March 2005 | Case Studies | I.T. Toolkit

Bid Farewell to 12 Cents On the Dollar

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An online trading platform for liquidating and sourcing electronic components has laser manufacturer beaming with delight.

Pinpoint accuracy is essential at Coherent Inc., a manufacturer of lasers and laser-based solutions for commercial and scientific applications. But in the past, the Santa Clara, Calif., company did not always apply the same precision to its supply chain as it did to its products.

"Until recently, we didn't pay a lot of attention to operational execution or materials management," says Sanat Dave, Coherent's director of materials.

At one time, the company could grow and thrive without improving those functions. Coherent's original customers—research scientists—didn't need products delivered on a tight schedule. And if a piece of equipment stopped working, scientists would tinker with the optics themselves rather than make an urgent call for a repair or replacement.

Today, though, more and more industrial customers rely on devices from Coherent to keep production lines running. To stay competitive, Coherent needs to meet customer demands, while controlling costs. So the company focused a laser beam of attention on its own operations.

"The goal is to do a much better job of managing materials and inventory, and turn our supply chain into a competitive advantage," Dave says.

One tool Coherent has harnessed in this cause is WCTBid.com, a web-based trading platform for electronic parts, operated by WCTBid, Fremont, Calif. Late last year, Coherent started using the service to liquidate obsolete components, hoping to recover more money than it could on its own through the broker market. This year, it will also start using the service to procure components.

Manufacturers that deal with brokers one-on-one often lose out—both when they sell and when they buy, says Alan Scroope, founder and CEO of WCTBid. When they no longer need a part, liquidating the excess inventory recovers, on average, 12 cents on the dollar.

"If you were to buy that component when you have a need, however, you might pay 150 percent of your standard cost," says Scroope.

WCTBid developed its service, WCTBid.com, to level the playing field for manufacturers. Companies that need components use the service to post their requirements, allowing pre-approved brokers to bid for their business.

Companies that want to sell excess components, or obsolete finished products, use the service to offer goods anonymously to thousands of brokers, potentially pushing the price up.

Coherent operates manufacturing plants in Santa Ana and Auburn, Calif.; Portland, Ore.; Bloomfield, Conn.; and East Hanover, N.J., plus two locations in Germany and one in Scotland. Until recently, the company had only occasionally tried to sell components it no longer needed for manufacturing.

"We didn't have any real process, and many components had been sitting around for some time," Dave says. When someone at the company did make a sale, they followed no specific procedure and recovered only a fraction of the original purchase price.

"Our sales process was individual purchasing managers having their buyers talk to a few brokers to see what could happen," he says.

Dave witnessed WCTBid.com in action at a previous employer, where it helped the company double its return on liquidated parts, he says. Officials at Coherent started negotiating with WCTBid last summer, and in December they posted their first components for sale on the system.

Pay-As-You-Use Pricing

Implementation was fast and simple, Dave says. Coherent gave WCTBid information about its components on a Microsoft Excel spreadsheet, and WCTBid provided training sessions. "We didn't need to get our IT group involved," Dave says.

The pricing model for WCTBid.com is "pay-as-you-use," says Anne Patterson, WCTBid's vice president, client delivery and strategic alliances. "Customers pay a percentage of the transaction fee for products bought or sold through the web site."

In its first attempt to sell parts through WCTBid.com, Coherent enjoyed a windfall, bringing in three times the original purchase price. This is unusual, Patterson notes, "though it does show the range of possibilities."

Typically, a company that had been liquidating parts on its own for 10 percent of the original purchase price would boost that recovery to 20 or 30 percent with WCTBid.com, she says.

Coherent plans to also use WCTBid.com to procure electronic parts. The company turns to the broker market, rather than to its regular suppliers, when an unexpected surge in demand for a product creates a sudden shortage. The company also buys from a broker when suppliers stop manufacturing a part it still needs for one of its products.

When such needs cropped up in the past, buyers at each manufacturing site followed their own instincts and preferences to locate sources.

"Buyer A would call his favorite broker and Buyer B would call her favorite," Dave says. "There was no rhyme or reason as to which brokers they would go to and why," and no easy way to determine what the market at large was charging for those parts.

Once Coherent starts purchasing through WCTBid.com, a buyer who needs a part will enter the requirements in the system, and WCTBid will display those needs to brokers with whom company officials have chosen to do business.

Instead of calling one broker and buying the part at any price he or she names, WCTBid lets Coherent broadcast its request out to its approved broker audience. "The brokers will undercut one another to successfully secure a purchase order," Scroope says.

Coherent will introduce the purchasing function first at one of its contract manufacturers, allowing the company to control purchases the contractor makes on its behalf, Dave says. Eventually, Coherent plans to roll out the purchasing function to all its own locations.

Some contract manufacturers boost revenues by padding the prices of parts they procure for clients, Scroope says. Clients can't control this practice because they're not in on the negotiations between contractors and brokers. "Our clients were being held for ransom by their subcontractors," he says.

But when their subcontractors buy through WCTBid.com, manufacturers can insist that they buy only from the brokers who offer the best prices, and they can use the system to monitor their purchases.

Along with the services Coherent is using, WCTBid offers several others. Some clients use the trading platform when they run low on their own branded parts, which they need in their warranty service operations.

"We actually source product for our clients that they themselves would have originally sold through their distribution channel," Scroope says. "We purchase the products in our name and drop-ship to clients. That keeps clients anonymous, and keeps the price down."

If a broker knows a large company has an urgent need for a part, "it will charge 10 times the price," he says. But if the broker sells to WCTBid on behalf of an anonymous buyer, it will probably offer a better deal.

Some companies use the WCTBid platform to eliminate waste by establishing internal trading relationships.

"For example, the U.S. region might liquidate product when there's a requirement in Europe, within the same company and within the same department, for the same product," Scroope says.

Using WCTBid's web-based platform for communications, large companies can discover inventory imbalances and shift parts to locations that need them.

Another WCTBid tool helps companies that have too much of a product still on the price list. "They can't liquidate the product because that will impact the price they get through their distributors," Scroope says. Instead, the company can use the WCTBid platform to advertise the excess inventory to its own sales force.

"A sales representative can log on while at the distributor's location and view that the corporation wants to liquidate at a knock-down price," Scroope explains. The rep can then negotiate a price with the distributor, rather than lose the sale to the broker market, or even to a competing sales rep from inside the company.

Besides providing better financial results, WCTBid makes it easier for buyers to gain approval for purchases from their managers. Instead of waiting for buyers to send the details of purchases they want to make, managers can consult the system to get the information quickly, Dave says.

The system also brings greater discipline to materials management at Coherent. "This implementation provides a consistent practice, site to site, for how we dispose of excess products and procure shortages," says Dave. "I know every purchasing manager follows the same methodology."

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