaining insight into corporate spending, especially if the scope of screening is manageable for the start. Ineffective spend management processes will prevent any organization in its attempts to contain enterprise costs. An integrated approach to spend management must include gathering information from all spending processes and constituencies (e.g., financial, purchasing, IT and other departments) to effectively manage the spend. The situation to obtain consensus is also important and not that easily obtainable in the case of sourcing based on multiple attributes. Given different constituencies are differently affected by attribute trade-offs, it is important to find a middle ground between departmental stakeholders like design engineers, marketing personnel, logistics managers, buyers, finance, legal department, etc., which all can also come from different locations (e.g., corporate office, local subsidiary, distribution center) and consequently have different agendas and approaches.

 
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