Procurement Strategies: Good Stuff Cheap

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To prevent that, HPFS’s Andover, Mass., office has 470,000 square feet of offices and storage space and labs and parts shops and loading docks that operate around the clock, taking in leased and repossessed equipment for a lavish technical wash and wax. Refurbishing used gear includes wiping hard drives, replacing components, testing chips, restoring basic configurations and sucking the dust out of a system. At any given moment, HPFS has 50,000 used assets here. Half-a-million pass through in a year. Skids hold yellowed, junky monitors that will soon meet an environmentally conscious death. There are pallets stacked with notebooks like giant plates of nachos. In the back, 45,000 square feet of warehoused gear is stacked to the ceiling, waiting to ship out to HP’s services group, or to brokers, or to a CIO who got herself a deal on a 20-year-old VAX system.

The Andover facility (it was Compaq’s before the merger) didn’t exist six years ago. IBM has built 20 refurb houses worldwide, taking in 15,000 assets a week. These vendors are not in denial; they’re taking the brokers on.

In general, vendors can’t beat brokers on price because their overhead is much higher. But vendors do have certain advantages. Trusted brands. Deep knowledge of the systems. Extensive services groups to support the gear. Dealing with the vendor directly certainly provides the least complicated license transfer and maintenance contract transfer process. This is where the secondary market is going. "I’ll pay a little more and deal directly with the vendor rather than pay a lot less and go through a broker," says Brooks, Keystone Property’s CIO.

The vendors are as scientific about the secondary market as the brokers are seat-of-the-pants. HP’s warehouse is entirely automated. There are equations that determine the value of used gear?whether, say, it’s more valuable in parts than as a whole. "We have tuned the demand," says Af Assur, IBM’s director of global remarketing for Global Asset Recovery Services, which is part of IBM Global Financing, the leasing group. "We know the inflow and outflow about two months in advance, so we plan and know exactly what to do with the asset when it comes in."

It has been a coldly corporate ramp-up, which is why Rothman thinks fewer people know about his business than they do Lynch’s. "It’s not as sexy a story as, you know, some broker-making-millions story," Rothman says. "Look, 40 percent of our [division’s] revenue is from the secondary market. That’s a big number."

The Market who sets the price?

Paradoxically, the complexity of the secondary market was spun out of the simplest notion: supply and demand. When demand ruled, so did vendors. They set prices; they determined the value, or lack thereof, of used gear. Now supply rules, and CIOs have a great opportunity to grab the power to define value.

HP’s Rothman calls it the law of the jungle. ARC’s Lynch calls it the American way.

Malcolm Fields, CIO at Hon Industries, a $1.8 billion office furniture manufacturer in Muscatine, Iowa, calls it his fiduciary responsibility. Fields is a self-described tightwad. He says that recently his units have fallen in love with the secondary market because demonstrating ROI is a cinch when capital costs can be reduced.

"We’ve started browsing the hardware section of eBay. I’ve bought gear on there three or four times," says Fields. "We’ll search on a type of equipment just to get a sense of the market. Then we typically buy from smaller, independent players, direct. We insist on strong warranties."

Fields, like Haser at Tenneco, was impressed by the amount of good stuff he’s found. Like Haser, he was happy to discover that more and more services are supporting the market. Like Haser, his company is noticing his effort to reduce costs. "I’ve already saved us hundreds of thousands," he says.

And, like Haser, Fields has found a new way to do his job. He’s setting a price, and the market moves to meet it. That’s a big change. And change is good. Especially for CIOs.

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Copyright © 2002 IDG Communications, Inc.

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