Advanced partnering
A term often considered over used, partnerships between purchasing and distributors do exist—and are successful.
By Susan Avery -- Purchasing, 3/4/2004 2:00:00 AM
In PURCHASING magazine's January and February issues, MRO/Distribution News looked at ways sourcing operations can impact their companies' bottom lines by measuring and documenting value-added savings and how a manufacturer supplier created a formal program for its distributors to use with customers that calculate such savings.
This month's annual report on MRO (maintenance, repair, operations) buying takes purchasing's point of view and looks at sourcing operations at three manufacturing companies in diverse industries and ways they successfully manage relationships with supplier partners. All three achieve purchasing objectives by working with distributors to lower inventory levels, improve process efficiency, enhance customer service and reduce costs. The distributors in turn appear to have good working relationships with their manufacturer suppliers. In tandem with manufacturers, the distributors are able to help their customers with technical expertise, tri-lateral price negotiations and product standardization efforts.
The first two stories of this report examine long-term relationships managed by MRO buyers at Siemens Westinghouse Power Corp. and Belvac Production Machinery Inc. The third provides a glimpse at a newly formed partnership at Tesoro Petroleum Corp. poised to be equally successful.
SIEMENS WESTINGHOUSE POWER CORP.: Purchasing leverages best practices across corporation
In the early 1990s, integrated supply management was all the rage in the world of MRO purchasing. Distributors and other integrators offered their customers arrangements whereby they handled many of the processes necessary to fill MRO requirements—placing orders, purchasing supplies, managing inventories, making deliveries—promising significant reductions in purchasing costs. Then, it seemed just about everyone in the field was jumping on the bandwagon. Over the years, many of these agreements failed to keep their promises and some suppliers abandoned the business. Still there are survivors—and some integrated supply arrangements that are positively thriving.
One that comes to mind has been in place for nearly 10 years. Seven Siemens Westinghouse Power Corp. ( SWPC ) plants have agreements with a handful of integrators that continue to show cost savings, process improvements and other benefits for the company. Buyers at one plant in particular, the SWPC plant in Charlotte, N.C., have been successfully managing an integrated supply agreement with Strategic Distribution Inc. (SDI) since 1994. Arrangements with SDI and other integrators are working so well for the plants that the company's Indirect Supply Management Americas group is looking to implement best practices in integrated supply management across some of its other businesses.
Headquartered in Orlando, Fla., SWPC is Siemens power generation business in North America, providing customers with products, support and service in gas and steam turbine-generator technology, process control and power management systems, operations and maintenance support, power plant modernization and upgrades and fuel cells for the distributed generation market.
Located in Bensalem, Pa., Strategic Distribution Inc. (SDI) provides its customers with MRO supply chain management services, which include purchasing, receiving and issuing indirect material as well as inventory control and management.
SWPC's secret to its success with integrated supply management: Open communication in its relationship with its integrator, say both Dane Sebastian and Kevin Elston, purchasing professionals in SWPC's Indirect Supply Management Americas organization. A 32-year purchasing veteran, Sebastian coordinates the program with SDI at the plant in Charlotte. Elston works in the company's corporate procurement strategy office in Orlando, Fla.
In his role, Elston works with SWPC plant buyers on the exchange of best practices in integrated supply and on process improvements with certain integrated suppliers and buyers involved in the arrangements. He's a member of the MRO team for the company's North American Procurement Office that works to leverage purchasing between Siemens companies.
When asked to describe an integrated supply agreement (as most MRO buyers familiar with the concept know, when you've seen one integrated supply agreement, you've seen one integrated supply agreement), Elston defines the term using a spectrum, from less integrated to more integrated. Services provided by integrators on the "less" side include procurement and delivery of MRO items to customers. The "more" side entails complete MRO inventory management—ordering, delivery, stocking, user distribution, etc. Integrated supply at SWPC plants runs across the spectrum, with most agreements, such as the one in place at the company's plant in Charlotte on the "more" side.
Early adopter
Like many companies a decade ago, Siemens management turned to its purchasing operation for help reducing costs. Having determined buying and managing MRO inventory to not be a core competency, the company looked to integrated supply management as a way to better control its purchasing costs.
After 10 years, integrated supply at the plant in Charlotte (an early adopter along with a plant in Winston Salem whose management has since been turned over to a Siemens subsidiary, TurboCare) continues to deliver cost savings of about 2% per year. Sebastian doesn't have a figure that demonstrates savings since the beginning of the agreement. The 2-3% savings from the mature relationships come from continuous improvement efforts. He points to a move to standardize the plant's purchase of carbide inserts in roughing applications that could result in a cost reduction of approximately $70,000 as an example.
Another example involves a process engineer of the integrator's working with the tooling engineer of its manufacturer supplier to develop a process for the plant that reduces the number of operations using a certain cutting tool. This helps lower setup time and overall cost. Still another is a reduction in consumption at the plant: Sebastian recently worked with the integrator to cut down on the number of Tyvek suits ordered by plant employees.
