Leveraging its ERP system and network investments, Sonoco Products Co. implements e-procurement software to help control operating resource costs

ERP and E-Procurement Software Assist Strategic Purchasing Focus at Sonoco

In the 1990s, Sonoco embarked upon a plan, termed “Vision 2000,” to increase earnings for the industrial and consumer packaging company. The company sought success through expanding existing markets, developing new ones, and focusing on more effectively operating its business.

As part of the focus on efficient operations, Sonoco viewed information systems as the foundation to continuous improvement and invested in information technology (IT) systems that let it more effectively maintain and view data within the company. The first component to building this foundation was a PeopleSoft ERP system for financial and human resource applications in 1998.

In addition, to more efficiently manage the company’s overall purchasing strategy, changes to the purchasing group were initiated in 1997. The group’s main focus was to ensure that the right systems, processes, and people were in place for strategic-based purchasing and cost control. To help accomplish these goals, purchasing of operating resources supplies and certain commodities were centralized at corporate headquarters in Hartsville in 1998.

Key in providing visibility of data and leveraging supplier negotiations for the centralized purchasing group has been an electronic procurement (e-procurement) tool that allows the company to control which suppliers its employees use when purchasing operating resources, resulting in cost savings. The tool also interfaces with the new ERP system’s accounts payable module to automate many purchasing and payment tasks.

STRATEGIC FOCUS FOR PURCHASING. An initial move for Sonoco was to create a corporate purchasing and logistics group comprised of individuals with a wide range of backgrounds, including marketing, finance, acquisitions, and accounting as well as purchasing. The group was tasked with aggressively reviewing different cost saving initiatives, productivity improvements, and supplier improvements to come up with a long-term strategic purchasing vision (Figure 1).

FIGURE 1: Changes to the purchasing group were initiated in 1997, creating long-term goals for strategically managing external purchases.

Shifting approaches. To the new group, it was obvious that Sonoco’s purchasing operations were inefficient due to following a transaction-based purchasing approach rather than a strategic-based one. The group identified payments to more than 40,000 suppliers for the year 1997. Purchasing of operating resources was specifically targeted for improvement, since it showed more opportunities than the raw materials purchasing process, which had a smaller supplier base and had been more strategically managed in the past.

Operating resources are supplies such as maintenance, repair, and operating (MRO), janitorial, safety, and office products (Figure 2). They are exclusive of supplies for raw materials, logistics, and capital. Over time, operating resource purchases at Sonoco had not been strategically managed, resulting in higher prices, inefficient processes, fragmented contacts with suppliers, and low data visibility. Also, there were many regional and local suppliers, and, with more than 16,500 employees, there were more than 16,500 potential “buyers”—each with the ability to purchase certain products.

The group began focusing on ways to leverage the company’s purchasing power through aggregating the company’s purchases of certain commodities with one national supplier, while also considering alternatives such as strategic alliances with multi-company purchasing consortia. This would require a dramatic reduction in local purchasing autonomy, but it would also allow Sonoco to capitalize on recent mergers that have formed national, rather than regional, suppliers. Overall, it was crucial that the right information systems, processes, and people were in place for strategic-based purchasing and cost control. In addition, ways to automate transaction execution and consolidate data would be key components of the system implementations.

To negotiate effectively with suppliers, the new purchasing organization began examining data from the company’s legacy purchasing system, which was soon to be replaced by a new ERP system purchasing module. This data allowed identification of key suppliers within each of the operating resource categories identified in Figure 2. The group initially began a program to reduce suppliers for the MRO category, and ultimately lowered the number from 1,200 to three by September 1998. Supplier reduction in other operating resource areas continues.

FIGURE 2: Purchasing of operating resources was specifically targeted for improvement, since it showed more opportunities than the raw materials purchasing process, which had a smaller supplier base.

Organizational changes. From a people and organizational standpoint, Sonoco finalized its centralization of procurement at the Hartsville, S.C., headquarters in November 1998 in a move aimed at improving purchasing practices. At corporate, a procurement manager is now aligned with specific divisions and also with certain commodities across the country. This has provided increased leverage with suppliers and eliminated redundant effort between divisions.

KEY PURCHASING SYSTEMS. In parallel with the new purchasing initiatives, the company needed new Y2K compliant purchasing software. Based on the integration capabilities with its installed PeopleSoft financial modules, the group chose a PeopleSoft ERP system module for its new purchasing system.

Search for purchasing front-end. At the same time, Sonoco also formed a group of IT and purchasing representatives to explore software that would provide users with online catalogs from which to choose items. According to Steve McCay, strategy and analysis manager for Sonoco’s corporate purchasing and logistics group, the PeopleSoft purchasing module’s capabilities dictated that it was more applicable as a “back office system” for purchasing professionals. This module would function as a central purchasing data repository and perform more complex tasks such as blanket orders and capital purchases. What was needed, says McCay, was a “user-friendly, elegant front end that you deliver to the users for generating orders.”

