How supply managers add value
"The advantage of having an integrated supply chain is to move the providers of goods and services as close to the consumer as possible, thereby eliminating the internal and external non-value-added layers that impede an efficient and effective long-term acquisition process." --Terry Sueltman, vice president of supply management, Honeywell IAC
By Anne Millen Porter -- Purchasing, 1/13/2000 2:00:00 AM
The Michigan State Global Electronic Benchmarking Network (GEBN) rates Honeywell as "most advanced" in 13 of 16 supply chain strategy areas. In the remaining three areas, Honeywell earns a "moderately advanced" rating. Here's a look at how one Honeywell division earned a "most advanced" rating for its practices in creating value for the company, its customers and its suppliers.
Based in Phoenix, Ariz., Honeywell's Industrial Automation and Control Products and Solutions Division (IAC) has changed its business model substantially during the past decade. Where it used to sell only proprietary systems--hardware and software made, sold and serviced exclusively by Honeywell--it now strives to offer "TotalPlant" solutions whereby it delivers open-architecture systems (combining the best standard and custom modules) and then supports those systems with single-point-of-contact services.
"We used to make everything," says Terry Sueltman, vice president of supply management for Honeywell IAC. "But as the world has changed, we've migrated to more open systems. This has changed the profile of what we do. Suppliers now play a much larger role in our business."
The division's Global Projects Organization--a group that builds customized TotalPlant solutions for end users outside of North America--used to deliver solutions that were approximately 80% proprietary and 20% purchased. By 1997, however, the group had completely reversed those figures to 20% proprietary and 80% purchased. In North America, purchased goods and services can represent up to 60% of delivered solutions. For the division all told, Sueltman says more than 40% of total revenue flows out to pay for goods and services provided by outside suppliers. And materials, he says, represent 70% of the division's product cost structure, making superior supply base management "critical to profitability."
Expanding the supply management mandate
Because Honeywell IAC purchases much of its delivered solution, it follows that supply management would become intricately involved in the division's total-value proposition, delivering not only bottom-line cost savings but also working to generate revenue growth and to improve asset management. The organization has done this by--
- Centralizing itself and documenting its processes.
- Upgrading the quality of its staffing.
- Leading outsourcing initiatives.
- Expanding its reach around the globe.
- Becoming involved in spending areas not traditionally covered by supply management.
- Becoming interested and involved in the selling side of the business.
- Introducing processes for selecting top-performing suppliers, forming long-term alliances, assessing supplier value, developing supplier capabilities, managing supplier performance, and integrating suppliers into the Honeywell business.
Driving revenue growth
To support revenue growth for the Honeywell IAC division, Sueltman says the supply management organization has both--
- Dramatically improved the way the division bids on global projects.
- Created services supply agreements that allow the division to fulfill a longstanding customer desire for single-point-of-contact systems support.
In second quarter 1998, supply management at Honeywell IAC created a sub-organization called Global Projects Supply Management (GPSM). The objective of GPSM was to support Honeywell's Global Projects Organization (see description above) with "proactive pre-award solutions support."
The new group formed a steering committee to map the Global Projects Organization's procurement process. The vision of the committee was "to have a fully integrated seamless process to manage the outside purchase and subcontracting processes from sales to project closeout; applied consistently across the global IAC organization."
GPSM developed a project procurement plan; established subcontract management tools based on IAC's global project management methods; developed standardized procurement, bid-tab maintenance, and freight forwarding processes; and designed cost-estimating tools to automate the pre-award bidding process.
The upshot is that supply management professionals are now involved up front in the bidding process as opposed to project engineers estimating costs and materials based on catalogs or customer specifications. "Supply management," says Patrick Walker, manager, Global Projects Supply Management, "has been able to streamline the process, reducing cycle times, bill of materials costs, and engineering costs." Supply management also maximizes working capital by working with finance, project managers and suppliers--pre-award--"to match supplier payables and receivables to the customer's milestone payments in order to maximize project cash flow." What's more, Walker notes, GPSM is able to direct business to the company's preferred supply base, which has resulted in increased leverage, higher discount levels and higher margins.
Some documented GPSM results: A $200,000 overhead cost avoidance in 1999, a $925,000 direct cost savings in 1998, and a PO cycle-time reduction of 50% for global strategic projects where Honeywell IAC has direct supply involvement and direct charges capabilities to the project. Says Walker: "GPSM has contributed significantly to top line [revenue] business results in the form of increased margins, lower direct and indirect costs, as well as bidding cycle time reduction and increased contract costing efficiencies."
