The Best Tool for the Job: Selecting and Implementing E-Tools

October 24, 2007

Liquidity Services Inc., of Washington, D.C., has had 18 consecutive quarters of earnings growth since it was founded in 1999, and is 18th on BusinessWeek's most recent Hottest 100 Small Companies list. It makes its money facilitating the resale of overstocks and obsolete and returned consumer goods for retailers, manufacturers and distributors. It has a contract to do the same for all the public surplus of the Department of Defense.


The company owes its success to an e-tool -- the online auction. Tools to facilitate the full range of business processes proliferated over the past decade. Some firms base entire business models or product lines on such tools, while other traditional companies are looking for tools as a means to improve operational efficiency or processes.


"The question facing supply management professionals today might be best summarized as: How do we ensure we're getting the most out of the e-tools available?" states a report from CAPS Research, a strategic sourcing research center co-sponsored by the W. P. Carey School of Business and the Institute for Supply Management.


The center recently gathered a group of supply managers to look closely at e-tool optimization. The group's observations became an outline of how successful companies use e-tools to improve processes and how they manage implementations. The event was sponsored by Philips Lighting Company, which was the focus of a best practices case study examined by participants. Other cases focused on PepsiCo, Sonoco Products and GlaxoSmithKline.


All of these companies are using various e-tools to enhance procurement and supply efforts. However, one firm that is using an e-tool as its major product offering is Liquidity Services.



Managing the reverse supply chain


Liquidity Services co-founder Bill Angrick saw that the liquidation market was highly fragmented, dominated by local cash buyers who would pay a fixed price for a full truckload of items, then resell them with no feedback or sharing of subsequent profits. The opportunity was to provide a service that increased profit to sellers.


"We'll take the same truck, break it down, we'll create a manifest of everything on the truck and provide that back to [the retailer]," says director of investor relations and corporate communications Julie Davis. "In addition, we have what we call a consignment model, so we will share an average of 80 percent of the final auction price with the seller."


Angrick's company is turnkey. It locates and solicits interested parties (it has over 650,000 registered buyers), warehouses goods, takes photos, organizes product-specific lots and, most importantly, runs the e-auctions with as many as five bidders. By contrast, according to Davis, about 50 percent of eBay auctions close with zero bids.


That means the prices go up in Liquidity Services auctions, and selling parties make more money and have the benefit of better tracking of goods sold. Liquidity Services charges an average of 20 percent of sales price. Those results have attracted more buyers, sellers and inventory, and the data generated is helping retailers manage their reverse-supply-chain dilemmas.


The 550-person firm has resold everything from iPods (electronics are a major mover because of innovation and obsolescence) to retired military horses. Customers who previously used traditional liquidators can expect to double or triple revenue, Davis says. Sales were $173 million in 2006 (year ending March 31), while earnings were $9.4 million.



Pick, click, return


Some of the most frequent users of liquidation by e-auction are Internet retailers. About 6 percent of all goods sold at brick and mortar stores are returned, but Internet retailers experience double that.


Elliot Rabinovich, an associate professor of supply chain management at the W. P. Carey School of Business, says e-auctions are prime movers of time-sensitive goods, such as perishables, especially those left over from a seasonal sale. They're no longer as fresh as a retailer would like, have less appeal to consumers and need to be replaced by better-selling items for as little loss as possible. Typical buyers could be dollar stores, says Rabinovich, or companies that sell goods on eBay.


"[An auction] basically allows a third party to take records of the excess inventory and not only manage this information but also find buyers interested in paying for these products at a deep discount in order to resell them," says Rabinovich, who wrote on this subject in a 2006 research paper entitled "Logistics Service Providers in Internet Supply Chains," published in California Management Review.


"Savings are twofold," he says. "No. 1, for the Internet retailers themselves, they can basically write off the inventory much more quickly than trying to go and do it on their own. Second, savings come from the Internet retailer being able to conduct these transactions at a much lower cost through automated auction sites. They don't have to spend the time and money trying to find somebody on their own."


Liquidity Services' Davis says that concentration on the reverse rather than the forward supply chain is rising but is still a huge opportunity. She says the conservative estimate of the domestic reverse logistics market is $63 billion of yearly surplus assets, and could be as much as $100 billion. Rabinovich says this developing business has at least one more value to a company.


