Using a Corporate Intranet for Indirect and MRO Purchases
William G. Cafiero
William G. Cafiero, GE Information Services, Dallas, TX 75240, 972/788-8241, email@example.com.
Randolph M. Rowe
Randolph M. Rowe, GE Corporate initiatives Group, Fairfield, CT 06431, 203/373-2517, firstname.lastname@example.org
83rd Annual International Conference Proceedings - 1998
A General Electric Case Study, Web Address: www.geis.com
Abstract. How do you serve millions of customers worldwide, meet demanding stretch goals, manage a supply chain of thousands of suppliers and still deliver year-over-year double digit growth? The answer is to create a company culture to focus on the customer, act boundaryless, work with simplicity and speed. This requires globalization, new products, service quality and innovative information technology. This "case study" presentation describes GE's implementation of a new indirect material purchasing system. GE is developing a process called Integrated Indirect Supply (IIS) to apply sophisticated electronic commerce techniques to the purchase of indirect and MRO materials. IIS will incorporate a company wide intranet, an extranet for supplier communication, integrated use of purchasing cards (with line item detail), and complete "back office" EDI transaction usage. This presentation discusses the architecture of IIS and describes the GE implementation plan.
Background. General Electric is a diverse, integrated, $80 billion dollar global company. Its twelve business units operate in three major areas:
- Services (businesses such as GE Capital, NBC, GE Information Services, etc.)
- Core Products (such as Transportation Systems, Appliances, Lighting, Industrial and Power Systems, etc.)
- Technology (such as Aircraft Engines, Plastics, Medical Systems, etc.).
In late 1991 - early 1992, Jack Welch, CEO of General Electric, conducted a study of the relationship between our selling prices to our material input costs. The results were disturbing! The inflationary excess of the 1980's were seriously eroding the competitiveness of GE. What we found was a profound disconnect between the two. It had been masked by the great efforts we placed in getting our own "Cost of Operations" under control.
The gap was too wide for a normal course of action and therefore we had to establish an aggressive plan of action to correct the situation and improve the way we managed our supply chain.
The entire GE sourcing organization was shaken up to address the challenges.
Launching the Enterprise Sourcing and Payables Initiative (ESP). The top leadership of the company was ready to drive the necessary change to achieve the desired improvements. The Sourcing Initiative delivered millions and millions of dollars worth of savings for the company which enabled the company to develop improved products and services for our customers as well as remaining competitive in the marketplace.
As the company grew, we expanded our focus:
- With the Sourcing Initiative launch in 1992, Jack Welch embarked on the Six Sigma quality program.
- All levels of employees are being trained and management compensation packages now reflect an emphasis on quality improvements.
- In 1996, we continued to focus on internal processes and how information technology will be utilized to improve the competitiveness of the company. Jack Welch named Gary Reiner as the Chief Information Officer in mid-1996. To better serve our customers, Gary is focused on leveraging new technology and explosive growth of the Internet to manage how business will be conducted in the future.
Sourcing Best Practices and Productivity Tools. A wide range of sourcing "best practices" were develop and improved upon during this time period. The initiative was focused in three key areas:
- Strategic Sourcing: looking at negotiations, consolidation, globalization and how we deal with information and the organizations involved.
- Process Improvements: here we are looking at our transaction processes, interface processes and our supplier processes.
- Product Design Improvements: where the focus is on product cost reduction and new product introduction.
Overall a very successful "external" program which continues today which expands to the focus on quality.
Driving Change - Workout. As we moved forward, we brought together all of the GE businesses to take a close look at our internal sourcing and payables process. We concentrated on four areas: direct materials, indirect materials, payables and strategic sourcing.
Our data revealed that over 82% of invoices we processed were valued at less than $2,500 each. Overall, nearly 26 % of our invoices process required some level of "rework" by either GE or the supplier. This "rework" would include fixing the account number, mismatched receiver, inaccurate supplier invoice - wrong item number or purchase order number.
