Online Procurement Replaces Campus Computer Resale

• 08/01/99

Background

In 1994, the Massachusetts Institute of Technology began a journey down the road of reengineering. MIT decided to redesign their administrative processes, which had become too complex and costly over the years. Institutional purchasing was an area targeted as one where cost reductions could be implemented via vendor partnerships and supplier consolidation. The initial supplier consolidation team, chartered in 1994, discovered that MIT conducted business with over 14,000 suppliers, and half of these were one-time transactions. In addition, approximately 80% of the paperwork involved in these transactions was attributed to orders under $500 and accounted for only 3% of the total purchase amount. The goals of the supplier consolidation team were to reduce the number of suppliers and to improve the purchasing business processes. So how did the MIT Computer Connection fit into this plan?

A Brief History

In the mid 1980's, computer manufacturers were offering significant education discounts to institutions of higher education choosing to operate campus computer resale locations. At that time, making the decision to open a campus computer store was an easy one. Education discounts were generous and colleges and universities benefited as more and more students, faculty and staff began to use personal computers.

MIT opened the Micro Computer Center (MCC) to provide computers, peripherals and software for sale to students, faculty, staff and departments at very low prices. The campus store was owned and operated by MIT as a full cost recovery operation. The resale location had initially experienced significant savings for the Institute.

In these early days it was easy for the MCC to meet its goals, but as time went on, the same environmental forces at work in the retail computer world became reality for campus stores. This made it difficult for the MCC to maintain its advantage. The MCC reorganized and reinvented itself in an effort to increase sales as margins decreased and competition increased.

At first, the MCC tried changing customer purchasing behavior by driving sales to specific configurations available at peak sale times. This experiment did not generate the desired customer behavior and still left the MCC inventory management and overhead costs intact.

By 1995, the MIT reengineering effort was underway and vendor consolidation was one of the plans that they hoped would reduce the cost of doing business. As a supplier of computers, software and related products, the renamed and reinvented MIT Computer Connection (still the MCC) was an obvious candidate for reorganization. A redesign team, Desk-IT, studied options that would drive Institute purchasers toward MIT-recommended products and decrease the operating overhead of the campus resale site. The project team estimated that some 7,000 requisitions and purchase orders were written for computers and related products for purchase through the MCC and the Central Procurement Office (CPO) annually. At an estimated cost of up to $130 per paper transaction, potential savings were significant.

After studying various mixes of partial and full sales service, the team proposed the following three options for the MCC:

1) Remain open as a full-service operation

2) Reduce the operation to partial service with special order capabilities

3) Outsource

The team listed advantages of a full or partial service operation as convenience, uniform support and academic discounts. The disadvantages were high overhead and inventory costs. The monthly MCC inventory could go as high as $4 million and required rental of warehouse space. The storefront operation required staffing of 19 full-time employees. Outsourcing was seen as an alternative that provided savings on overhead, inventory and business processes. The team believed that outsourcing would be less convenient, would eliminate the academic discounts and would cause MIT to lose control of purchasing and product strategy. However, in November 1995 they recommended an outsourcing implementation that would close the MCC storefront by June 30, 1996.

In the time after the team's recommendation was announced, MCC efforts focused on streamlining the operation and product lines. The MCC operated under the partial service model through the first half of 1996 and by October it was decided to begin the redesign effort in earnest.

The Birth of MCC/Online

A new team was charged with writing a Request for Solution (RFS) and selection of a vendor partner who would provide an electronic solution to replace the MCC. By February 1997, the RFS was sent to 13 potential partners in the United States. Since the team did not have a definitive solution in mind, the RFS left room for vendor interpretation.

Seven vendors responded with a range of solutions. The seven responses were narrowed down to three finalists by March 1997. Most of the respondents had similar cost structures, product availability, shipping costs and support. All respondents were able to stock inventory. Few of the vendors had relationships with our key education partners, Apple, Dell, SGI and SUN. Maintaining that educational advantage and keeping these four relationships intact were key selection criteria. Most of the respondents had immature electronic purchasing solutions. Web-based commerce was just emerging as a potential model. This e-commerce capability was another key consideration in the final selection.

After site visits, telephone interviews and analysis of selection criteria, NECX of Peabody, Mass., was chosen from the finalists. The team chose NECX for several reasons: their cost was one of the lowest and shipping arrangements were similar to the other vendors; their willingness to work on the project with MIT was high; and their Internet solution was extremely robust. NECX also had experience in Web commerce and Electronic Data Interchange (EDI), with an existing online catalog of over 30,000 products.

Establishing the Catalog

NECX worked with MIT to set up a new catalog within its existing retail electronic catalog. NECX had the e-commerce and EDI experience MIT needed, and MIT provided the digital certificate experience NECX lacked. This technical fit provided MIT with an electronic catalog with special pricing and access limited to the MIT community.

In September 1997 the MCC/Online-NECX catalog went live in Phase I of an electronic catalog implementation. The customer's first exposure to the MCC/Online catalog (web.mit.edu/ecat/necx) is informational and instructional. Once customers have the correct digital certificates installed on their computers, they can see the MIT Recommended Products page of the catalog. This page refers customers to products that have been tested by Information Systems for compatibility on the MIT network. NECX works cooperatively with MIT to keep these pages up-to-date. The MIT Recommended Products page is also the entry point to NECX's extensive catalog of products. NECX has worked with MIT and the vendors to provide education pricing on the MCC/Online catalog. Not all of the products have educational discounts, but a market study showed that NECX prices were competitive in all of the product lines offered.

MIT customers can easily get information, availability and pricing for thousands of products in this single catalog. There are detailed specification sheets, links to manufacturers' Web sites and special tools to help customers navigate the catalog and get the needed information. NECX has a Memory Configurator to assist customers in identifying the correct memory for upgrading their equipment, as well as a powerful search tool, PowerSearch, to help them find products by category, manufacturer or part number.

