Motorola Reinvents its Supplier Negotiation Process Using Emptoris and Saves $600 Million

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Learn about a Fortune 500 company that reinvented its supplier negotiations and saved $600 million.

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Motorola Reinvents its Supplier Negotiation Process Using Emptoris and Saves $600 Million

  1. 1. An Emptoris Case Study Motorola Reinvents its Supplier Negotiation Process Using Emptoris and Saves $600 Million Emptoris, Inc. www.emptoris.com
  2. 2. - - © 2001 - 2008 Emptoris, Inc. Sales contracts dictate virtually every aspect of a business relationship, including payment terms, service levels, pricing, and customer obligations.These contracts play a critical role throughout the Quote-to-Cash process, from the initial proposal through final payment. Unfortunately, most companies do not take a structured approach to managing their sales contracts, and, as a result, often suffer from extended sales cycles, eroded deal quality, missed obligations, or squandered opportunities to renew and expand existing relationships. Emptoris Contracts, a leading enterprise contract management solution, enables companies to improve sales effectiveness by managing the Quote-to-Cash process throughout the entire customer lifecycle. Using diCarta Contracts, companies can shorten sales cycles, reduce revenue recognition issues, and structure more profitable deals through better control of underlying contract language and terms. Improving the Quote-to-Cash Process: Managing Complexity The process of managing deals from initial sales proposal through contract creation, negotiation, and acceptance, typically involves numerous resources across an organization. It is not unusual for sales operations, field sales, planning, finance, legal, product management, and consulting to be involved in the process. Coordinating the process across all resources, while ensuring that deals contain only accurate product, pricing, and terms, and that proper review and approval procedures are enforced can be challenging.With increasing deal size, more complex negotiations, and higher sales volume, maintaining an efficient, effective process can become unattainable. For most companies, simply applying more people. Proposals Contract Amendments Renewal Management Deliverables Management Receivables Contract Creation Negotiation Field Sales Product Team Contract Mgrs Inside Sales Legal Proposal Team Service Delivery Sales Opps Pricing New Deals Ammendments/ Change Orders Proposal Requests New Business Prospects, Customers and Partners $ Proposals Contract Amendments Renewal Management Deliverables Management Receivables Contract Creation Negotiation Field Sales Product Team Contract Mgrs Inside Sales Legal Proposal Team Service Delivery Sales Opps Pricing New Deals Ammendments/ Change Orders Proposal Requests New Business Prospects, Customers and Partners $ Executive Summary
  3. 3. - - © 2001 - 2008 Emptoris, Inc. One of the greatest challenges Motorola has ever faced was the disastrous telecommunication downturn of 2001. No one tells this story better than Mike Zafirovski, Motorola’s President. “Flash back for a moment to 2001. In the wake of the dot-com and telecommunications bust, Motorola faced new, hungry competitors and an uncertain marketplace nervously confronting its own threats- terrorism, economic upheaval, and public trust shaken by corporate scandal. We were not facing your garden variety downturn in the telecom industry!” As figure 1 illustrates, Motorola faced multiple challenges in this downturn, which it now refers to as the“Perfect Storm.” First, the market for telecommunications equipment collapsed with demand in the cellular phone industry falling by one-third. Second, Motorola discovered that some of its products were not competitive. Third, Motorola struggled with internal complications driven by inefficient processes and resource reductions, which meant there were fewer people to negotiate with suppliers. As Theresa Metty, Motorola Vice President and Chief Procurement Officer, comments,“Any one of these forces would have been a challenge, but all happening at the same time was devastating. We knew we needed to act quickly if we were to navigate our way out. We knew if we could find a way to leverage our purchasing power more efficiently and effectively, we could have an enormous impact on profitability and market share. The question was how.” To help answer this question, Motorola launched the Motorola Internet Negotiation Tool (MINT), Motorola’s internal name for Emptoris’web- based strategic sourcing application. Market Collapse  Demand dropped sharply  Revenues tumbled  Extreme overcapacity Internal complications  Supplier negotiation processes inefficient  Limited resources Products not competetive  Lacked key features  Aging portfolio  Too expensive Emptoris Contracts Spans the Quote-to-Cash Process Figure 1 - Motorola’s Perfect Storm
