Little Glamour, Lots of Value

These days it seems like you can throw an "e" in front of just about anything and create a new
business model. While it's not that simple, it's not that far off. While the Internet hype
machine tends to focus on consumer e-Commerce sites like eBay and Amazon.com, it is the
much less heralded business-to-business e-Commerce that could be the biggest eMarket in
the near future.

There may not be anything glamorous about business-to-business e-Commerce, except for the
value it can deliver. While the metals industry is slowly implementing e-Commerce tools, the
industry's Internet focus has been on selling product. By focusing only on selling, companies
miss one crucial half of the business-to-business e-Commerce equation--e-Procurement.

In a metals industry that has been relentlessly focused on cost-reduction, metals companies
may be missing their chance for big savings. Maintenance, repair, and operations purchases,
which generally account for 2030% of revenue, are often neglected. This represents a huge
opportunity to squeeze out savings-perhaps by as much as $80120 per transaction.

The fact is that e-Commerce already is changing the fundamentals of how metalproducing
companies buy. This article will examine e-Procurement, a new e-Commerce business-to-
business procurement model that relies on the Internet and electronic markets to compress
cycle times to reduce non-value added roles, increase the information flow and generally
lubricate the supply chain. The emergence of the Internet and intranets is providing
companies with entirely new business models that allow them to collaborate externally with
key suppliers while proactively managing demand internally, an often overlooked part of
procurement.

Until recently, only large corporations that could rely on proprietary networks and EDI
utilized this type of procurement planning. Now, companies of all sizes are just beginning to
shift their demand to the Internet. In fact, recent Andersen Consulting metals industry
research shows small metals companies leading large and medium metals companies in the
race to embrace the Internet. With all sizes of companies striving to use e-Commerce,
business-to-business Internet transactions across all industries, now estimated to be $20-30
billion annually, are projected by the Forrester Group to skyrocket beyond $850 billion
annually by 2002.

Unfortunately, Andersen Consulting research shows that the metals industry is lagging
behind many other industries in adopting eC-ommerce technologies, but this is not
universally true. Some of the world's largest aluminum producers are aggressively pursuing
e-Procurement savings. On the other hand, none of the largest integrated steel producers have
begun to implement e-Procurement processes. Ironically, a recent Andersen Consulting
survey of 44 steel producing, outside processing, and service center facilities indicated that
purchasing was the most frequently considered area for applying e-Commerce. For metals
companies that have been slow to enter the Internet arena in general, e-Procurement makes a
strong "first project" because a solid business case can be developed around it and there is a
natural internal audience for the application.

This article will contrast e-Procurement with today's "best practices," so metals companies
can understand what options they have when migrating to new business models to reduce
costs and increase overall organizational effectiveness. We will explore different e-
Procurement models, and show how buyers, suppliers, and end customers benefit. We'll also
examine the organizational implications of e-Procurement, who typically sponsors
procurement transformation, and how procurement can become a strategic element capable of
driving top line growth.

The limits of strategic sourcing

In the past, companies from all industries strove to implement strategic sourcing plans that
rarely varied in their approach and results. Every two to three years, teams of bright MBAs
would come on-site, segment purchasing budgets by type of good/service, identify the
vendors for each segment, eliminate those believed unnecessary, and renegotiate lower prices
by aggregating demand with "preferred suppliers." This approach guaranteed more sales
volume at lower prices while meeting guaranteed service levels. Senior management
approved business cases forecasting the savings, and internal newsletters were written
declaring the success of the initiative.

But often the rhetoric and the reality were very different. Executive vice presidents quickly
overrode strategic sourcing policies that had them riding coach class to Korea. And over time,
the projected benefits quickly tailed off as the policies "failed to stick."

One reformed strategic sourcing partner used a rubber band analogy to describe how an
organization's ability to stretch to achieve these savings snapped back with the passing of
time--often leading to renewed attempts at finding strategic sourcing solutions. Many metals
companies fell into this trap because they failed to understand that a key component of real
procurement savings is managing demand within a company--a task far more difficult than
exercising buyer power in the market place, eProcument provides the tools to mesh internal
demand management with buyer power.

