Baking Giant Turns to E-Procurement
Norm Andrews, a general manager of sweet-goods giant Interstate Bakeries, is contemplating the limits of e-commerce while touring a sprawling doughnut and bread-making plant in San Francisco.
But the decades-old Ho Hos maker is a different story.
This complex device, which rolls the thin layers of cream filling and chocolate cake together, is one of just three in the country. So when the conveyor belt that transports the Ho Hos through the rollers malfunctions, there's no way that Interstate is going to head online for help.
"We called the guy," when the last problem occurred, says Andrews, who oversees production within the 180,000-square-foot factory. "He changed the thickness of the belt and it worked. You get this relationship with these parts manufacturers and that's worth a lot."
Kansas City-based Interstate, also known as IBC, traditionally has run its business offline through a web of personal relationships with scads of suppliers.
Yet last year, the company, under increasing pressure to control costs, embarked on a $1.5 million nationwide project that will dramatically change how it buys, shifting many of its catalog purchases online.
This "indirect" procurement project covers everything from bearings for assembly line machinery, to the components of delivery trucks, to chemicals and brooms used to clean bakery floors. It excludes items such as fuel and product ingredients such as butter, flour, eggs and packaging.
With the project, IBC hopes to centralize the buying power of a $3.6 billion businessand demand volume discounts from its suppliers, instead of leaving 64 small bakeries in 29 states to negotiate varying prices for goods and services. A successful year could help IBC knock $6 million or more off $120 million in procurement costs. If IBC succeeds, the company could show that major change can be achieved using inexpensive systems hosted by little-known online marketplace host, eScout.
Before using eScout, IBC employees called local suppliers for as many as three quotes before deciding what to order. Purchasing decisions might involve eight different office clerks, engineers or sanitation workers in a given food factory. Each buyer was left to make the best deal possible by phoning or faxing orders in to suppliers. "Did we buy at retail?" IBC's senior vice president of purchasing Brian Stevenson asks. "I'm not sure we did. But an individual bakery can't buy products as well as a $3.6 billion company could. We needed to act more like a $3.6 billion company."
A study by consultancy Cambridge Technology Partners showed IBC that the existing way was not cost-effective. But the software that many vendors were trying to sell IBC could have run as high as $6 million to install and customize, Stevenson says.
"We weren't going to bet that much money on e-commerce," says IBC Chief Financial Officer Frank Coffey.
IBC also looked at Transora, a startup building a worldwide supply hub for the consumer packaged goods industry. Transora debuted in June 2000, but IBC had little interest in joining. For one, it's led by Sara Lee executive vice president Judy Spreiser and used by IBC rival Earthgrains, which was purchased by Sara Lee last year.
"Transora was so huge that we had a hard time getting our hands around it," Stevenson says. Knowing Transora existed, however, did influence conservative IBC's decision to start its own private exchange, Coffey says.
The company picked eScout, partly because it would host the private exchange for IBC, which has a bare-bones IT staff, and partly because it was a local Kansas City business. IBC's chairman knew eScout's CEO, Sandy Kemper, the former CEO of UMB Financial, a bank started by his family.
EScout was also much more affordable. IBC believes $1.5 million will cover the entire cost of the project. It includes employee training, software customization, consulting, computer equipment, telecommunications charges and cost of travel.
Of course, the future of IBC's procurement project depends largely on the financial health of eScout, which is struggling but expects to turn a profit by the end of the year. "If they can see out four quarters, there's a good chance that they're not going to tank," says Louis Columbus, an analyst at Boston-based consultancy AMR Research.
He says eScout, which largely caters to Midwestern clients, is smart to personalize marketplaces for customers and build services around their existing business relationships, rather than touting flashy technology as a solution to purchasing problems.
For its part, IBC expects a return by the end of this year, Stevenson says.
ROI with procurementlike ROI on many IT projects is difficult to track. A typical indirect e-procurement project, including integration costs, runs about $4.3 million, accord- ing to AMR Research.
But AMR found that the biggest stumbling block for many companies trying e-procurement is underestimating how hard it is to make the project work. Nearly a third of the companies AMR surveyed were forced to cut back the number of spending categories and business processes they were trying to change. About half the companies experienced project delays. That said, the same percentage reported saving between 5% and 10% on procurement, which is in line with what IBC is expecting.
IBC, which has bakeries that range from $15 million to $100 million in annual sales, is one of eScout's biggest customers. So it's not surprising that privately held eScout had to stretch to meet IBC's needs.
For starters, eScout's catalog offerings were mostly limited to office supplies when the two companies started talks in late 2000. "Bakeries buy a lot more than office supplies," Coffey says. "We couldn't use a generic marketplace. We needed something specific."