  4. 4. - - © 2001 - 2008 Emptoris, Inc. Cost Reduction- the Course to Navigate With falling revenues, Motorola sought to improve earnings by cutting costs and improving margins. As Metty explains,“Since the top line was not growing, we needed to achieve our earnings per share goals by reducing costs. The equation was simple. Every dollar saved equaled $12 in new revenue. So, for Motorola to deliver the same earnings to the bottom line that it achieved using MINT ($600 million), Motorola would need to increase sales by over $7 billion.” In the process of implementing MINT, Motorola had to re-invent the sourcing and supplier negotiation process. The objective was to take advantage of market over-capacity to reduce costs quickly. However, this required overcoming the complexities in the sourcing process and improving the supplier collaboration and negotiations to make these processes more effective and efficient, all with a drastically reduced workforce. In the words of Rob Harlan, the Director of Global E- Procurement at Motorola and the leader of the initiative to implement MINT,“We had to do more with less, and do it now!” Selecting the Solution to Weather the Storm As figure 2 shows, managing the strategic sourcing process at Motorola is extremely complex. With all of the complexity in parts, people, suppliers and locations, Motorola needed a solution that would not only optimize the selection of suppliers based on the total cost of ownership (TCO)1 , but also would enhance the supplier collaboration and negotiation processes. The solution needed to handle every type of sourcing project from very large and complex semiconductor negotiations to very small one-time prototype purchases. This large and complex problem required a robust solution with global capabilities. A Motorola team unanimously selected Emptoris to provide this solution after an exhaustive evaluation process. Motorola Complexity •250 commodity managers •51 direct material commodities •26 indirect commodities •300,000 active parts •Dozens of manufacturing locations •Complex cost-quality tradeoffs Supplier Complexity •44,000 suppliers •Complex pricing structures •Many cultures and languages Total cost of ownership (TCO) 1 Total cost of ownership incorporates all elements of cost related to a supplier’s offer. This includes not just pricing but additional out-of-pocket costs related to shipping, taxes, tariffs, financing, warranty and maintenance. It also includes soft costs and opportunity costs related to delivery, availability, quality and performance. Figure 2 - Strategic Sourcing Complexity at Motorola
  5. 5. - - © 2001 - 2008 Emptoris, Inc. When designing a solution to weather this perfect storm, it is important that each component works together as part of an integrated solution. One of the unique capabilities of Emptoris’solution is its ability to enable each step of Motorola’s internet negotiation process (figure 3). Key components Emptoris provides to support each step of the process include the following: In step 1, using Emptoris’flexible data model, the commodity team can build the TCO formula on the fly through the user interface. The model captures both data elements and the formulas 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 auction, an electronic sealed bid request for quote (eRFQ), or both. For each direct material commodity area at Motorola, close to 100% of the spend is sent through an eRFQ initially. In step 3, using Emptoris’embedded workflow and communication, the commodity team collaborates with suppliers, iteratively exploring options for how the supplier can meet Motorola’s needs at the lowest TCO.These options may include modifications to the quantities, delivery requirements, delivery dates or item specifications. Confirm suppliers understand Step 1 Communicate Requirements Step 2 Develop Sourcing Strategy Step 3 Collaborate with Suppliers Step 4 Supplier Negotiation Step 4 Analyze scenarios (optimization bid analysis) Step 4 Award the business Multiple price and non-price factors Reverse auction or Request for Quote (RFQ) All elements of total cost of ownership (TCO) Powering Motorola’s Internet Negotiation Process Figure 3 - The Internet Negotiation Process
