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Annals of Reengineering
Three years ago, MIT began establishing partnerships with external vendors as part of the "supplier consolidation" effort. Newer faculty may not be aware of why these partnerships were formed, and other faculty members may be curious about how this effort is working.
Background
When the supplier consolidation research began in 1994, MIT had more than 45,000 suppliers in its vendor base. Some of these vendors had provided only one very specialized product, but even so, MIT was spreading its purchases out among too many suppliers.
People who purchased goods and services for their areas were expected to spend Institute money wisely, but they could decide which companies they wanted to buy from. (Larger purchases did require a justification form proving that a buyer had "shopped around" for a decent price.)
The Institute had an internal Office of Laboratory Supplies (OLS) for scientific and office products, chemicals, gas cylinders, and furniture; with "stores" and a warehouse on campus. However, OLS had to mark up the price of its products in order to be self-supporting, so buyers were not really getting the lowest prices if they purchased from this internal source.
The supplier consolidation effort began with the formation of teams whose members had expertise in particular commodity groups. After reviewing what MIT was buying and from whom, it became clear to the teams that the Institute needed to reduce its number of suppliers in order to take advantage of our combined buying power. "Market basket" price surveys with large vendors also showed that MIT could get significantly lower prices by buying direct, rather than through our own Office of Lab Supplies.
Establishing partnerships for repetitive, commonly purchased goods and services would not only reduce prices but also allow MIT to do a better job of measuring a vendor's performance and service. Another objective of supplier consolidation was to minimize paperwork by having partner companies bill MIT electronically for all transactions, rather than having separate purchase orders and invoices for each transaction. The senior administration agreed with the recommendation to improve the buying process through partnerships, although participation was not mandated.
Customers who use MIT's electronic catalog, ECAT, to order from partner companies see the MIT-negotiated price for products. This makes it much easier to accurately calculate the cost for an order.
The partners and how they're doing:
Olsten Staffing Services
The first partnership was with a company providing temporary secretarial and clerical services. Prior to the redesign, MIT had used 30 different agencies for temporary help. Our partner company, Olsten, subcontracts with several other agencies, but Olsten coordinates all the requests. They provide temporary workers who are familiar with MIT procedures, and the partnership ensures price uniformity and competitive rates.
The Olsten partnership saved customers $280,000 in fiscal year 1997. Savings in fiscal 1998 were down slightly, to $230,000, because MIT used fewer temporary staff, and Olsten's market share at MIT dropped by 10 points. The partnership manager at MIT is working to determine why previous customers of Olsten have contracted with other agencies.
VWR Scientific
Based on the findings of supplier consolidation teams, MIT closed the Office of Laboratory Supplies, effective July 1, 1995. (This meant that the Institute would no longer be carrying the costs of MIT-owned inventory, typically $1 million or more at any time, and that the space occupied by the warehouse and store operations could be used for other purposes.) A partnership for scientific supplies and chemicals was established with VWR, which set up a small stockroom on campus. This gives technicians, researchers, and students access to the most commonly used lab supplies.
Savings to customers were $610,000 in fiscal 1997. However, because of slow growth in the first three-quarters of fiscal 1998, discounts were reduced and the savings number dropped to $550,000. Volume will need to grow by at least seven percent in the current fiscal year to reach the savings target of $650,000.
Office Depot
This partnership got off to a rocky start, primarily because the outside vendor wasn't sufficiently geared-up to handle the initial volume of orders from MIT. However, once the start-up problems were resolved, the partnership has been working well. The fulfillment rate for next-day desktop delivery to the customer averages at least 98 percent.
