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Case Study


Headquarters: San Francisco, California


For a corporation with a multibillion-dollar supply chain, increasing operating efficiencies through the Internet will have a significant impact on the bottom line. At Chevron Corp., a global oil and gas company with more than $40 billion in annual sales, the costs of everything from paper clips to oil rigs can stack up quickly. With its cost of operations currently sitting at about $10 billion a year, Chevron spends money to make money. Until the Internet began to pick up steam, Chevron managed its supply chain largely on paper, through good old-fashioned purchase orders. But as we learned from Dave Clementz, president of Chevron Information Technology Co., that's changing.

"We had primarily paper-based purchase ordering in place around the time the Internet took off, five years ago," said Clementz. "But we saw the phenomenal growth going on out beyond our corporate firewall." Chevron did do some electronic procurement at the time, primarily through EDI systems accessing existing electronic catalogs, but on a relatively small scale. And various employees were using all kinds of different catalogs; most of them on paper, though a few were electronic.

"A couple of years ago, we stepped up our efforts in the product procurement area with an eye on centralizing on electronic catalogs and the Internet," Clementz said. Chevron partnered with a company called Requisite Technology, which uses a technology called e-Merge to turn paper product catalogs into Internet-based electronic catalogs quickly.

"Suppliers were eager to participate and give us lower unit prices for high-volume products bought electronically," Clementz added. "In the early going, we concentrated on bringing in the suppliers we spend the most money with."

Three SAP installations were sitting behind Chevron's firewall when the company started moving in earnest toward business-to-business commerce. As middleware to facilitate tran-sactions, Chevron deployed Ariba's ORMS (Operating Resource Management System), because it integrated tightly with SAP and Chevron's back-office software.

How does a typical Chevron product transaction go? A Chevron procurement employee connects to the ORMS software through a browser. The software, sitting behind Chevron's corporate firewall and on top of the SAP systems, includes a customizable XML metadata layer and message synchronization services to talk with Internet-based catalogs, which offer office supplies and oil rigs alike. An employee fills an electronic shopping basket, and the software sends purchase orders out beyond the firewall to the catalogs. Chevron's suppliers then send filled purchase orders back to the software. The transactions are logged from those purchase orders in SAP.

According to Nick Solinger, Ariba's director of marketing, ORMS is scalable up to 200,000 seats and can process hundreds of thousands of purchase orders a day. For a big company like Chevron to put in place a solution like ORMS can take from 6–18 months, although according to Solinger, Dana Corp. completed a live installation in 11 days.

"Suppliers can really cut their costs of goods sold this way," Clementz said, "because they don't need 100 people in pickup trucks carrying briefcases to go do the selling. They can just log on." According to Clementz, Chevron's electronic catalog suppliers are reporting profit improvements ranging from 5–30% since moving their offerings online.

What's the bottom line for Chevron? Chevron's office in Bakersfield, California, where e-procurement is centralized, currently handles about $80 million of product procurement costs. By replicating the Internet procurement process in offices around the globe, Clementz said, "We plan to cut $200 million out of our $10 billion cost-of-operations spending by next year."

That can seem small percentage-wise—about 2% of the cost of operations—but in dollar terms, it's a significant savings. Beyond replicating the process in other global offices, where does Clementz see Chevron's Internet-centric supply chain trend going?

"About 40% of our cost of operations goes to supplies currently, and about 60% goes to services," he said, "so we think there is a big opportunity to do for our services procurement what we did with the Internet and product procurement. We think this is the next step. And the key for us in all of this was to look out beyond our firewall."

As we said in the introduction to this chapter, a B2B market doesn't exist in isolation. In its ultimate form, a marketplace becomes part of the supply chain management system of an enterprise. Companies using enterprise resource planning (ERP) systems such as those from Baan, J.D. Edwards, Oracle, PeopleSoft, or SAP to control production, inventory, and accounting can benefit from using special marketplace ordering programs tied to the ERP systems. Supply chain management, integrated with ERP, provides an automated way to order materials and settle accounts. It also supplies performance data on order fulfillment times, rejects, and other statistics that can give procurement professionals an objective way to measure vendors. This control allows managers to lower inventories and optimize production schedules.

Many companies also value the anonymity of ordering through a B2B marketplace. They can buy and sell raw materials without tipping off competitors to production plans. The automated system allows companies to give different prices or terms to different trading partners. Sellers like the capability of an automated B2B system to provide fast settlement.

Many ways exist to establish a marketplace and many interaction styles also exist. If you go to http://b2b.yahoo.com/, you'll see dozens of vertical markets run by Yahoo. Ebay is in the act at http://pages.ebay.com/business_exchange/. You can buy everything from shop lathes to bandages in these specialized auctions. The Ebay and Yahoo online auction services offer an open and easy way to start using a simple vertical marketplace.

Dovebid.com, a company known for six decades as Dove Brothers, LLC, is a brick-and-mortar auction house for industrial materials that has gone click-and-mortar. Dovebid.com maintains vertical auction sites and does Webcasts of real-world auctions. The company has an agreement to feed B2B Yahoo, but Dovebid.com offers a wider range of services including equipment valuations and logistics support.

Although auctions can be a part of a B2B marketplace, the marketplace concept depends on facilitating customized relationships between buyers and sellers. Ariba, CommerceOne, and Trilogy are the heavyweights in the marketplace industry and each one partners with a mind-boggling list of companies acting as market makers in vertical marketplaces.

There's power in togetherness. Ariba, CommerceOne, and Trilogy each offer a central service that can cross-feed into sites with similar software. The Ariba Network, the CommerceOne Marketsite, and Trilogy's Buying Chain Marketplace each provide central services that can include applications for special orders, taxation advice, distribution services, invoicing, payment, and customized reports. So, for example, a market maker with a CommerceOne site in the automotive parts industry might link to Marketsite to order shipping services or perhaps electrical parts common to other types of businesses.

It's important to note that these central markets have real advantages for smaller buyers and sellers. Even if a big business has a regular set of suppliers in its own marketplace, it can also tap into the pool of suppliers entered into the central marketplace. Smaller buyers can benefit from volume discounts often given to any company purchasing through the common systems. Smaller sellers compete shoulder-to-shoulder with the big companies. However, each company in the system has total privacy and can reach special terms with any other company.

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