Managing demand proactively

Andersen Consulting's work with metals companies has identified e-Procurement as an

alternative to strategic sourcing that can deliver long-term, sustainable savings by
transforming the way in which organizations buy. Until now, the procurement focus has been
primarily on the indirect goods and services purchases--pencils, personal computers,
temporary services, and other incidentals that typically comprise 25% of what organizations
spend.

But the potential of e-Procurement is much greater. Depending upon the degree that
procurement is fragmented across the organization, companies can achieve savings of 10-
25% per billion dollars purchased annually. These savings drop directly to the bottom line,
and result from managing resources within the company. With the need to improve bottom
line performance helping to drive mergers and acquisitions across a number of industries,
CFOs in the metals industry should pay close attention to this topic.

Most importantly, the new e-Procurement business model gives management access to real-
time information that lets them decide which sourcing options make the most sense for them.
Depending upon the goods and services they buy, there are entirely new options for how they
buy. Engaging and integrating e-Procurement with the supply chain requires an
understanding of the new electronic mechanisms and markets available today. Andersen
Consulting's research shows these markets vary depending on two factors:

 Transaction Control.' In a seller-centric world, buyers "travel" to a website to

transact. Alternatively, as power shifts to the buyers, sellers increasingly have to
participate in a "reverse market" in which they respond to seller's stated needs as they
begin to service a "market of one."
 Degree of Competition: The other factor depends on what you are buying and the
degree of collaboration vs. competition. For fungible products, spot markets exist that
are highly competitive and decisions are made solely on price. Alternatively, in a
collaborative environment, buyers and sellers have relationships, share information,
and negotiate contracts.

The combination of these two factors are driving and defining the emerging business models
in business-to-business e-Commerce, e-Procurement is just one of these models, but it is a
very important one.

Supplier/buyer bond

Let's focus on e-Procurement where the buying organization plays a controlling role in the
transaction. This relies heavily on collaborative, negotiated relationships between the buyers
and their preferred suppliers.

Within this model, buyers work with their preferred suppliers to create catalogs of items that
the buyers agree to procure from their preferred suppliers. These catalogs include information
such as descriptions of the products, delivery lead times, and negotiated prices for each.
These items are then collated into a unified catalog, which typically resides on the buyer's
intranet, and can be accessed by all members of the buying organization.

From this buyer-centric catalog, purchasers can not only have visibility into negotiated
agreements with their preferred suppliers, but can also fill out purchase requisitions, route
those requisitions for approvals, and convert the purchase requisitions into purchase orders
electronically. These electronic transactions can be integrated with the buyers accounting and
enterprise management systems and processed according to rules of those systems.

The advantages of the e-Procurement model are manifold. All individuals within the buying
organization can take advantage more easily of the contracts negotiated by their
organization's procurement departments. Tight integration between the e-Procurement
website and the other internal systems of the buying organization means increased financial
control on tracking. Additionally, since individuals within metals companies can "self
service" more of their purchases, procurement professionals can move away from the
"transaction focus," which is often times the norm in their part of the organization, and begin
to take a more significant role in performing strategic sourcing activities with their suppliers.

Since most e-Procurement websites lie behind corporate firewalls, it is difficult to see
examples of these sites firsthand. In many original examples, organizations would build these
types of websites from scratch.

Finally, this new model provides a dramatic contrast to strategic sourcing that is based on
supplier price concessions. It focuses on partnering with suppliers around shared profitability.
This alignment changes the nature of the discussion and gives buying organizations the right
to ask for future price concessions after they have been earned and not simply by demanding
them as the "price of admission."

Managing the e-Procurement environment

Metals companies that adopt the above e-Procurement business model want to maintain
control of procurement within their Enterprise and put the infrastructure in place to provide
an adequate level of oversight. But not all companies will have the foresight or funding to put
in place this end-to-end, integrated procurement environment.

Absent this commitment, the rapid adoption of the Internet as an electronic marketplace will
further fragment an organization's demand. With access to the Internet at the desktop,
companies increasingly will buy what they need across the organization. Individuals will
quickly begin buying at seller websites and use a variety of electronic marketplaces to meet
their needs. Like the introduction of PCs in the business environment in the mid '80s, lack of
controls could lead to proliferation and result in everyone being his own Chief Procurement
Officer. Taken to an extreme, metals companies will rapidly need to regain control of
procurement or find themselves paying too much for what they buy, focusing on activities
that are not core components of their business, and relying on individuals who lack the
procurement skills needed to be effective.