  6. 6. - - © 2001 - 2008 Emptoris, Inc. In step 4, suppliers use online bidding functionality to offer innovative options for the commodity team to evaluate. This is important because the supplier often knows multiple ways to meet the commodity team’s needs based on the supplier’s capabilities. Using Emptoris’solution, suppliers can submit any number of bids that can include rebates, volume discounts, bundling, and substitutions, for example. In step 5, leveraging Emptoris’embedded optimization-based bid analysis, the commodity team evaluates different sourcing strategies to see the effect of various purchasing policies on the total cost of ownership and supplier award distribution.The team can run and compare an unlimited number of“what if”scenarios against all bids in the system. The system recommends line-by-line what supplier to buy from and provides the reasoning analysis identifying the contributing factors to this decision.The optimization bid analysis is tightly integrated into the negotiation platform, so the buyer can quickly modify the requirements 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 purchasing policies. Avner Schneur, the CEO of Emptoris notes,“While Emptoris’internet negotiation solution offers sophisticated functionality, to drive adoption, it is important to shield the user from the underlying complexity. Therefore, the system was designed to provide an extremely easy-to-use environment. Thus, the power of optimization is exposed to the commodity team without requiring them to understand how it works.” Charting the Right Course with Optimization-based Bid Analysis When selecting suppliers, the goal is to identify the best mix of suppliers to meet Motorola’s needs at the lowest total cost of ownership subject to a set of purchasing policies. As figure 4 shows, often in purchasing situations, there are many items, suppliers, pricing strategies and business constraints that make this problem quite complex. To highlight how these factors contribute to a difficult decision process, consider the following. In a single negotiation, the commodity team may flexibly specify requirements on thousands of items, each with different quantities and delivery locations. Suppliers may respond with multiple bids on all items simultaneously, employing complex pricing strategies that incorporate price breaks, rebates, substitutions and discounts for groupings of items. Because the focus is on total cost of ownership and not just price, the commodity team that values the long term performance of strategic suppliers then incorporates supplier performance criteria measuring quality, delivery and service. Finally, the commodity team may need to enforce purchasing policies in the decision. A purchasing policy can be, for example, splitting items between two suppliers to hedge risk or allocating a certain portion of the business to a minority supplier. Emptoris’optimization-based bid analysis easily handles this complexity, identifying in minutes what could take up to one month using more traditional spreadsheet analysis.
  7. 7. - - © 2001 - 2008 Emptoris, Inc. Highlighting the importance of supplier relationships in the selection process and MINT’s ability to factor them in using optimization-based bid analysis, Zafirovski points out,“Excellence in procurement, like most aspects of business, is about cultivating successful relationships. Motorola can’t afford to damage supplier relationships as it chases low-cost solutions. Pricing is only one consideration. Quality of product, timely delivery, volume and flexibility, they all factor into the supplier equation. Early on, our supply 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 institutionalize and optimize the supplier negotiation process at Motorola,”says Harlan. This included creating a high impact team with deep sourcing and system implementation experience to rollout the MINT system quickly and teach our commodity teams how to use it. Motorola implemented an extensive change management program and focused intensively on training at the user, executive, and supplier levels. Motorola also took careful steps to build trust with suppliers by training them on the MINT solution and process while also integrating key demand aggregation systems to build a foundation for conducting online sourcing using more in-depth analysis. Finally, early on Motorola conducted high profile sourcing negotiations and communicated the process and results to the rest of the procurement community Minimize total cost of ownership (TCO) Flexible Requirements •Item •Specification •Quantity •Due date •Proprietary attributes (bid fields) •Total cost formulas Supplier Bids •Bundling •Multiple price breaks •Rebates •Substitutions •Quality and quantity ranges •Multiple delivery locations and times Purchasing Policies •Budget limits •Award splits •Switching costs •Contractual obligations •Preferred suppliers Supplier Ratings •Supplier, category and item level - Qualification - Quality - On-time delivery - Item attributes (e.g., tolerance) Figure 4 - The Role of Optimization-based Bid Analysis
