Motorola Reinvents its Supplier Negotiation Process Using Emptoris and Saves $600 Million. An Emptoris Case Study. Emptoris, Inc.

Transcription

1 Motorola Reinvents its Spplier Negotiation Process Using Emptoris and Saves $600 Million An Emptoris Case Stdy Emptoris, Inc. VIII-03/3/05

2 Exective Smmary With the disastros telecommnication downtrn in 2001, Motorola, Inc., needed to redce the costs of direct and indirect materials drastically and increase prodctivity throghot its operations. To deliver the savings and prodctivity improvements necessary, Motorola reqired a spplier negotiation soltion that wold redce the negotiation cycle time, simplify coordination between commodity managers and sppliers and optimize contract awards across sectors. Motorola called on Emptoris to provide an internet negotiation soltion combining innovative bidding, online negotiations and scenariobased optimization analysis to help Motorola s commodity teams identify the best procrement strategy while enhancing spplier relationships. Motorola lanched the comprehensive sorcing soltion in As a reslt, Motorola has sorced over $16 billion and saved more than $600 million, inclding $200 million (an extra 4-7%) attribted directly to the advanced collaboration, online negotiation, and optimization-based analysis capabilities the Emptoris soltion provides. Using the system not only changed the way negotiations are condcted, bt it has also served as a catalyst for moving Motorola from loosely coordinated efforts by individal sectors to condcting global negotiations jointly across bsiness nits. Motorola - a Leader in Innovation Motorola, Inc., a $27 billion manfactrer of commnication technologies, trned seventy-five in Well known as a leader in celllar phones, Motorola s technological achievements date back to the 1930 s when it first commercialized the car radio. Other sccessfl innovations inclde walkie-talkies sed by American troops storming the beaches in World War II and space-based commnications that enabled Apollo astronats to say to Mission Control, Hoston, we have a problem. Today, Motorola remains a global leader in wireless, broadband and atomotive commnications technologies that help make life smarter, safer, simpler, synchronized and fn. As a global leader, Motorola sells a large variety of prodcts and services, which adds complexity to an already massive procrement process. To nderstand the size, scale and complexity of procrement at Motorola, the company spends almost two-thirds of its revenes, or $17 billion per year, on goods, materials and services. Motorola manages 44,000 sppliers across seventy-seven categories of spend. 1,200 procrement associates located in twenty-for contries by 300,000 different items every year. 2

3 Sailing throgh Telecom s Perfect Storm One of the greatest challenges Motorola has ever faced was the disastros telecommnication downtrn of No one tells this story better than Mike Zafirovski, Motorola s President. Flash back for a moment to In the wake of the dot-com and telecommnications bst, Motorola faced new, hngry competitors and an ncertain marketplace nervosly confronting its own threats- terrorism, economic pheaval, and pblic trst shaken by corporate scandal. We were not facing yor garden variety downtrn in the telecom indstry! As figre 1 illstrates, Motorola faced mltiple challenges in this downtrn, which it now refers to as the Perfect Storm. Figre 1 - Motorola s Perfect Storm Market collapse Demand dropped sharply Revenes tmbled Extreme overcapacity Prodcts not competitive Lacked key featres Aging portfolio Too expensive Internal complications Spplier negotiation processes inefficient Limited resorces First, the market for telecommnications eqipment collapsed with demand in the celllar phone indstry falling by one-third. Second, Motorola discovered that some of its prodcts were not competitive. Third, Motorola strggled with internal complications driven by inefficient processes and resorce redctions, which meant there were fewer people to negotiate with sppliers. As Theresa Metty, Motorola Vice President and Chief Procrement Officer, comments, Any one of these forces wold have been a challenge, bt all happening at the same time was devastating. We knew we needed to act qickly if we were to navigate or way ot. We knew if we cold find a way to leverage or prchasing power more efficiently and effectively, we cold have an enormos impact on profitability and market share. The qestion was how. To help answer this qestion, Motorola lanched the Motorola Internet Negotiation Tool (MINT), Motorola s internal name for Emptoris web-based strategic sorcing application. 3