Matching models to needs

Metals companies need to become familiar with e-Procurement technologies and concepts, as
they are likely to find their customers asking for similar capabilities. We believe that large
metals companies spending more than $1 billion annually need to put in place a procurement
strategy aligned with their overall business strategy. While it is unlikely that any one business
model fits an organization's needs, the organization needs to define the right combination that
allows it to be most effective. This framework also helps highlight why the role of
procurement is changing. Traditionally, procurement organizations have been order-takers
who have spent most of their time handling paperwork. In the new procurement model,
procurement professionals take themselves out of the transactions as customers "self service"
their demand on-line using custom catalogs. These catalogs effectively provide Enterprise
access to the goods and services that have been sourced by the procurement organization. The
new procurement group consists of professionals who spend the majority of their time
fulfilling a new set of roles including:

 Customer Relationship Management--focusing on developing strong relationships

within the Enterprise to assure the satisfaction of the business with an emphasis on
meeting needs and assuring maximum transaction volume.
 Supplier Relationship Management--conducting strategic sourcing, contract
management and generally making sure that the suppliers are providing the
performance the business needs to continue and/or expand the relationship over time.
 Order Fulfillment--managing the day-to-day transaction flow beginning with
requisition and approval all the way through to receipt and payment of the goods and
services.
Beyond these three roles, the organization is managing compliance, generating management
information to support customer and supplier management, and managing the electronic
catalogs either internally or in conjunction with the suppliers.

Who will lead the charge?

Embarking on such a transformational journey, which is a multi-million dollar investment,

can only succeed with the sponsorship of so-called "Clevel executives." The compelling
reasons for executive sponsorship reside in the personal value proposition e-Procurement
offers different titleholders.

 Chief Financial Office--Procurement provides CFO's with the ability to significantly

reduce cost while increasing overall organizational effectiveness. For them, Andersen
Consulting builds business cases, migration plans, and an overall benefits
measurement program to assure their ability to realize and sustain benefits year after
year.
 Chief Information Officer--Andersen Consulting believes that e-Procurement is one
of the first "killer applications." It allows CIO's to demonstrate to the business the
value they can deliver on the desktop. Buyers and decisionmakers help create the
management information that comes from integrating procurement and financial
systems.
 Chief Procurement Officer--For those CPOs who can embrace this vision, their
organization moves from being a cost center to a service center providing services
that increase the effectiveness of the business while simultaneously increasing
service.

Beyond the internal winners, suppliers increasingly accept this business model, after first
rejecting it. It has become clear that suppliers also can reap the benefits of e-Procurement.
Benefits that accrue to suppliers include:

 Increased Sales Volume--By providing electronic catalogs on-line, Enterprise-wide,

they are able to capture volume not previously available.
 Reduced Sales Costs--Vendors can redefine the role of the salesperson who can move
to a more consultative sell and take advantage of the leverage e-Procurement
provides.
 Reduced Operating Costs--The e-Procurement operating model assures accurate and
timely orders and goes a long way toward minimizing the cost of reworking error-
prone manual orders.
 Improved Demand Insight-Through this electronic connection, organizations can
forecast buyer demand better and use this to pull products/services through the supply
chain.
 Improved Customer Relationships --In teaming with their customers, they are able to
better service them, reduce overall procurement costs, and lock in long term
relationships.

These benefits are derived primarily through stronger partnerships based on improved
information sharing allowed by e-Commerce technologies. The ability to share volumes of
specific information in real time is a powerful sourcing tool, one that metals companies
should be demanding of their suppliers.
Mastering the "e"

While the vast majority of metals companies have websites, and 92% of these websites
include selling-related information, most metals companies still have only begun to tap the
vast potential of e-Commerce. The fact of the matter is that metals companies cannot focus
on simply being buyer or sellers on the Web. In the near future, the most successful
companies will likely have mastered both capabilities. While this may appear to be a large
step, companies can begin by assessing the current procurement environment, creating a
procurement vision that works for them, and building a business case that shows the benefits
to be achieved.

Andersen Consulting's experience has shown how surprised executives are by the savings
that can gained through e-Procurement. It is an effective tool that combines internal demand
management and buyer power to craft impressive results.