  8. 8. - - © 2001 - 2008 Emptoris, Inc. at Motorola. All of these factors contributed to the rapid adoption and the substantial increase in the percent of spend negotiated online via MINT as seen in figure 5. Successfully Navigating Out of the Storm The MINT solution not only helped Motorola survive the Perfect Storm, it also facilitated a change in the negotiation paradigm both for Motorola and its suppliers as shown in figure 6 below. As Metty notes,“We have shortened our collaboration and negotiation cycle significantly. We have empowered our suppliers to respond more creatively to our needs, going far beyond price. And, we have equipped our buyers with strong optimization and analytical tools enabling them to explore more options to achieve maximum value.”Old Paradigm •Manual part-by-part •Price-based only •Face-to-face, one-to-one •Imperfect information •Gut feel New Paradigm •Automated and aggregated •Base on TCO •Internet-based, many-to-many •Transparent •Quantifiable trade-offs Figure 6 - Negotiation Paradigm Shift at Motorola Figure 5 - MINT’s Adoption at Motorola Drive eSourcing to 90% of Motorola's eligible spend... 30% 15% 20% 10% 40% 90% 58% 70% 2002 2003 2004 (proj) 2005 (proj) e-RFQ e-Auction …with rapid global adoption. 725 598 1200 271 311 600 Number of events (cumulative) Number of internal users Number of suppliers 2002 2003
  9. 9. - - © 2001 - 2008 Emptoris, Inc. As of April 2004, Motorola has negotiated over $16 billion of purchases online, saving well over $600 million (figure 7 below). Motorola has steadily increased the percentage of its spend sourced online using MINT. In 2003, the figure was 80% of Motorola’s direct materials, and 50% of total overall purchases, and it continues to grow. In addition, the number of categories of spend negotiated using MINT is significant. Nearly every category has been sourced using MINT. In 2003, it was used in sourcing events from under $2,000 to over $2 Billion. 600 Motorola employees and 1,000 suppliers utilized MINT in nearly 500 sourcing events. Zafirovski says,“Procurement 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 brought aggressive cost-competitiveness and cost analysis to Motorola’s sourcing process. We applied the power and efficiency of the internet to deliver a new level of compliance across the corporation. Thanks to our procurement team and the MINT system, Motorola navigated its way out of telecom’s‘Perfect Storm’and today is charting a course to success.” Dave Devonshire, Motorola’s Chief Financial Officer adds,“By any measure, the impact of this innovation is huge. Motorola’s annual expenses for materials and services total about $17 billion. Our MINT system currently processes about $9 billion of it electronically. And that figure is growing. Over the past three years, we’ve saved more than $600 million. Savings are realized not only in pricing, but also in reduced travel, improved cycle time and significantly higher operating efficiency. Every aspect of our procurement process is optimized as never before thanks to the MINT system.” Motorola’s Future with MINT Although the success to date has been phenomenal, Motorola will continue to utilize MINT to drive additional costs out of the system. Motorola plans to deploy MINT to commodities that are not fully leveraged today as an immediate area of opportunity. Says Metty,“We believe it is imperative and possible to use MINT for 100% of our purchases for both existing and new products.” Motorola also Savings($million) The Impact of MINT Figure 7 - MINT’s Adoption at Motorola …across 50% of total spend ($ millions). $6,800 $2,400$1,600 $9,800 2002 2003 e-RFQ e-Auction Over $600 million in savings... $0 $250 $500 2002 2003 Savings($million)
  10. 10. - 10 - © 2001 - 2008 Emptoris, Inc. plans to utilize MINT to manage changes in the supply base which are driven by new technologies and geographical shifts in business. Finally, MINT will enable commodity managers to re-evaluate quickly previous sourcing decisions that were optimal at one time but because of changes in market conditions or in Motorola’s demand, may no longer be optimal. As Metty states,“We are very proud of our accomplishments, and we are excited about the future prospects of MINT. The numbers are big now, and we will drive them even higher!”
  11. 11. - 11 - © 2001 - 2008 Emptoris, Inc. Emptoris is a world leader in innovative supply and contract management software solutions that empower enterprises to realize best value and accelerate profitable growth. Emptoris solutions are used by successful Global 2000 companies in every industry. Customers include American Express, Boeing, ConocoPhillips, GlaxoSmithKline, Kraft, Motorola, Owens Corning, Syngenta, and Vodafone About Emptoris
  12. 12. For more information about Emptoris, visit: www.emptoris.com, call 1.781.993.9212, or email sales@emptoris.com. Emptoris, Inc. 200 Wheeler Road, Burlington, MA 01803 tel 781-993-9212 • fax 781-993-9213 • www.emptoris.com © 2001 - 2008 Emptoris, Inc.

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