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The Hidden Gems of the Enterprise Application Space

Written By: Predrag Jakovljevic
Published On: October 29 2003

Emergence of SRM

The evolving supplier relationship management (SRM) market and its ever-evolving or emerging constituent parts like e-procurement, strategic sourcing, spend analysis and so on have lately shown great opportunities to the pure-play SRM vendors with genuine value prepositions. These have been seen in increased user awareness and adoption, certain venture capital investments in these days of scarce capital outside the trendy biotechnology sector, which then prompted geographic expansion and sporadic mergers of incumbents with complementary offerings.

It would not be a colossal discovery to realize that difficult economic times with flat and often crippling revenues have particularly forced enterprises to reduce costs in ways other than tried-and-true massive layoffs. Purchasing departments, which have long been regarded as "necessary-evil pen-pushers," have recently come to mind as the bottom line improvement opportunity makers through ensuring sourcing and procurement of all materials (indirect and direct) and services for the organization in a more strategic, streamlined, efficient, and cost-effective way.

Owing to ever increasing deployment of outsourcing, virtual manufacturing, contract manufacturing, vendor managed inventory (VMI) and many other modern manufacturing concepts due to increased global competition and the need for enterprises to focus on their core competencies, enterprises are often spending over 50 percent of their revenue on procured goods and services. Thus, suppliers' bases have been an ever-increasing factor to every organization's performance. Moreover, suppliers, many being manufacturers themselves, should be leveraged as a valuable source of expertise instead of being treated as a mere external cost center (if the user companies could glean that knowledge at all), capable of helping their customers deliver more innovative products faster and at better quality levels, and not necessarily only at lower prices. In other words, the competition has meanwhile shifted from being between individual companies to being between companies and their value chains.

However, so far, the communication between manufacturers and their suppliers has been mainly transactional and at arm's length in nature. As a result, few companies can openly claim to manage their suppliers closely and efficiently, and hence, deliberately or not, many continue to put up with being inexplicably overcharged for orders or with accepting late shipments. The situation gets even worse when the enterprises have to discern how much they spend, with whom, on what items and during which period. For that reason, they also have to maintain entire teams of employees to perform either mundane or frustrating administrative tasks generated by purchasing activities, such as checking deliveries against orders, expediting missing orders, fielding questions from requestors and suppliers, tracking down delinquent payments, and processing paper-based invoices.

Amid this chaos that leaves very little time for conducting any strategic work (e.g., crafting a sound sourcing strategy, supplier agreements, leverage aggregate spending, conducting astute supplier evaluation and tracking, and creating a viable mix of suppliers and subsequent optimal supplier business allocation, etc.), they are forced to make new purchasing decisions based mainly on inexact notions of which suppliers offer the lowest prices, or the fastest delivery at the time. The ramifications of maverick spending, redundant supplier arrangements and so on have been well publicized in the past, and almost everyone reading this could contribute with his/her version of bad experience and annoyance.

This is Part One of a two-part note.

Part Two will discuss what SRM suppliers offer and give recommendations on how to select SRM software.

The Promise of E-procurement

During the dot-com euphoria, many were dreaming about savings through automated e-procurement of indirect materials, bundled with auctions and quantity/price-based bids (requests for quotes/RFQs) via once proliferating Internet market places (often even hoping it to be a penny-pinching stint at the expense of resentful participating suppliers), the more realistic ones have always known the importance of the strategic supplier base.

The value proposition of e-procurement software focused on two areas:

  1. Reducing the time and costs necessary to expedite an order

  2. Getting the lowest price from suppliers


With the advent of the Internet exchanges, the emphasis was again primarily on auctioning and getting the cheapest price available for buyers. The overlooked and missing aspect in both cases was the supplier, which largely explains these once high-flying markets' not so glorified recent history.

Still, the value proposition of indirect materials e-procurement software remains considerable, promising gains in contract value with suppliers, enhanced workflow processes that can be integrated with other enterprise systems, and a more efficient purchasing process that can reduce requisitions' fulfillment time to hours instead of days. Users are however far more knowledgeable and critical about the promises made by the vendors, and are demanding more proof of the ROI attained. Consequently, the e-procurement vendors have been adding functionality for enabling purchase officers to better select vendors through sourcing features, and support suppliers through catalog management tools and portals.

Now that back-to-basic reality has indisputably triumphed, almost every company has been closely scrutinizing closely their relationships with suppliers and figuring out how best to reach, leverage and nurture them. Supplier participation remains an important consideration for surviving e-procurement vendors and their users. Namely, sourcing and auctioning functionality cannot work properly without suppliers answering RFQ criteria and submitting bids. With the core procurement functionality matured, buyers and vendors need supplier participation to achieve a level of collaboration to complement the procurement process. Given ever-shorter product life cycles and companies' ever-increasing reliance on third parties to increase customer satisfaction, the need for some form of supplier relationship management (SRM) category of software should not be questioned.

