Creating an electronic ordering system.

• Author: Flynn, Michelle J.
• Position: Liberty Mutual Group automates procurement process

Thanks to innovative re-engineering and an online purchasing system, Liberty Mutual has cut its purchase orders in half and expects its total procurement costs to drop 19 percent.

A few years ago, Liberty Mutual took a hard look at its procurement process and decided it was far too cumbersome and costly. Now, thanks to improved processes and an electronic ordering system, the company has reduced cycle time in its procurement process by 99 percent and product pricing by more than 25 percent.

Like many other companies in the early to mid 1990s, Liberty Mutual, a diversified financial services company, moved to a strategic business unit alignment to enable each line of business to enhance its competitive position. But to really streamline purchasing, we had to reengineer our procurement process, an area that until a few years ago had not received much strategic focus. Here is how an investment of less than $500,000 in systems technology generated millions in savings.

Despite the reorganization along business-unit lines, the administrative departments were still centralized in 1993. Because we acquired products in bulk, all items were delivered to our centralized warehouse in southeast Massachusetts. To obtain supplies, our field offices placed four-part, written quarterly requisitions for "standard" items. Each field office had a large storage room to support the stockpiling of supplies made necessary by the long intervals between orders.

A team assigned to study the process found the purchase order, approval and payment process was cumbersome and costly. For office supplies alone, we used 15 to 20 suppliers. We issued hard-copy purchase orders to suppliers to replenish the warehouse and did a three-way match for receipt and invoice payment. Our product pricing was very competitive because we purchased in bulk. But our order, storage and redistribution processes incurred high administrative costs, long lead times and limited product choices. We never charged the units directly, because all costs flowed to the central procurement budget.

In light of this, the task force made six primary recommendations: Reduce the administrative costs of procuring and delivering products; improve product quality, choices and delivery times; charge users directly; reduce the supplier base; shift order process responsibility to the users; and eliminate storage space in the field offices and the central warehouse.

We assigned an implementation team to develop a...