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New way to buy at Motorola

06 Sep 2004 | (Case Study)

Motorola's award-winning supplier negotiation system, dubbed MINT, has saved the company $600 million so far, while changing the way Motorola's procurement process works.

Theresa Metty has never liked online auctions. Motorola Inc.'s first-ever chief procurement officer, Metty has long harbored concerns that unfettered price competition at auctions can damage a company's relationship with valued suppliers and even encourage unethical behavior, such as using "ringers," or unqualified bidders, to manipulate prices.

To understand her attitude, it helps to know that before joining Schaumburg, Ill.-based Motorola in November 2000, Metty was vice president of global procurement at IBM Corp. (Armonk N.Y.), where she worked for legendary purchasing guru Gene Richter — who definitely was not an auctions fan.

"I had a real personal bias against auctions," Metty said. "The way they were being done by some companies was pretty bad stuff."

It's surprising, then, that Metty, 52, has become a grudging admirer of the practice. She softened her views after seeing the cost savings gained via online auctions while she was restructuring the supply chain of Motorola's Personal Communications Sector (PCS), which makes cellular handsets. Since becoming the company's senior procurement executive in March 2003, she's had even more opportunity to appreciate the contributions auctions have made to a new companywide supplier negotiation and procurement system from Emptoris Inc. (Burlington, Mass.).

That program is estimated to have saved Motorola more than $600 million in purchasing costs during the past two years.

Metty insists, however, that there's far more to the company's new procurement system — the Motorola Internet Negotiation Tool (MINT) — than simply putting contracts out to bid on the Internet.

"I get really upset when I hear people refer to this thing as an auction tool, because it's not," she said. Nearly $10 billion of the $17 billion Motorola spent on purchases in 2003 was routed through the MINT system, Metty said, but auctions accounted for only about $2.4 billion, or approximately 14 percent of the total.

"This isn't just about auctions," Metty said. "It's about making optimal strategic purchasing decisions."

Whatever you call it, there's no question that Motorola's new approach to procurement has changed the way the company handles its purchases of goods, materials and services. This change has resulted in significantly lower procurement costs, one of the main ingredients in Motorola's recent financial rebound.

Besides saving money, the system has made Metty's procurement staff more productive by automating many of the routine, time-consuming aspects of negotiating purchase agreements, such as requests for quotations (RFQs) and requests for information (RFIs). Thus, the staff has more time to cultivate supplier relationships and develop cost-effective purchasing strategies.

"No human being, or 100 human beings, could have done the things that this tool does," Metty said. "It has forever changed my attitude about online procurement systems."

The Institute for Operations Research and the Management Sciences (Informs) was equally impressed when it evaluated Motorola's revamped procurement system in April. Informs chose Motorola and its supplier Emptoris over six other finalists to receive the organization's 2004 Franz Edelman Award, which recognizes outstanding uses of operations research and management science to change organizations and people's lives.

"Overall, it's a superb example of high-value, high-quality operations research," said John Milne, an IBM engineer who served as one of this year's judges.

Perfect storm

Procurement inefficiencies weren't the sole cause of Motorola's difficulties when the technology industry plunged into recession a few years ago. But as sales declined sharply in 2001 and 2002 and the company struggled to reverse $6.4 billion in net losses, in part by shuttering plants and laying off more than 50,000 workers, its supply-chain managers found themselves in the hot seat. With the company's survival on the line, those managers played a crucial role in helping Motorola weather what company president Mike Zafirovski calls a "perfect storm" of slumping demand, product missteps and a swollen, no-longer-viable cost structure.

It wasn't so much that Motorola's procurement process was broken as that the company desperately needed to squeeze cost savings out of every function. Divided between decentralized, largely autonomous business units, its purchasing system was ripe for consolidation and better coordination. At the same time, new Internet-based procurement tools were creating opportunities to wring more productivity out of unwieldy negotiation and purchasing processes.

One of the most stubbornly manual parts of Motorola's procurement process was its supplier negotiations, in which teams of commodity managers met face-to-face with suppliers to negotiate contracts for the coming year. The meetings sometimes lasted for weeks, incurring significant travel costs for both buyer and suppliers. And with multiple criteria to consider, including product specifications, pricing, volume, scheduling, warranties, delivery details and countless other potential conditions, it often took weeks for commodity managers, using elaborate spreadsheets, to painstakingly evaluate the competing bids and award a contract.

"Negotiations were such a horrible process that we did them as rarely as possible," said Metty. "We needed to do something different."

By the time Metty arrived at Motorola, a team of senior supply chain managers from across the company already was exploring the potential for online negotiation and procurement, albeit cautiously. Quentin Samelson, director of Motorola PCS' e-supply strategy, said the company had rejected numerous offers to shift some of its purchasing to online auctions.

