CEO Battenberg ups the ante for Delphi's buyers
Tom Stundza -- Purchasing, 4/4/2002 2:00:00 AM
Delphi Automotive Systems of Troy, Mich., is increasing global sourcing, successfully hedging its risks with futures contracts, and working with suppliers to dramatically improve parts quality.
The initiatives were led by Ray C. Campbell, who steps down this month as the vice president of global purchasing of Delphi and passes the baton to R. David Nelson, who was most recently vice president of worldwide supply management at Deere & Co.
Delphi CEO J.T. Battenberg III tells PURCHASING Magazine: "Our purchasing organization is crucial to the success of our becoming a lean enterprise, supplying customers worldwide. Purchasing has to be the strong link between suppliers and manufacturing because, to speed our flow of material, we need suppliers to meet a whole new set of quality, delivery and continuous improvement criteria."
The CEO notes "the technology of sourcing materials and making parts into components and modules is being transformed at a rapid pace, which has a direct impact on our bottom line." Campbell agrees that "The procurement organization contributes significantly to the tactical efforts within Delphi. It has to, since procurement accounts for 50-60¢ of every sales dollar."
Global purchasing at Delphi sourced $14 billion worth of production materials last year. The company spent another $1.4 million on machinery and equipment, tooling and operating supplies.
Battenberg says the business of supplying motor vehicle manufacturers has changed because vehicle demand in North America has shifted from cars to light trucks and vans over the last several years, requiring suppliers to modify parts. At the same time, there is increasing demand from other regions of the world for smaller, less expensive vehicles that satisfy basic transportation needs. "Increasingly stringent government regulations regarding vehicle safety and environmental standards are also driving new product development," he adds.
The CEO says, "Delphi management believes the company is positioned to capitalize on these industry dynamics," and points out that purchasing is deeply involved in the corporation's global restructuring plans and strategic cost reduction efforts designed to cut annual structural costs by more than $300 million (after-tax) by late 2003.
Uncertain automotive parts industry conditions made it necessary in 2001 to begin implementing key restructuring initiatives, according to Battenberg. These include:
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Expanded use of the Delphi Manufacturing System, which maximizes manufacturing flexibility, reduces total manufacturing costs and achieves lean production through cell manufacturing techniques and value-stream mapping.
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Intensified use of the Delphi Global Purchasing process to obtain globally competitive prices and reduced materials costs for consistent high-quality supply of direct materials and parts and indirect materials, machinery, equipment and services.
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Implementation of common organizational and management structure, standardized training programs and a common set of key metrics for measuring performance.
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Application of a "fix, sell or close" process to identify and deal with operations not performing at desired levels to improve overall cost competitiveness. Already, the firm has formulated plans to sell, close or consolidate nine plants.
Purchasing's mission, according to Campbell, is to find and develop "only those suppliers who are willing to work with us to achieve our vision" and "to get at that big pot of money still in the waste stream of materials."
How purchasing operates
Delphi seeks 3% annual reductions in costs from suppliers and has made other (undisclosed) cost cuts by consolidating and leveraging commodity purchases. Suppliers are expected to be globally competitive with benchmark pricing compiled by Delphi's buyers. Chosen suppliers are expected to have continuous cost reduction improvement processes in place. In addition, suppliers are expected to work with Delphi buyers toward annual price reductions, via long-term and lifetime contracts. Delphi hosts various supplier workshops to provide assistance in cost reduction efforts. (For more on CEO's cost reduction drives in purchasing, see "Spend a little, save a lot!" on page 23 in this issue.)
Still, Campbell admits, "There is huge waste in the materials accounts." He notes, "An expanded effort to implement the Delphi Manufacturing System globally means there are also expanded efforts to implement all aspects of the Delphi Global Purchasing System." Use of lean manufacturing cells has accelerated the changes mandated in new customer requirements. In response, "the procurement organization has instituted common purchasing systems, policies and procedures globally to leverage economies of scale," says Campbell.
"We are working to develop suppliers who are creative, flexible, dedicated and driving continuous improvement in all aspects of their operations," says Campbell. "There is a lot more opportunity to reduce purchasing costs as long as there is cooperation between purchasing and its internal customers and between purchasing and its suppliers."