Due to the large number of different purchasing systems at GE, we saw an opportunity to address our inefficient processes, improve contract compliance, reduce our transaction process costs, further consolidate our purchasing base and leverage the emerging electronic commerce technology.
To achieve the next level of savings opportunity, we needed a fundamental "game-changer" in the sourcing and payables process.
Error Free Transaction Processing. As we embrace the Six Sigma quality principles, our enterprise sourcing and payables initiative approach is to drive "Error Free Transaction Processing."
Grounding ourselves on our customer's Critical to Quality Characteristics (CTQ's), we can focus on reducing variation in our processes and optimizing the sourcing and payables process by streamlining, automating workflow and eliminating rework.
When you really take a close look at the your processes, it is amazing to see the cost impact of the "hidden" factory within your company. Those "quick" calls to check the status of a requisition, or if or when the supplier will ship, or the status of a payment to the supplier, begin to really add up when multiplied across the businesses over thousands of requisitioners and thousand of suppliers.
Defining Six Sigma Critical to Quality (CTQ) Measurements. As we define our CTQ's, we first looked at the relationship between three key groups in the sourcing and payables process. They are:
- GE Users: the ultimate customer
- Suppliers: both internal and external
- Sourcing and Account payables
The inter-relationship between all these parties drives the processes in which we conduct business. What is key for GE is placing emphasis on "seamlessly" facilitating the transactions between GE users and suppliers. Effectively delivering competitive contracts to GE users while not creating a bureaucracy for the end user to constantly navigate through is our goal.
By defining the CTQ's up front, we set the course for developing our new system and process requirements.
Managing the Sourcing Process. With our CTQ's defined, we continue to work on strategic sourcing. To enable the strategy, we need a "Data Warehouse" which is reliable, timely and searchable. However, the data needs to comply with Corporate wide information standards, like commodity codes and common supplier codes. It was important to have our business users involved in the initial mapping and definition process.
By defining precise standards, we will drive consistency into our data repository and thus improve the quality of our strategic sourcing decisions.
Changing the Role of Sourcing. Essentially what we are talking is changing the role of sourcing within the GE Businesses. Today's current practice is a very labor intensive process involving order placement, supplier management and settlement with strategic sourcing as an after thought!
We are redesigning our processes through streamlining and automation to shorten the cycle and free up critical resource time to focus on strategic initiatives on both the front and back end of the transaction. We want our sourcing professionals to work those "value added" activities to improve supplier quality and customer service. At the same, we will be analyzing our purchasing habits to improve how we spend our time and money more effectively and efficiently.
Linking Core Processes to Best Practices. Across GE we focused on Direct Material Procurement, Indirect Procurement, Services Procurement and Integrated Accounts payables. Applying Six Sigma methodologies to improve policies and procedures will drive significant savings and increase productivity. Linking Best Practices like Electronic Data Interchange (EDI), Bar Coding, Evaluated Receipts Settlement (ERS), Procurement Cards, Trading Process Network and Coding Standards to Core Processes enable GE businesses to gain significant improvements.
The GE Electronic Commerce Vision. Now that we had laid the groundwork for our rational in developing a quality sourcing and payables process, let's take a close look at our Electronic Commerce Vision. The key points to note are:
- We are building a common centerpiece ERP system across the businesses, housing our core databases like Order Entry, HR, Manufacturing, Finance and Direct Material sourcing.
- We are introducing the Intranet based Integrated Indirect Service (IIS), based on the Trading Process Network (TPN) from the TPN Register Company, to purchase all of our indirect product and services.
- Transactions will be processed through an EDI virtual space where we are linking to the external GE supplier community and the global marketplace.
- At GE, payments are processed through a shared service model for all accounts payable, meaning one single payment channel to our suppliers.
- All data is stored in a strategic Data Warehouse (DW) for analysis.
- We are leveraging the emerging internet and client server technologies to maximize the benefits to businesses to better serve our customers.