EScout, which built its hosting platform using Commerce One's software, agreed to start customizing the site in January 2001 to suit IBC and its suppliers' buying and billing needs.
"Being able to adopt this is not easy," Stevenson says. "EScout is a fine company. But were they 100% ready for us? The answer to that is no. Were we ready? Absolutely not. We went into this with our eyes wide open."
Within seven months of starting the project, IBC had 10 of its Southeastern U.S. plants using the eScout-hosted exchange. Employees at those bakeries spent about $300,000 online in November 2001, according to Dan Engdahl, IBC's e-procurement project leader. That's about 30% of IBC's goal for the region.
At each factory, there will be five to 10 computers tied to the company's wide area network. Some of the 128 garages that service the 12,000 vehicles in IBC's delivery fleet will connect to eScout to order parts and supplies over dial-up connections.
But using eScout is not like going to Lands' End to buy a shirt, says Stevenson.
A mechanic who may have little experience logging on to the Internet has to know what kind of a truck part to look for and how to search for it. If it's part 123Z, for example, the employee may have to enter the manufacturer's name with the item number, typing two stars surrounding that number, to do a search. "You need to teach people to do effective searches instead of browsing," Engdahl says.
On the supplier end, convincing companies to invest the money and time to use eScout has been a challenge, Stevenson says. So far, 28 of the company's suppliers are online. Going forward, companies that win contracts with IBC will be those who are willing to go online and offer the best price. Only pre-screened vendors' products will appear during a catalog search.
Companies that run franchisessuch as tire makers and uniform manufacturersare proving most stubborn, as they are reluctant to change their business model and sell direct to IBC online.
"We probably have 50 different models of tires and everybody orders that tire from a local source with a local contract," Andrews says. "I think what we do now is antiquated."
Stevenson says the company is forging ahead, and will try to get 50 suppliers online by March.
For suppliers, selling online "opens Pandora's Box," Engdahl says, as it exposes their pricing to their competitors, something handled privately before.
But there is a carrot for suppliers such as Motion Industries, one of the biggest engineering parts companies, who do business with IBC online. "They'll at least triple their sales" with IBC, Engdahl says. "They could quadruple their sales."
After a little haggling, Charles Schoenbachler, the owner of Label Craft USA, a family-run company in Louisville, Ky., agreed to go online in exchange for business with 56 IBC bakeries instead of 48. Label Craft, which makes fluorescent stickers that advertise price specials, knocked 14% off the price of its labels, which cost between $1 to $3 per thousand, in exchange for the extra business.
The sticking point?
That Label Craft would have to be Internet-ready even though only 10 of IBC's 64 bakeries are equipped to use eScout. "I was a little reluctant to go online," says Schoenbachler, who pays eScout 2% of whatever he sells to IBC on the site. "But I figured all we could do is lose if we didn't."
Label Craft, like close to 40% of IBC's online suppliers, didn't have any sort of online catalog when the company agreed to work with eScout. It can take up to three months to build a catalog, depending on how many product SKUs (stock-keeping units) the supplier offers, Endahl says. The biggest challenge is the time it takes to build so-called smart forms, which allow users to click and scroll down to choose the color, size or options available for, say, a uniform shirt.
Aside from the technical issues, there are cultural problems. IBC managers are anxious about abandoning their traditional system of buying from people they know.
Carey Krantz, an engineering manager with IBC-owned San Francisco French Bread Company, says he fears the company will lose relationships that have taken years to build, that enable the company to get fast service and find rare parts.
"There's a certain security (in talking with people) that you don't get from e-mail," Krantz says. Nonetheless, he believes about 60% of IBC's vehicle parts, components, wiring, lubricants and other supplies could be bought easily online. IBC plans to start training workers in the San Francisco and Sacramento sites to use eScout starting in March.
Stevenson says the company is prepared to be patient in training workers and in negotiating with suppliers. And patience will be needed. The company still must convince employees at 50 more bakeries to fire up their browsers.
If the system isn't simple or if it doesn't work well, Krantz says, it may be "the heck with e-commerce."
Interstate Bakeries Base Case
Headquarters: 12 East Armour Boulevard, Kansas City, Mo.
Chief Information Officer: Michael Holdgraf, Vice President of IS
Senior Vice President, Purchasing: Brian Stevenson
Financials in fiscal 2001: $3.5 billion in revenue, $61.1 million in net income, 2% net profit margin
Challenge: Transform paper-based processes into electronic processes; cut indirect procurement costs by buying on the Web; lower prices on contracts with suppliers; and put billing online