At the services end of the division's business, Leslie Arnold, manager of strategic programs for supply management at Honeywell IAC, says the organization has likewise been paving the way for increased revenue growth. Responding to a longstanding customer desire for single-source service solutions, she says supply management created a program--called "service partners"--under which it partners with top-performing suppliers to "fill gaps in the services portfolio at a reasonable cost which can then be resold at profitable margins." Established in 1996, the service partners program gives Honeywell IAC "access to supplier tools and back-up technical support to directly service client and server platforms at end-customer sites." Some examples of agreements that have been put into place under the program:
- Authorized warranty service provider agreements which authorize IAC to work on an OEM's product during the warranty period and give IAC the tools, labor reimbursements, and back-up technical resources required to service the product.
- Value-added reseller agreements that give IAC deep discounts when they add value and resell an OEM's products or services as part of a solution.
- Global services reseller agreements that give IAC deep discounts when they resell a supplier's services globally.
- OEM/purchase agreements which give IAC discounts when they embed a supplier's product in the manufacturing of their products and/or end-user discounts when they use a supplier's products internally.
An important outcome of the service partners program has been a set of negotiated global agreements (during 1997-1998) with several leading computer companies, resulting in "significant cost savings and revenue growth for the division via expanding the scope of services at the end-customer site." Through implementation of these agreements, Arnold says the division's North American Field Organization (its N.A. sales organization) was able to increase service-related revenues by 91%. Supply management, she notes, contributed over $7 million in cost savings, while maintaining order fulfillment metrics and improving customer satisfaction throughout the supply chain. "The implementation of the service partners program has allowed Honeywell IAC to grow the services business significantly while maintaining the tools and consistent processes needed to be competitive in this dynamic market," Arnold says.
Improving asset management
Beyond revenue growth, the supply management organization at Honeywell IAC has been deeply involved in improving asset management and in reducing direct costs. "Honeywell IAC supply management has instituted many initiatives aimed at improving the division's use of capital," Sueltman says. These include:
- Spearheading of major outsourcing initiatives.
- Globalization via expansion of sourcing into the Far East.
- Inventory reductions and improved payment terms with suppliers.
- Supply-related changes to product and service mix.
- Seamless integration of high-performing, preferred suppliers into the Honeywell IAC organization.
Three years ago, Honeywell IAC consolidated 14 field procurement offices into one central location in Phoenix, reducing headcount by 60. It standardized processes and created a desk reference to document ISO practices. Sueltman notes that the consolidation project "increased customer satisfaction significantly and shrank order cycle times." Due to more efficient use of personnel, he notes that the consolidation allowed the division's field and projects supply management group to institute a warranty tracking program that saved IAC several million dollars.
In what is called the "working capital value chain initiative," supply management at Honeywell IAC led a team from the division's Manufacturing and Global Delivery Management (M&GDM) group, finance, and the North American Field Organization (NAFO) to develop methods for optimizing working capital across the value chain. The team reviewed where inventory and cash reserves are held throughout the supply chain, and assigned improvement actions.
Using ABC (activity-based cost) analysis, supply management together with M&GDM reduced inventory replenishment times and increased supplier bonded inventory as well. In 1998, their efforts reduced component materials inventory by 20%; reduced leadtimes, on average, by 25%; and tripled suppliers' bonded inventory.
Supply management has also been active in leading major outsourcing efforts for Honeywell IAC. In 1995, the organization led an effort to outsource the division's traffic and shipping functions to a third party, resulting in direct reduction of packaging and labor costs. Due to the outsourcing, Sueltman says Honeywell IAC enjoyed a $1.6 million cost savings from the 1995 baseline budget to the 1998 budget. What's more, he says, "After three years the division had experienced no cost increases while increasing its shipping volume." Upshot: The division's cost per shipment fell 36%. At the same time, Sueltman says, survey results show that customer service levels have improved. "In 1995 the customer satisfaction rating was 76%. In 1998 the rating improved to 93.3%."
In 1998-1999, supply management at Honeywell IAC recommended the outsourcing of printed wiring assembly (PWA)--including surface mount technology, mixed technology, and through-hole technology printed wiring assemblies for the division's systems business. This project created a 20% reduction in assembly cost and reduced controlled working capital (expressed as a percentage of revenue) by nearly a point. The project also generated an inventory reduction of several million, allowed the division to sell equipment to the supplier; and generated substantial cash-flow benefits.