Request for Quotation Productivity: TPN Post. Since 1994, GE has been developing an Electronic Request for Quotation process to maximize the opportunity for suppliers while creating a more efficient process. Over the past three years, this program has developed into the Trading Process Network (TPN Post) platform.
At GE Lighting, buyers have been able to significantly reduce the cycle to process request for quotations. Our new process: shows the preparation time reduced to less than two days (collections of drawings, specifications and other requirements); eliminated all mailing costs and cycles; lowered the supplier response evaluation and award time to less than two days. Utilizing this new process, GE has increased competition and seen price reductions in the range of 5 to 15 percent.
The Six Sigma Indirect Sourcing Process. In the new indirect sourcing process, we have developed a six sigma process for managing the supply chain - encompassing the requisitioning to remittance process. To start, we are empowering end users to access the Trading Process Network (TPN) to order products or services from on-line supplier catalogs. If an item can not be found in our catalog, an off-catalog requisition process can be used. Also, products or services can be submitted out for bid via the TPN Post module. Based on the user profile and defined business rules, the system controls the process flow, routing and approval requirements. The system is also integrated with a standard e-mail system to permit easy notification of activity. All orders are processed via EDI to suppliers once approved. We are employing two payment settlement processes:
- Traditional receiving and invoice processing with 2 way evaluated receipts a longer term goal
- A procurement card to process low dollar transactions.
All transactions are processed via the shared service accounts payable facility with data transmitted to the data warehouse.
GE's Global Indirect Sourcing Vision. Launching from this foundation, our vision is to implement an Intranet based global Enterprise Sourcing and Payables System (ESP) - integrated with each business' enterprise application. Within 3 years we want to capture $ 5 billion in annual volume, bring the appropriate number of suppliers on-line, process all transactions electronically and maximize the utilization of the procurement card. We are confident that this new process will deliver millions of dollars in savings in both costs and productivity.
The Components of the Enterprise Sourcing and Payables (ESP)-Integrated Indirect Service. The ESP-IIS system is made up of three components:
- The Purchasing Service with TPN as the backbone
- The Payment Settlement Process
- The strategic sourcing Data Warehouse
All three components are linked via the internal GE Intranet with external links to the marketplace via the Internet and EDI.
Focus on the Indirect Commodity Groups. As we look at implementing the ESP-IIS program, we are focusing on three areas:
- Indirect Non-Core purchases like advertising, promotions, office supplies, computers, professional services, contract labor, etc.
- Indirect Core purchases like MRO and packaging
- Indirect Other purchasing like capital equipment, tooling, etc.
GE currently utilizes a central process model for managing its travel and living purchases, telecommunications and transportation requirements.
We look for synergistic opportunities across all of the GE businesses to create a single buying channel.
ESP-IIS Benefits. By implementing this program, we see two areas of benefit:
- Hard Benefits in terms of price leverage and usage/leakage control
- Soft Benefits in terms of Six Sigma process quality improvements and lowering the cost of each transaction.
All in all, this program will deliver significantly to the company's bottom line, thus driving GE's competitiveness and positioning GE to better serve its customers.
Lessons Learned. Unlike many E-Commerce offerings you hear about today, this program is for real! When launching an initiative like this, it is a "Total" Process Project. Involve everyone: Requisitioners, Purchasing, Account payables, Suppliers - yet still be focused.
We had to look at all areas of the process:
- Data Collection
- Process Mapping
- Developing the Business Case
- Internet/Intranet/Extranet (Infrastructure)
As the project comes together, it is recommended that the solution be piloted in a small area first - then production rollout would follow.
Conclusion. GE has seen tremendous opportunities through utilization of Electronic Commerce techniques. We are taking the lead in the developing a comprehensive E-Commerce sourcing and payables Process by changing the rules of engagement between GE and its suppliers. We are confident that this process will provide significant benefits to General Electric and its suppliers.