Using the Internet for RFQ Management: A GE Case Study
William G. Cafiero
William G. Cafiero, Sr. Consultant: GE Information Services, Dallas, TX 75240, 972-788-8241
82nd Annual International Conference Proceedings - 1997
Overview. In today's competitive business environment forward looking companies are continually evaluating ways to become more productive and to lower their costs. One area of significant opportunity for most businesses is the purchasing process. This process includes all the steps from identifying requirements and potential suppliers, through the final payment for the goods or services purchased. In GE's case, considerable thought has been given to the process of purchasing indirect and MRO materials and services.
In 1995 GE began development of a computer tool to assist buyers in the management of the RFQ process. This tool is part of the GE Trading Process Network suite of services and is called TPN Post (e.g. it is used to "post" RFQ data to selected suppliers). What is TPN Post? In its simplest form it is a tool that enables GE to communicate electronically with its potential suppliers, in an easy to use, cost effective fashion, to manage the entire RFQ and supplier negotiation process. It uses up-to-date RFQ management software, for GE and its suppliers, connected via a low cost, very secure, internet communications link. The complete service includes consulting services to assure that GE maximizes the potential of the service, along with dedicated customer service functions to support both GE and its suppliers.
The objective in using TPN Post is to automate as many of the non-value added tasks in purchasing as possible, while providing a streamlined and structured method to locate, communicate and negotiate with suppliers. In summary, TPN Post offers GE opportunities to improve the purchasing process by:
- Removing non-value added activities
- Increasing supplier choice
- Fostering price competition
By using TPN Post the scarce purchasing resources that GE has available can focus on true value added purchasing activities, rather than spending time on the low value added transaction handling parts of the process.
GE Lighting Case Study. GE Lighting is continuously improving its products and customer service, in an effort to strengthen its market leadership position in the US. Worldwide, more than 400 new products were introduced last year, with an emphasis on quality and customer value.
Improved customer service and satisfaction around the world is an ongoing priority at GE Lighting. The "Satisfaction Guaranteed" program was designed to increase product placement in retail outlets and provide a strong incentive for customers to buy GE compact fluorescents.
GE Lighting is reinvesting in the business to improve competitiveness, quality, service, and cost. Customer satisfaction levels are growing, partly due to a $100 million investment made in 1994 to expand production capacity and improve manufacturing processes.
Corporate Goals. GE Lighting is studying several methods to increase its competitiveness. One technique GE Lighting is implementing allows suppliers to place bids electronically. The initial and primary focus has been on the MRO side of the lamp manufacturing function to purchase replacement manufacturing parts more efficiently. However, packaging is involved on a limited basis for box designs, cartons, and shrink wrap, and some direct materials, (e.g., chemicals and glass) are being purchased via the new system as well.
In North America, there are 26 lamp plants. All purchasing is done centrally, and long-term contracts were let for many commodity items. Purchases are made from approximately 80 suppliers - 55 of whom are considered to be qualified suppliers by GE Lighting. GE Lighting maintains a "performance book" on each of the 55 qualified suppliers. Other suppliers include local suppliers and specialty item suppliers. These suppliers create specialty items that are designed by GE and manufactured to GE drawings to support the MRO process (maintaining the lamp manufacturing equipment). Approximately 5,100 quotes were let in 1995, with 2 buying agents supporting the effort. Many thousands of items are purchased by GE Lighting to support the lamp manufacturing MRO process.
The impetus for using the TPN Post system is multi-fold, focusing on achieving cost savings and increasing productivity. Specifically, GE Lighting anticipates that the new system will allow it to:
- Achieve immediate cost savings by more competitively selecting suppliers (domestically and globally)
- Reduce the sourcing cycle by 50% (from 10-14 days to 1 or 2 of GE Lighting's involvement)
- Do daily quoting, as needed
- Allow buying agents to focus on the strategic components of the purchasing process (e.g., increasing productivity and quality), rather than the transactional ones (e.g., pulling the drawing, preparing the bid package)
Actions. The lamp machine parts to maintain the machines generally are purchased in small quantities, although there are thousands upon thousands of them - with a price tag of approximately $20 million/year. Machine parts are contained in 1.5 million drawings - all of which have been in paper format. GE Lighting is actively rasterizing (digitize and store drawings as an electronic image) them. Currently, 110,000 drawings are in the system - and by the end of 1996, 500,000 will be rasterized (GE Lighting is only storing drawings for the equipment that is operating in the plants).
In the past, the purchasing system was manual. At the end of the day, electronic requisitions from each plant were batched to headquarters. When an item hits the minimum level in the inventory control system, a requisition is automatically spit out. In some cases, an established vendor held a contract to supply the part and automatic ordering occurred. At headquarters a request for retrieving the drawing from the vault was prepared. After the drawing was pulled and reviewed, a decision was made - by one of the 2 buying agents - as to whom to solicit a quote from (a producibility review). Then a bid package was then manually prepared (including the drawing). This process took anywhere from 7 to 14 days.
