About Chemical Innovation - Subscription Information
May 2001
Vol. 31, No. 5, pp 41—43.
Management Insights

Table of Contents

Charles Waters
Marc C. Fitzgerald

E-procurement: A new management tool

Just one year ago, it appeared as though the $160 billion market for energy and chemical process plant equipment (PPE) had barely moved into the Internet Age. In January 2000, the PPE market was a loose conglomeration of participants, including more than 2000 sellers and 1000 buyers. The limited number of transactions that actually took place were accomplished via obsolete electronic data interchange connections. Other inefficiencies existed in the market—many are leftovers from the heydays of the oil and gas industry in the 1980s. The supply chains within the energy and chemical PPE industries were ~30% inefficient; the equipment-engineering cycle was on average about 8 weeks too slow. It was becoming apparent that the industries’ reliance on current information technology such as fax machines, telephone conferences, and express mail was becoming a detriment as the industry moved into the 21st century.

To address the deficiencies in the velocity of transfer of complex information, Industria Solutions Inc. (Mountain View, CA) created the Global Project and Procurement Network (GPPN). Much of the inefficiency and slowness was the result of the inability of current information technology to facilitate real-time collaboration or effective project management tools.

The objective of the GPPN is to provide online, real-time procurement services, such as catalog and request for quote information, while delivering real-time collaborative engineering and collaborative project management services. Ben Eazzetta, the co-founder and vice-president of Industria, was the architect of the GPPN system. He envisioned that the GPPN could be a means of engaging companies in real-time collaborations that would ultimately reduce inefficiencies in the PPE industry and provide more effective project management tools. In other words, this new solution would raise the level of operation in the industry to the speed of the Internet.

Network vs e-marketplace
Soon after Industria began working more closely with buyers and sellers, they realized the PPE market wasn’t as dispersed as it initially appeared, and that despite the high total number of participants, there were relatively few major players. A careful analysis of deals and transactions revealed that ~90% of the $80 billion spent on equipment comes from 50 buyers and goes to just over 200 sellers.

After extensive review of the industry’s dynamics, Tom Nardi, chief executive officer of Industria, and his team reassessed what was needed to propel the PPE industry into the Internet Age. “It wasn’t about building a new Web technology and inviting a few thousand buyers and sellers to participate,” said Nardi. “It was about integrating the best available technologies and bringing them to the top buyers. We realized that the industry’s biggest problem was not one of marketplaces, but rather of networks, and that it wasn’t about the material supply chain, but rather the information supply chain.”

Following analysis of the current operating issues affecting the PPE industry, Industria identified and created global integrated information networks that allowed major PPE owners, operators, and engineering procurement and construction firms (EPCs) to manage their collaborative engineering projects and mission-critical procurement processes. Through strategic alliances with IBM, DuPont, and others, Industria has been building the network they envisioned, while keeping their eye toward new developments in the industry and ways in which they can create compelling competitive advantages for buyers.

Specialized environments
In general, e-marketplaces serve an important need, but in specialized environments such as the PPE industry, procurement networks appear to be a significant step toward industry advancement. For example, from the buyer’s perspective, e-marketplaces have three strikes against them. The first is that an e-marketplace is designed as a business-to-consumer product almost like a shopping mall. This model assumes that equipment buyers and engineers do business in a mall-type atmosphere. They don’t. For bulk commodities, this paradigm might be effective, but for the specialized equipment needed in a processing plant, business buyers are not comfortable with a one-size-fits-all marketplace.

The second issue revolves around “open” and “closed” systems. An e-marketplace must be “closed” to appear different from its competitors. Networks, by contrast, are “open” systems, which are preferred by buyers.

The third issue centers on the advantages of the Internet. In the e-marketplace model, buyers must go to the technology, rather than having it delivered to them. The promise of the Internet always has been about bringing information to the user—a promise that e-marketplaces cannot fulfill.

Network vs networks
Without a major marketplace, what was the industry to do? It was apparent that there were some tangible benefits to creating procurement networks; however, the specific business challenges from networks were still being examined. Separate buyer networks provided a certain measure of value; creating numerous networks for a multitude of buyers and having them administered by a common operator was the better solution for developing a truly global network that fulfilled the needs of the industry.

Once the method was established, Industria turned its attention to the tools needed to create and link the various networks. The technology for such an endeavor wasn’t readily available.