Delphi purchasing is also choosing suppliers earlier than ever to participate in the company's advanced product quality planning efforts. "This is allowing purchasing to transfer necessary information from the engineers to the right suppliers early so they can identify cost savings earlier," Campbell says.
Delphi began as an agglomeration of various divisions and subsidiaries that supplied automotive parts to assembly lines inside General Motors Corp. In the early 1990s, the firm took shape as a subsidiary and began to transform itself from a North America-based captive supplier to GM into a global supplier of components, integrated systems and modules for a wide range of customers. By the time it spun off from GM in early 1999, the firm was selling products to every major producer of light vehicles worldwide. In 2001, its third year as an independent firm, it had sales of $26.1 billion with almost one third ($8.5 billion) from customers other than GM.
Campbell (who will act as a purchasing consultant) was elected Delphi vice president in charge of global purchasing at the time of the spinoff. He had served as executive director for worldwide purchasing of strategic and metallic activities and then quality/supplier development at GM before he was named executive director of worldwide purchasing for Delphi Automotive Systems in 1994.
During his tenure, Delphi Global Purchasing—a group of 2,300 purchasing, supplier quality and supplier development personnel—has become responsible for acquisition of 120,000 part numbers, with production material purchases segregated into four categories—chemical, electrical, metallic and technological.
Delphi's purchasing organization uses 30 commodity teams that spend 80% of the dollars. The teams look globally to develop leveraged sourcing strategies and to make the best supplier selections to support 199 wholly owned manufacturing sites, 43 joint ventures and 32 technical centers in 43 countries.
Campbell says, "Positive relationships with our suppliers generally allow us to order precise quantities and types of our raw materials on short notice, enabling us to maintain relatively low inventories." Also, there have been significant improvements in supplier quality so last year's purchases met a 67 parts per million (ppm) rejection rate worldwide and 39 ppm in North America.
However, Campbell says a bigger problem being addressed is "random spills" which he describes as "out-of-specification deliveries that cause shutdowns of manufacturing lines and cause manufacturing cost premiums." He says that "no matter how good the ppm, any parts that cause problems downstream are a purchasing problem that must be solved." He notes that, "While we strive to purchase from suppliers who offer us the best products in terms of quality, service, technology and price, we have too many suppliers."
Supplier cutbacks are next
Worldwide, Delphi has 5,000 suppliers. In fact, it spends $10 billion with 2,600 suppliers just to support North American manufacturing plants. Campbell and Battenberg both suggest that a 50% reduction in the supplier population will be a top priority for the new purchasing czar, Dave Nelson.
"We need to rightsize the supply base," says Campbell, who suggests it will take up to three years to accomplish. "The recession affecting the auto industry worldwide has heightened the sense of urgency about Delphi becoming a world-class cost management organization," says Battenberg.
Another cost management effort within Delphi involves the hedging of about a quarter of its purchase contracts for price-volatile commodities such as copper (for wiring harnesses) and platinum group metals (for catalytic converters). "We are exposed to market risks from changes in certain commodity prices," Campbell says. The primary purpose of commodity hedging activities is to manage the volatility and to offset the effects of changes in commodity prices. "The hedging program is a risk management effort—using a variety of derivatives contracts on the commodity exchanges—handled jointly with the corporate treasury department and marketing," he explains.
The program appears to be working since Delphi has not experienced the significant losses from reduced platinum group raw materials prices that deeply damaged the financial results of some other automakers and auto parts firms. Note: Delphi buys most of the platinum group metals it uses to manufacture catalytic converters for General Motors, directly from GM, with its remaining needs sourced from suppliers in South Africa, North America and Russia.
Yet another potential source of cost reduction is use of Internet-based electronic procurement. Motor vehicle producers have established Internet-based business-to-business integrated exchanges to facilitate transactions with suppliers. Delphi was the first of the Tier I automotive suppliers to host a supplier portal application through Covisint, the automotive e-business exchange. "The portal should enable Delphi purchasing to continue to improve supply chain efficiency by enhancing communications and data management with its suppliers," says Campbell.
The purchasing organization also uses reverse auctions with Web-based providers such as FreeMarkets. "Buyers have to do more than just buy; they also need to focus on areas like supplier development and quality," says Campbell. "As a result, the sourcing activity has increased in complexity and is ever more time consuming." He believes that "e-tools such as online auctions save time and money by eliminating inefficient practices that create waste, increase cost and lengthen the process."
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