Mike Mahon is Caltex's general manager in charge of procurement based in Singapore. He sources oil drums, and all the indirect materials needed to store, process and create many of the oil and petroleum products we know today. Caltex has hundreds of suppliers in 55 countries, and spends some $800 million a year on indirect materials. What does Mahon have to do with cash management and treasury? Plenty, thanks to the internet.
Caltex has enlisted Chase Manhattan Bank to provide a single web-based end-to-end procurement solution that will be used by Caltex entities in the United States, Philippines, Malaysia, Hong Kong, Thailand, Singapore, South Africa, Australia and New Zealand. The E-procurement system marries a web-based payment system which Chase and Caltex claim is globally "market leading and unique".
"This partnership with Caltex represents one of the most significant e-payment services to be delivered by a bank globally," says Steven Groppi, regional business executive for Chase Treasury Solutions. "E-procurement is being evaluated and implemented by most major corporations around the world, but one of the limitations has been the linkage of these platforms into sophisticated cross-border and local payment systems."
"Chase didn't try to force fit an existing solution onto us," Mahon comments on the factor that clinched the deal.
Trio of systems
The E-procurement system consists of three integrated systems procurement, payment and logistics.
Under the procurement system, supplier catalogues are hosted on a website maintained by Chase. Caltex logs on and creates a detailed purchase order that can be sent electronically or by fax. Mahon says that purchase orders used to cost the company $145 to $160 per item. Under Chase's system, the cost has been reduced to between $5 and $15. Additionally, "this system will eliminate maverick buying," says Mahon.
The system allows Caltex to source strategically, and cut down the number of intermediaries in the supply chain. For suppliers, which have to agree to be paid by Chase, the site means access to Caltex buyers worldwide and more accurate purchase orders which can be electronically integrated into their back office.
All purchases are paid by Caltex via the web. The system automates accounts payable and reduces inter-company billing. Importantly, "the e-payment system will eliminate the need for paper letters of credit," says Mahon. Letters of credit used to cost the company $300 each. The e-payment system will feed transaction files directly to Caltex's ERP system, calculate and remit withholding and value-added taxes to the government, handle multiple currencies and allow for different payment terms for each supplier. Paying in local currencies means that Caltex takes on foreign exchange risk, which Mahon says is now reduced, as the system keeps a close track on who has to be paid, how and when.
The electronic logistics system seeks to tie preferred freight forwarders into a worldwide network. Caltex entities will be able to view online freight and customs estimates, track the progress of the shipment and trigger the e-payment system.
Caltex and Chase expect that all three systems will be fully operational by the fourth quarter of this year. When fully operational, Mahon expects that the company will cut down procurement, payment and logistics costs by 10% to 20%, which means savings of at least $80 million a year.