Strategic sourcing plan has Varian near peak performance
By Wayne Forrest -- Purchasing, 11/13/2008 2:00:00 AM
Two years ago, when Kevin Castle joined Varian Inc. in Palo Alto, Calif., he found a procurement structure that was disjointed, to say the least. The new chief procurement officer discovered that the procurement staffers at Varian's various factories around the world in countries as diverse as the U.S., Australia, the U.K., Italy and the Netherlands, never communicated with each other and were not sharing suppliers.
"At that time, procurement was basically a couple of people sitting in each factory, placing orders," Castle recalls. "Basically, people would come to their desk, fax an order and not have a second thought about it." And, rarely, if ever, would Varian's buyers challenge suppliers' price increases.
Since then, Varian has orchestrated what Castle describe as "a Herculean effort" to create a centralized global purchasing organization that today is producing savings on several fronts, including manufacturing.
Since Varian Associates was founded 60 years ago, the company has expanded through both acquisition and internal growth. In 2000, Varian Associates split into three public companies—Varian Inc., Varian Medical Systems and Varian Semiconductor Equipment Associates.
"Because the company has grown through acquisitions recently, it made us a prime candidate to centralize and standardize our activities," Castle says.
Castle works in Varian Scientific Instruments, which specializes in analytic instrumentation for the medical and life sciences markets. Scientific Instruments accounts for approximately 85% of Varian Inc.'s annual total spend of approximately $600 million. U.S. operations account for approximately 40% to the total spend.
"In 2006, we had 10 components coming from low-cost countries, literally, for our entire factory system," Castle says. "Today, we have more than 10,000 components sourced in China and surrounding areas."
What helped prompt the massive turnaround? For starters, better communication between Varian's factories to leverage its spend better. With most of its suppliers within 100 miles of each factory, Varian's buyers two years ago "had no idea there were any suppliers around the world who could support the factories," Castle says.
"We have gone from a situation where nobody knew anybody else in the world outside of the 100 miles around their factory to where most of our purchasing professionals know suppliers in other countries and are directly communicating, negotiating, and doing business with them today," Castle says.
Varian also changed the mindset of employees who perceived procurement as an administrative function. Factories were directed to hold strategic planning meetings and specify how much they need to improve margins with in its product line. Then the central procurement office would offer its assistance.
The company created global sourcing commodity councils to improve the local factories' understanding of the global supply chain and began to utilize low-cost country sourcing through the creation of a transactional buying team in its international procurement office.
"We got into a partnership model where they started to realize that procurement can do a lot to help with margin targets and help to enable growth," Castle says. "That was a huge shift in the mindset at Varian that had never taken place before."
With its new sourcing infrastructure, international procurement office and better communication processes in place, Varian began to make strides on the manufacturing side.
Over the last 18 months, the company has reached a point where today six level-five product lines are completely outsourced to different factories, ready for direct shipment to customers. It also has succeeded in having seven level-four products built, where the company only needs to assemble the final components and accessories and put the finished product in the box for shipping.
Varian also is outsourcing four level-three, standalone modules, which are embedded in final products, allowing the company to eliminate thousands of part numbers and modularize the components into one unit. "It enables us to have better inventory management and lower costs," Castle says.
With the help of supply management software from Sunnyvale, Calif.-based Ariba, Varian has been able to mitigate much of the risk that may have been associated with less experienced buyers sourcing in new regions. Varian created templates, which took its buyers step-by-step through the procurement process.
"The templates made sure we didn't forget about a drawing or a spec," Castle explains. "We made sure we got approval and there were no disastrous outcomes in the negotiation process." The process also helped Varian save as much as 60% in some cases. Castle also can track Varian's top 10 sourcing projects on a real-time basis without contacting procurement managers.
With more effort in sourcing and preparation, Varian's buyers receive drawings and specifications from its engineers, making for a "clean and transparent" beginning to the process. "We are finding that our big packages are much better, because the process forces our buyers and engineers to check off all those boxes and make sure all the specs and requirements are defined effectively," Castle says.
Bottom line savings are emerging in other areas as well. For example, Castle estimates that Varian conservatively saves approximately 10% through reverse auctions after an RFP. Negotiating time from initiation to the end of the award process is down at least 30%. In the past, it took two months to do a typical negotiation but today, Castle says it is easily done in less than six weeks and, in some cases, down to two to four weeks, depending on the complexity of the event.
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