Expanding the global reach of the sourcing organization is another value contribution that supply management has pursued for Honeywell IAC in recent years. In January 1997, for example, a team led by supply management investigated a Far East supplier for the purpose of manufacturing circuit card assemblies. In 1998, the project generated nearly $2 million in savings for Honeywell IAC and exceeded targeted performance on delivery and quality. A critical success factor, Sueltman says, was the identification and assignment of "dedicated and talented personnel from the supplier and Honeywell IAC" and the establishment of "efficient communication channels" at the outset of the project.
As the business profile has changed over the years at Honeywell IAC, Arnold suggests that supply management has also become more influential in determining the company's product and service mix. For example, in 1998, the supply management organization became involved in extracting the division from a highly restrictive supply agreement for a critical piece of hardware not negotiated by the supply group. When it became clear, Arnold says, that the existing supplier was meeting neither market demands nor performance-cost objectives, the supply management organization stepped in to re-source the item. "Now that Honeywell relies more on suppliers for its solutions, the successful management of the supply chain becomes the most important ingredient in our ability to deliver a product with the functionality our customers demand," Arnold says. In context of the re-sourcing initiative, she says the supply management organization--
- Formalized and worked to improve inter-company communication by establishing and coordinating weekly meetings, documenting actions, hosting roadmap reviews, etc.
- Invoked the dispute resolution part of its contract with the original supplier, eventually negotiating IAC out of its exclusive relationship based on the supplier's inability to meet Honeywell requirements.
- Drove down the base price of the critical item by nearly 50%.
- Ensured that a price add-on specified in the original contract was based on real value added instead of "cost of doing business."
- Renegotiated a support agreement from a high fixed cost to a no-cost spares pool and full-time technical support line (which is all that Honeywell really needed) for a total cost of $2,000.
Says Arnold: "Engineering had set up the original agreement. We had to work very hard to convince both engineering and marketing that the deal was not a good value for Honeywell. The re-sourcing process was extraordinarily difficult, but the quality of our new solution has improved dramatically."
Organizational support
Integration--both with internal customers and with external suppliers--may well be the key to the extraordinary success of Honeywell IAC's supply management initiatives. For example, Sueltman notes that the company has a policy of co-locating supply management professionals with key internal customers like manufacturing, development engineering, marketing, information technology, and projects marketing. On the supply side, he notes that supply managers are tasked with driving business to an optimum set of preferred suppliers and with providing tools that ensure the success of suppliers as opposed to "dictating and mandating." Organizational capabilities emphasized by supply management at Honeywell IAC include:
- Ability to document processes and strategies.
- Improvement of the supply base.
- Cultivation of strong supply alliances.
- Involvement of suppliers in new product or new business development.
- Strong performance metrics.
- Good information systems.
The product of this thinking is the division's trademarked Customized Supply Solutions (CSS) approach. "In the early 1990s, Sueltman says, "Honeywell IAC developed a program relating to supplier integration. Customized Supply Solutions are programs developed and implemented "in concert with suppliers and internal IAC users to improve availability, application, and flexibility of purchased goods and services." They ensure that inventories are maintained and transactions are conducted with the greatest possible efficiency. CSS examples include:
- Resident suppliers. Over the past six years, Honeywell IAC has invited 24 suppliers to be resident suppliers. Resident suppliers manage over 10,000 part numbers and many other business requirements. Through use of its resident supplier program, supply management at Honeywell IAC has been able to reduce tactical resources by over 60%.
- Visual replenishment. Suppliers are invited to visit Honeywell facilities and review inventories on a predetermined basis, refilling bins as necessary. Examples of products included are hardware, electronic components, cables and packaging. Suppliers' parts typically bypass inspection and receiving. According to manager, Scott Thompson, "The supplier gains an advantage in this process by visually monitoring the business levels, which can then be easily translated into the supplier's demand input." Visual replenishment also promotes efficiencies by reducing phone calls, faxes, e-mails, and meetings to review business levels.
- Kanban/faxban. Similar to visual replenishment, the system uses a predetermined trigger, such as an empty tote or card placed in an order slot. "Honeywell IAC uses kanban or its cousin, faxban, in situations where the supplier cannot maintain a frequent presence in our business," Sueltman says. For example, a Honeywell business located in York, Pa., has a supplier located in China. Each day the buyer-planner sends to the supplier an e-mail message containing the quantity of assemblies used that day. The supplier uses the e-mail as a trigger and immediately sends the exact amount of inventory to replace what was used, creating, in essence, a 9,000-mile kanban. "Having a kanban/faxban provides efficiencies to both organizations in reducing paperwork, streamlining the forecasting process, adopting uniform packaging and shipping quantities, and reducing inventory levels."