"First of all, the savings they were promising [usually 10 percent to 20 percent] seemed way too good to be true," he said.

Another worry was the potential for damaging the company's supplier relationships.

"Everything was kind of single-mindedly increasing competition to the point you were almost forced to negotiate on price only, not taking any partnerships into account," Samelson said.

Despite those concerns, Motorola benchmarked online procurement systems at companies like General Electric, Hewlett-Packard and Sun Microsystems. Although most were still in early trial stages, several companies were getting encouraging savings from online reverse auctions. (A reverse auction resembles the familiar process of an eBay auction but flips the roles, with the buyer requesting a specific product or service and suppliers bidding for the right to sell it.)

Pilot project

To test the concept, Motorola in early 2001 started using electronic auctions to buy promotional items such as Motorola-branded pens and coffee mugs, as well as advertising and event-marketing services. The pricing of those purchases averaged 50 percent lower than previous contracts.

When those events proved successful, organizers tried buying relatively small orders of printed-circuit boards and metal stampings. A third wave of tests confirmed the potential benefits on a far larger scale, as the company bought capacitors and resistors through a series of large auctions, the biggest involving more than $75 million worth of capacitors.

"They all produced significant savings," recalled Rob Harlan, Motorola's senior director of e-procurement, who took over the MINT project from Samelson in 2001. "We were amazed when we started getting savings beyond our expectations on things we had already tried to squeeze cost out of," he added.

By the end of 2001, the benefits of the auction system were irrefutable. In less than a year, $500 million worth of purchases had been negotiated through 28 auctions, saving the company nearly 20 percent overall and more than 50 percent on some items.

The procurement team had deliberately sought to score some early, big successes to help win over the inevitable skeptics and build support for the program. "We went after some pretty aggressive stuff early on," said Metty.

She noted that the savings in some areas, such as office supplies, were almost laughably large: "We got 80, 90, 95 percent discounts."

Although the initial results were promising, the pilot project also exposed shortcomings. Motorola started out using EBreviate software from A.T. Kearney Procurement Solutions (Chicago), which worked well for auctions but couldn't link to an existing Motorola system that gathered information on companywide demand for specific commodities. Neither could the software issue RFQs and RFIs or conduct multistage negotiations.

And, as Motorola sought to leverage its buying power by aggregating purchases from across the company, it sometimes needed to seek bids for 20,000 or more part numbers from dozens of suppliers in a single negotiation. Add to that the sheer size and complexity of Motorola's purchasing activity (see "Motorola's procurement challenge," page 41), and it's easy to see why the company needed a robust, scalable solution.

Beyond auctions

In search of a tool that could handle the entire procurement process, Motorola sought proposals from eight leading software vendors in late 2001, including Emptoris, Ariba and Perfect Commerce. By early 2002, after careful evaluation, Emptoris was the unanimous choice.

"Emptoris was the only company that met most of our requirements," said Harlan. The key advantage of its software was its ability to model complex procurement constraints and then use linear programming algorithms to calculate optimum contract awards

Another attraction was the software's compatibility with the company's existing procurement methods. "Motorola's been fairly successful in doing negotiations, especially for direct commodities. So we didn't want to come in and completely change that process," said Ron Sorensen, a Motorola procurement project manager.

Metty said one of the system's most important benefits is the speed and ease with which buyers can evaluate multiple scenarios for contract awards. Such optimization once took days or weeks but now can be done in a few hours. Because the process is so much faster, buyers now have more time to consider the benefits of "bundling" discounts for buying multiple products from a single supplier, or the costs and benefits of awarding business to new, unqualified suppliers.

Metty estimates that at least 20 percent of Motorola's purchases prior to the new system were awarded in a non-optimal fashion. By non-optimal, she means the company was unable to take into account all the relevant factors when making a decision and, so, did not realize all the savings possible. "The beauty of this tool is it allows us to go after that 20 percent," she said.

Samelson recalled one instance in which a Motorola purchasing manager in Florida tried an auction for labels, insulators and other paper-related items the company had been buying from more than 100 suppliers. Gathering data for the auction took several months, Samelson said, but it was worth the effort. "We saved tens of millions of dollars and cut our supply base to about 10 suppliers with a day's worth of actual negotiations."

Selling the system

Getting Motorola's top executives to approve the online procurement project wasn't a big hurdle, since each business unit chipped in from its existing budget to share the system's modest, $10 million cost.

"It was crystal clear immediately that this thing was going to be a winner," said Metty, who reckons the system paid for itself the first few times it was used.

A bigger challenge was winning over the company's purchasing managers and suppliers — a necessity if Motorola was to maximize savings by routing as much of its purchases through the system as possible.

"When you're trying to put in something that affects people's jobs, then you really have to show them the way," said Harlan, who became the program's biggest booster during early adoption.