This year, he plans to work with the integrator to keep cycle time high. "Delivery times at a tool crib window may be 98%," he says, "but with 60,000 SKUs, stock outs still pose a bit of a challenge."
In 1994, a cross-functional team made up of representatives of the purchasing and maintenance functions from Siemens plants in Charlotte, Winston Salem and Orlando chose the integrators through a rigorous selection process. "We were looking for a supplier that we were comfortable with," says Sebastian, who says the selection was based on the supplier's expertise at inventory management. "It was a leap of faith back then to move from a traditional distributor to an integrator." SDI provides the SWPC plant in Charlotte with products that fill its tooling, maintenance and some production requirements. The plant's annual spend on these items is approximately $5.3 million. In addition to SDI, SWPC plants work with these integrators: Kennametal Full Service Supply, Weber Supply, Turner Supply and DXP.
As part of the Charlotte plant's arrangement with SDI, the integrator manages the tool room using its computer system. Both SWPC and SCI own the inventory, some of which is managed on consignment. At the tool room window, SDI employees assist plant employees with the requisition process. Employees place orders for materials they need which the SDI employees deliver directly to the point of use. The plant receives an invoice twice a month. SWPC pays integrators for its services using a negotiated mark up or margin. At other SWPC plants, requisitioners obtain MRO items through vending machines or bread truck programs.
SWPC measures supplier performance using a score card. Buyers rate the integrators based on up to 40 metrics, including fill rate, stock outs, price variance, cost savings (hard and soft), productivity improvements. "We try to incorporate metrics that are important not only to purchasing but also to end users," says Elston.
BELVAC PRODUCTION MACHINERY INC.: Partnership provides OEM expertise, cost reductions
At Belvac Production Machinery Inc., the strength of purchasing's relationship with one of its suppliers lies in the distributor's knowledge and expertise of its manufacturer suppliers.
Based in Lynchburg, Va., Belvac produces equipment for the rigid container packaging industry, including high-speed trimming, necking, base profiling and reforming, shaping, bottom rim coating, flanging and inspection technology. Each year, can makers produce approximately 198 billion beverage cans using Belvac systems.
The company has a 17-year partnership with Applied Industrial Technologies, Cleveland, Ohio. An Applied service center in Forest, Va. fills Belvac's requirements for motors, bearings, conveyors and fluid power systems from such manufacturer suppliers as McGill, Dodge, Jason and others. But that's not all. The distributor also provides Belvac with design assistance, subassembly and other value-added services.
Its assistance with one particular part, a roller bearing subassembled at the manufacturer and supplied by the distributor, helped Belvac reduce costs of the component by 30%. The company had been assembling the bearing in-house.
The purchasing operation at Belvac has such a strong relationship with Applied at the local level that Dianne Hogan, purchasing agent, says she "felt compelled to share it at the corporate level" with its parent, Dover Corp., during its annual purchasing conference in November 2002. She was convincing. The scope of Belvac's agreement with Applied has since been expanded throughout the corporation. Hogan has worked in Belvac's purchasing department for 13 years.
Involve the manufacturer
For one of the can manufacturing systems it sells, the Belvac plant in Lynchburg had been buying Dodge roller bearings and producing housing and adjustment sleeves itself, later assembling the components. "We had some problems with contamination resulting from a grease we were using so we approached Applied for assistance," says Hogan. "It was one of our busiest times so our capacity was extremely limited."
Working with Dodge, one of Applied's manufacturer suppliers, Scott Paris, senior account manager, Applied Industrial Technologies, determined that the manufacturer could assemble the finished roller bearing component, helping to lower costs for Belvac.
"As always, Applied came back with its supplier and suggested that they assemble the machinery for us," says Hogan. "They said the effort would help lower inventory levels, eliminate quality issues (contamination) and reduce labor rates. They were able to quote a 3-5% cost reduction, not to mention savings from internal process efficiency improvements."
Belvac and Applied also worked together to determine optimum usage and inventory levels for JIT delivery of the bearing sub-assembly. "It became a dock-to-stock type item," says Hogan. "When we were producing and assembling it, it was a long leadtime item."
Applied's Paris says, "We gave Belvac a better finished product with a quality guarantee from the manufacturer as well as lower costs over the long term. In the past nine years, they have used 4,000 or 5,000 bearings. At $150 apiece, the cost savings is significant."
Belvac counts on Applied to source other specially constructed or manufactured parts for the machinery it builds. These projects include special roller bearing assemblies built by Dodge exclusively for Belvac, cam followers from McGill and belting from Jason. "Applied knows our business extremely well and brings solid design expertise to our plant," says Hogan.
To simplify its parts inventory management requirements, Belvac also has Applied label all the parts it sends—approximately 3,000 each week—including boxes, packing slips and invoices.
TESORO PETROLEUM CORP.: Smart buyers enter supplier relationships with open eyes
A rigorous supplier selection process conducted by a cross-functional strategic sourcing team at Tesoro Petroleum Corp., San Antonio, Texas, helps assure that a new relationship with an electrical supplies distributor gets off on the right foot.