- Shared scheduling/rolling forecast. Honeywell automatically provides long-range forecast information to suppliers on a regular basis. For example, Honeywell IAC in Phoenix provides a weekly shipment schedule, including short- and long-term forecast information, to many suppliers. In another location, the MRP system provides a 53-week forecast, with demand buckets as often as suppliers require (weekly, semi-monthly, or monthly). In 1998, visual replenishment, kanban/faxban, and shared scheduling/rolling forecast combined reduced replenishment leadtimes by 20%, Sueltman says.
- Parameter conversion. This CSS includes a strategic review of part values and procurement processes used on low-value B and C class items. In essence, low-dollar purchases are identified and order quantities are increased to equal three-, six-, or 12-month supplies. "Increasing order quantities on low-dollar items allows Honeywell to spend more time managing high-dollar purchases," says Gale Anderson, who led development of the solution. "This also gives the supplier the opportunity to reduce the number of shipments made and transactions required for receiving, invoicing, and inspecting." In 1998, supply management reduced inventories by 25% using parameter conversion.
- Procurement card. In 1998, IAC made over 28,000 transactions and saved $2 million in transaction costs using procurement cards (each card transaction represents a $75 cost avoidance to Honeywell), according to Sandra Jacobs, director of projects, services, and support for Honeywell IAC. Suppliers benefit by having reliable payment schedules and streamlined paperwork. Use of procurement cards has allowed Honeywell to make resident suppliers the only contact for internal customers. It has also allowed suppliers to "process map" administrative processes, eliminating non-valued steps and significantly diminishing the number of invoicing problems. Web-based buying capabilities have further streamlined card-based purchasing processes.
- Consignment. Suppliers hold inventory on-site at Honeywell, with payment occurring after the stock has been consumed. Sueltman says the division has found that the avoidance of activities such as requisition-writing, PO-writing, shipping, packing, unpacking, receiving and counting combined with the benefit of having immediate access to inventory, often outweighs the higher administrative costs associated with consignment inventory. Benefits to suppliers include flexibility to increase production/delivery quantities, elimination of expediting and ordering fees, and greater access to Honeywell consumption information. Bonded inventory has tripled and is expected to expand in the near future.
Honeywell IAC has extensively implemented these customized supply solutions over the past seven years, Sueltman says. Results of the combined CSS programs for 1998 contributed to benefits worth over $2 million to the division. From the production side of the business, Sueltman notes that supply management has worked with over 100 suppliers to create customized supply solutions on over 60% of 17,000 active parts. The plan is to increase that coverage to over 75% by the year 2000.
"The advantage of having an integrated supply chain is to move the providers of goods and services as close to the consumer as possible, thereby eliminating the internal and external non-value-added layers that impede an efficient and effective long-term acquisition process," Sueltman says.
Supplier development
To rely so heavily on suppliers requires a supply base with virtually impeccable performance, Ann McEowen, manager of supplier development, acknowledges. "Rarely does a supplier meet all your needs on day one of the relationship. While their parts might meet your specifications, they may not be conducting business in ways that meet your needs entirely." Still, she says, "Our philosophy is to carefully select suppliers, then work with them cooperatively to improve performance and increase their value contributions."
To develop suppliers and to drive performance improvements, supply management at Honeywell IAC uses several tools.
The division's supplier value assessment process has four key focus areas:
- Quality improvements: Dock-to-stock program, quality improvement programs.
- Supply solutions: Resident suppliers, stocking programs.
- Awards program: Supplier day, supplier of the quarter, supplier of the year.
- Supplier performance: Quarterly reviews, supplier value assessment process scorecard, supplier alliance program.
The division's performance management process (see graphic) gradually raises the level of integration between Honeywell IAC and its suppliers, according to established performance metrics. (Both suppliers and supply managers are expected to achieve set performance thresholds.) Supply management moves suppliers from traditional roles into strategic sourcing roles according to their capabilities to perform over the long term (Level I). Suppliers are then challenged to outperform their competition and receive additional business from Honeywell. Honeywell may also request lower pricing, better delivery, elimination of inventory, and elimination of paperwork. If they achieve their goals, strategic suppliers may then become integrated with the business (Level II). They might join the resident supplier program, inhabiting offices alongside the customers who need their products or services. In a manufacturing environment, the supplier may participate in development of new products (Level III). Once the supplier is fully integrated, supply chain efficiency is analyzed and increased (Level IV). "Each aspect of the supply process is analyzed from the inception of the idea to the final stage of the product or service life cycle," says Marc Ensign, director of strategic sourcing. "Performance management centers on results, not effort; achievement, not work; and leadership, not dictates."
