Lockheed Martin: Negotiators Inc.
Centralized organization moves into its fourth year of analyzing and leveraging the systems integrator's massive spend
By David Hannon -- Purchasing, 2/5/2004 2:00:00 AM
Four years ago Lockheed Martin decided that it was time to make some major changes to its largely decentralized organization. The $26.6 billion defense contractor had grown and changed through a series of acquisitions and divestitures and the five individual business units were functioning as, well, individual business units. In short, the different business units were not optimizing their full savings potential and with a $13.2 billion annual spend, they were missing serious savings opportunities.
In 1999, Lockheed Martin set out to restructure the organization to better share information and reduce the transactional activity in the business units. Lockheed decided to create a separate group dedicated solely to finding ways to share best practices and consolidate redundancy. With that goal in mind, the Corporate Shared Services organization was created.
There are four main divisions within Corporate Shared Services: human resources; financial services; energy, environment, health and safety; and global supply chain management. (A fifth organization handles systems and process management within Corporate Shared Services.) The global supply chain management (GSCM) group is responsible for purchasing agreements used by more than one business unit, supplier and subcontractor management, supplier diversity programs, and e-procurement and reverse auction tools across the entire corporation. (Currently, Lockheed Martin spends about $150 million through reverse auction tools, mostly with Exostar auction services, which it co-founded.).
The Subcontract and Supplier Management arm of GSCM focus on leveraging the company's massive $7.7 billion subcontractor spend (58% of the company's total spend). But another group within GSCM focuses on negotiating contracts with suppliers.
In February 2001, there were four different groups negotiating corporate agreements with suppliers independently of one another and pricing was inconsistent across business units. The company wanted to make sure it was getting the best price possible from its preferred suppliers and get buyers more involved to avoid contract leakage, as well as drive use of e-business tools, lean manufacturing and Six Sigma initiatives across business units. As a result, the Strategic Sourcing Solutions group was created with the following objectives:
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Consolidate agreement generation activities into a single organization
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Develop strategy-based agreements
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Become populated with high-potential individuals that have technical capability.
Today, 52 employees with cross-functional experience and technical backgrounds make up the Strategic Sourcing Solutions group, headed by Vice President William Burg. The group's main objective is to identify areas where the company can better leverage its contracts and suppliers across business units and help negotiate improved contracts in specific spend areas. It functions much like an outside consultancy and views the individual business units as its customers. The group works only with contracts of $1 million or greater that can be used by two or more business units for both government and nongovernment contracts alike.
Strategic Sourcing Solutions focuses on the direct and indirect materials and services spend. To date, there are 1,600 agreements covering $3.6 billion in spend that the Strategic Sourcing Solutions group has leveraged. In 2002, the group produced $178 million in savings and is projecting savings of $210 million and $250 million for 2003 and 2004 respectively. By 2007, it expects to provide $1.4 billion in savings.
The term "solutions" is in the name for a reason—to emphasize that the group brings solutions, not just shared agreements to the individual business units. As Kurt Ravenfeld, manager of strategy development puts it, the Strategic Sourcing Solutions group does not actually "control" any spend in the traditional sense.
"We leverage the spend and represent Lockheed Martin to our supply base and negotiate on our company's behalf to establish the contractual relationship," Ravenfeld says. "All of the transactional activity and use of those agreements and supply bases resides with the individual business unit. We measure our success by contract utilization, not control of spend."
Leading by example
But getting various organizations to adopt and adhere to such contracts is not always easy. Lockheed Martin as a company does not use mandates or edicts to drive such programs but instead relies on successes from the Strategic Sourcing Solutions group to spread the word across the company and drive cooperation. And it seems to be working.
As part of its purchasing turnaround, Lockheed Martin focused on direct materials first because price comparisons are easier when there are exact part numbers for everything. One spend area that got some early attention was machined parts. After a close analysis, Lockheed Martin found its spend was roughly 25-40% higher than it should be because of its fragmentation. A machining council was assembled to look into driving down the number of suppliers and to consolidate among preferred ones. The supply base was reduced by a combination of driving more business to the preferred suppliers, increasing the frequency of negotiating that spend and introducing reverse auctions where appropriate. Now, machining projects are run three or four times a year instead of once a year. In addition, the analysis of that spend was used to uncover more minority suppliers in that spend area.
More recently, the aeronautics business brought its $600 million fastener spend to the Strategic Sourcing Solutions group for leveraging, which was viewed as a major endorsement. With a high percentage of its spend on existing contracts, the aeronautics group was somewhat hesitant about releasing control of its procurement processes to a central organization.
"Aeronautics was a demanding customer for us, so when they gave us that hardware it was quite a vote of confidence for us," says Michele Freeman, director of direct and operating supplies and services agreements. "The benefit is the three buyers that aeronautics had dedicated to its fastener spend can now focus more on supplier management. It has set a tone with other Lockheed businesses that said if aeronautics could do it, they could also."
A major fastener negotiation was planned for January 2004 at press time, combining both reverse auction and face-to-face negotiation techniques.
The integrated circuits (IC) spend is another success story for the Strategic Sourcing Solutions group. When Lockheed Martin divested a number of its businesses to BAE Systems in 2000, it lost a significant percentage of its component spend, including a good chunk of its IC and connector spend—as much as 60%. To limit the impact of that volume drop on its existing contracts, members of the Strategic Sourcing Solutions team worked directly with suppliers to ensure pricing did not change. A closer analysis of the IC spend found savings opportunities of $2.5 million. Once the individual parts and prices were identified, the Strategic Sourcing Solutions group worked directly with engineers, buyers and suppliers to minimize or eliminate the missed opportunities.
