Intel goes global with indirect buying strategy
Leveraging its 5-step program unites purchasing, business and finance units
Susan Avery -- Purchasing, 4/7/2005 2:00:00 AM
High-tech giant Intel is successfully leveraging a single global sourcing process across its entire indirect materials spend. The internally developed 5-step process emphasizes the use of source teams, which are made up of representatives of the company's various global business units. Within the five steps are such activities as a documented sourcing plan, Internet negotiations and e-catalogs, and formal supplier business reviews. In two years, the global indirect materials organization (IDM) has used the 5-step process to source 95% of the company's indirect goods and services buy. It has helped to reduce costs by 10%.
Perhaps more importantly, "the 5-step sourcing process has provided a standard framework and common language to Intel's Corporate Purchasing global commodity management team," says Roger Whittier, co-director of corporate purchasing at Intel in Santa Clara, Calif. "It has clearly accelerated global sourcing of indirect materials."
Intel's indirect buy consists of spending for construction, travel, professional services, marketing services, logistics, IT and facilities services, and makes up 60% of the company's annual procurement spend. Until 2002, Intel had been mainly sourcing indirect goods and services by region. Purchasing professionals in three regions—U.S., Europe, and Asia—did not work closely with their internal customers in the business units or exchange best practices. It was clear the IDM organization was not fully leveraging the company's global buying power.
At the same time, Intel was becoming more global. More of the company's revenues were starting to come from regions other than the U.S. and the separate business units were becoming increasingly global in nature. Spending on indirect goods and services was growing faster than spending on direct materials—25% faster from 1997 to 2002—and maverick or off-contract spending was growing in step.
The IDM organization conducted some extensive benchmarking activities and learned that more world-class sourcing organizations were working hand in hand with their internal customers at company business units, aggregating spend volumes worldwide, consolidating purchasing activities, and documenting global strategy.
To reach world class, the IDM organization first had to overcome several daunting challenges. The first involved the company's organizational structure. In 2002, purchasing professionals in each geographic region reported to management in their respective region. Intel left this decentralized organization in place in the new plan, only now the purchasers also report functionally to a centralized global sourcing team. While a sourcing specialist for IT in Europe now reports to European management, his or her functional responsibilities align to a global IT sourcing team.
A second challenge: there was minimal spend data available on the indirect buy. Intel had been using several purchasing systems around the world making it hard for the IDM organization to gather information on its annual spending on indirect materials. Today, the company has one ERP system that tracks more than 90% of the spend worldwide.
The third challenge was one of perception. The business units viewed the IDM organization as a resource and not a business partner. To resolve the challenge, the group implemented formal business partnering training.
"Now we are working as a team to understand the commodities globally and how to best leverage Intel's spending worldwide," says Kinnar Ghiya, e-procurement sourcing program manager for Intel. "For each commodity, we have one global source strategy that clearly states how we are going to do business in the Americas, Europe and Asia."
5 steps to success
The 5-step sourcing process is not new. Intel's materials management organization has long used it and the IDM organization has always been involved in such activities as market research, working with the business units, negotiating with suppliers and managing costs. The difference is that the purchasing professionals in each region now have a framework for sourcing indirect goods and services. "We have a consistent process across the globe, and we don't miss a step," says Ghiya.
Step one: Collect and analyze internal data. At this step, the IDM organization identifies internal stakeholders and puts together a global sourcing team to purchase similar goods and services in all regions. In addition to representatives of business units from each region, the team also includes a member of the company's finance organization. All are equal members.
The global source team collects, analyzes and validates internal requirements. Using one ERP system worldwide helps the source teams to track and analyze spending. To simplify the process, Intel uses the United Nations Standard Products and Services Code (UNSPSC) in its Corporate Spends Tool (see PURCHASING, March 18, 2004; p. 42) and in a new global procurement reporting tool.
Step two: Converge internal and supplier market data. Next, the global source team identifies the supply base, and benchmarks with other companies and market research firms. For individuals serving on the global source teams, Intel provides formal training in market intelligence as well as supplier management, documenting the strategic sourcing plan, the 5-step process, global diversity and global reporting.
Step three: Develop sourcing strategy. Now, the global source team documents its strategic sourcing plan (SSP)—the heart of the process. In putting together the strategy, the team carefully considers such components as technology, quality, availability, cost and fulfillment. The SSP may include setting up and conducting an e-auction for negotiations with suppliers or creating and managing an e-catalog. Typically the SSP is for 1 to 3 years. To date, IDM has documented SSPs for 48 goods and services, covering more than 95% of spending.
Step four: Execute strategy and implementation plan. In this step, the global source team qualifies and selects suppliers and develops a negotiation strategy. The action plan laid out in SSP is executed at this step.
Step five: Manage supplier relationship. The final step closes the loop. The source team continues to collect market intelligence to determine if they need to make any changes to the sourcing strategy. They establish supplier expectations, and monitor performance through audits, score cards and business reviews.
In practice
The IDM organization is sourcing ground transportation globally using the 5-step sourcing process. At Intel, ground transportation consists primarily of auto rental and leasing. Auto rental pertains to the cars rented by employees for use during business travel. Leasing is more complex, and is defined by region. In the U.S., Intel leases autos for its sales team but in Europe, it leases cars for some executives as well as its sales team. The company also leases cars to employees who have relocated from the U.S. or other parts of the world. In Asia, leased autos are mainly for employees who have relocated.
Brian Rock, corporate travel sourcing manager, leads the global source team for ground transportation from his base in Ireland. Team members are located in each of the three regions. Rock explains that the team has very different customers with very different requirements. The team works with its partners via e-mail and telephone. Once they hammer out the requirements, they evaluate the supply base and interview suppliers to learn more about their unique capabilities.
With the information in hand, the source team issues an RFP to potential suppliers. Team members meet with their customers in the regions to draft a scope of work and then hold a reverse auction. "We work with Jared [Justus, corporate purchasing finance analyst] to develop a supplier selection matrix to choose the best possible supplier using such 'hard' factors as cost and 'soft' factors as management structure," says Rock. "We are working with Jared to validate the savings and we're in agreement. We have slightly exceeded our goal. Now, we are working with our business partners to gain their support on our recommendation." Next up: Implementing the agreement and setting up the Supplier Business Review.
The IDM organization is also sourcing tuition reimbursement globally using the process. While Intel has long been a strong proponent of continuing education and training, the company's spend with colleges and universities until recently was largely unmanaged. Leading the global source team for tuition reimbursement is Raymond White, professional services sourcing specialist. Identifying Intel University as a major stakeholder, he put together a team that identified and analyzed the company's spending as well as its internal policies related to the program. The team collected market intelligence by communicating with suppliers and peer organizations.
The global source team determined that much of Intel's spending for tuition reimbursement is in the U.S. and targeted it first. The team has progressed to the fourth step of the process; it is negotiating with colleges and universities and implementing a new tuition reimbursement policy. The team is also using supplier management strategies with key education providers and conducted a Supplier Business Review.
Now Playing: 