Irish paper and packaging company Smurfit is in the throes of a significant move towards electronic procurement for its indirect office materials and supplies. It followed a general approach to e-business and a carefully taken decision to avoid following the crowd of other companies that had rushed down an e-procurement route on the back of promised savings of up to 20%.
Now, as the likely cost savings come down to a more realistic 7-9%, Smurfit's more cautious approach in choosing a local Irish company with a hosted solution, Marrakech, is beginning to pay dividends, while others are still coping with heavy up-front investments in software acquisition. Marrakech's business model sees companies that adopt its solution paying a slice of the value of their indirect materials transactions to the company.
The first of Smurfit's European offices went live around six months ago, and the company's goal now is to ensure that all of its sites adopt Marrakech's hosted approach within six months. Then, Smurfit will consider using e-procurement for direct materials, though the business case for such a move is still in review.
So, how did the company go about the move, and what were the hurdles it had to overcome?
Emma Cullen, e-procurement project manager, says the first moves came as the organisation was digesting a major move toward SAP. Yet, like others that were using SAP, Smurfit chose not to go down the SAP route for e-business. In fact, it avoided all the big names - SAP, Ariba and Commerce One. "We were in the middle of a fairly intense SAP implementation, which was taking a lot of our time, and we were conscious that we might spend all our effort working on that and miss out on other opportunities.
"When we started looking at the e-procurement solutions area, we spent a lot of time looking at Mysap.com because, from an integration point of view, it seemed like the easiest one to do with our SAP installation. We also looked at Ariba and Commerce One, but we decided to go with Marrakech, particularly because of its business model, even though we believed there might be some integration issues," says Cullen.
Easy does it
Smurfit's approach, which saw it choose a largely unknown company rather than charging down the route followed by its rivals to more familiar names, could have been a mistake. Yet by adopting a cautious approach, the company minimised its risk. The clinching point in going down the Marrakech route was that, after coping with its SAP installation, Smurfit wanted to be rid of consultants and adopt a DIY approach with little risk.
"We had spent a lot of time and resources on SAP and, to be honest, there wasn't a lot left," Cullen admits. "We wanted to be fairly cautious in e-business - we're very bricks and mortar; very traditional. We wanted a low-risk proposition, and we didn't want to invest upfront in big software.
"We were taken with using hosted software - it wasn't something we had ever done before, so we liked the idea," explains Cullen.
Smurfit admits it had also learned a lesson from one of its sister companies in the US, especially when it came to the tricky topic of content management. "Our sister company in the US, Smurfit Stone, which was slightly ahead of us, was using the application Claris, and it had warned us not to underestimate how much content management would be required in terms of managing catalogues and the like," says Cullen.
"We didn't want any problems like that. We wanted to host that out to [a company] like Marrakech - no upfront costs, just a hosted application, no configuration, no installing of hardware and software, and it would also manage suppliers' content for us."
Cullen says that having shunned some of the bigger names, Smurfit had to ask itself, 'Who's Marrakech?' "Traditionally, we don't like to be the guinea pigs. We normally go for the tried and trusted way. We picked SAP, for example, when we could have gone for something more bespoke, because we wanted to go with what definitely works. When it came to Marrakech, because the risk was so low and all it was really costing us was time, people started saying, 'We'll take a punt on it.'
The decision-making process and the support of senior executives not only left Cullen feeling good about the decision, but also helped drive adoption throughout the company. Having the support of a team of individuals from different parts of the company, such as IT and purchasing, left the board with the comparatively easy choice of backing their decision.
"There has got to be support from senior management in the company, and I don't think these things would have rolled out as quickly as they did without that sort of backing. The other key for getting involved was the backing of the vice-president of purchasing. Even though he didn't have anything to do with IT, it was critical that he bought into the business case and that he thought this was an opportunity not only to reduce the supplier base for indirect goods but also to increase compliance. To me, its not an IT project any more, it's a purchasing project," she says.
What is perhaps surprising is that Smurfit took a decision to move forward, with chief financial officer buy-in, yet without many hard figures to go on. But Cullen suggests that few figures were given because they would have been too vague amid all the hype. "We wanted to increase the compliance to supply contracts. And, normally, if you were to increase the volume through a supplier, you'd expect to get lower prices.
"But we didn't need to put figures down for that. If we had been looking for capital expenditure approval for something like Ariba, we'd have had to say we guarantee to get prices down by X%. But with Marrakech, because we weren't buying anything like software, the risk was low and we didn't need a business case of how quickly we would get a return on investment," she explains.
The proof is in the pudding
When it comes to getting organisational staff's buy-in over the purchase of indirect materials, Smurfit's approach is consensual, says Cullen, and based on an appeal to people's logic rather than being confrontational.
"Once we're a year into this, which would be next March 2002, we will sit in a darkened room and crunch numbers for a few days and hopefully come up with savings. I think that's the strongest message, because if you say to a general manager that the plant down the road has used this or that, and has seen savings of X%, what manager is not going to do it?"
Now Smurfit is considering whether there are any benefits to using Marrakech for the procurement of direct materials - such as paper, or starch - for Smurfit's main business. The difficulty for both is that, with a limited number of direct material suppliers, cutting costs will be difficult. And for Marrakech, its business model would have to change, possibly to one similar to a telephone bill, where there is an upfront fee, a monthly fee and a usage fee.
"If you think of buying a paper machine, it costs millions of pounds. Marrakech could never justify taking 1.5% on that transaction, nor is it trying to. Another problem is that the raw materials are very bulky - starch, paper, etc - and if you find a supplier down a back street in China that's selling those materials very cheaply, it's still no use because you'd never get them in time, and the transport costs would be prohibitive," explains Cullen.
Pay to play
Of greater concern to Cullen is getting suppliers to join up to use the system, and pay for the privilege. And she admits that so far, not enough have signed up. "When we talked to one of our safety product suppliers, he said he had 25 projects in progress trying to go to different e-procurement marketplaces, and he wasn't happy. Not only does he have to produce electronic files for his catalogues, he's also going to have to pay 1.5% for the use of the Marrakech network.
"The real benefit to the supplier is that when it integrates the Marrakech system into its sales order processing, all electronic orders it receives go straight into its legacy systems. But no-one wants to do that, so they're not getting the benefits. They're not getting rid of the people who are re-keying in faxes because now they're re-keying in printouts!"
Company CV: Smurfit
- Smurfit Group began as a small Irish boxmaker in 1934, becoming a public company in 1964, under the name Jefferson-Smurfit Group.
- The company is a leading worldwide producer of containerboard, corrugated containers, folding cartons, paper sacks, décor base paper.
- It is one of the world's leading collectors of wastepaper for recycling, using much of the material collected in paper production at its own mills.
- The company's operations generated gross sales of approximately US$ 19bn (£13bn) in 1999, and it employs 68,000 at sites in Europe, North America and Latin America.