"Often the nonsavings is because a supplier finds out they are a sole supplier. If a supplier makes the part only for Lockheed Martin, they naturally increase the price," says Freeman, adding that if a certain supplier is not providing the level of savings desired and is bidding on other spend areas or business units, because it is cross-business, the Strategic Sourcing Solutions group can leverage that information and work with the supplier.
Beyond component suppliers, the Strategic Sourcing Solutions group looks for ways to leverage the vast subcontractor spend at Lockheed Martin. The primary strategy is to combine the subcontractor's volumes with Lockheed Martin's volumes.
"Even though we are seeing a move to a greater use of subcontractors, we still have the subcontractors use our contracts and forecast their volumes with ours so we can leverage them," says Ravenfeld, adding that the relationships with subcontractors are much more dynamic and complicated. The company also has employee purchase programs on some of its indirect contracts, which allow Lockheed Martin employees to buy at company rates.
Servicing the services
The Strategic Sourcing Solutions group negotiates more than direct materials contracts, and is actively moving more into indirect and services spend areas, looking to benchmark and improve coverage.
In 2001, Richard Wooten took over as director of corporate travel services and began to review the $440 million travel spend. After more than two years of leveraging the spend and benchmarking rates, travel spending is 84% compliant with preferred contracts, with air travel and rental car leading the way with 93% compliance and 99% compliance to preferred contracts respectively.
The challenge in leveraging the travel spend went beyond negotiating a better contracted price, however. Wooten needed to apply the company's lean initiative to the travel ordering/buying process. The result was implementing self-service online booking and ordering systems, which streamlined the process, while helping track where employees are when traveling.
"We mapped out the processes and found we had 55 satellite ticket printers in use across the entire company," says Wooten. "We removed all but 15 of those by using e-mail tickets and saved $1 million a year right there."
The transportation services spend was another area where Strategic Sourcing Services felt it could better leverage the company's buying power. Lockheed Martin buys most of its transportation services through a consortium partnership with General Electric but wanted to benchmark its rates in various transportation modes against others in the industry and government rates. To do that, Lockheed Martin tapped the National Transportation Research Center (NTRC), a nonprofit organization with ties to Oak Ridge National Laboratories and the University of Tennessee.
"NTRC had access to data from internal resources and worked with the Chattanooga Freight Bureau in this benchmarking project," says Freeman. "They looked at eight different transportation spend areas and compared our rates vs. industry. We found that our rates were 25-30% more competitive than industry."
As of October 2003, Lockheed Martin's transportation spend was 99% on its strategic contracts, up from the low-90s in 2001. "In two years we were able to drive that kind of discipline into the businesses," says Freeman. "We are quite proud of that accomplishment, especially considering it was done in a company where we do not use edicts or mandates. It was all done through influencing and sharing benefits."
Diversity efforts
In addition to centralizing the contract negotiation and evaluation duties, Lockheed Martin also uses its centralized sourcing organization to identify further supplier diversity opportunities. Supplier diversity is a top priority at Lockheed Martin (as it is with most companies that do a lot of business with the government) and falls under the direction of Mike Bush, director of supplier diversity in the GSCM organization. Each business unit is responsible for meeting its supplier diversity goals, but Bush and the GSCM have developed a corporate-wide diversity rating program. And each project manager is measured annually on how they help meet the company's diversity goals when evaluating a spend area.
"Each project manager assesses our corporate agreements and commodities to look for socioeconomic participation across all levels," says Freeman. "It is one of the strategies we employ in looking for an integrated supply base. Supplier diversity is not just a marketing program here. We use it to drive value-add in our contracts. We are working to make the diverse suppliers as competitive as possible."
In May 2003, the company's efforts were rewarded when it was inducted into the Billion Dollar Roundtable, a group of companies that contract more than $1 billion a year with minority and women-owned businesses.
Future plans
The Strategic Sourcing Solutions group quantifies its success by the percentage of spend that is going through its negotiated contracts and not by the savings on individual contracts. Overall, the company is roughly 40% covered by strategic agreements, up from a mere 10% in 2000. The group plans to get that up to the mid-40s in four years.
Of course, there are normally dollar savings that come along with increased coverage and the company is tracking those numbers as well. In the three years since the creation of the Strategic Sourcing Solutions group, the company has seen $514 million in material savings and expects to enable $1.4 billion in savings through 2007. The company even had its corporate auditors come in and validate the savings methodology it was reporting.
There is still a lot of work to be done, according to members of the Strategic Sourcing Solutions group. Implementing a robust spend analysis tool and getting a much closer view of the company's indirect spend is a big priority going forward. The goal in direct commodity spending is to get more of its complex commodities leveraged after a review of its spend data warehouse showed missed opportunities in that area.
Benchmarking will continue to be a central part of the strategy at Lockheed Martin, including the use of outside groups, as was done in the transportation spend. The challenge there is to identify and engage such independent groups that have accurate and effective benchmark data for a specific spend area.
As the company continues to pursue its stated goal of becoming "the world's best advanced technology systems integrator," managing the complex subcontractor spend remains a top priority.
Recruiting top-notch personnel with technical degrees and cross-functional experience is an ongoing effort within the Strategic Sourcing Solutions organization, which sends 20% of its employees to other parts of the business after they gain valuable supply-chain experience.
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