Central sourcing strategy saves Dial $100 million
Specialists leverage surfactants, plastics, indirect and other products.
Christopher Reilly, CPI Editor -- Purchasing, 1/15/2002 2:00:00 AM
Five years ago Dial Corp., the Scottsdale, Ariz.-based manufacturer of soaps and detergent products and consumer goods split from Viad Corp., its parent company, and became an independent entity to better focus on its core competencies.
Accompanying that change was a restructuring of Dial’s corporate functions into a business-unit approach, which included an overhaul of the purchasing function from a decentralized organization operating at the site level, to a central body headed by a chief procurement officer (CPO).
The move not only changed the structure of the company but it also changed the way its employees viewed total costs. By simplifying its supply base, working closely with its key suppliers, leveraging its buying power with those suppliers across the different business units, and developing a system for implementing innovative cost-savings ideas, purchasing was able to drive $100 million in total costs from the system in five years, including $10 million in 2001.
From local to central
Prior to the split of Dial Corp., purchasing had a decidedly local flavor, with purchasing managers at each of the Dial sites responsible for all purchases, from surfactants and other detergent raw materials, to computer systems and ancillary services. It was typical for buyers at one facility to buy the same raw material as a buyer at another Dial plant from two different suppliers and at different prices. While a decentralized purchasing structure can have its advantages, it was ineffective in taking advantage of Dial’s volume requirements and corporate-wide buying power.
Similar to the pharmaceuticals and personal care markets, in the consumer products market, financial success can often be determined by the company’s speed in developing new products in response to—and often in anticipation of—shifts in consumer buying trends. Such a fast-paced environment places added pressure on the purchasing function to ensure that the company is aligned with the best suppliers, and that new products may be developed and brought to market ahead of the competition.
Early on, corporate management realized the need for a smaller, more strategic purchasing function featuring a corporate buying group, and led by a corporate officer. Dial’s CPO and senior vice president, Michael H. Hillman explains:
"When we centralized the purchasing function, we combined all of our purchases and developed a strategy in which commodity experts would purchase those items in their area of expertise across all of the business units," Hillman says. "For example, there are purchasing managers who deal in chemical buying, plastics buying and paper buying, respectively," Hillman says.
"These purchasing professionals are extremely knowledgeable in their particular areas," he says, adding that the purchasing manager in charge of chemical procurement is a chemist by training and degree, able to understand the finer points of chemical composition and "knows what goes into the products that we make," Hillman says. "These procurement pros are not just buying widgets," Hillman says.
The structure also includes purchasing managers in each of Dial’s separate business units—including personal cleansing, laundry care, air fresheners and food products—are assigned to raw materials purchases. As an example, within Dial’s foods business, a specific procurement manager is in charge of purchasing all of the meats, spices, and other food ingredients used in the company’s canned meat products. A separate procurement group handles all of the non-inventory supplies, etc., in support of company’s plants and facilities. In addition, an international procurement group supports the company’s operations in Argentina, Mexico, and Guatemala.
The heads of these various procurement groups report directly to the CPO.
Hillman says that he and the other procurement professionals at Dial work closely with all of the general managers in various business units, "so that as business continues to grow, or as we develop new needs within the business groups, we are prepared from the supply side," he says.
Purchasing takes the lead
The fact that top management at Dial saw the need for corporate leadership for its purchasing practices speaks volumes to the importance it places on controlling its costs and generating significant savings through leveraged buying and supply chain management.
As it relates to supply at Dial, Hillman says that purchasing takes a leadership position within the company’s cross-functional process. Further evidence is the fact that he was recently promoted from a vice president to senior vice president in the last year.
Cost reduction goals are outlined in the corporate-wide strategic plan, and are based on a number of variable factors. In 2001, the company’s annual cost reduction goal was $10 million.
