Linking supply chains saves Raytheon $400 million

Shelley Stewart takes the helm as supply chain VP and introduces initiatives across Raytheon

By Susan Avery -- Purchasing, 8/23/2001 6:00:00 AM

Assuming responsibility for supply chain management at one of the country's largest industrial companies 15 months ago, Shelley Stewart Jr. brought to the job a wealth of experience at strategic sourcing, electronic commerce and supplier diversity activities. As he settled into his post as vice president of supply chain management, he examined supply chain strategies already in place at many of Raytheon's diverse businesses, some of which are made up of newly acquired companies.

Building upon the established strategies he considered successful, Stewart started implementing a series of supply chain initiatives—with support from company's top management and its Supply Chain Council—that helped the Lexington, Mass.-based defense and electronics firm save $261 million by the end of 2000. Among the initiatives:

• Introduction of a single process for strategic sourcing for use by supply chain managers consistently across Raytheon businesses.

• Company-wide deployment of a process for sourcing indirect materials using commodity teams and consortiums that was developed by supply chain managers within the Hughes defense business, which Raytheon merged with in 1997. Stewart also is working to apply the thinking behind the Raytheon Indirect Strategic Agreement Team (RISAT) to an initial $400 million of the company's direct materials buy (including electronics, fasteners & hardware, RF & microwave). Projected annual cost savings for the direct material endeavor: 12% to 15%.

• Application of Raytheon's Six Sigma quality initiative to the supply chain organization's supplier development effort. The group also has introduced an alliance program for the company's strategic suppliers across its businesses and is reengineering the company's subcontract management process.

• Company-wide adoption of the aerospace and defense industries'e-procurement exchange, Exostar, as well as FreeMarkets' reverse auction process.

• Creation of a Leadership Development Program, a two-year rotational program through which eight-month assignments are provided for recent graduates of schools with supply chain curriculums such as Arizona State University, Northeastern University and Howard University. At the same time, Stewart also has beefed up his organization's training and retention policies for current supply chain personnel.

• Enhancement of the company's already strong foundation of supplier diversity programs, led by Benita Fortner, director of supplier diversity. This effort includes a written strategic plan that calls for inclusion of minority-owned businesses in each of the newly introduced supply chain initiatives.

For 2001, Stewart expects these initiatives to save $400 million. This figure, he says, also includes savings from efforts to reduce inventory levels. Supply chain's role in these activities includes a number of "supplier-managed inventory" initiatives for both direct and indirect materials. The supply chain organization also has used online channels to sell excess material and is working to reduce obsolescence.

The supply chain organization has responsibility for purchasing more than $7 billion in goods and services annually. Of this figure, some 72% goes toward the buying of direct materials: semiconductors, connectors, capacitors, castings and forgings, machined parts, hardware, and electrical parts, among others. The remaining 28% is spent on such indirect materials as information technology, corporate travel, contract labor, MRO, logistics, procurement tools and utilities. Stewart also is working to add such other non-traditional purchases as employee benefits to his responsibilities. This would bring the buying tab of his organization to $9 billion annually.

All of the goods and services purchased by Stewart's group go into the manufacture of products and services in the areas of commercial and defense electronics and business and special mission aircraft. With annual revenues of $16.9 billion in 2000, Raytheon has operations throughout the U.S. and serves customers in more than 70 countries.

Raytheon businesses range from defense and commercial electronics (Missile Systems, Air and Missile Defense Systems, Air Combat and Strike Systems) to aircraft integration systems to such commercial electronics businesses as Raytheon RF Components, Commercial Infrared and Raytheon Aircraft.

Stewart's role is to organize supply chain activities among these diverse businesses across the company. His experience includes 18 years at United Technologies Corp., where he most recently was director of worldwide sourcing. He has also worked as vice president of programs and business development and VP of materials at Hamilton Standard, a UTC division. As vice president of supply chain management at Raytheon, he reports to Don Ronchi, vice president, Raytheon Six Sigma and chief learning officer. Five supply chain managers at the corporate level as well as the RISAT team report to him. Within the Raytheon businesses, there are about 3,500 "supply chain professionals." Of this number, roughly 2,200 work in procurement; the others are in logistics, planning and requirements activities.