4 Cost Redction- the Corse to Navigate With falling revenes, Motorola soght to improve earnings by ctting costs and improving margins. As Metty explains, Since the top line was not growing, we needed to achieve or earnings per share goals by redcing costs. The eqation was simple. Every dollar saved eqaled $12 in new revene. So, for Motorola to deliver the same earnings to the bottom line that it achieved sing MINT ($600 million), Motorola wold need to increase sales by over $7 billion. In the process of implementing MINT, Motorola had to re-invent the sorcing and spplier negotiation process. The objective was to take advantage of market over-capacity to redce costs qickly. However, this reqired overcoming the complexities in the sorcing process and improving the spplier collaboration and negotiations to make these processes more effective and efficient, all with a drastically redced workforce. In the words of Rob Harlan, the Director of Global E-Procrement at Motorola and the leader of the initiative to implement MINT, We had to do more with less, and do it now! Selecting the Soltion to Weather the Storm As figre 2 shows, managing the strategic sorcing process at Motorola is extremely complex. With all of the complexity in parts, people, sppliers and locations, Motorola needed a soltion that wold not only optimize the selection of sppliers based on the total cost of ownership (TCO) 1, bt also wold enhance the spplier collaboration and negotiation processes. The soltion needed to handle every type of sorcing project from very large and complex semicondctor negotiations to very small onetime prototype prchases. This large and complex problem reqired a robst soltion with global capabilities. A Motorola team nanimosly selected Emptoris to provide this soltion after an exhastive evalation process. Figre 2 - Strategic Sorcing Complexity at Motorola Motorola Complexity Spplier Complexity 250 commodity managers 44,000 sppliers 51 direct material commodities Complex pricing strctres 26 indirect commodities 300,000 active parts Dozens of manfactring locations Total cost of ownership (TCO) Many cltres and langages Complex cost-qality tradeoffs 1 Total cost of ownership incorporates all elements of cost related to a spplier s offer. This incldes not jst pricing bt additional ot-of-pocket costs related to shipping, taxes, tariffs, financing, warranty and maintenance. It also incldes soft costs and opportnity costs related to delivery, availability, qality and performance. 4

5 Powering Motorola s Internet Negotiation Process When designing a soltion to weather this perfect storm, it is important that each component works together as part of an integrated soltion. One of the niqe capabilities of Emptoris soltion is its ability to enable each step of Motorola s internet negotiation process (figre 3). Figre 3 - The Internet Negotiation Process Confirm sppliers nderstand Step 1 Commnicate Reqirements Reverse action or Reqest for Qote (RFQ) Step 4 Award the bsiness Step 2 Develop Sorcing Strategy Step 4 Analyze scenarios (optimization bid analysis) Step 3 Collaborate with Sppliers Mltiple price and nonprice factors Step 4 Spplier Negotiation All elements of total cost of ownership (TCO) Key components Emptoris provides to spport each step of the process inclde the following: In step 1, sing Emptoris flexible data model, the commodity team can bild the TCO formla on the fly throgh the ser interface. The model captres both data elements and the formlas that define the inter-relationships of these elements. This model incorporates all elements of total cost. In step 2, Emptoris provides the commodity team with the ability to select the best negotiation approach, which can be an electronic reverse action, an electronic sealed bid reqest for qote (erfq), or both. For each direct material commodity area at Motorola, close to 100% of the spend is sent throgh an erfq initially. In step 3, sing Emptoris embedded workflow and commnication, the commodity team collaborates with sppliers, iteratively exploring options for how the spplier can meet Motorola s needs at the lowest TCO. These options may inclde modifications to the qantities, delivery reqirements, delivery dates or item specifications. 5

