Perhaps One of the Greatest Successes in Today S Global Marketplace Resulting from The

1.0 INTRODUCTION

Perhaps one of the greatest successes in today’s global marketplace resulting from the advent of the internet is the website Ebay, an online haven for consumers of every imaginable item. One might speculate that the main driver for its success lies in the variety it offers to customers. Inarguably, however, Ebay owes a large part of this success to the notion that human beings tend to seek out the best possible alternative for fulfilling their wants and needs. On one hand is the seller, eager to maximize his or her profit by obtaining the highest possible price, while on the other hand are potential buyers, competing with each other to obtain the desired item at the least possible cost. The result is a highly efficient, remarkable means of commerce that, upon its unveiling, many considered a stroke of genius. Sun Microsystems, a giant in the IT industry specializing in hardware, software, and IT solutions, took enormous but calculated risks when it opted to implement a similar strategy in 2000 with respect to its supplier market.

1.1 Background of Sun Microsystems

Although Sun, like Ebay, is a well-known name today, it had its start as a small company in 1982, when it was incorporated by four graduate students from StanfordUniversity. Specializing in microcomputers, Sun (which stands for Stanford University Network) grew rapidly despite setbacks and sluggish growth by its competitors. In 1983 it obtained its first $40 million dollar project and set up operations in Europe. With the introduction of PC-NFS technology in 1986 (software for PC networking), Sun gained access to a whole new market and by 1987 partnered with AT&T to become a leader in business computing. By 1988 it reached $1 billion in revenue, and by 1993 it had produced and shipped one million multiprocessing UNIX servers, a figure unsurpassed by any other company in the industry.

One example of the practical applications Sun had accomplished up to this point was it’s enabling of hundreds of thousands of fans to access the Internet for up-to-date information on the 1994 World Cup games. Sun had also developed servers and workstations that could run sophisticated 3-D software for analyzing the structural state of the Golden GateBridge at any given time. Its success increased tremendously after the development of JAVA, a universal software platform that allowed applications to be written once and run on any system. By 2001, Sun had grown to become an $18.3 billion company with offices in 170 countries. Today, Sun continues to be a leader in all aspects of the IT industry, including storage networks, data delivery systems, e-solutions, workstations, and servers.

1.2 Problem Statement

As one might imagine, with the phenomenal growth Sun had experienced during the 1990s, its parts requirement across its full range of IT hardware offerings reached astronomical levels. Sun had gone from producing 100% of its systems in-house to about 10% within a span of three years. Subsequently, considerable time and effort was spent outsourcing manufacturing operations to electronic parts manufacturing service providers both within the U.S. and overseas. Though this strategy was aimed at reducing costs, it increased the complexity of Sun’s supply chain and made it difficult to accurately communicate supply and demand issues to all suppliers. The combined pressure created by increased outsourcing and insistence from upper-tier managers to reduce costs led to a situation in which relationships with suppliers were both crucial and delicate. On one hand was Sun’s need for cooperation with suppliers, and on the other was its need for these same suppliers to be competitive with each other.

Early in 2000, upper level management began pressuring the purchasing department to explore alternative options for materials procurement, towards which the company was currently spending about $9 billion annually. More specifically, management was pushing for exploration and analysis of an option which implemented online reverse auctions, also referred to as “dynamic bidding.” In the dynamic bidding process, all suppliers of a specific component or product are connected via an online interface, in which they place bids to provide the lowest possible manufacturing cost for the product. Suppliers can see the bids of all other suppliers during the bidding period, and adjust their bids accordingly. At the end of the auction, all supplier bids are taken into consideration along with the other criteria established for the product at hand, and the supplier that best fulfills these criteria is awarded a contract. As one can see, the concept of reverse auctions operates on the same dynamic that a normal auction such as Ebay does. Suppliers place bids by lowering their prices for the purpose of winning a contract, aiming to obtain the highest possible price for their goods and thus maximize their returns. The company awarding the winning contract vies for the lowest possible purchase cost, which in turn maximizes its end returns.

In April of 2000, Kevin Carroll (V.P. of Supplier Management) and Marissa Peterson (Executive V.P. of Worldwide Operations) approached Sonia Syngal (Director of Procurement Strategy and Supplier Relations) with the task of performing a dynamic bidding pilot test. The proposed time frame was one month for selecting a software vendor and working with them to run the test. The end results of this test had major implications for Sun. At its completion in May, Sonia found that the test cut sourcing costs by approximately 30 percent; taking the annual material procurement cost of $9 billion into consideration, this translated into an annual savings of almost $3 billion. She was then given one week to prepare a recommendation on the future of dynamic bidding at Sun. Her 35-person team was to accomplish this task while preserving Sun’s supplier relationships and maintaining the quality of inputs for its finished products.