Dial looks at its savings goal in terms of "year-to-year" results. In other words, the cost reduction goal does not include cost-avoidance techniques. Rather it must involve ideas that take excess cost out of the system entirely. Hillman explains, "If a supplier wants to give us a 5% increase on a particular commodity material, and we settle on a 2% increase, that’s a cost avoidance," says Hillman. "For cost reduction, we look at the amount we paid for that product last year, and the amount we pay this year. The difference is what we save."
Purchasing decisions are made in line with Dial’s corporate strategic plan and its supply chain management goals. Purchasing asks questions and identifies possible answers regarding where the company can consolidate its suppliers, where it should explore supplier services, where supplier performance may be improved, and what opportunities exist for Dial and its suppliers to collaborate for mutual benefit.
According to Hillman, "Dial has many suppliers that it works with strategically to tap the best of both corporations," Hillman says. "Whether we’re sole-sourcing a commodity product, or the supplier is large enough to our business that they may fine-tune or tailor their supply to our operations, purchasing meets with the suppliers’ representatives to identify and review business opportunities," Hillman says. "And we ask a lot of questions to ensure that we’re not adding non-value-added cost to the system. It’s as important to us that our suppliers make a healthy profit as it is that we make a profit," he says.
"For example, we have worked with several of our strategic suppliers to develop vendor-managed inventory programs at Dial sites," Hillman says. "We have surfactants and other raw materials tanks at our facilities that are supplier-owned, and are replenished at the discretion of the supplier, when they have a lull in production," he says.
According to Hillman, such an arrangement allows the supplier to make better use of its production time, while Dial is guaranteed some degree of supply availability and does not own the inventory (and is not liable for it) until it is actually used in the process.
Finding the savings
Coming up with cost-savings ideas is a formal process at Dial, and involves every employee as well as every link of its supply chain. As part of the redesign the company underwent in 1996, a formal procedure was introduced to get people thinking about cost reduction. In recent years, that program has evolved to its current form, entitled "Slay the dragon." Getting employees to buy in was natural because it’s in Dial employees’ best interest to sniff out and submit the cost reduction ideas. The more the company saves, the better its profitability. Both these factors have a direct impact on the bonus each Dial employee receives at the end of the year.
Here’s how it works: Every employee within Dial is ultimately responsible for a budget, and is charged to save money in their area by identifying and implementing innovations and cost-reduction ideas to the central purchasing group.
Cost-reduction practices and procedures may take many forms at Dial. According to Hillman, some savings may be realized by collaboration and leveraged buying power with suppliers. For example, Hillman says that some of Dial’s suppliers are involved in purchasing raw materials, such as plastic film and other products that may be used in Dial product packaging, and cites instances where the supplier would purchase the plastic material if they were able to get a better deal. And the reverse is also true. "Dial’s purchasing function will get involved in raw materials purchases [for suppliers] wherever it makes sense," Hillman says. "Cost savings go across everything we do."
Savings ideas may involve something as simple as leveraging a contract negotiation, an offer from a supplier not used in the past, or may come from something more technical, such as a product formula change which would likely involve product substitution.Ideas are formally submitted to a database administered by purchasing. Each idea submitted is reviewed. Purchasing determines the pros, cons and opportunities presented by the idea and prioritizes each aspect as applied to the strategic cost savings goals. According to Hillman, each aspect of supply and delivery is monitored, including supplier qualifications and on-site audits. Based on its research, along with input from a cross-functional savings research team, purchasing establishes a probability for success of the idea, prior to implementation. "Having an idea is one thing. Bringing that idea to a level of savings is another," Hillman says.
If the probability for success of the idea is favorable, purchasing begins to allocate resources to the savings idea, and assigns a team leader for the specific project. It is the team leader’s task to champion the savings project and guide it through to implementation. Often the project is headed by a member of purchasing, but Hillman says that this is not a requisite.
Next, the cross-functional team works toward making the cost savings idea a reality. Finally, the cross-functional development team routinely monitors implementation progress to ensure that the cost-savings project reaches fruition.
Buyer-Supplier Teams: Beyond Cost Avoidance
04/21/2002
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