Buyers target new business wins at Magna Electronics
The purchasing organization's overhaul at Magna Electronics is designed to not only reduce costs and buy smarter, but also help the tier-one automotive supplier be more responsive and win more business.
By David Hannon -- Purchasing, 4/9/2009 2:00:00 AM
While most C-level executives see purchasing's job as reducing costs, a few visionary corporate executives understand purchasing's role in helping the company win new business, in addition to managing costs. Executives at Magna Electronics in Holly, Mich. are among those visionary few and with that in mind, they recruited David Muller to be director of purchasing and told him to overhaul the department. His charge was to get the buyers working closer with the engineers and lower the costs on its bills of materials so the sales staff could provide more competitive quotes to potential customers.
The result: Purchasing nearly doubled its savings rate, which helped the company win new orders at a time when it was needed. Here is how Muller and his team did it:
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Early involvement in product design so they could review initial BOMs (bills of material) and suggest alternative suppliers that could meet requirements at less expense.
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Conversion of some of its supplier base to direct suppliers rather than distributors where savings were possible.
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Archived data on past quotes to provide a base for negotiating future quotes more quickly.
Building the team
 David Muller, Former Director of Purchasing, now GM of Magna Suxing Electronics |
The newly overhauled purchasing organization at Magna Electronics was designed from the ground up with winning new business in mind. When the executive team at Magna Electronics—which boasts former Ford purchasing chief Carlos Mazzorin as president and COO—brought Muller on board in mid-2007 from Valeo Engine Cooling Corp., it wasn't because they wanted him to continue running things as they were. The company wanted Muller to overhaul the way purchasing was run with the goal of helping the company win new business.
"I was basically being asked to bring purchasing from a transactional department to a strategic department," Muller says of the daunting task. "The department was not meeting its goals in several areas, including cost reductions."
Muller's first step was to hire Justin Reaume, formerly of Inalfa Roof Systems, as a purchasing manager. Together the two auto-industry veterans began developing the vision and outline for a purchasing organization of the future—including everything from organizational development to supplier and commodity strategies to collaboration with other divisions within Magna.
 Justin Reaume Director of Purchasing and Supplier Development, Magna Electronics |
One of the challenges Muller and Reaume, who is now the director of purchasing and supplier development, identified early on in the purchasing organization was the level of internal capabilities. The existing purchasing organization was built around people that were used to processing purchase orders but not strategic thinkers, Muller says. "We wanted people with the right mindset," he says.
Of 11 people in the department today, eight are new in the last two years, all hired from outside the company to get people with a broader and more strategic mindset.
In addition to Reaume (Muller actually left purchasing recently to head up Magna Suxing Electronics its Asian business for Magna Electronics), the purchasing organization now has three commodity buyers, four project buyers and two supplier development engineers who help suppliers understand how their technology lines up with that at Magna Electronics. There is also a supplier quality department that handles receiving and inspection, but as the issues become more technical in nature, the supplier development engineers get involved.
Going direct in reverse
With a solid team in place, the purchasing organization began reviewing Magna Electronics' total spend and found the company was buying almost three-quarters of its electronics from distributors. Magna Electronics' buyers were in the habit of sourcing through distribution because of the variety of parts and availability of stock, which was helpful in turning around new business bids quickly. And it worked while the automotive industry was seeing growth, but to be truly competitive on bidding new business in a slower market and meet its cost reduction goals, Muller and Reaume knew the purchasing team needed to buy more of its materials directly from major electronics suppliers.
But as a division of a tier one, Magna Electronics' limited spend and breadth made it difficult to negotiate deals in a timely manner with major electronics suppliers. To improve those suppliers' view of the company, the purchasing organization began a reverse marketing campaign with larger suppliers that could help its larger programs.
Reaume explains that as part of the reverse marketing strategy, the purchasing team will give a presentation on the company to certain suppliers, highlighting the company's growth, new business strategies and technology path, so suppliers will want to work with Magna Electronics. The purchasing organization also offers to add suppliers to its preferred supplier lists, which lets suppliers get more involved in the design phase of Magna products.
As another way of attracting the larger direct suppliers, the purchasing team will offer suppliers "crosses" or options to bid on other business within Magna International.
"We want to convince them that the business they are going to bid on is a real opportunity," he says. "We know suppliers are benchmarked to death and (are tired of) quoting on things they are not going to win."
As a result of those efforts, Magna Electronics' purchasing organization added 19 direct manufacturers as suppliers in a year. However, that doesn't mean its goal is to eliminate buying through electronics distributors altogether. If a distributor can offer the same part through consignment with better payment terms than a direct manufacturer or at a nominal increase, Reaume says they will typically purchase through distribution. And components such as resistors and capacitors are usually still sourced through distribution, as well, due to the minimal difference between the cost of direct and indirect shipments.
