Team breathes new life to indirect procurement
Boston Scientific creates centralized group of strategic sourcing experts to leverage its spend
By David Hannon -- Purchasing, 7/14/2005 2:00:00 AM
It's been an eventful 18 months for Boston Scientific. Within that period, the Natick, Mass.-based medical device maker has: received FDA clearance for its new product, the Taxus Express2 stent, in March 2004 after years of clinical trial reviews; progressed through a series of recalls of the same product through the summer of 2004; reported a 62% increase in revenues by year end, with sales jumping from $3.4 billion in 2003 to $5.6 billion in 2004; celebrated the company's 25th anniversary; and made four acquisitions. The capper came in May 2005, when the firm was selected as the top company in the Boston area for 2005 by the Boston Globe, which evaluates Boston-based companies annually on a variety of issues, including return on equity, change in revenue and change in profit margin.
But behind the scenes at Boston Scientific there has been another major change that helped drive some of the success the company is seeing today. Like other best-practice firms including Hewlett-Packard, Intel and American Express, Boston Scientific's indirect procurement organization has been overhauled, centralized and given a new focus and vigor under the careful direction of Karen Weinstein-Millson, director of corporate procurement.
Indirect strategy
With a heavy emphasis on research and design for its primary products, like the Taxus Express2, Boston Scientific is limited in the amount of control it can exercise in its direct materials spend. Engineers and designers need to be given freedom to come up with the FDA-approvable, life-saving products without focusing on material cost as much as manufacturers in other areas typically do. The result is that Boston Scientific has focused its strategic sourcing efforts on the indirect spend areas.
"Direct materials purchasing in our industry requires much more validation, which is very costly and often a very lengthy process," says Weinstein-Millson. "In the indirect categories that do not require validation, the approval process to consolidate the purchases is more streamlined with less outside influence to impede the progress. Not to say it is an easy process, but it is more streamlined."
Weinstein-Millson reports to the company's vice president of supply chain but has a dotted line to each of Boston Scientific's 22 manufacturing plants. She also heads up a newly created group of nine strategic-sourcing managers focusing on indirect and services spend areas (including some nontraditional indirect items such as chemicals and sterilization), taking the lead on cost containment and procurement efficiency. Each of the global manufacturing and distribution sites also has at least one individual that works closely with the indirect procurement team in areas of strategy development and local implementation and compliance with the sourcing strategies.
The approach is less about mandate, more about best-practice sharing. "A team is only as good as each member's ability to communicate effectively," says Weinstein-Millson. "We have two types of meetings: business and communication." Business meetings are designed to discuss and make decisions on logistical and business issues and typically include brainstorming and sharing detailed information. Communication meetings, on the other hand, allow the team to demonstrate how each of its members' unique talents and abilities have made a difference, and foster discussion around how to do things better and leverage existing program structure for new projects or programs.
The results of these efforts are clear in numbers alone. In 2004, Boston Scientific reduced its indirect supply base by 26% over the year before and saw a 50% reduction in the number of suppliers that make up 80% of its spend. Today, 80% of its spend is represented by 5% of its supply base with a 93% contract compliance rate.
When to change
But indirect procurement wasn't always so strategically structured at Boston Scientific. In fact, until recently, there was no centralized indirect procurement team in place. All of the buying had been done at its 22 manufacturing facilities around the world. In 2000, company executives brought in an outside consultant to perform a diagnostic study and identify the gaps and opportunities within procurement.
"The gaps identified included a lack of focus on total cost of ownership and a limited understanding of supplier economics and supply market trends," say Weinstein-Millson. Also identified as key to building a distinctive indirect procurement organization were closer linkages to other functions and skill levels. In October 2001, the company created a [somewhat minimal] centralized indirect procurement organization which has, over time, grown based on consecutive wins to build a cadre of talented professionals charged with creating value for the company.
"Each position added requires a lengthy approval process and continued demonstration of continuous improvement," says Weinstein-Millson. "The [results shown in the] corporate dashboard continues to be the springboard from which we are able to secure more funding to add additional resources as we identify areas that would improve the competitive advantage."
But it's more than just cost containment this group is after—every initiative has a business goal, a procurement strategy and a value-creation goal.
"We have chosen to work with our supplier community on process improvement to ensure Boston Scientific realizes maximum value from our strategic supplier relationship over the long term, with the objectives of reducing total supply cost, improving operational supply chain performance, improving supplier communication and increasing the velocity at which continuous improvement and best practices are shared and implemented," says Weinstein-Millson.
Breaking it down
There are several projects that exemplify the total cost philosophy taken by the indirect procurement organization. For example, when approaching the logistics spend, strategic sourcing manager Saron Hines focused first on the air- freight lane between Ireland and Boston, where the majority of its logistics dollars were spent. Rather than simply trying to get a lower air-freight rate in a competitive market, Hines worked with local logistics contacts to redesign the boxes used to ship the company's products, which maximized available lift capacity on direct flights in the lane.