6 In step 4, sppliers se online bidding fnctionality to offer innovative options for the commodity team to evalate. This is important becase the spplier often knows mltiple ways to meet the commodity team s needs based on the spplier s capabilities. Using Emptoris soltion, sppliers can sbmit any nmber of bids that can inclde rebates, volme disconts, bndling, and sbstittions, for example. In step 5, leveraging Emptoris embedded optimization-based bid analysis, the commodity team evalates different sorcing strategies to see the effect of varios prchasing policies on the total cost of ownership and spplier award distribtion. The team can rn and compare an nlimited nmber of what if scenarios against all bids in the system. The system recommends line-by-line what spplier to by from and provides the reasoning analysis identifying the contribting factors to this decision. The optimization bid analysis is tightly integrated into the negotiation platform, so the byer can qickly modify the reqirements and re-open the negotiation with minimal effort. In the final step, the commodity team selects the scenario that best meets their needs based on the total cost of ownership and chosen prchasing policies. Avner Schner, the CEO of Emptoris notes, While Emptoris internet negotiation soltion offers sophisticated fnctionality, to drive adoption, it is important to shield the ser from the nderlying complexity. Therefore, the system was designed to provide an extremely easy-to-se environment. Ths, the power of optimization is exposed to the commodity team withot reqiring them to nderstand how it works. Charting the Right Corse with Optimization-based Bid Analysis When selecting sppliers, the goal is to identify the best mix of sppliers to meet Motorola s needs at the lowest total cost of ownership sbject to a set of prchasing policies. As figre 4 shows, often in prchasing sitations, there are many items, sppliers, pricing strategies and bsiness constraints that make this problem qite complex. To highlight how these factors contribte to a difficlt decision process, consider the following. In a single negotiation, the commodity team may flexibly specify reqirements on thosands of items, each with different qantities and delivery locations. Sppliers may respond with mltiple bids on all items simltaneosly, employing complex pricing strategies that incorporate price breaks, rebates, sbstittions and disconts for gropings of items. Becase the focs is on total cost of ownership and not jst price, the commodity team that vales the long term performance of strategic sppliers then incorporates spplier performance criteria measring qality, delivery and service. Finally, the commodity team may need to enforce prchasing policies in the decision. A prchasing policy can be, for example, splitting items between two sppliers to hedge risk or allocating a certain portion of the bsiness to a minority spplier. Emptoris optimization-based bid analysis easily handles this complexity, identifying in mintes what cold take p to one month sing more traditional spreadsheet analysis. 6

7 Highlighting the importance of spplier relationships in the selection process and MINT s ability to Figre 4 - The Role of Optimization-based Bid Analysis Flexible Reqirements Spplier Bids Item Bndling Specification Mltiple price breaks Qantity Rebates De date Sbstittions Proprietary attribtes (bid fields) Qality and qantity ranges Total cost formlas Minimize total cost of ownership (TCO) Mltiple delivery locations and times Prchasing Policies Spplier Ratings Bdget limits Spplier, category and item level Award splits - Qalification Switching costs - Qality Contractal obligations - On-time delivery Preferred sppliers - Item attribtes (e.g., tolerance) factor them in sing optimization-based bid analysis, Zafirovski points ot, Excellence in procrement, like most aspects of bsiness, is abot cltivating sccessfl relationships. Motorola can t afford to damage spplier relationships as it chases low-cost soltions. Pricing is only one consideration. Qality of prodct, timely delivery, volme and flexibility, they all factor into the spplier eqation. Early on, or spply chain partners learned that MINT went well beyond electronic bidding. Driving Adoption- Getting All Hands on Deck We basically took a faster, wider, deeper approach to instittionalize and optimize the spplier negotiation process at Motorola, says Harlan. This inclded creating a high impact team with deep sorcing and system implementation experience to rollot the MINT system qickly and teach or commodity teams how to se it. Motorola implemented an extensive change management program and focsed intensively on training at the ser, exective, and spplier levels. Motorola also took carefl steps to bild trst with sppliers by training them on the MINT soltion and process while also integrating key demand aggregation systems to bild a fondation for condcting online sorcing sing more in-depth analysis. Finally, early on Motorola condcted high profile sorcing negotiations and commnicated the process and reslts to the rest of the procrement commnity at Motorola. All of these factors contribted to the rapid adoption and the sbstantial increase in the percent of spend 7