"The real opportunity in the supply chain isn't simply about leveraging the supplier base, it's about leveraging common processes and technology," says Stewart who is working to closely align the goals and objectives of his organization to those of the corporation. The goals:

• Enhance customers' success, especially through technology leadership and program execution.

• Reduce debt, using Raytheon Six Sigma tools to lower inventories, receivables, and contracts in process.

• Make progress as an employer of choice, with emphasis on creating a work environment that encourages learning and professional development.

One of the challenges in bringing diverse businesses together is developing a definition of "supply chain" that everyone in the company can share. Stewart, working with the Supply Chain Council, has come up this:

"Raytheon supply chain delivers the right materials and services to the right place at the right time for the right total cost—integrating key processes and functions across the entire value stream to meet customer requirements."

While Stewart expects this definition to continue to evolve, he believes that it's important to have one so that everyone in the company "is working from the same baseline."

From this definition comes the company's strategic sourcing process. The Supply Chain Operations Reference (SCOR) model, which is used by supply organizations throughout industry and was adapted by Raytheon, provides some consistent guidelines. The guidelines center around such supply chain activities as plan, source, make and deliver.

Within each category is a series of elements or tools. "Plan" includes demand forecasting, capacity planning, and early supplier involvement. Under "source", buyers find such tools as alliance agreements, supply base rationalization, and supplier diversity. What's unique about Raytheon's adaptation of this model is addition of the "customer" aspect of the process. At this point, supply chain managers can see the fruits of their labors: customer satisfaction, improved profits, reliable sources, operating cost reductions, gains in strategic markets, and leadtime reductions.

Responsible for hammering out the definition of supply chain is the Supply Chain Council, a group of leaders representing each of the Raytheon businesses. Role of the council, which was already in place when Stewart came on board (although he's tweaked it a bit) is one of collaboration among supply chain leaders. "As peers, not only do we look for opportunities to share best practices, we also are creating an overall direction for the supply chain in the company." Council members speak bi-weekly and meet quarterly.

At the last meeting, members discussed the current state of Raytheon's supply chain and agreed upon and validated metrics used within each of the businesses. "We agreed upon actions—and selected individuals accountable for them—for a number of company initiatives. Some of these include a supplier alliance model, a balanced score card, expansion of the Leadership Development program next year from five to 10 graduates and creation of a distance learning program which the supply chain organization is developing with a university.

(Stewart is a founding member and chairman of the supply chain council at Howard University which is starting a supply chain curriculum within its MBA program this fall. The council also includes representatives of Ford, IBM, UTC, and Eaton Corp.)

Raytheon's Supply Chain Council is the vehicle through which Stewart communicates supply chain initiatives to the businesses. "All these initiatives are agreed to at the council level," says Stewart. As such, "they have been sanctioned, supported and, in some cases, are being led by the supply chain leader at one of the businesses."

The supply chain organization also has a Web site that it is working on to make a "true portal" for all supply chain activities within the businesses. Other ways the organization communicates to supply chain managers include mass e-mail mailings and strategic planning sessions (one was held in June; another is coming up in September.)

Leveraging processes

Formed in 1995 in what was then the Hughes defense business, RISAT develops corporate agreements for the indirect spend, about $2.5 billion annually. The Raytheon Indirect Strategic Agreement Team, a group of about 30 people, is based in California and is managed by Steven Kim.

"We don't try to centralize a lot of things, but this group makes sense on the indirect side," says Stewart, who is encouraging the businesses to purchase off the agreements. To make it easier to comply, RISAT is making catalogs of goods and services available through Exostar (with the first being office supplies). Other indirect goods and services purchased by RISAT include chemicals, facilities, IT & telecom, logistics, MRO, contract labor, travel, and utilities.