Also, although the group had reduced the number of MRO suppliers and was working on reductions in other operating resource categories, a mechan- ism for monitoring user compliance with the new, smaller group of suppliers was needed. The online catalog group examined several software packages that would provide the friendly user interface for generating orders, as well as limit user choices and communicate with the ERP system. They also considered the ability to acknowledge receipts as a key component of the desired software.

User-friendly purchasing. Ariba ORMS e-procurement software was ultimately chosen, due in large part to its ability to integrate with the ERP system. Such capability allows the company to utilize PeopleSoft’s functionality for an automatic comparison between the purchase order, the payment voucher, and the actual receipt – something that had previously been a costly, time-consuming, manually intensive activity for purchasing and accounts payable personnel. The software, although only having been on the market for a short time, had an impressive list of corporate customers, including Cisco Systems, FedEx, GM, and Chevron.

The Ariba system is object-oriented software designed to run on the PC desktop and automate the procurement process for goods and services. Using Sonoco’s corporate intranet, the new application could be deployed on existing PCs and Microsoft Internet Explorer 4.0, the company standard for web browser software, lowering startup costs and leveraging recent investments in building an intranet. Because of its ERP system adapter, the system would also leverage Sonoco’s PeopleSoft investment.

Although Ariba ORMS is actually intranet rather than internet based, it is typically viewed as an e-procurement tool. Sonoco receives catalogs from the supplier in a text file format. These files are loaded into the purchasing software so users can view and choose line items and submit requisitions. The line items have a URL link that goes to the chosen supplier’s web site, where pictures and further product details are available.

In addition, the system allows non-catalog purchases. According to McCay, although the company wishes to direct most purchases to preferred online catalog suppliers, it realizes that many exceptions can occur, such as unavailability of a product or an unsatisfactory waiting period for receiving it.

The company is currently looking at more fully utilizing the Ariba Network, a recent extension of the software that is more “pure e-procurement” in McCay’s words. This medium allows users to find the product directly on the supplier’s web page or on the network, apply the Sonoco preferred pricing with that supplier, pull it back into a requisition, and then send it out according to that supplier’s desired means of receiving the order—all via the Ariba Network.

E-PROCUREMENT SOFTWARE. Sonoco chose to first install the new e-procurement software at its Hartsville headquarters, where purchasing had already been centralized. In addition to the headquarters, the Hartsville campus includes the company’s largest paper mill, which has seven cylinder board machines producing 195,000 tpy. Hartsville had been responsible for order totals of several million dollars in the operating resources category.

Although standardized on PeopleSoft for its financial and HR requirements throughout the company, this was not the case for all purchasing within Sonoco. The various divisions had been allowed to choose their own ERP systems, such as Baan, TQMP, and others, for production and material requirements planning. These systems typically include purchasing functionality of various degrees and capabilities, but are predominantly used for purchasing of raw materials at Sonoco.

The ultimate goal is to have the data interfaced from the various division-level ERP systems to the central PeopleSoft system in Hartsville. However, in contrast, the company is standardizing operating resource purchases on the Ariba e-procurement system.

Project cost. Due to earlier investments in installing network infrastructure and upgrading computers across the company, the cost of installing and standardizing on the e-procurement tool was isolated to the software and its related servers. Sonoco chose to partner with Andersen Consulting to ensure that the installation and rollout achieved the desired objectives while completing the project in an aggressive time frame.

Implementation project. Sonoco began the 150-day implementation project for the software in October 1998 with help from PeopleSoft and Ariba as well as Andersen Consulting. McCay reports that, on average, the team consisted of seven people working on the project during the November 1998 to April 1999 time frame, which included two dedicated Sonoco employees. Since the appropriate infrastructure was in place due to the PeopleSoft implementation, McCay notes that a limited number of Sonoco IT specialists were pulled into the project.

Because of the reduction in the number of MRO suppliers that had already occurred, Sonoco chose this operating resource category in which to focus the e-procurement software implementation, although suppliers from other categories also participated. This meant that preferred suppliers had to supply the online text catalog for use within the Ariba system. The flexibility of the system allows users to request non-catalog items as well, routing them to purchasing agents for sourcing and/or approval.

Many factors are contributing to the project’s success, including a solid infrastructure re-engineering processes, but the key, according to McCay, is the coordination with the preferred suppliers.

“You cannot achieve significant change in the way you do business using this model unless supplier relationship building has been accomplished,” emphasizes McCay. “You have to work very closely with each supplier, covering the smallest detail, even to the point of over-communicating.”