Document it
Another strategy that Muller and Reaume focused on was documentation of its purchasing processes, strategies and even its bids with the goal of streamlining the process while making it more sustainable. "When I first came here the formal sourcing strategies had not been put down on paper," Muller says. "So one of our first steps was to identify and write the strategies to guide us, which is a lengthy process."
Of the 20 commodity areas that Magna Electronics sources most, they identified 10 as strategic and targeted them for process documentation. Today, the commodity buyer and the supplier development team in those areas develop priorities for the spend based on deep-cost models, taking into account their own cost structures as well those of the suppliers in that spend area. What matters most in one commodity area may not be the same in another. Knowing the details, they then developed a strategy outlining how Magna Electronics can get more from its current standing with that commodity area.
The commodity strategies are influenced by departmental goals (direct buy percentage, amount of low-cost country content, etc.), as well as supplier performance data and long-term technology roadmaps. An additional goal is to drive volume to preferred suppliers to increase the leverage with that supplier and improve the relationship.
"During the development of that strategy the team will meet weekly to update me," says Reaume. "And before that strategy is completed, we present it at the upper management meeting to get their feedback." The purchasing organization has a regular time slot on the executive management committee's schedule to present such items for review.
Those committee meetings are a way for purchasing to get new information. For exa
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mple, "in some cases the engineering department may tell us they want suppliers that can handle smaller drill sizes or some other requirements that may come into play two years from now that we may not be aware of but will help us select the right long-term supplier in that commodity area and possibly win more business down the road."
Another step that Muller put into place to better document the sourcing and supplier selection process was requiring all stakeholders to sign a "Sourcing Recommendation Form" before a contract is finalized and sent to a supplier. While inserting that step into the supplier selection process did slow the process down slightly, it was an effective way to increase the visibility of the supplier selection process and limit the growth of the supply base.
"When I came on here, we had 17 plastics suppliers on a $2 million spend because mechanical engineers were adding suppliers without anyone's approval," says Muller.
"So adding that step slowed things down in the beginning but eventually helped manage the supply base. In the beginning I was rejecting suppliers I thought we didn't need and fighting with project managers who felt I was slowing the process."
Overall, Magna Electronics' total number of suppliers has remained fairly constant, but a reduction in the total number was never the goal, mostly because in the work it does with electronics manufacturing services providers, it cannot dictate the number of suppliers—it has to work with the suppliers its customers request in many cases. "But the structure of our supply base has changed," Muller says. "Lowering the number of suppliers is not a competitive advantage, but more making sure you have the right suppliers certainly is. And our spend per supplier has increased as well."
History repeats
In another effort to documents its processes while also improving the firm's ability to win new business, the purchasing team created a historical quote database that maintains the information on the hundreds of quotations that it sends out.
Reaume says one of the four buyers spends about half his time on new business quotes, compiling BOMs, splitting them up and working with hundreds of parts each week. "And he only has so much time and would be sifting through e-mails looking for similar parts sometimes in trying to get a quote package ready," he says. "Since we have our hands on all this market information and we weren't storing any of it, we started recording all our quotes into an Access database and we have the manufacturer, part number and all the volumes the parts were quoted at."
By archiving all the data, the buyers don't have to start from scratch every time they are responding to an urgent RFP and wait for their own suppliers to provide quotes. They can simply look up the last time they quoted a similar part and develop a cost model from that, at least until the supplier does respond.
Scoreboard
Muller and Reaume also implemented—or more accurately brought back—supplier scorecards. Magna International had developed a homegrown scorecard system that collected data from its ERP system, but it was not being leveraged very effectively by Magna Electronics.
"When we started talking to them, most suppliers did not even know the scorecard system existed though they may have been in the system," Reaume says. "New data was not being uploaded or used in supplier selection."
Today, all suppliers are in the web-based system and their information is updated regularly. With the system revived, suppliers can now see their scoring and how they compare to their peers. To date, it's had a bigger impact on some suppliers than others, Reaume says, but even that provides useful supplier information.
"Sometimes you provide a low grade for a supplier and you never hear back from that supplier," he says. "But in other cases you provide a mediocre grade and the supplier calls and asks why and wants to know how to improve it. So it lets you know which suppliers care most about the business."
Early involvement
Another major initiative that the purchasing organization undertook was to get more involved in the product design phase, where a majority of the cost is dictated. To achieve this, Magna Electronics implemented several new steps into the product design phase that lets purchasing provide its input.
First, engineering sends the purchasing organization a BOM very early during design stages in order to allow it to suggest alternate suppliers or begin the discussions/negotiations with suppliers before the final design is complete. Purchasing also provides its updated list of approved suppliers to the engineering organization during the component selection of the design phase. And for generic components such as resistors, purchasing developed a matrix that indicates which company to use for a particular resistor case size and tolerance.
"This is the area we required the most support from upper management," says Reaume, adding that Mazzorin's understanding of purchasing was key in this phase. "We got some pushback about having buyers sit down with engineers to review a bill of material and suggest alternate suppliers. It had to come from the top down that we would design in suppliers that were willing to work with us and sell to us directly."