"It allows a retailer a little more flexibility in erring on the side of excess inventory, a little bit more of a cushion," he says. "They know they will have a much easier time writing it off at the end of the season than they were able to do before this tool was available."



A blueprint for e-tool optimization


According to the CAPS Research report, a number of factors have driven adoption of e-tools at many firms. Cost reduction, for example, is a major benefit of electronic reverse auctions. Purchasing professionals invite a select group of pre-screened suppliers to a private online auction event. Suppliers submit bids for the requested products or services; bids decrease throughout the event, thereby potentially lowering the ultimate contract price for the purchaser.


In addition to auctions, other e-tools are used internally to assess costs and analyze spend data. Improvement in data collection made possible by e-tools assists companies to manage globalization, plus it helps firms meet the requirements of Sarbanes-Oxley. SOX reporting requirements necessitate accurate and accessible information, which e-tools can help provide, giving supply managers full visibility of assets, liabilities and contract obligations. Improved sourcing and e-tool utilization is also enabling firms to mitigate and manage financial risk through better decision making.


The report notes that users realize benefits when an optimized e-tool makes their task more efficient or effective. However, a true sign of success is when a tool is so well embraced that future e-tool implementation is welcomed instead of dreaded. Return on investment can be measured in dollars saved, but equally important to supply professionals are improved processes and visibility. While funding is always a concern, just as important to decision makers can be its applicability and support systems.

Gauging success, setting priorities, learning lessons


The CAPS Research event showcased a number of examples where global companies had effectively used e-tools for various purchasing and supply management-related activities. The successes included:

  • Performance rating systems of suppliers;
  • Spend analysis that exposed where indirect, maverick or off-contract spending takes place;
  • Contract management in terms of standardizing contracts, logging them, storing them centrally, routing for multi-level signatures and organization of all contracted-related documents;
  • Streamlining the electronic ordering and invoicing and payment process, with a laser focus on ease of use;
  • Facilitating compliance with Sarbanes-Oxley reporting regulations.


Mere availability of an e-tool with demonstrated benefits does not mean it should be implemented, however. The CAPS Research report recommends setting priorities for usage. Adoption should be consistent with corporate initiatives, which also helps to garner high-level support; the current status of existing systems should be assessed to locate gaps or bottlenecks; areas of impact should be identified, as well as user needs and preferences. Analyzing input and feedback from users and potential users can help prioritize projects as well as determine tool design and customization. How will suppliers be affected? How fluent are current or future suppliers with e-tools?


How can firms make e-tools work best in their organizations? Supply management professionals at the CAPS meeting offered some tips based on their experience.


First, decide with all parties on an "ideal" process, then look for the e-tool that facilitates that. Know your limitations -- is a third party more suited to host an e-system if internal resources aren't as familiar with it? Accuracy is king, especially with spend analysis or spend management tools, and one can hardly over-prepare or provide too much detail. Be sure that everyone with any connection to a tool is trained, updated and sought for feedback. Multinational companies have to consider the scale of rollout of a tool -- is it better to work out bugs on a small scale before global usage, or if one country is used as a test, could country-centric problems arise? And, heed the importance of compliance and buy-in.



Bottom Line:

  •  Drivers for use of e-tools include cost reduction, managing complexity, reporting requirements, financial risk management and mitigation, cross-functional capability, and user benefits.
  • Return on investment is not necessarily always judged in dollars but rather in improved processes and visibility.
  • The legal reporting requirements for Sarbanes-Oxley place an additional burden on public firms, but the silver lining for some has been increased visibility to asset and liability and contract obligations.
  • Success of e-tool implementation is dependent on each company's priorities and needs, and has included: performance rating systems of suppliers, spend analysis, streamlining electronic ordering and payment systems, contract management, Sarbanes-Oxley reporting, and e-auctions.
  • The input of all involved will help fit an e-tool to an agreed-upon "ideal" process.
  • Accuracy is Job One, especially with spend analysis or spend management tools.
  • Training, updating and feedback monitoring are essential for e-tool implementation.