The result was a 167% increase in the number of boxes that could be shipped on each airline pallet. A further spend- analysis project reduced the company's number of freight forwarders down from 10 to two and the overall effect was a 17% reduction in air-freight costs through better utilization of airline capacity at a time when logistics rates were dramatically increasing. The result has been a reduction in average transit time from 3.7 days to 2.5 days.
Paul Thornton has spearheaded the company's purchasing-card program, which got underway in 2001 with U.S. Bank as its p-card provider. The project started with two clearly stated goals: First, provide a tool for Boston Scientific employees that will empower them to shrink the procure-to-pay cycle for MRO goods and services. And secondly, drive costs out of the low-value purchasing transactions, while enabling procurement professionals to focus on strategic initiatives.
Today, the company's p-card program encompasses more than 25% of total supplier payments. Process savings vs. traditional purchase order transactions are estimated to be in excess of $11 million since the 2001 rollout and the spend in the p-card program is now 80-85% with preferred suppliers, a major improvement over historical spending figures.
Thornton says the p-card program didn't require a lot of internal selling and when new acquisitions are made (and four were made last year), he simply sends them a package outlining the program. He usually gets a call shortly after for more information from someone at the new division. "The program is a mainstay of plant lean initiatives and has been adopted by acquired companies as a component of its sourcing integration," he says.
Another new initiative within the indirect procurement organization is a risk-mitigation effort, which is being piloted in the chemicals spend area. Cindy Gross, manager of risk mitigation, has put a five-step process in place to improve the risk mitigation in the organization. The first step is to identify each supplier in a given spend area. After that process, there is an effort to reduce to a single, best-in-class supplier where possible and maintain that relationship. Key to this step is notification of product or source changes. The next step is streamlining the documentation with the supplier. Then, work begins on assimilation and uniformity with all Boston Scientific specifications. And the last step involves the creation of a change notification strategy.
The newest member of the team is Ken Hartman, the procurement team's technology guru (and technically titled the SAP procurement business process manager). With a background in consulting and technology, Hartman is now looking at how the indirect procurement organization can better leverage some of the new tools available using its existing SAP system as a backbone.
One of the functionalities now being leveraged is SAP's contract-management module, which has been rolled out at the Natick, Mass. headquarters site under the direction of Beth-Anne Reith, another strategic sourcing manager and member of the indirect procurement team.
Another new function that now has a place at the procurement table is the facilities management spend. With the growth and acquisition path Boston Scientific has been on, this spend area has become a greater priority in recent years and provides a major opportunity for savings and cost consolidation. The company's capital construction spend is estimated to be around $150 million and the facilities and maintenance spend is around $50 million. Dan Gold is strategic sourcing manager for facilities and reports both to Weinstein-Millson as well as the head of facilities. In fact, he is physically located with the facilities department, not the procurement organization, to keep close contact with their decisions and daily challenges.
With a centralized person (Gold) in place to set strategy in these areas, the work is now beginning to review the company's facilities spend regionally, nationally and globally focusing on both high dollar areas and redundancy among suppliers across locations/divisions.
Gold is also working to establish bid or negotiation strategies in the facilities spend areas and understand the capital expenditure plan for the forecasted period.
"The challenge is to do that while giving end users more flexibility in supplier selection and timely execution," he says. However, purchasing manages the process and suppliers must meet strict company standards so ultimately a pool of sound suppliers will be developed resulting in better cost, schedule, quality, and safety.
Boston Scientific spends upwards of $75 million on travel and entertainment. Five years ago, the company decided to give the travel spend to the procurement group to drive cost containment and scalability. At the same time, the company wanted to be able to produce instant information on any employee traveling in the event of an emergency. Kevin Falvey heads up the company's travel procurement program and the strategy in this area is clear: leverage the company's size and spend to obtain the best rates with qualified and trusted travel service providers.
To that end, the company now works with a single travel booking service (American Express) to leverage its spend. That step also makes tracking employees much easier in the event of an emergency.
BostonScientific's team of strategic sourcing managers
| Ken Hartman | Cindy Gross | Paul Thornton | Dan Gold | Beth Reith | Kevin Falvey | Saron Hines | |
| SAP Business Process Manager | Strategic Sourcing Manager and Manager of Risk Mitigation | Strategic Sourcing Manager | Strategic Sourcing Manager | Strategic Sourcing Manager | Director | Strategic Sourcing Manager | |
| Focus area | SAP Procure-to-pay | MRO and lab services | Temporary services, cafeteria services, P-card | Facilities and capital equipment | Technology | Travel and fleet | Freight/logistics, sterilization |
P-card results
| 2002 | 2003 | 2004 | |
| SOURCE: BOSTON SCIENTIFIC |
|||
| Spend in program | $11.4 million | $15.5 | $18.1 |
| Transactions | 43,827 | 64,584 | 5,961 |
| Cardholders | 646 | 898 | 1,312 |
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