The TPN Post system integrates the requisition, print rasterization, and electronic bidding systems. The steps are as follows:
- The plant electronically generates a request which is batched to headquarters (in the same way as it occurs with the manual system).
- The next day, the buying agent reviews the request, and pulls up the drawing on his/her desktop.
- The buying agent then uses TPN Post to select the appropriate suppliers to send the RFQ to, based on their capabilities and performance. TPN Post sends an "automated fax" message to each selected supplier informing them of their selection for this particular project. From this point on supplier communication and response is done in a "paperless" environment using the TPN Post service.
- The buyer uses TPN Post, with its Internet communications process, to distribute the RFQ to the selected suppliers. Typical RFQ data includes the items required, the target price, the bid due date, and the date that the machine part must be supplied.
- Potential suppliers access their "electronic mailbox" on the TPN Post service to see what RFQ requests GE Lighting has transmitted. They will be given approximately 7 days to review the bid package (including the drawings) and to prepare a quote.
- The suppliers' bids are sent to GE Lighting electronically. The system then automatically chooses the lowest cost producer, who also meets the requirements set up in the qualification screen. TPN Post supports a "multiple round" bidding process if the buyer determines the initial bid responses are not satisfactory.
- The award is made the next day, and a PO will be automatically cut (via EDI). More than 90% of the suppliers use EDI or EDI to Fax to receive the 20,000+ POs that GE Lighting issues each year. A small percentage of suppliers are able to receive payments via Electronic Funds Transfer (EFT).
Figure 1 below shows the complete process. (Figure is not available in text-only version.)
There are several safeguards built into the system. For example:
- Any firm submitting a quote for 10% less than the next lowest bid will immediately be spit out for review.
- Weekly reports will be generated for review by the sourcing staff. They contain a summary of all purchases made, sorted by supplier. This will allow sourcing staff to determine if any supplier has too heavy a shop load, and therefore would be over-committing if additional purchases were awarded. These reports also will contain a summary of cost savings.
- Suppliers who are performing below the acceptable quality level (according to the GE scorecard) may be excluded from additional bid opportunities until their performance improves by the sourcing agent (since he/she selects who receives the bid package).
Implementation. During a three-day period, the 55 qualified suppliers and selected others attend a 1/2 day training session where they are introduced to the new way in which GE Lighting will purchase products, equipment requirements, and the TPN Post system itself. They also receive software to practice with the system. The sessions will be held continuously until all suppliers are trained. Incumbent suppliers will use the manual purchasing system until they are trained.
In general, suppliers have responded favorably to the new system because they will see RFQs faster. It will also help them to gain business with other businesses - within and outside of GE - as they become part of a supplier data base.
GE Lighting is in the process of integrating the new system with its EDI and purchasing systems. (The latter systems are already integrated).
Outcomes. The system's perceived benefits are many:
- Cost savings have been substantial. While in some cases, no savings accrued because the lowest cost provider was already under contract, cost savings of 10% to 20% have been realized by shifting from incumbent to new suppliers. In addition, by increasing the quality and efficiency of the transactional components of the process through automation, there is a $15,000-$20,000 cost take out (paper, postage, etc. from mailing out the request for quotes).
- The number of RFQs let is expected to rise substantially. This will allow GE Lighting to achieve several benefits. First, it will be better able to find qualified buyers that can supply parts at 10% less than the current supplier. In the past, a contract might be let for 2-3 years, and if the price held steady GE Lighting was content. Now 3, 4, or even 5 other potential suppliers will be able to look at the RFQ and prepare a bid. Second, if quality problems arise with a supplier, GE Lighting can keep that supplier from seeing bid packages until their quality rises.
- The sourcing cycle has been reduced by 50%. While suppliers still need ample time (e.g. about 7 days) to study the RFQ and prepare a bid, GE Lighting has been able to automate the transactional portions of the purchasing process - thereby reducing GE's involvement in the process from 10-14 days to 1-2 days. In the past, purchasing was event-driven, sometimes causing a time lag between when a buyer wins the business and when the first order is placed. With the automated system, quotes are gathered in real time - allowing for daily purchasing.
- Productivity improvements are a central benefit. When fully operational, it's anticipated that the system will provide the buying agents with 6-8 additional days per month where they will be able to work directly with the plants on productivity initiatives. For example, a buying agent will visit a plant where he/she will review the top 50 parts used in the plant with production staff, machine adjusters, and the suppliers. This review will include such items as: What wears out? Why? How can it be changed to improve productivity? In these review meetings, the team will be able to make immediate decisions regarding the critical quality dimensions in force and the viability of them. At that time the dimensions, such as tolerances, may be modified and the drawings are updated. Or, they will be able to focus on improving machine yields and quality.
- These buyers will also be available to look for new suppliers - by leveraging existing, qualified suppliers to other GE businesses and qualifying self-nominated potential suppliers. In addition, the system will also tie in suppliers in Europe and the Asia-Pacific rim. For example, the GE Tungstrum facility has been brought up as a supplier to make replacement parts.
- Buyers will also be freed up to work with suppliers on improving how they manufacture the machine parts; supplier costs will be reduced; and subsequently so will the prices to GE Lighting.