“In designing the network, it became obvious that it would need to be based on Internet technologies to achieve a global reach and would be implemented using the latest technologies, including XML, Java, and streaming media,” said Nardi. “But beyond the technology, what was needed was more than just a procurement network: It would have to be a project and procurement network. This network would address not only the business process issues of the individual participants, but the market process issues of all the participants in the engineer–procure–construct–operate–maintain (EPCOM) cycle as well.”

The EPCOM cycle
There are two primary sets of buyers in the market for PPE: owner–operators (e.g., chemical and oil companies) and engineering procurement and construction companies (EPCs). Over the past few decades, these two entities have co-existed in the business cycle as dictated by the market. Seven days a week, 24 hours a day worldwide, EPCs and owner–operators reinforce the EPCOM cycle.

Understanding the EPCOM cycle is tantamount to understanding the basic relationship between the owner–operators and EPCs. During the EPC portion of the cycle, the EPCs, by definition, engineer, procure, and construct the process plant and then they hand it over to the owner–operators, who operate and maintain it. The cycle is reciprocal and every piece of equipment in every plant is at one stage or another in this cycle.

Any technology solution that did not encompass the entire cycle was considered insufficient. Buyers quickly voiced concerns about the ability to streamline their procurement—bulk materials and engineered equipment—but only within the bigger picture of the complete EPCOM cycle.

Nardi declared, “It’s all about the information, and it’s about all the information. It is information, not technology, that creates competitive advantage.” With these words in mind, Industria began to focus on the life, persistence, quality, velocity, renewal, and the overall flow of information to ultimately provide a faster, smarter resource for equipment buyers to make the most strategic decisions.

The information that the GPPN collects during the EPCOM cycle is stored in a secure database for fast retrieval years after a project is completed. The information can be reintroduced to the cycle for maintenance or redesign and will assist market participants globally in managing the information life cycle throughout the equipment life cycle.

Managing the information onslaught
During the Industrial Age, it was necessary to manage the material supply chain. In the Internet Age, the focus is on managing the information supply chain. However, information comes from all directions, so to think of it as a linear process would be incorrect. Realistically, the need is to manage an information supply grid, with multiple parallel and perpendicular chains representing suppliers, internal divisions, partners, and external channels. In the end, this information must flow within and outside a company, often making several round trips.

Another important aspect of the grid is that it must be seamless, beginning with the origination of an idea and seeing it through to the completion of the job. Information must move through the system with ease, speed, and user friendliness in order to create knowledge. This is the challenge, but it also may represent the future of a $160 billion industry.

Six benefits of the GPPN
  • Lower costs. An integrated network will drive down costs. It does this by creating greater competition in the market, by networking a global set of buyers and suppliers, and by improving vertical (within a participant’s organization) and horizontal (among all participants) efficiency. Additionally, the GPPN will remove many of the ancillary costs of collaborative engineering, such as travel and shipping expenses, and allow buyers to punch through artificial price floors as a result of having better information on purchasing performance relative to global peers.
  • Faster cycles. The integrated network of the GPPN—with its best available information technologies—will remove the administrative logjam at the EPC phase of the cycle by eliminating excess paperwork, meetings, travel days, and shipping delays. As a result, project members can reduce the bid–evaluate–commit cycle and vendor review process by as much as 2 months on a 24-month project.
  • Less downtime. If a high-value, mission-critical, custom-engineered product fails, it often can stop work throughout the plant. Should this happen, it is essential to immediately access the information that can get the plant up and running again. The GPPN’s data vault would make this information available within seconds.
  • More safety. Bad or inaccessible information can cause problems and limit the owner–operator’s ability to properly solve the problem. With the GPPN, industry experts can be brought on line at any time to consult, regardless of location.
  • Higher productivity. An integrated network can allow procurement professionals to work with more suppliers in the same amount of time. Also, engineers with the right collaborative technologies can spend more time on high-margin engineering work, rather than sorting through low-value paperwork.
  • More control. The collaborative design and project management tools of the GPPN allow buyers to collaborate with engineers and update the design as needed. This is especially important when purchasing custom-engineered equipment that can take anywhere from 3 months to 2 years to construct. The ability to exert version control and change-order processing gives buyers the luxury of centralizing and integrating information on the network, rather than on paper, which makes it possible for all project participants to concurrently review the same information, providing for greater accuracy on the project.

Charles Waters is the vice president of marketing at Industria Solutions Inc. (1500 Plymouth St., Mountain View, CA 94043; cwaters@industria.com).
Marc C. Fitzgerald, formerly the assistant editor of
Chemical Innovation, is now the chemistry acquisition editor with CRC Press (mfitzgerald@crcpress.com).

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