But beyond the cost savings, some companies may actually think about the strategic role of
procurement once they get it right internally. To what extent might this service provide value
to their customers? What additional products and services might they be able to cross-sell?
To what extent would this deliver similar savings to their customers and drive client
retention?

After all, e-Procurement offers the cost-savings strategy companies hope for, it's just in an
area they perhaps did not expect.

~~~~~~~~

By Christopher Sprague; Lou Pahountis and Barry Jennings

The authors are with Anderson Consulting. Lou Pahountis is in the Metals Practice, and
Christopher Sprague and Barry Jennings are in the Supply Chain Practice.

STEEL E-COMMERCE WORKSHOP

A half-day workshop on how to utilize e-commerce in the steel industry is scheduled for
February 28, in Atlanta. Organized by Gorham Conferences and MindBlazer, and entitled
"Profitable Strategies in eCommerce for the Steel Industry," it has been designed to provide
attendees with the information they need to operate successfully in the age of the Internet.
Workshop leaders are James Dickey, Andersen Consulting; Waldo Best, Morgan Stanley
Dean Witter; and Doug Schuster, MetalSite.

If you can't make it to Atlanta, you can still take part in the workshop live over the Internet,
according to the organizers. All you'll need to particiate interactively in the workshop is PC
access from your office to the Internet and a speakerphone at your desk.

For registration information, for on-site or Internet participation, contact Deedra Manter or
Michael Concannon at Gorham Conferences by telephone at 207-892-5445 or by fax at 207-
8922210.

The workshop is being held in conjunction with Gorham's Iron and Steel Scrap and Scrap
Substitutes Conference.
ALCOA TAPS ARIBA TO CUT PROCUREMENT COSTS

Last October, Alcoa Inc. signed an agreement with Ariba Inc. to use the Ariba business-to-
business e-commerce solution globally to reduce purchased operating resource costs across
the company. Alcoa plans to use the Ariba Network platform to integrate with its suppliers
and deploy the Ariba Operating Resource Management Solution (ORMS) application
throughout its worldwide enterprise.

Alcoa is a $15.3-billion, Fortune 100 company with operations in mining, refining, smelting,
fabricating and recycling, serving the packaging, automotive, aerospace, construction and
other markets worldwide. It employs more than 103,500 employees in 24 units at 215
operating locations in 31 countries.

Operating resources are the goods and services required to operate a company, ranging from
items such as information technology, telecommunications equipment and professional
services, to recurring items such as MRO (Maintenance, Repair and Operations) supplies,
travel and entertainment expenses, and office equipment. According to Killen & Associates,
operating resource expenditures are often the largest segment of corporate expenditures,
representing approximately 35% of an average company's total revenues.

With the widespread implementation of Intranets and the adoption of the Internet as a
business communication platform, organizations can now automate enterprise-wide and inter-
organizational commerce activities with operating resource management solutions, Ariba
officials state.

By concentrating on operating resource management, an enterprise can achieve significant

strategic goals including reduced costs of operating resources, decreased cycle times,
improved control, increased end-user satisfaction, and reduced number of disparate
application solutions. These benefits all contribute to increased corporate profitability.

"After a thorough review of the various business-to-business e-Commerce procurement

systems on the market, Alcoa chose the Ariba solution because Ariba has demonstrated that
its solution can deliver significant cost savings," said Kevin McKnight, vice president,
Procurement ABSS at Alcoa. "Ariba has a large, established network of customers and
suppliers and we believe its solution can easily integrate with our existing business systems.
This partnership with Ariba supports Alcoa's aggressive cost improvement initiatives in the
procurement area. With the Ariba solution in place, we can implement a consistent
purchasing process from requisition to payment and further leverage economies of scale to
deliver business benefits to our bottom line."

Alcoa will integrate the Ariba e-Commerce solution with its financial systems, extending this
predominantly client/server system to the Internet. Alcoa may also channel purchases for
maintenance, repair, and operating expenses (MRO) through the Ariba Network platform.

"With the addition of Alcoa, Ariba continues to expand its global network of buyers and
suppliers for business-to-business eCommerce," said Dave Rome, vice president of marketing
at Ariba. "By channeling all its operating resource purchasing, including MRO goods and
services, through the Ariba Network platform, Alcoa will now be able to leverage one single
conduit to integrate with all its suppliers of non-production goods and services."