Today, purchasing is not only identifying suppliers, but also indicating which components are recommended. "But we developed the approved vendor list with engineering," Muller says, to emphasize how the collaboration works. "That's where purchasing can really bring value-add—helping the company become more competitive through a joint project with engineering. A good design that is cost-effective is the right balance."
In addition to partnering more closely with engineering in its own divisions, the purchasing organization at Magna Electronics is also now the primary electronics buyer in North America for all of the businesses under Magna International. So, now Reaume is sent BOMs from other divisions which he reviews to see if there are improvements to make to the supplier list to reduce costs, improve leverage or even help win new business.
"If we have worked with direct suppliers and another division submits a BOM that has suppliers we're not direct with, I try to find a compatible component from a supplier we are direct with and cut the cost and resubmit it so they can include the new part as part of their design," Reaume explains. "And now I can go to electronics suppliers as Magna International and negotiate with our expanded volumes."
Understand costs, bring results
But while the list of changes Magna Electronics' purchasing organization has made seems daunting, Reaume explains it is primarily based on understanding the suppliers' cost models. If purchasing truly understands the supplier's cost models, it prevents suppliers from offering an unsustainable price to get in the door only to raise their prices later.
For example, in one instance, the purchasing team found a U.S. supplier that can meet an Asian supplier's price, which made the buyer somewhat suspicious. But upon closer analysis it became clear that the supplier had been very strategic in how it bought its own machinery and managed its costs, which let the supplier offer much lower price quotes than its U.S.-based peers and be competitive with Asian suppliers.
Another example of how effective the new strategies were came when an EMS firm that had offered a contract for bid came back a second time for another bid. The first time Magna Electronics bid, it was buying primarily through distribution and had not done any reverse marketing to increase its list of direct suppliers. But a year later, it had been able to produce a BOM that was roughly 25% lower based mostly on new direct suppliers and won the EMS firm's business.
The results that Magna Electronics has seen from its purchasing overhaul speak for themselves. When Muller and Reaume took over the purchasing department in mid-2007 the department was at a 3.3% savings rate. By the end of the year it was up to a 6.5% savings rate. But Muller and Reaume say it's not just exceeding their savings targets. Most importantly, their work has improved the turnaround time and cost-competitiveness in its BOMs that have helped their company win business that would not have been possible in the past.
"Today, purchasing is viewed as a competitive advantage in our company where it wasn't before," says Muller. "Today, the quotes or the bills of material are not the reason we don't win the business. Once we got to that point we saw that it was working."
Q&A
Mazzorin provides the support from the top
Certainly one of the major advantages that David Muller and Justin Reaume had in implementing many of their new purchasing procedures was the backing of their president and COO, Carlos Mazzorin, a former purchasing executive himself. In fact, when Mazzorin arrived at then Magna Donnelly six years ago after serving as head of Ford Motor Co.’s purchasing organization, he took the first steps toward improving Magna’s purchasing organization by removing a layer of administration and having purchasing report direct to him.
Mazzorin (left) recently told Purchasing about how he works with purchasing at Magna Electronics. Following are some highlights of that conversation.
Q: How was your work at larger companies like Ford different from the work you do now at Magna Electronics?
When you work at Ford as I did, the buy was huge and the complexity was enormous due to all the different brands we had at the time. Our spend was $100 billion when I was there. So the savings potential was enormous also. If you can shave 10% off that, it is $10 billion.
Moving to a tier one in my “second act” was a total turn, because in the past I always saw the supplier from the other side. So now I wanted to know if I could do, as a supplier, what I had been telling my suppliers to do all those years while I was in purchasing.
That was my second act—trying to do those things. It’s more challenging because you don’t have the leverage with the suppliers you had at a company the size of Ford. So it requires a different strategy. Some of the practices are the same, but managing a tier two takes more effort than managing a tier one. About 80% of the practices are applicable though.
Q: In the past purchasing reported to a VP and now they report direct to you at Magna Electronics, is that correct?
Yes, I keep a strong eye on purchasing because I know it’s 60% of my cost. When I was the head of purchasing at Ford, I reported directly to the president of the company as well because of the amount of cost I managed. So I am very keen on purchasing not because of my past experience as a purchasing executive, but because of the impact that good or bad purchasing has on the company’s bottom line. Any savings go direct to the bottom line. The better you get at managing material costs, the more profitable you become.
Every other week we have a complete review with purchasing. We agreed on a set of metrics and we go from quality to material costs and supplier strategies. And three times a year we have a global review as well.
Q: Any advice for a CEO trying to build a relationship with its purchasing organization?
I find it amazing that at so many companies the purchasing organization is buried someplace. It doesn’t have the visibility or impact or strategy or participation in the company’s direction. It looks like purchasing doesn’t have the energy to learn about it like they do sales and marketing.
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