Harlan's team rolled out an ambitious plan to deploy the system quickly among a critical mass of internal users and suppliers. Nearly two dozen in-person training workshops were held in the United States, Europe and Asia during 2002, followed by 15 "train the trainers" sessions. By the end of that year, more than 300 Motorola purchasing staffers and 600 suppliers had been trained. In 2003, that grew to almost 600 staff and 1,200 suppliers. "Too often, change management gets the short end of the stick," said Harlan. "We didn't let that happen."

Frequent communications and opportunities for users to get hands-on experience with the system were key to Motorola's adoption strategy. Senior purchasing managers were invited to learn about the system by observing auctions, while a monthly newsletter reported on the initiative's progress. Each business unit designated "champions" to support and publicize the new system, and leaders who showed extra effort were rewarded with praise and even cash incentives.

By 2003, most procurement staffers were required to include at least one e-negotiation goal in their annual performance objectives.

Suppliers had little choice but to learn to use the new system, but Motorola conducted thousands of training sessions to ensure the vendors were comfortable with the technology. To maintain proficiency, suppliers must attend online training refreshers within a week of every auction, RFQ or other event.

"Preparation is key. If they're prepared and trained, then there's no delay in getting those RFQs back," said Karen Lenahan, a Motorola program manager whose staff trains MINT users and supports them with a 24-hour global help line.

Dani Mendez, regional sales manager for Rohm Electronics LLC (Dallas), praised Motorola for helping suppliers make a smooth transition to the new system. "Their support team does a great job," she said. While not a fan of auctions, Mendez said, Motorola's system was easy to learn and continues to improve.

Metty acknowledged that many suppliers start out with mixed feelings about the system. She said one Japanese vendor had bluntly expressed his hatred for MINT. But after explaining that he did not like competitors' seeing his bids during online auctions (suppliers' bids are visible but their identities are kept under wraps), the vendor admitted that he actually liked the efficiency and flexibility of the process.

"Their margins are a little thinner now than they used to be," said Metty, "but, generally speaking, the suppliers like the fact that this isn't just about price."

Thanks to its training and promotion efforts, Motorola's 2002 total of $1.6 billion procured through 270 auctions grew to $2.4 billion and 725 auctions the next year. Electronic RFQs and other nonauction activity grew even faster, from $5 billion in 2002 to $7.4 billion last year. "The adoption rate has been like nothing we've ever seen before," said Metty.

Lessons learned

One clear lesson for Motorola's procurement team was that electronic auctions work great for procuring some products but offer little benefit for others.

"We found that the best possible commodity to negotiate at an auction is one that you haven't paid much attention to in the past," said Samelson. For Motorola, some of those neglected areas included the promotional items procured in the initial pilot auctions as well as labels and insulators, for which the company was able to save millions by purchasing through auction.

What didn't work well were auctions where few suppliers were competing, where switching suppliers would be costly or difficult, where Motorola was not an important customer to the suppliers and where demand in the market outstripped supply.

"They're really good when you have to conclude a quick, mostly price-oriented negotiation," said Samelson. "But the better the relationship you have with suppliers, the more strategic a relationship is, the more complex the part that you're buying, the less it applies."

Another lesson was the need to reassure suppliers that negotiations and auctions would adhere to strict ethical guidelines. Sorensen recalled one supplier that approached Motorola after losing an auction bid and offered an additional 5 percent discount. The offer was rejected.

"We left money on the table," he said. "But they learned a lesson that we are going to operate ethically."

Srinivas Bollapragada, senior operations research director for GE Research (Schenectady, N.Y.), who coached Motorola's team in the final round of the Edelman competition, said that Motorola did an outstanding job of driving adoption of the Emptoris system and integrating that system with its existing procure-ment processes.

"The implementation and execution are the key here," he said, noting that the software industry's history is littered with examples of projects that have failed for lack of those ingredients.

As Emptoris CEO Avner Schneur put it: "Buying the system is the easy part. Getting such a successful implementation and getting such a paradigm shift within an organization — that's the challenge."

Tim Minahan, vice president of supply chain research for the Aberdeen Group (Boston), has included Motorola in a soon-to-be-published study on best practices in e-sourcing. He praised the company for delaying its entry into online sourcing until it was confident it could ensure integrity and fair play and that it wouldn't disrupt long-held supply relationships.

Minahan nonetheless cautions companies not to view online procurement as a panacea. He likens it to "corporate liposuction" that can suck the fat out of inefficient supply markets but can't substitute for strategy, execution and strong supplier relationships.

"You can only do so much liposuction before you actually cause harm to yourself and to your company," Minahan said.

Motorola officials aren't worried about overdoing the strategy anytime soon. While the company thus far has negotiated more than $16 billion of purchases online in the past two years, nearly half its purchasing activity is still not routed through the system.

"There's still so much more we can do," Metty said.

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