Perhaps out of habit, some customers continue to buy office supplies from other vendors, despite the fact that Office Depot's MIT-negotiated prices on most items are significantly lower. For example, here's a comparison of some commonly purchased office supplies and the prices (for the same brands and quantities) from both Office Depot (OD) and a local competitor:
One HP toner cartridge
$75.12 (OD) $105.60 (competitor)
Carton Xerox brand 8 1/2 x 11 copy paper
$25.95 (OD) $39.19 (competitor)
Dozen Papermate medium stick pens
$.91 (OD) $2.88 (competitor)
Box 1/3 cut manila file folders
$4.65 (OD) $11.04 (competitor)
Box of 5M standard staples
$.42 (OD) $1.84 (competitor)
TOTAL
$107.05 (OD) $160.55 (competitor)
On these five typical office products, the direct savings to the customer purchasing from Office Depot would be $53.50. There would also be savings to MIT on both delivery costs and the work associated with approving, pricing, ordering, and paying for goods. For example, partner companies deliver products to the customer's desktop at no extra charge. (If an office purchases from a non-partner, the products will usually be delivered to an MIT loading dock, and then a Mail Services employee has to bring the supplies to the customer.) And the partner companies bill MIT electronically, thus reducing processing costs in the Procurement and the Controller's Accounting offices. (Orders to non-partner companies result in more steps and paperwork.)
Savings to customers who used the Office Depot partnership in fiscal 1997 were $600,000 on a volume of $2.7 million. Savings grew in fiscal 1998 to $680,000 on a volume of $3 million. Office Depot is currently providing 87 percent of MIT's office supplies.
BOC Gases
MIT has an exclusive arrangement with BOC for gas products and cylinder management. (Customers can still specify another vendor, but BOC serves as the agent.) BOC tracks all the gas cylinders on campus and bills customers electronically for cylinder rental. The process is both more cost-effective (saving MIT $140,000 in fiscal 1998) and more efficient (because MIT does not have to process additional purchase orders since all requests go through BOC).
NECX for desktop devices
In the summer of 1997, MIT's Computer Connection (MCC) began a transition from a retail storefront operation for hardware and software to electronic commerce. The MCC still maintains its on-campus showroom in the Student Center, where customers can try out demonstration models of MIT-recommended computing products and get help from MCC consultants. (Closing the retail operation eliminated the carrying costs of inventory, which averaged $2.5 million. In addition, 13 positions were eliminated, and space was freed up for Athena cluster support and PC Service.) REPAIR????
MCC's partnership with NECX provides a Web-based catalog and ordering system for software and hardware products. Educational discounts with Sun, Apple, Dell, and Silicon Graphics have been maintained. In the first 12 months of the partnership, total sales volume was $8.1 million. Though sales have been increasing steadily (now averaging about $900,000 per month) there have been some recent problems with availability and delivery. MIT is working to "shake out the bugs" with both manufacturers and with NECX.
Some customers have been frustrated by the extra layers of processing that are still required. Until ECAT2 is available later this year, departmental buyers must place orders via MIT requisition to the MCC or Procurement Office for processing. ECAT2 will eliminate that step because it will be fully integrated into SAP, MIT's financial system. No special software will be required with ECAT2; just a Web browser such as Netscape.
After ECAT2 is up and running with NECX, MIT will begin to move the original partner vendors (VWR, Office Depot, and BOC Gases) to the new system as well.
In fiscal 1998, the partnership with NECX resulted in savings of $300,000. About 75 percent of that savings was to departments and the rest was to individuals making personal purchases.
What else is happening?
MIT's vendor database is now a lot smaller; with 21,280 suppliers.
BULLETOther efforts in supplier consolidation also resulted in fiscal 1998 savings, as follows: $350,000 on furniture and carpeting; $600,000 on travel-related costs; $750,000 on publishing-related services; and $1.2 million on long-distance telephone rates.
As noted in the September/October issue of the Faculty Newsletter, MIT continues to provide options to simplify the purchasing of goods and services. For example, use of the VIP Visa card at MIT is growing, with more than 650 cards issued so far. As of mid-October, there had been more than 6,000 transactions using the card, with total expenditures of $900,000. (The average purchase price per transaction was $145.) Currently, the credit card is used primarily with non-partner companies, but usage in the VWR stockroom is expected to grow as more departments sign up for cards.
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