Start-up Vert Inc. knows procurement is not its core strength. The primary focus of the half-dozen employees at the Cambridge, Mass., company is to develop its product--a display unit that integrates video, wireless Internet, and global positioning capabilities--and get it ready for volume production.
However, with printed-circuit boards, semiconductors, resistors, and flat panels on its list of must-haves, Vert has had to find a way to efficiently buy those parts without adding excessive costs to the process, said chief executive Brad Harkavy.
Last year, Vert opted to outsource all of its procurement to ThreeCore Inc., Danvers, Mass.
"We're not big enough to have a procurement department or even have one person who can do all our procurement," Harkavy said. "With ThreeCore, we're paying about 60% to 70% of what we would pay a procurement person, but we are getting the skill sets of more than one person."
For years, indirect materials purchasing has been handed off to outside parties, but more recently major OEMs and some mid-tier companies have been giving a greater amount of procurement responsibilities for direct materials to their EMS partners or even distributors.
And increasingly there are signs the trend is trickling down to smaller manufacturers, which is spawning a number of third-party companies that specialize in procurement and supply chain services, according to Tim Minahan, an analyst at Aberdeen Group Inc., Boston.
Total revenue for pure-play indirect and direct outsourced procurement services is expected to grow from $4.8 billion in 2001 to $9.7 billion in 2005, which represents a 19.3% compound annual growth rate, according to Aberdeen.
"It's still a fledgling market for outsourcing direct materials procurement, but we tend to see more traction in the mid-market," Minahan said. "Companies are in different phases right now. It's being based on each company's individual analysis."
The savings factor
One of the appealing factors is the savings that outsourcing procurement can bring, according to several companies and service providers.
"Two and a half years ago, when we started, very few companies wanted to talk about outsourcing direct materials purchasing because they saw that as a competitive advantage," said Tom Petersen, president and chief executive of ThreeCore. "In the last six months, we are seeing a tremendous change in attitude as more companies recognize that using outside services makes sense.
"The savings we have been able to achieve on average is about 17% of the direct materials spend. Our cost is slightly higher than what a company would pay a senior buyer," he said.
ThreeCore provides outsourcing services on a project basis, as part of a staff augmentation, and for an entire range of operations. It also has a number of supplier databases and technology for reverse auctions, Petersen said.
It was the reverse-auction service that caught the eye of BOC Edwards, a division of BOC Group that makes temperature control units for the semiconductor equipment industry, said supply chain manager Tom Connelly.
"We saved a ton of money by running reverse auctions with ThreeCore. In the last 18 months, I would say we saved anywhere from $250,000 to $300,000," Connelly said, adding that the company has run auctions for sheet- metal parts, precision machining, and other direct materials.
Now, BOC Edwards, Wilmington, Mass., is considering bringing ThreeCore into other projects, including vendor-managed inventory programs and quoting services.
Filling the gaps
Outside procurement providers are also being used as a way to fill gaps in internal operations and move purchas-ers and supply chain managers away from tactical transactions into more strategic roles.
EMS provider Sparton Electronics, Jackson, Mich., has been using an outside party for a few years, said Stephanie Martin, vice president of corporate material acquisition and logistics. After Sparton receives a quote for a particular part, it uses BuyerSource, St. Peters- burg, Fla., to handle P.O. execution and to ensure parts are available for the first 90 days of production.
"We use Barbara Grilli, president of BuyerSource for our new-product introduction process," Martin said. "If a supplier wins a bid but tells us they can't supply the part until 12 weeks from now, Barbara helps us fill the gap, and, using our approved-vendor list, helps us find that part in the interim. We are outsourcing tactical procurement for our start-up jobs."
Like Sparton, Scorpio Systems Inc., a Palm Harbor, Fla., networking operations consulting firm that occasionally has to build equipment prototypes, uses BuyerSource to oversee all of
its procurement needs, said president Paresh Patel.
"It's not worth it to us to tie up our resources to track down parts and figure out why we only got 16 parts when we asked for 20," Patel said.
"I've been in purchasing for 13 years and saw a need for this type of niche buyer, almost like a MacGyver type who can solve a variety of problems," said Grilli, who has worked in several industries including aerospace and test and measurement.
But even as executives grow more comfortable with procurement outsourcing, other service providers say the electronics manufacturing industry at large remains wary of the practice. iSuppli Corp., El Segundo, Calif., recently acknowledged that its research business is growing much faster than the procurement services it originally set out to sell, and that adoption rates are slower than expected.
"We had people who were interested in the service, but when push came to shove we found it was difficult for customers to get over issues like who's buying what and how much responsibility is passed over," said Lloyd Kaplan, vice president of business development.
"It's very difficult to get any money out of anybody to do anything today because of the continued uncertainty," Kaplan said.
Even so, that's not stopping companies, even large ones like IBM Corp., from competing in the market.
IBM's Business Transformation Outsourcing practice, which is part of its Global Services group, has been offering procurement outsourcing services since 1998, said Bill Schaefer, vice president of procurement services.
"We make about $44 billion in purchases each year and we have considerable experience in this area," Schaefer said. "It's difficult to have such deep expertise if you are a smaller company. Companies are now coming to us and asking how they can make their procurement organizations more effective."