Technology

How Canadian National Cut $10 Million in Procurement Costs

This old-economy company discovered new ways to save money through E-procurement.
Gary M. SternJuly 18, 2001

Ordering spare locomotive parts and other supplies at the Canadian National Railway Co. once entailed poring over 75,000 items in catalogs that were “three times heavier than the Yellow Pages,” says Sameh Fahmy, the railroad’s vice president of supply management.

But when Montreal based CN introduced Ariba’s E-procurement software in January, the railroad was able to cut its purchasing costs, streamline its service staff, and reap savings mostly by eliminating what Fahmy calls “maverick purchases,” or decentralized transactions of small-ticket items such as portable radios.

Last year, when CN was evaluating the Ariba system, it was also looking at Commerce One’s procurement software. The railroad opted for Ariba, because its license was a flat fee, while Commerce One charged a transaction fee based on the cost of each purchase. But a Commerce One spokesman says the company has since changed its pricing to allow customers to purchase software licenses without transaction charges.

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Fahmy estimates that by transferring these maverick purchases to the online system, the 1,700 CN employees responsible for purchasing supplies have cut costs 20 percent, to the tune of $10 million a year, by using discounted prices from electronic catalogues.

The railroad’s former purchasing system was “labor-intensive,” Fahmy notes. Like many old-economy companies, CN issued requests for proposals for large purchases to four or five suppliers. Requests were faxed in and voted on by a multidisciplinary committee. The process was very time-consuming.

For smaller purchases, staff would search out each item such as railroad ties, switches, and signals in the supplier’s printed catalog, which didn’t include CN’s discounted prices. The purchasing contracts with suppliers were automated, but the rest of the process was done with phone, fax, and overnight mail.

The whole system was just begging for conversion to an electronic format.

The E-procurement system was piloted with 15 suppliers in August 2000. Ariba trained staff at the railroad’s service centers in Montreal, Edmonton, and Chicago. Several employees had difficulty issuing multiple requisition orders, but those problems were resolved by the time the system went live in January for all of CN’s 35 suppliers.

Andrew Bartels, research leader for E-business at the Norwalk, Conn.- based market research firm, Giga Information Group, says that E- procurement enables many old economy companies to “leverage buying power. E-procurement encourages getting better prices from suppliers.”

Smokestack companies are more conservative than many dot-coms, and that may explain why some of the biggest business-to-business success stories are occurring in the Old Economy and not the new one. CN’s Fahmy says, “We wanted to reduce the cost of doing a purchase order . But we took time to ensure that we did things correctly.”

After six months, the railroad has reduced the cost of processing each of its 100,000 annual purchase orders valued from an average of $50 per order manually to $4 electronically.

By automating purchasing, CN has been able to reduce its supply service staff from 147 employees to 135. Because CN employees are buying more items from major suppliers, CN is also lowering costs by obtaining larger discounts for bulk buying. In addition, using Ariba, CN has been buying fuel on the options market, reducing its fuel costs.

Using E-procurement, CN employees can review their orders and most frequently purchased items. Employees can use the online catalog to browse for price discounts.

CN integrated its E-procurement system into its SAP enterprise resource planning system. When an employee generates a purchase order online, the invoice creates an entry directly into the ERP software.

CN’s move to E-procurement also pushed its suppliers to alter their business processes. For example, Acklands-Grainger, the Toronto-based industrial equipment supplier, sold $14.2 million worth of equipment to CN in 2000, making the railroad one of the company’s largest customers.

Acklands-Grainger automated its 46,000 items online to accommodate the railroad. The result of selling supplies online, says Neil de Jong, business manager at Acklands for the CN account, was process improvement, lower prices, and improved quality control.

Still, there are some things E-procurement can’t do. De Jong notes that his staff still makes sales calls to CN, since “E-procurement can take away the personal touch. We still want to deal face-to-face with customers to resolve problems.”

Gary M. Stern is a New York-based financial writer.