Tom Robertson, vice president, procurement, set the process in motion late in 2001, which resulted in the team selecting Graybar as the company's primary provider of electrical supplies. Headquartered in St. Louis, Mo., Graybar is a distributor of electrical, telecommunications and networking products and a provider of related supply chain management and logistics services.
Since that time, Graybar has demonstrated that it has what it takes: It provides Tesoro refineries with consignment inventory of some 500 fast-moving electrical supplies. It also keeps the company posted on its spending on electrical supplies across the refineries, works with manufacturers to keep prices competitive and bring in technical expertise and is ready to assist Tesoro in its relationship with its engineering and construction supplier and its e-sourcing efforts.
An independent refiner and marketer of petroleum products, Tesoro operates six refineries in the western U.S. with a combined capacity of 560,000 barrels per day. The company's retail-marketing system includes more than 560 branded retail stations. It's new Mirastar brand serves motorists at Wal-Mart refueling locations in the western states.
Prior to assuming his current post in the fall of 2003, Robertson worked as a supply chain consultant, helping Tesoro consolidate its purchasing activities and improve related processes. Working with Tesoro personnel he helped to identify spend categories ripe for consolidating. He put together cross-functional teams representing each of the company's refineries and provided the teams with methodology to help leverage spending across the company.
Electrical supplies is one spending category the company decided to consolidate. The team immediately got to work, setting objectives to leverage the spend in an effort to reduce the company's total purchasing costs, reduce the supplier base and begin work toward product standardization.
At the time, the refineries (there were five in 2001; a sixth was acquired in 2002) were purchasing electrical supplies on their own. All told, Tesoro was buying the supplies from 10 to 20 distributor and manufacturer suppliers. The $5 million electrical supplies spend includes wire and cable, conduit, fittings, enclosures, lamps and ballasts, fuses and some services. It does not include instrument products.
Supplier workshops
The team began the supplier selection process by issuing an RFI (Request For Information) to a number of national and regional electrical distributors. With several of those who responded, the team held meetings, or workshops, to gather additional information.
Then, early in 2002, the team issued an RFP (Request For Proposal) that included a market basket of items including wire, conduit, fittings and the like. Again, it held workshops with potential suppliers to gather yet more information.
Robertson says these steps set the stage for a team review of supplier branch locations situated near Tesoro refineries. The reviews were conducted by Tesoro employees (Instrumentation and Electrical supervisors, electrical engineers, and buyers) expected to have daily contact with supplier personnel at the branch. The team rated the branches using a scoring system of 1 to 5, with 5 being excellent. It judged a location on its look and feel, orderliness and organization, business processes, depth of resources (personnel), employee professionalism and sincerity, focus on continual improvement, depth and breadth of stock and consistency from branch location to location.
By May, the team made its selection and developed a business case for change. "We placed tremendous weight on these supplier branch reviews," says Robertson. For one refinery, the location of the nearest Graybar branch was 200 miles away. For this refinery, the team opted to continue a relationship with an incumbent regional supplier.
At this time, the team met with Graybar to discuss ways the distributor envisioned working with its manufacturer suppliers on Tesoro's behalf. "We wanted to have some assurance that there was a process in place for tri-lateral negotiations between us, Graybar and its suppliers."
While the agreement with Graybar is still fairly new, Tesoro clearly is benefiting from its relationship with the distributor, particularly as a result of its approach to tri-lateral negotiations. The distributor also takes advantage of opportunities to work with Tesoro on continuous improvement teams; teams meet at the refineries to present new ideas, address issues and implement best practices. Graybar also helps Tesoro track its spending on electrical supplies.
Graybar invites manufacturers to meetings at the refineries to educate employees on technical matters, such as a recent training event on programmable controllers for workers in the I&E group that took place at one location. "It was extremely well received," says Robertson. "Our relationship with Graybar enables technical knowledge to funnel into Tesoro at a quicker pace than in the past."
Tesoro is working with Graybar on product standardization. "We will be focusing on quality assurance and will be reviewing QA resources here in San Antonio," says Robertson. This will help us have a better focus on standardization."
Teroso's burgeoning relationship with Graybar has all the earmarkings of a true partnership, says Robertson, pointing out several indicators to that effect. For one, the distributor has been working with the petroleum company on efforts to select certain fast-moving commodities for consignment. "Graybar has been extremely responsive at identifying items and optimizing inventory levels," he says. "They have done an exceptionally good job at meeting the refinery's needs in terms of always having the right levels of inventory. There really is a close working relationship between the I&E people in each refinery and the Graybar outside sales person. An excellent partnership has developed in that regard."
Tesoro also is looking to extend its partnership with Graybar to its relationship with an engineering and consulting firm. "We made it clear that we have a strong relationship with Graybar and that we want the firm to spend some time developing a relationship with them as well, so that when we enter into a major contract using the E&C contractor to lead the project they in turn will feel good about using Graybar. As such, they'll be able to help us standardize on product support and service and provide the right kind of management of project materials."
Looking ahead, Robertson has plans to tap Graybar's e-commerce expertise.
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