Some of these indirect materials RISAT sources through a consortium (for example, office supplies) whereby it pools Raytheon's requirements with 17 other companies. "We are thinking about making it larger, but first we have to determine the market," says Stewart. "It may be companies smaller than us that don't have leverage. We're trying to make a little business of it and are really doing well."

While corporate agreements are not new to Raytheon, they are "new" in the way that they are currently being deployed. "In the past, we used leverage for such indirect goods and services as travel," says Stewart. "It's the natural thing to do, and we are still reaping the benefits. But, how can we make more gains once the leveraging is over? What we want to do is move from a simple commodity strategy to a fully integrated commodity strategy. In other words, we are doing such things as putting the agreements online."

As some of the company's past efforts at aggregating its direct materials purchases have faded, Stewart recognizes the value of an effort by one business group to aggregate purchasing of some goods and services. Thinking behind the Raytheon Commodity Team (RCT), led by Mike Rager, consists of a centralized process around the purchase of direct materials—where it makes sense—with decentralized execution. The structure of RCT is similar to that of RISAT.

At this point, the supply chain has identified five commodities for RCTs: semiconductors and passive electronic components, electromechanical hardware, interconnects, RF microwave, and machining and fabrication, which represents a $400 million annual spend. The teams' cost savings goal for the first year: 12% to 15%.

An RCT leader is the supply chain manager within one of the businesses responsible for the largest share of the spend. This "commodity expert" leads the team of his or her peers who also have responsibility for buying the commodity. Working with Rager, the expert develops a written strategy using the company's SCOR model. (Stewart expects that some of the materials may be purchased online through Exostar and FreeMarkets.) The strategy is then introduced at the local level for execution.

Six Sigma & supplier development

In keeping with Raytheon's corporate goals, Stewart's organization is applying Six Sigma to the company's supplier development activities. To this end, he's also assembling a network of Raytheon Six Sigma champions to go out and work with the supplier community. (Traditional Six Sigma is focused on eliminating defects and reducing variation. It is defined as 3.4 defects per million opportunities.)

The Raytheon process for supplier development has six steps:

1. Identify supplier candidates for projects.

2. Define objectives and resources.

3. Baseline opportunities (they don't have to center on cost-cutting) and rank.

4. Analyze selected opportunities.

5. Implement projects.

6. Document and realize improvements.

In identifying suppliers, Stewart says he doesn't want his organization to select only suppliers "that are broken. We think we can work Six Sigma with suppliers at the higher end as well as the low end. On the other hand, I don't want suppliers to think we are using it just to attack the small and mid-size suppliers. We are going to use it across the supplier base. Six Sigma is a continuous improvement or problem-solving tool and all relationships have problems."

While he won't go into detail, Stewart says he is looking to e-tools to help identify not only the right suppliers for the process, but also the right projects within those suppliers.

As an example of deploying Six Sigma with a supplier, Stewart points to a recent effort to reengineer an infrared camera Raytheon had built for some of its defense customers that the company has taken commercial. To sell the camera commercially, "it has to be significantly less expensive and doesn't have to perform in the same kind of environmental operating conditions," he says. Raytheon's Night Vision camera, which is currently available on certain Cadillac automobiles, represents how Six Sigma processes were used to transform a defense technology into a commercial product that is small, cost effective and durable.

Stewart also is applying Six Sigma to Raytheon's alliance relationships.

"What we want to do is elevate these relationships. We want our technology people talking to the supplier's technology people, our business development people talking to theirs and our supply chain people talking to their manufacturing people. This helps us because it gets the supply chain involved earlier as well." One pilot program has Aircraft Integration Systems in Greenville, Texas, working with Rockwell Collins.

Another initiative which uses Six Sigma is a reengineering of Raytheon's subcontract management process. Led by John Norton, vice president of supply chain at Raytheon's Command, Control, Communication and Information business and Steve Ogg of the company's Electronic Systems business, this initiative uses an industry standard set of best practices to provide a consistent model for the company's subcontract management process.