Still, the indirect e-procurement functionality has matured to almost a commodity level. Enterprises have a large number of vendors to choose from, with many bringing a wide spectrum of expertise to their offerings. Incumbent vendors such as FreeMarkets, Ariba, or Commerce One still have superior skills for building marketplaces and managing business-to-business (B2B) transactions, while traditional enterprise application vendors such as SAP, Oracle, PeopleSoft, or SSA Global have experience and ability in managing the financial settlement and integration with back-office applications like financial accounting and inventory management systems.

Consider Direct Materials

However, direct materials are where enterprises need to pay more attention to detail as to further save costs and leverage suppliers' expertise beyond customary catalog browsing and hunting for the cheapest commodity. Direct materials that go directly into the final products are often more critical to the bottom line, as they contribute to the costs of the finished goods and services provided to customers, have a major impact on profit margins and involve much more intricate sourcing and procurement practices. True, in some asset-intensive industries like mining or utilities, indirect materials associated with maintenance, repair, and operation (MRO) represent the majority of the expenses. Thus, both direct and indirect materials management have driven enterprises to take the next step by making the sourcing of products and services strategic to the organization.

A decade ago or so, material planners would scrutinize their material requirements planning (MRP)-based recommended orders' printouts, and order materials based mostly on price breaks offered by the supplier. Knowing their decisions were not optimal (i.e., that could be tangibly purported), they had to use their gut feeling and other empirical means, bundled with cumbersome or rudimentary spreadsheets to analyze and execute their decisions, even though an optimal sourcing strategy was only an abstract notion. In the case of some well versed buyer doing things almost right, these practices would hardly ever be documented, and any new buyer would have to figure these out for himself/herself upon the predecessor's departure.

Challenges to SRM Initiatives

Thus, SRM describes an emerging category of software to manage these evolving relationships between manufacturers and suppliers. Given the relative nascence of the SRM movement, it often means different things to different people. The SRM market landscape is also quite fragmented as many vendors support only one process or aspect of the entire spectrum from requisitioning to monitoring supplier performance. Also, due to its roots in both procurement and supply chain management (SCM), and given many vendors are using different names to describe their focus (e.g., sourcing, spend management, visualization, etc.) the confusion further abounds.

If one is to consider SRM as an overarching strategy (concept) of all business interactions between manufacturers and suppliers, it should encompass design, planning, sourcing (including analytics/spend management and sourcing execution), purchasing, order fulfillment, payment/settlement and feedback (e.g., scorecards and supplier performance monitoring). SRM should also try to enable some or all of the following—automation, optimization, visibility, collaboration, self-service, and cross-process integration. Of those functions above, sourcing and procurement would be more "introverted," i.e., dealing with identifying spending patterns, best supplier mix and product categories, and directing internal employees towards best-value purchasing behaviors, contracts and automated processes. The other parts of SRM are more "extroverted," dealing with automating supplier interactions (i.e., transactions, information sharing, and collaboration).

The relative immaturity of most company's SRM initiatives and of the SRM software market provides additional challenges. Namely, enterprise resource planning (ERP) solutions for the most part, cover the same, well-established basic footprint of ERP functionality. Some have gone so far as to call ERP software a commodity, although that ignores the fact that there are still key differences between many solutions, particularly for different industries. The SRM market on the other hand, covers a wide range of the above-mentioned previously unrelated software applications and the suites offered from different vendors can vary dramatically. For example, some vendors will refer to SRM as extended procurement process, others to a collaborative layer that sits atop SCM applications, and still others will refer to analytics and decision support. Some products offer tools for reverse auctions and multi-attribute sourcing logic, while others focus on the operational aspects of procurement like automated replenishment. On the other hand, some prospects' SRM needs may start with the design phase in the product lifecycle management (PLM) and extend to the processes that would rather fall under supply chain execution (SCE) like distributed order fulfillment.

In other words, the SRM market is still in its infancy compared to ERP, and is emerging from the traditional procurement applications, primarily due to expanded collaboration features and the availability of Web-based technology. Thus, no vendor provides all (if even a majority) of the required solutions for a full SRM initiative at this stage, so almost all solutions will involve best-of-breed components. Due to the number of components that are used to deliver an SRM solution, there is still a plethora of niche providers that offer compelling products yet fail to deliver on the breadth of the solution required.


This concludes Part One of a two-part note.

Part Two will discuss what SRM suppliers offer and give recommendations on how to select SRM software.

 
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