8 negotiated online via MINT as seen in figre 5. Sccessflly Navigating Ot of the Storm Figre 5 - MINT s Adoption at Motorola Drive esorcing to 90% of Motorola's eligible spend... with rapid global adoption % 10% 58% 70% 15% 20% 90% 30% e-rfq e-action (proj) 2005 (proj) Nmber of events (cmlative) Nmber of internal sers Nmber of sppliers The MINT soltion not only helped Motorola srvive the Perfect Storm, it also facilitated a change in the negotiation paradigm both for Motorola and its sppliers as shown in figre 6 below. As Metty notes, We have shortened or collaboration and negotiation cycle significantly. We have empowered or sppliers to respond more creatively to or needs, going far beyond price. And, we have eqipped or byers with strong optimization and analytical tools enabling them to explore more options to achieve maximm vale. Figre 6 - Negotiation Paradigm Shift at Motorola Old Paradigm New Paradigm Manal part-by-part Atomated and aggregated Price-based only Base on TCO Face-to-face, one-to-one Internet-based, many-to-many Imperfect information Transparent Gt feel Qantifiable trade-offs 8

9 The Impact of MINT As of April 2004, Motorola has negotiated over $16 billion of prchases online, saving well over $600 million (figre 7 below). Motorola has steadily increased the percentage of its spend sorced online sing MINT. In 2003, the figre was 80% of Motorola s direct materials, and 50% of total overall prchases, and it contines to grow. In addition, the nmber of categories of spend negotiated sing MINT is significant. Nearly every category has been sorced sing MINT. In 2003, it was sed in sorcing events from nder $2,000 to over $2 Billion. 600 Motorola employees and 1,000 sppliers tilized MINT in nearly 500 sorcing events. Zafirovski says, Procrement is one of three vital few areas we are targeting at Motorola to realize cost savings of $3 billion or more by next year. MINT plays an important role in reaching that goal. With it, we broght aggressive cost-competitiveness and cost analysis to Motorola s sorcing process. We applied the power and efficiency of the internet to deliver a new level of compliance across the corporation. Thanks to or procrement team and the MINT system, Motorola navigated its way ot of telecom s Perfect Storm and today is charting a corse to sccess. Dave Devonshire, Motorola s Chief Financial Officer adds, By any measre, the impact of this innovation is hge. Motorola s annal expenses for materials and services total abot $17 billion. Or MINT system crrently processes abot $9 billion of it electronically. And that figre is growing. Over the past three years, we ve saved more than $600 million. Savings are realized not only in pricing, bt also in redced travel, improved cycle time and significantly higher operating efficiency. Every aspect of or procrement process is optimized as never before thanks to the MINT system. Figre 7 - MINT s Adoption at Motorola Over $600 million in savings... across 50% of total spend ($ millions). Savings ($ million) $500 $250 $ $6,800 $1,600 $9,800 $2, e-rfq e-action 9

10 Motorola s Ftre with MINT Althogh the sccess to date has been phenomenal, Motorola will contine to tilize MINT to drive additional costs ot of the system. Motorola plans to deploy MINT to commodities that are not flly leveraged today as an immediate area of opportnity. Says Metty, We believe it is imperative and possible to se MINT for 100% of or prchases for both existing and new prodcts. Motorola also plans to tilize MINT to manage changes in the spply base which are driven by new technologies and geographical shifts in bsiness. Finally, MINT will enable commodity managers to re-evalate qickly previos sorcing decisions that were optimal at one time bt becase of changes in market conditions or in Motorola s demand, may no longer be optimal. As Metty states, We are very prod of or accomplishments, and we are excited abot the ftre prospects of MINT. The nmbers are big now, and we will drive them even higher! 10

11 Abot Emptoris Emptoris is a leading provider of powerfl enterprise spply management soltions for Global 5000 companies. Throgh Emptoris 5, a site of Web-based spply management soltions, enterprises are able to drive millions of dollars in bottom-line savings, execte savings initiatives faster, and improve the prodctivity of their procrement and spply management teams. Emptoris cstomers inclde American Express, Boeing, Cigna, Fleet Financial Corporation, GlaxoSmithKline, Keyspan, Motorola, Owens Corning and Samsng America. Emptoris, a privately held company, is headqartered in Brlington, Massachsetts. For more information abot Emptoris and the Emptoris Enterprise Spply Management Site, visit call ext. 196 or sales@emptoris.com. 11

12 Emptoris, Inc. 200 Wheeler Road, Brlington, MA tel fax