Supplier relationship management drives indirect savings at UTC
UT500 teams use process, policy and sourcing strategies to achieve goals
By Susan Avery -- Purchasing, 9/7/2006 2:00:00 AM
As director of UTC general procurement, Susan Spence leads the indirect goods and services management team at United Technologies Corp. The team recently formalized its supplier relationship management (SRM) process, which classifies suppliers based on their criticality to UTC operations. The SRM process is comprised of such tools as supplier score cards, quarterly performance reviews and risk management plans.
General procurement has corporate contracts with 240 suppliers of indirect goods and services including such categories as factory supplies and services, IT/telecom, fleet vehicles, energy and transportation and logistics. A corporate contract for UTC covers one or more of the company’s business divisions, where indirect is a $6 billion annual spend.
Suppliers the team has designated as “A”, or critical, are those that, if supply is interrupted, can shut down a production line, such as a provider of industrial gas, or those that impact a large number of UTC employees, such as a travel services provider. The team considers 22 indirect suppliers critical.
This spring, Spence and her team invited these critical suppliers to a forum at the company’s Leadership Center in Farmington, Conn., where they discussed the UTC roadmap, its continuous improvement (ACE) tools and other topics. Some suppliers shared their experiences with their peers on their use of such ACE tools as market feedback, customer surveys and standard work. “It’s very powerful,” says Spence, of the peer-to-peer presentations. “If suppliers are not continuing to improve their processes, they are not going to keep up with us as factories get leaner and more process-focused. If they can’t keep up, we are not going to be successful.”
Hank Miller, regional vice president, business development for supplier PHH Arval in Sparks, Md., attended the forum. PHH provides UTC with fleet management services and approximately 15,000 vehicles in the U.S. and another 15,000 vehicles to UTC employees outside the U.S.
“As a key supplier, we are intimately familiar with the ACE tools,” he says. “The supply management team at UTC lives what they preach.”
In October, PHH will attend a three-day ACE-training program to work with Spence and her team to apply the continuous improvement tools to UTC’s executive lease program.
A measure of success
Similarly, Spence and her team share best practices with their peers in supply management at other organizations, and have participated regularly at roundtable discussions on such topics as SRM, consumption and specification management and low-cost country sourcing hosted by purchasing professionals at New York-based Bristol-Myers Squibb.“Sue’s group usually has a lot to offer at these sessions,” says Tom Spak, senior director of sourcing and supplier excellence, Bristol-Myers Squibb. “Theirs is a progressive organization. They institutionalized their UT500 program as a way of procurement partnering with the business units to reduce costs.”
Initially launched in April, 2001, UT500 sets savings targets for categories of indirect spending managed by cross-functional, cross-divisional teams. The teams use process, policy and sourcing strategies to meet their goals. UTC’s goal for the two-year initiative was $500 million. The teams surpassed that goal, reducing costs by $800 million. At the end of 2004, this figure was up to $1.1 billion. In 2005, the teams added another $300 million to the tally. Scott Singer, director of UTC global supply management, has responsibility for managing the UT500 program.
UT500 teams are successful because of executive sponsorship, says Kent Brittan, formerly senior vice president of supply management, later chairman of International Operations, United Technologies, before retiring in 2005. In addition to an executive sponsor, the teams have finance and supply management sponsors as well. For instance, Robert Leduc, president, Flight Systems, Hamilton Sundstrand, is the executive sponsor of the UT500 factory supplies team (chemicals, MRO, packaging).
UTC has re-launched the program twice—as UT500 Plus!. The re-launches were in 2003 and 2005, each with a goal of $500 million for the two-year programs that include similar initiatives in Europe and Asia. “While it’s bringing in more savings every year, we adjusted the teams accordingly, recently adding an engineering services team, to continue the momentum,” says Spence. “We are in our fifth year and continue to get outstanding ideas and uncover more opportunities. Just when we thought we turned over every stone, a team comes up with new best practices.”
Take UTC’s engineering services buy, for example. For the contract labor part of the buy, the UT500 team is working with a small number of preferred engineering service providers for onshore, offshore and near-shore assignments. Among the team’s strategies is use of ACE tools to ensure that supplier performance continues to improve. “This frees up our own engineers to work on more advanced programs,” says Spence.
The UT500 team for fleet services recently rolled out a new program in the U.S. offering U.S. employees an option to purchase UTC company vehicles coming off-lease. The program provides savings for both the businesses and employees. Employees can access information on the program from the UTC mall, an online tool for purchasing indirect goods and services.
While the global indirect goods and services management team added staff in 2001 to help ensure success of UT500, it was the for the second re-launch that UTC determined that there needed to be a global commodity manager leading each category of spending. These managers are not all based in Farmington where Spence and other purchasing professionals working at the corporate level are located, but also in Paris and Asia (where Spence has counterparts to manage teams there). “We told the leads that their role and responsibility is to gather global team members and align themselves on strategy,” says Spence. “They won’t necessarily be using the same suppliers, but they will be promoting the strategies within the businesses.”The global commodity managers get together three times a year, with one session scheduled for October to develop plans for the following year.
Global commodity managers also regularly present information on various programs to the supply management council which is made up of leaders from the UTC businesses and others led by Singer. At one session held this summer, the commodity manager for energy shared with council members a guidebook he put together on the importance of energy conservation in light of higher energy rates the company’s plants have been paying recently.
Brittan laid the foundation for the group’s success at indirect by entering into a relationship in 1998 with IBM Global Services to outsource procurement and the technology that drives the process. At Carrier, where a pilot program for the service took place, Ed Dunn, vice president of supply management, says the decision to outsource the req-to-check process leaves he and his team with time to spend on more strategic activities such as the sourcing of direct materials. “When I consider all the activities I’m involved in here, I spend no time on non-product purchasing, because someone else is focusing on it,” he says.
Also, Spence and her team have conducted reverse auctions for many indirect goods and services, and have been particularly innovative in using the tool for such buys as tax preparation, video conferencing, software applications, building demolition and relocation. Savings range from 19-71%.
| UT500 teams |
| Business services Engineering services Factory services (energy) Factory services (facilities) Factory supplies (MRO) Factory supplies (chemicals & industrial gas) Financial services Fleet vehicle services HR services Durable tooling Industrial equipment Technology services (IT, telecom, office equipment) Transportation & logistics Travel |
ELEMENTS OF EXCELLENCE
UT500 teams use process, policy and sourcing strategies to meet savings goals for indirect.
Don’t be afraid to outsource non core competencies such as the req-to-check process
Use online auction tools when they make sense
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