A third tool, developed by Bill Kramer, manager, is called "partnership for productivity" (P4P), a program aimed at tightening relationships and promoting understanding between Honeywell IAC and its suppliers. The program creates a process that encourages suppliers to initiate suggestions for delivery, quality or cost improvements, and to receive business benefits for doing so. P4P teams establish mutual goals and plans for improvement and share information and resources for accomplishing the goals.
Looking forward
In order to enhance overall supply chain integration with customers and suppliers, Sueltman says Honeywell IAC will continue to focus on activities that support "blurring of business borders." In the future, he anticipates developing joint technology roadmaps with suppliers and using Internet technologies, electronically linked enterprise-to-enterprise applications, and supplier-customer development programs to streamline communications throughout the supply chain. Solutions such as Internet ordering, electronic catalogs, electronic funds transfer, EDI, purchasing cards, and quoting and bidding via the Internet are all expected to generate substantial reductions in processing times and transaction costs. Boise Cascade, the IAC office products supplier, already has implemented a Web-based ordering system, allowing IAC employees to order office supplies via the Internet, eliminating the need for a dedicated employee to manage this aspect of the business. Suppliers are also able to remotely access IAC's MRP database for inquires regarding component part demands, forecast information, and inventory positions.
Honeywell IAC Profile
Honeywell's Industrial Automation and Control Products and Solutions produces advanced control software and industrial automation systems for control and monitoring of continuous, batch, and hybrid operations; process control instrumentation; analytical instrumentation; field instrumentation; industrial control valves; recorders; controllers; flame safeguard equipment; supervisory cell controllers; production management software; equipment controls; programmable controllers; communications systems for industrial control equipment and systems; and professional services, including consulting, networking, engineering, and installation. Its customers include chemical plants, computer and business equipment manufacturers, data acquisition companies, food processing plants, medical equipment manufacturers, oil and gas producers, pharmaceutical companies, pulp and paper mills, refining and petrochemical firms, textile manufacturers, heat-treat processors, utilities, package and material handling operations, appliance manufacturers, automotive companies, and aviation companies.Honeywell IAC's supplier scorecard
Honeywell IAC's supplier scorecard
Criteria for suppliers supporting production
- Quality: Incoming, in-process, customer.
- Assured supply: stockouts or on-time delivery, customized supply solutions, working capital improvements.
- Solution value: consultative and global supply, product and technical support, responsiveness.
- Economic value: price trends, transactional efficiency, payment terms, invoicing.
Criteria for suppliers supporting projects/services
- Account management: account rep, business flexibility.
- Accounts payable: invoicing, invoice resolution, payment terms.
- Solution value: Consultative and global supply, responsiveness to IAC end users, supply solutions and quality performance.
- Economic value: price trends, transactional efficiency, working capital improvements.
The scorecard (one part of the assessment process) is designed to "evaluate the total cost of doing business and to promote a long-term relationship with key suppliers." The program rewards suppliers based on selected criteria which "assist IAC with future sourcing decisions." A score of 25 points can be obtained for each of the four criteria, for a total of 100 points. A supplier who receives a score of 100 is completely meeting expectations and receives a total cost factor of 1.00. A score that is less than 100 causes the total cost factor to increase resulting in an increasing cost of doing business with that supplier. SOURCE: HONEYWELL
Value contributions from supply management at Honeywell IAC
Short term
- Purchased parts, services price reductions.
- Inventory reductions.
- Purchased parts/services being Y2K compliant.
- Reduction in the number of POs generated.
- Number of preferred suppliers that have been integrated into business.
- Number of net 45 day term suppliers.
- Number of resident suppliers.
- Number of Customized Supply Solutions.
- Warranty period on purchased parts being "normal market warranty" plus 6 months.
- Purchased parts leadtimes less than 2 weeks.
- Number of purchased parts that are dock to stock.
Longer term
- Locate and develop global suppliers that have global distribution capabilities.
- Locate and develop global suppliers that have best-in-class TQM initiatives.
- Continue to educate the IAC supply base with regards to understanding IAC's customer needs/requirements and integrating supplier quality improvement roadmaps that blend with these needs/requirements.
- Focus on working capital improvement initiatives, including assisting the IAC business unit in outsourcing of non core competency activities. SOURCE: HONEYWELL
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