Given this task, there were three main problems, or issues, which had to be tackled. The first issue involved Sun’s relationships with its suppliers, in which it had invested heavily. Requiring them to compete with each other in what some might view as a competitive, cut-throat environment could potentially damage relations and even result in them turning away. The second issue dealt with internal factors – namely, the potential negative response of experienced commodity directors who might feel threatened by the new procurement strategy. Finally, there was the issue of selecting the most appropriate software vendor for full-scale dynamic bidding across all of Sun's commodity areas. Sonia was satisfied with the performance of Market Owner, the vendor used during pilot testing; however, this vendor had little experience in the high-tech market and thus might not be a viable solution for full-scale implementation of dynamic bidding.

2.0 DISCUSSION/ANALYSIS

2.1 Maintaining Supplier Relations

Sun operated under a strategy referred to as the “leveraged manufacturing model”, which entailed a high level of outsourcing and very little in-house manufacturing. As a result, it invested heavily in its relationships with suppliers and also chose suppliers whose long-term goals were aligned with those of Sun. Global commodities directors expressed concerns that suppliers would be dissatisfied with dynamic bidding; instead of personal one-on-one negotiations with Sun, they would now be forced to enter a competitive environment in which they’d have to fight for Sun’s business. Indeed, this was a complex issue because it dealt not with the unpredictability of numbers, but with the unpredictability of human reaction, for which there was no quantitative model. As a result, Sonia insisted that certain measures be taken to reduce the probability that suppliers would reject dynamic bidding as a viable means of doing business.

Policies had to be implemented to counteract the arising notion from suppliers that Sun would now focus solely on the lowest possible cost. One global commodity director at the time, Ted Dagnese, had informed Sonia that several suppliers expressed concern that Sun would start to consistently award contracts to the lowest bidder. Sonia therefore felt it necessary to promote its already existing CQLT program as a supplier screening method that would remain intact. Referring to cost, quality, lead time and time-to-market, the CQLT screening methodology would ensure that other important factors would be considered besides cost. In addition, Sun planned to enforce a policy of qualifying suppliers before inviting them to the dynamic bidding marketplace. This would require that they met the aforementioned criteria even before they were given a chance to bid for a contract based on cost.

Another policy that would be implemented to maintain healthy supplier relations and reduce any fears they might have was the extension of the Scorecard system, which was a means of evaluating suppliers based on such performance measures as quality or delivery time. Scorecards would be used in the dynamic bidding process to assign suppliers a maximum percentage of market share. This would ensure that large supply contracts would not be awarded solely to one supplier. In addition, it would encourage suppliers to improve their scores and at the same time, reward them with higher market share.

In addition to policy implementation, Sonia Syngal decided to analyze some of the benefits to suppliers that might have gone unconsidered. For example, she discovered that currently, a large portion of supplier cost originated from continued negotiations with Sun’s commodity directors to obtain larger market shares and price for components. Dynamic bidding would be a straightforward process that did away with a lot of this overhead, thus reducing a supplier’s total operating expenditures. In addition, it would provide suppliers with valuable information about their competitors and allow them to benchmark accordingly.

2.1.1 Suggested Strategies for Improving Supplier Relations

Though Sonia’s recommendations were indeed crucial to maintaining good relationships with suppliers, other recommendations would also help to ensure this healthy relationship.

Managing supplier relations is crucial to any business. As the complexity of the product increases, the supplier’s role in providing after sales support until life expectancy becomes an important aspect for customer satisfaction.Thus after the RFQ has been cited, a thorough analysis should be performed on potential suppliers. Besides the score cards, executive support for reverse auctions is crucial in making sure that a contract is awarded to the best vendor. The GCD’s involvement and their opinions before signing on a supplier is one way to ensure that their vast knowledge bank about the supplier’s past performance is taken into account. Top-level executives need to become chief advocates for e-procurement if it has to achieve success as it involves strategic changes throughout the organization.