Preferred suppliers. Sonoco chose specific operating resource commodities in which to limit the number of suppliers—in some cases, a limit of just one. These preferred suppliers were then educated on the requirements for providing the appropriate information to Ariba ORMS from their respective catalogs. Obviously, those suppliers that were already knowledgeable about the e-procurement software and its requirements were the easiest to partner with.

The new e-procurement software allows Sonoco to automatically assist users in requesting items outside of what is provided in the catalogs. Although the system allows users to order items with a non-preferred supplier, users are being educated as to the overall benefits of using preferred suppliers.

How it works. Figure 3 shows the data flow of how orders are placed within the new purchasing software. If an order is a catalog item, the software checks to see whether the dollar value is under the limit established in that user’s profile. If it is, the order is sent via fax or EDI, based on supplier profile, and processes through to the PeopleSoft accounts payable module.

FIGURE 3: Data flows from the e-procurement software to the ERP system as both catalog and non-catalog orders are placed.

Non-catalog orders get routed based on business rules to an agent in purchasing’s centralized sourcing group. The agent then completes any required information and “approves” the order. The e-procurement system then handles the order in similar fashion to the catalog order previously described.

Although non-catalog ordering is still used, McCay reports that the ultimate goal is to reduce such orders to emergency situations, since non-catalog orders are more time consuming for purchasing agents. He also states that these orders will continue to be necessary until thorough, robust catalogs are available.

“We are still in somewhat of an evolutionary phase, so we wanted to make sure the system was running as well as possible before we became too restrictive with non-catalog orders,” explains McCay. “With the new visibility of these purchases, agents are now in a position to know where the catalogs need improving, as well as to better encourage the users to buy from the preferred suppliers.”

Purchasing card. Sonoco’s goal to keep its software installation as standardized as possible was successful for the most part. However, the company did have one pressing requirement that required new features from its software vendor. This related to the use of a purchasing card (pcard), a type of credit card accepted by certain suppliers and used for high volume, low dollar purchases. Such cards avoid processing costs, which could be as much as $150 per order under the old legacy systems.

Sonoco had implemented a pcard program a few years prior to installation of the e-procurement system. Eligible users had eight to ten pcards that had specific Sonoco general ledger account codes associated with various departments. This allowed the pcard purchases to automatically process through to the correct area in the general ledger, avoiding costly journal reconciliation tasks.

Sonoco faced several challenges associated with the pcard in regard to the new e-procurement software and to its existing pcard process. The first, a technical challenge, was that the e-procurement system limited a user to one purchasing card. The Sonoco implementation team addressed this by enhancing the functionality of the system to allow the users to change the account codes on items during transaction reconciliation. Although this is a basic function when creating an order, the users needed a way to identify the appropriate account codes on orders that did not originate in the system but would be processing through the general ledger.

User hurdles. The second challenge revolved around user acceptance. Since the pcard system was extremely easy to use, with users picking up the phone and contacting the supplier, it was difficult for the e-procurement software to compete with such speed and simplicity.

In addition, users have had to be trained on how to reconcile within the system, in addition to the original reconciliation activity using the paper-based monthly statement. The most challenging portion related to the charges not originating within the e-procurement system. Such charges create a reconciling item in the system and must be reviewed to make sure the correct department has been charged, since only one pcard per user is used now instead of many.

Although the new purchasing software is user-friendly, McCay says that the difficulty of introducing it into a manufacturing environment should not be underestimated. Many people are unfamiliar with the keyboard, and the advantages of using the system rather than walking a purchase order around should be communicated.

“The users at Sonoco have been excellent in every way, from working with us on usability and setup, to training and problem resolution,” stated McCay. “This project will succeed in a big way because of this cooperation.”

RESULTS AND GOALS. McCay estimates that, for the operating resources category overall, the new e-procurement software has allowed Sonoco to reduce its supplier base by approximately 5% to 10%, with further reductions expected. Now, a majority of all orders for operating resource supplies are place through Ariba ORMS at Hartsville. With a goal of up to a 10% reduction in spending on operating resources, investment for the system will be more than recovered.

Sonoco is continuing with a phased roll out of the new e-procurement software. Several plants in the Northwestern U.S. are now using Ariba ORMS. Additional rollout to the other plants is targeted for 2000.

“To start with, we have chosen the regions that would be easiest because of an existing hub concept,” describes McCay. “The Northwestern industrial products business had such a setup, wherein requisitions come into the hub where they are processed and paid. Ariba allowed us to easily go out to that region and train them on the system, routing all non-catalog orders to the hub for sourcing.”

Due to some level of required support for non-catalog requests, the hub concept may play well for corporate purchasing to effectively handle that type of order.

McCay reports that the number of purchasing professionals has not dropped significantly as a result of the new purchasing systems. However, he does say that the skill set of the employees has “shifted significantly,” with less clerical work and more analytical and supplier negotiation work.