Subcontract management is an element of the supply chain centered around the company's work as a product integrator which comes with a statement of work or specification and has a significant dollar value. "Using best practices we have taken every element of subcontract management and broken it down into processes," says Stewart. "And, we have an action plan in place to leverage some of the existing activity going on in some of the businesses."

Technology

As Stewart sees it, a real opportunity for the supply chain organization lies in leveraging common technology across the company.

"E-enabling our environment is critical for us," he says, considering the effort one of his organization's more complex undertakings. However, "it could provide one of the best paybacks."

Raytheon is a big company involved in many activities. Across the businesses, there are 67 different procurement systems alone and more than 110 buying sites. Stewart wants to understand exactly what the company is doing and what it needs to do. "Then, we can develop an e-strategy for the organization. It's all about how we can connect better with our internal customers as well as our suppliers."

While Raytheon's implementation of SAP's enterprise resource planning (ERP) system should eventually help streamline the number of procurement systems currently in use, Stewart recognizes that this effort is going to take time and that ultimately there may be more than one or two e-procurement systems in use within the company. Meanwhile, he is working to develop an e-hub concept which is expected to have a procurement module, data warehouse and supplier management system within the company firewall.

"What we are trying to create is a tightly integrated seamless ordering process which will provide one "face" to the user and our suppliers. As such, we are working to build a common architecture around these things so that the data will look similar as well."

A central data warehouse called Data Mart gathers information on purchasing activity from disparate systems across the company.

"We are working to make this tool more robust," says Stewart. "It's important at the corporate level for supply chain managers to have good data. It's what drives our strategy for both direct and indirect materials. You can't have compliance on corporate deals if you don't know how much you are spending."

One of the e-tools the supply organization is currently using is Exostar, the defense and aerospace exchange through which Raytheon is partnering with Boeing, Lockheed Martin, BAE Systems and Rolls Royce.

To date, the supply chain organization has conducted more than 40 auctions through Exostar, with good results. But, Stewart says that Exostar is more than an auction tool. The auctions were for indirect and direct materials, with particularly good results for many of Raytheon's minority and women-owned suppliers. "They are not being excluded, which is important to us. Auctions through Exostar provide them with opportunities to see things that they wouldn't normally see. We now have a way of making sure buyers are getting small and minority suppliers in the game. We can see it through the auction process."

At the same time, the supply chain organization is using FreeMarkets reverse auctions for more complex buys (those with more-demanding specifications). Buys through FreeMarkets tend to have higher dollar values—Raytheon recently completed a $14 million board buy through the reverse auction. Auctions through Exostar are at a lower dollar volume, but as Stewart says "They are buys that someone has to do anyway. This simply helps speed them up a bit." Stewart comes to Raytheon with experience at using the e-auction tool; while at UTC he managed the company's relationship with FreeMarkets.

Supplier diversity

As a company, Raytheon has a series of comprehensive goals for small, women- and minority-owned supplier businesses, some of which are based on government mandates.

Raytheon Chairman and CEO Dan Burnham leads the company's supplier diversity council. Stewart is the council chair, and Benita Fortner, is the corporate liaison officer. What they are doing differently this year: they have a written strategic plan.

In October, Burnham will be named chairman of the National Minority Supplier Development Council, the largest minority business advocate in the country. "This puts us at the forefront of working with minority businesses," says Stewart who serves on the council's board of directors.

For women owners of small businesses, the company held in December a Women's Business Forum which linked women business owners with female executives within Raytheon. Through the initiative, "we developed corporate relationships through which our executives mentored the women small business leaders."

As supplier diversity champion for Raytheon, Fortner is also a leader within the Exostar initiative. "As we rationalize our supplier base, we don't want to leave some of these businesses behind," says Stewart. "So, we are bringing them along with us." To this end, his supply chain organization has a good track record of creating opportunity for small businesses. Of the reverse auctions it has had to date, several of the awards have gone to small businesses.