Aerospace firm uses "start slow, grow quickly" approach
David Hannon -- Purchasing, 2/19/2004 2:00:00 AM
The one major lesson the purchasing team at 75-year-old, family-owned British defense contractor Martin Baker learned from its experience with online reverse auctions is to not be afraid to "start slow and grow quickly," according to Andy Patrick, purchasing manager at Martin Baker.
While some purchasing organizations choose to focus on deep integrations and a lot of handholding both internally and externally when deploying e-auctions, Martin Baker wanted to test the waters before taking the big plunge with the technology. Patrick says having some savings numbers early on in the deployment process helped sell the technology to the company executive team and get suppliers accustomed to the process.
After decades of working intimately with its short list of suppliers on the quality of its main product line—airplane ejection seats and safety equipment—Martin Baker in 2001 decided it was time to drill down into its $90 million spend and bring its material costs back down to earth. Patrick says, for many years, the company had such a strong emphasis on quality with its suppliers due to the nature of its product, that material costs from those suppliers had become inflated and needed to be reviewed and sourced more competitively.
"The company is 75 years old and we have some very long-term suppliers," says Patrick. "Some of those suppliers almost grew up with Martin Baker and evolved into large organizations themselves. We were not necessarily looking for a lean integration of processes and a paperless system. With a relatively small centralized purchasing team of 15 people, it does not cost us a lot to raise a purchase order. We were looking more to attack the cost of the materials we were buying."
But the age of the product design left a question as to how transportable the supply contracts would be in a competitive bidding environment. To find out the answer to that question, Martin Baker decided to seek out a technology that could plug in easily and get the company rolling on some competitive bidding events in short order to test the waters.
With a plan in hand, Martin Baker enlisted a supplier relationship management tool from Epicor Software (Irvine, Calif.). The Epicor Sourcing tool was installed and configured in two weeks in the summer of 2001, allowing Martin Baker to get up and running quickly. Patrick says the initial belief was that an e-sourcing tool could be used for a relatively short period of time to explore the perceived risks of transportability and supplier response while the medium-term requirements would be addressed by functionality within a soon-to-be implemented ERP system.
"We found the ERP providers really did not have the out-of-the-box functionality we sought, says Patrick. "So, having a standalone and robust product that did not tie into anything was actually very useful because we controlled what went into it, we could roll it out easily, if we wanted to use it we could use it, but we did not have to."
Martin Baker started its move toward e-auctions by categorizing its parts into high, medium and low value, targeting the low-value items for auctions first because their contribution to the cost of a bill of materials was still significant but the type of product would not concern the quality assurance professionals in the company. The auction activity started with machined steels and aluminum, materials that make up the bulk of an ejection seat, but for years had been sourced from the same group of suppliers in a more traditional contract renewal process.
Martin Baker invited only existing suppliers to the auction events to ensure quality standards were met. The procurement group organized a daylong event for each invited supplier, one at a time, giving the suppliers a detailed presentation on the company's business needs and what was being rolled out to meet those needs.
"The auction tools have a reputation for being a bludgeoning instrument, especially from the supplier view, so we wanted the suppliers to get a strong and supportive message," says Patrick.
With the selection work done, Patrick's team put together packages for bid that represented 12-18 months of machining work which would be genuinely transportable to at least half a dozen suppliers. Patrick felt intuitively if there were below four suppliers bidding on the work, it would not be a viable competitive environment. A standard reverse English auction was employed for most of the events, where bidders are anonymous but can see each other's bids. Invited suppliers were informed that the contract would not automatically go to the lowest bidder, but the auction results would be a major factor in awarding the contract in addition to historic quality and delivery performance. But because only qualified and existing suppliers were invited, most of the awards went to the lowest bidder.
The first three events were hosted by Epicor and were deemed successes, as suppliers embraced the concept and placed competitive bids. Martin Baker did not have any preconceived savings goals in mind for the early events, but simply wanted to see how the suppliers reacted to the technology and format. The first three events brought 30-35% savings over existing contracts. Based on that success, the auctions were gradually expanded to cover more of the transportable areas of the bill of materials.
"We've had upwards of 50% cost-outs on some auctions and not less than 30% savings," says Patrick. "We've had a supplier at the end of an 18-month contract say it wants the contract longer and would take further cost out if we renew with them. So we've been able to equitably negotiate even further savings and stay with the original contract award winner. We've also had people come back and say they can't afford to keep the business after these events due to increased costs, so we've pulled the contracts back in, reauctioned them and protected the original savings."
To date, Martin Baker has conducted eight auction events covering 15% of its total annual direct material spend. The overall rate of e-auction use has declined since their first introduction in 2001, however, because of its "halo effect." Patrick says suppliers are more aware of the tool and its use, so they are much more willing to talk about practical cost-reducing programs to avoid the auctions. Martin Baker is now looking to introduce auctions into its indirect spending categories and its U.S. operations are evaluating the technology's potential in light of the success seen in the U.K.
"E-auctions are not a whole procurement strategy in one, but part of a whole suite of tools including corporate purchasing cards and strategic alliances," says Patrick.
And what has been the long-term result of the company's start-slow-and grow-quickly-strategy? Well, Martin Baker's fast action has become the basis for the JumpStart program at Epicor which provides users with a 30 to 90-day trial period for using the Epicor Sourcing tool.
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