Case Study: Emerson Electric Inc. and Innovation - ' Introduction '

From its nondescript exterior, Emerson Electric Co. appears an unlikely innovator. The 111-year-old St. Louis-based maker of power tools and measurement devices for heavy industry was founded in 1890 as a manufacturer of electric motors and fans at a time when electricity was driving a new wave of innovation. Now that the Internet is driving a new wave of cost-cutting, Emerson is revolutionizing again.

But don't look for Emerson's latest smarts to come in the form of new products. Instead, check out the company's purchasing department—which, until recently, was No. 1 on the Top 10 list of dullest departments at Emerson, as it is at just about any company. There, Senior Executive Vice President Charles Peters and CIO Greg Carmichael have been using the Net to turn Emerson's purchasing practices on their ear at factories from Cleveland to Singapore. Sure, dozens of companies have talked about how they hope to be able to cut the costs of raw materials such as steel and plastic by shifting purchasing to the Net. Emerson, though, is doing something different. It's using the Net to get better information about itself and what it buys and spends, and then is using those insights to pinpoint places where costs can be cut. It might not sound like much, but it's already racked up some $30 million in savings for Emerson so far. Carmichael calls this new purchasing trend "strategic sourcing"—not possible before the Net. "Savings once hoped for from online parts exchanges just haven't materialized, as everyone had hoped," says Alister Sutherland, a software analyst for IDC, a technology research firm. What Emerson is doing—using the Net to find places where, say, orders placed by individual divisions can be combined and leveraged for greater savings—"is far more difficult and time-consuming, but ultimately should reap deeper savings over time," he says. Indeed, Emerson hopes to save $100 million-plus by the end of 2005. "All large manufacturers ultimately will have to do this to remain competitive in the future," Sutherland says.

Better management has been key, but better information has been Emerson's ace in the hole. Emerson's installation three years ago of a $12 million, state-of-the-art in-house communications network is helping those responsible for Emerson's $5 billion annual purchasing budget to push prices down and streamline and reform sloppy purchasing practices. So far, it has stopped some suppliers from charging different divisions of Emerson different prices for identical parts. It has let Emerson pool its purchasing power across divisions for millions of dollars' worth of volume discounts, and it's keeping suppliers from overcharging the company on key contracts. It's also boosting Emerson's own parts business by giving all divisions inside the company information about who's buying what inside the firm. The results have been based on the simple axiom: Information is power. "Before, we didn't know who was buying what, from whom or at what price," says Peters, who has been in charge of the effort. Carmichael adds that three years ago "we could only see the surface. Now we can see all the way to the bottom."

It hasn't always been a pretty sight. Before Emerson rolled out its new Materials Information Network—MIN, for short—purchasing execs at three of the 18 factories run by Emerson's Fisher Valves division, for example, had unknowingly been buying the same 12-foot stainless steel tubing from two suppliers at three different prices—which varied by as much as 35 percent. MIN discovered the overlap, enabling the three factories to pool their purchases of the tubing. The payoff? Lower prices for raw materials—in this case, savings of $45,000 on just one order.