The MCC's customer base consists of two distinct types of purchasers: individual members of the community who want to make a personal purchase for home use and departmental purchasers who are placing orders for Institute use. Individual members of the MIT community can make personal purchases from the catalog by using their credit cards. Orders can be placed from existing Athena1 workstations or, if they use Netscape Navigator, from a dorm or home computer. Orders are shipped to the address indicated by the customer and billed to their personal credit card. This has eliminated all cash and credit card transactions at the MCC.

The second type of purchase - departmental orders - is evolving. At first, departments, labs and centers continued to place orders by submitting them through the traditional paper requisition and purchase order process. In this process, requisitions are submitted to the MCC or the Central Procurement Office for processing. Designated purchasers in these areas verify the requisition signature authority and place the orders online on behalf of the departmental customer.

ECAT2 G'es Live

Phase II of the project rolled out as ECAT2 on February 23, 1999. ECAT2 allows the departmental customer to bypass the paper requisition system and place their orders directly. Purchasers may enter the NECX catalog as departmental buyers and create an order. The completed NECX shopping cart is sent to SAP, MIT's financial package, by the click of a Web button. A SAP requisition is then created, and a Web-based interface displays the requisition through SAPweb, which allows the customer to assign account numbers and contact information. The completed requisition then g'es through the necessary SAP workflow for authorizations and creation of SAP purchase orders. Once the electronic purchase order is generated, it is sent via EDI over the Internet to NECX for processing. NECX also sends MIT's invoice via EDI directly into SAP. A Department can then review their invoice within SAP and approve it for payment.

The orders are routed to NECX's distributors and suppliers via EDI. Product is shipped from these suppliers directly to the customer. Since NECX gets an EDI update of product pricing and availability each day, product is sourced by best availability so that orders are filled quickly. In most cases products that are available will ship the next day.

All customers benefit from IS's decision to leave a consulting and demonstration showroom in place. All of the products that are recommended for use at MIT are on display. Here customers can talk to an MCC consultant for pre-sales advice on the recommended products or get assistance navigating the catalog and placing an order.

Results to Date

In the first year of the partnership, sales reached $6.8 million through the catalog. Sales in June 1997, the final month of the fiscal year, topped $1 million. In the second year of the partnership, purchases through the catalog increased to $9.8 million. By June 1999, 75% of the departmental orders were being placed through ECAT2 by end-users. The remaining 25% were still being processed by Procurement. Work still needs to be done to drive more of MIT's computer sales through the partnership, but the purchasing trend is going in the right direction. (See Figure 1) It is anticipated that as more departments begin placing orders from the desktop with the acceptance of ECAT2, the number of end-user placed orders will near 100%.

Savings to the institute include the following:

• The MCC staff has been reduced from 19 full-time staff to 4.
• Savings from cost of goods are estimated at $350,000 for the first fiscal year.
• The initial transition eliminated the existing MCC inventory and its associated carrying costs.
• Reduction in paper procurement process.

The most significant savings are from the reduction in processing of paper requisitions, purchase orders and invoices. Each NECX order represents one or more purchase orders in the costly paper system. Our experience at the MCC has shown that many requisitions have multiple line items, which, in the past, would have been sourced from multiple suppliers. Instead, one order is now processed via the NECX catalog. With an estimated annual volume of more than 6,000 requests related to computer purchases, we anticipate the savings will be significant as paper requisitions, purchase orders and invoices are eliminated. In addition, the catalog provides increased visibility for the IS-recommended hardware and software products; if more customers purchase these products, IS should experience a reduction in support costs.

Conclusion

As would be expected, initial reactions to the online catalog were mixed. Some customers are very happy with the new model while others preferred the old MCC storefront. 'Immediate gratification' inventory is no longer available to the MIT community. Last minute or emergency purchases are referred to resale locations in the local neighborhood.

The initial fears of the Desk-IT team that outsourcing was less convenient, would eliminate the academic discounts, and would cause MIT to lose control of purchasing and product strategy have not been found to be true. Choosing the right vendor partner, NECX, has allowed us to maintain our relationships and academic discounts with key suppliers. Product strategy is still determined by IS, and NECX reinforces the strategy with the MIT Recommended Products page.

There is some loss of control that occurs in a vendor partnership. Telephone and e-mail have replaced face-to-face post-sales customer service. More of the responsibility for purchases, including resolving post-sales issues like returns and order tracking, has moved to the end-user. But NECX has continued to respond to MIT's request for continued improvement in the relationship.

The MCC consultants and IS Support educate customers through monthly training classes and one-on-one visits. The showroom provides more visibility of the recommended products and maintains the personal contact for customers who need it. Continued success of the partnership will depend on communicating the wider Institute goals of the project to the MIT community. Excellent training in pre-sales support and customer service are also key to winning broad acceptance. MIT and NECX will continue to work on improving the partnership.

Joanne Hallisey has been employed in the MIT Information Systems Department as Manager of the MIT Computer Connection since June 1996. Before that she worked at Wellesley College. She has 11 years of experience in higher education computer resale and co-led the team that transitioned MIT's $12M resale operation to an electronic catalog. Hallisey has a BS degree in Biology from Tufts University, an MS in Medical Technology from Anna Maria College and a MBA from Babson College. E-mail: [email protected].

1 Athena is a campuswide UNIX-based networked computer system serving the needs of MIT's academic community. Athena has over 600 user workstations distributed around campus in both general-use and departmental "clusters" where students and faculty can go 24 hours a day, 365 days a year to do class work, write papers, do personal work, and communicate with other computer users worldwide.