One suggestion would be the implementation of Product Lifecycle Management (PLM). Product Lifecycle Management (PLM) is a tool that can go a long way to help vendors and suppliers to work in a collaborative environment. With this tool all the essential information that is vital to a product development can be shared. Such software, if incorporated in the supply chain, can improve efficiency by 4 percent. The information that can be shared is wide ranged, starting from specifications, performance, test results, R&D updates to sales figures, pricing and promotional plans. With this knowledge, suppliers and Sun have a common goal; to improve product quality and thus the market value of the product. This would enable both vendors and Sun to have common goals and work towards it. Sharing of critical information about a firm or a product requires a high level of trust. PLM or an open portal of information demonstrates this trust and thus plays a critical role in supplier/vendor relations. It also clearly demonstrates the expectations from the suppliers and minimizes all problems due to lack of communication. Suggestions made by suppliers can be evaluated and worked towards as a team.

Once the rewards that a buyer obtains through previous bidding activity reaches a high level, a partnership with the supplier should be established. When objectives, aims and strategies of both firms are aligned, the need to come in terms with a new supplier with every new contract is not required. This would conserve a significant amount of time in building new relationships with other suppliers.

Too much focus should not be laid on the current contract in order to build up relations with the supplier. There may be a mismatch of expectations and a lack of communication can easily weaken relations. In order to avoid this, clear expectations, guidelines and all terms of contracts should be made clear before the online bidding process. Detailed RFQs would also help increase communication while minimizing confusion among the supplier tiers.

Programs for extensive training on the software tool for e-bidding should also be implemented to increase the familiarity with the software. Educating suppliers on the values of e-procurement, and supplementing with user-friendly tools for ease of use will further reduce the initial resistance to online reverse auctioning.

2.2 Internal Factors

2.2.1 GCD Approval

In addition to considering relationships with existing suppliers, Sonia also had to consider the commitments of the global commodity directors. Given their extensive experience in finding ways to cut procurement costs, most commodity directors were initially pessimistic about the success of dynamic bidding. In order for the project to have a chance at implementation, it was critical to win over their support which would additionally be crucial for preserving strong relationships with existing suppliers.

A possible strategy to gain approval from global commodity directors would be to offer them incentives for recruiting suppliers. According to the current procedure, GCDs spent months of time meeting and negotiating with prospective suppliers. As a result, there is a substantial waste of time as well as numerous costs that incur. With dynamic bidding, the original negotiating procedure which could take months can be resolved within the matter of a thirty minute, real-time, electronic auction. As a result, by rewarding GCDs for recruiting a winning supplier, they would have a greater incentive to effectively recruit.

2.2.2 Implementation Decisions

Sonia also had to make decisions on the implementation of the new process. She had already decided on selecting the “lowest risk” product for the test pilot, but she also needed to source more critical commodities in order to demonstrate Sun’s commitment to dynamic bidding. In addition, the appropriate commodities had to be selected along with the values of these commodities, and whether to implement a gradual approach or to jump in to a full-blown dynamic sourcing program.

Due to the uncertainty of success of this process, the most systematic approach would be to select a few items across the range of low risk products to critical commodities and apply a gradual implementation. This would make the point to demonstrate Sun’s commitment to dynamic bidding but would also allow the suppliers to ease into the new program.

2.2.3 Maintaining Sales Integrity

A third internal issue to consider was how to implement a system that would maintain the integrity of Sun’s sourcing process. For example, if suppliers call after an auction to offer a better price than the lowest bid, the commodity directors should not accept it. Given the skepticism of the commodity directors with the program, Sonia feared it would be difficult to get them to abide by the procedure.

To avoid the possibility of such an incident, the winning bidder should be guaranteed a deal upon the end of the transaction, and funds should immediately be electronically disbursed. It is understandable that the full amount may not be disbursed without receipt of the product, therefore the equivalent of a “down payment” could be charged to guarantee the transaction. Furthermore, this would prevent a commodity director from accepting a supplier’s offer after an auction ends and also prevent a supplier bidding too low for a quantity it cannot afford to produce.

2.3 Vendor Selection

The final problem that Sonia Syngal and the Supplier Management Group needed to solve, in order to be able to recommend dynamic bidding as a viable option for Sun, was appropriate software vendor selection. Prior to pilot testing, Sonia had identified several criteria which she believed would aid in selecting the appropriate software vendor/package. The first criterion dealt with real-time auctioning capability, which she identified as a necessity – Sun and all competing suppliers would need to see a bid as soon as it was placed. The second criterion was concerned with flexibility, which would allow for different auction configurations (i.e., grouping specific parts together in lots). The third criterion was graphics capability, which would allow all involved in the auction to quickly see and comprehend the current bidding trends. The fourth criterion was connectivity – reliable connectivity with an alert system for lost connections and a mechanism for resolving the lost connection was absolutely essential. The final criterion was the selection of an absolutely sound software package with no glitches.