Online Procurement Replaces Campus Computer Resale (1999)

Background In 1994, the Massachusetts Institute of Technology began a journey down the road of reengineering. MIT decided to redesign their administrative processes, which had become too complex and costly over the years. Institutional purchasing was an area targeted as one where cost reductions could be implemented via vendor partnerships and supplier consolidation. The initial supplier consolidation team, chartered in 1994, discovered that MIT conducted business with over 14,000 suppliers, and half of these were on-time transactions. In addition, approximately 80% of the paperwork involved in these transactions was attributed to orders under $500 and accounted for only 3% of the total purchase amount. The goals of the supplier consolidation team were to reduce the number of suppliers and to improve the purchasing business processes. So how did the MIT Computer Connection fit into this plan? A Brief History In the mid 1980's, computer manufacturers were offering significant education discounts to institutions of higher education choosing to operate campus computer resale locations. At that time, making the decision to open a campus computer store was an easy one. Education discounts were generous and colleges and universities benefited as more and more students, faculty and staff began to use personal computers. MIT opened the Micro Computer Center (MCC) to provide computers, peripherals and software for sale to students, faculty, staff and departments at very low prices. The campus store was owned and operated by MIT as a full cost recovery operation. The resale location had initially experienced significant savings for the Institute. In these early days it was easy for the MCC to meet its goals, but as time went on, the same environmental forces at work in the retail computer world became reality for campus stores. This made it difficult for the MCC to maintain its advantage. The MCC reorganized and reinvented itself in an effort to increase sales as margins decreased and competition increased. At first, the MCC tried changing customer purchasing behavior by driving sales to specific configurations available at peak sale times. This experiment did not generate the desired customer behavior and still left the MCC inventory management and overhead costs intact. By 1995, the MIT reengineering effort was underway and vendor consolidation was one of the plans that they hoped would reduce the cost of doing business. As a supplier of computers, software and related products, the renamed and reinvented MIT Computer Connection (still the MCC) was an obvious candidate for reorganization. A redesign team, Desk-IT, studied options that would drive Institute purchasers toward MIT-recommended products and decrease the operating overhead of the campus resale site. The project team estimated that some 7,000 requisitions and purchase orders were written for computers and related products for purchase through the MCC and the Central Procurement Office (CPO) annually. At an estimated cost of up to $130 per paper transaction, potential savings were significant. After studying various mixes of partial and full sales service, the team proposed the following three options for the MCC: 1) Remain open as a full-service operation 2) Reduce the operation to partial service with special order capabilities 3) Outsource The team listed advantages of a full or partial service operation as convenience, uniform support and academic discounts. The disadvantages were high overhead and inventory costs. The monthly MCC inventory could go as high as $4 million and required rental of warehouse space. The storefront operation required staffing of 19 full-time employees. Outsourcing was seen as an alternative that provided savings on overhead, inventory and business processes. The team believed that outsourcing would be less convenient, would eliminate the academic discounts and would cause MIT to lose control of purchasing and product strategy. …