Auto company centralizes spending, saves $5 million
Susan Avery -- Purchasing, 1/15/2004 2:00:00 AM
Three years ago, JM Family Enterprises Inc., a diversified automotive company best known as the exclusive distributor of Toyota automobiles in the Southeastern U.S., didn't have a corporate procurement operation. Each of the company's core businesses—a vehicle distribution and processing company, an insurance and warranty company and a financing company—was purchasing goods and services on its own.
Today, JM Family Enterprises—with annual revenues of $7.6 billion, the fifteenth largest privately held company in the U.S.—has a corporate procurement operation. Procurement Services, led by David Ruiz, procurement director, manages an annual spend of $400 million. Since its creation in 2001, Procurement Services has helped to reduce costs on that buying tab by more than $5 million. JM Family Enterprises is based in Deerfield Beach, Fla.
After a consulting firm advised the company that it was missing opportunities to leverage its buying activities, the executive management team hired Ruiz, a 20-year purchasing veteran, to create a procurement operation from scratch.
Armed with graduate degrees in business and engineering, Ruiz came to JM Family Enterprises with experience working as director of procurement for metropolitan Dade County (now Miami-Dade County) and as director of procurement for Royal Caribbean Cruise Lines.
His new job was not without its share of challenges. JM Family Enterprises had tried to consolidate its purchasing activities on a number of occasions—with limited success. While Ruiz had backing of the executive management team, he found that some of the company's associates were reluctant to give up some of their buying responsibilities to a newly formed procurement organization. Among his first duties: Working to sell the associates on the advantages of a dedicated purchasing organization. "Initially our task was to create relationships within the business units so they would understand the purpose and objective of procurement."
He and his team focused their conversations on the benefits of leveraging the company's annual spend as well as the importance of establishing companywide guidelines for supplier relationship management, risk management and contract management. They developed plans that detailed goals and objectives of the Procurement Services group. Ruiz staffed the new organization with JM Family Enterprises associates who had buying experience and recruited skilled purchasing professionals from other companies. Among them are Rola Muwakki Lopez, supply chain analyst, Whitney Green, operations manager, Lisa Canavan, procurement manager, Katherine Repinski, contract administration manager, and Gene Hudak, procurement manager. Ruiz also encourages buyers on his staff to pursue professional certification through the Institute for Supply Management.
Identifying suppliers
To gain insight into the company's purchasing activities, Ruiz and his team manually examined accounts payable files from each of the businesses. Their objective was to identify the company's top 10 spend areas as well as its top 50 suppliers. At the time, each business had its own Accounts Payable function. Now, AP, along with Procurement Services, Corporate Services, Benefits Services and IT are consolidated within JM Family Enterprises Shared Services Center. Ruiz reports to Scott Barrett, president, JM Family Enterprises Shared Services Center.
From their spend analysis, Ruiz and his team determined that the company's biggest purchases are: Automobile accessories (leather seats, customized wheels, stereos, etc.) that it installs on the autos it distributes, advertising and marketing services, transportation and information technology (IT).
Among the first categories of spending Procurement Services worked to leverage were temporary labor and office supplies. By consolidating spending and reducing the company's supplier base for these categories, Procurement Services reduced costs of acquiring temporary labor by $600,000 over a two-year agreement and the office supplies buy by $90,000.
For a more complex purchase, the company's audit and tax services buy, Procurement Services managed the acquisition process from beginning to end, identifying potential suppliers, pulling together a commodity team consisting of the vice president of finance of each company to issue and evaluate a request for proposal (RFP), conducting final negotiations, and awarding the business. Procurement Services helped reduce costs by $300,000 annually over a three-year contract.
"The executive management team gave us a major vote of confidence when they asked us to select a supplier of auditing and tax services," says Ruiz.
For another complex buy, a call services center for a JM Family Enterprises insurance company that provides fulfillment as well as sales capabilities, Procurement Services managed the process in similar manner; it put together a commodity team of experts from the business as well as information technology and strategically sourced the buy. Cost savings: $436,000.
In consolidating the company's supplier base, procurement looks for suppliers that—
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Add value to its processes by suggesting ways to reduce costs or enhance operations,
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Have potential for long-term relationships, and
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Have commitment of top management.
These criteria are in addition to price, delivery and quality. "One of the differentiation factors in selecting our auditing firm and call center services suppliers was top management commitment from the supplier to our account," Ruiz says.
In the same vein, Procurement Services has developed a supplier prequalification process for the company's auto accessories purchase. It also has created a new supplier kit.
For the information technology buy, Ruiz and his team took a creative approach and outsourced part of the procurement function. While most routine buys are managed by Procurement Services, other, more complicated purchases that require strategic review are outsourced to an IT purchasing consultant. Reporting to Ruiz, this individual provides expertise on the procurement process for more strategic buys, from identifying needs to structuring agreements with suppliers. Hesitant at first, IT managers at JM Family Enterprises now approach Procurement Services for assistance with new projects. Recently, the group asked for help with the purchasing and configuration of new servers.
Procurement Services keeps track of its performance, particularly at reducing cycle times. "Because some of our users might be concerned about our handling of requisitions and their purchases we set a target of three days," Ruiz says. "Our average is 1.25 days." Procurement Services also surveyed internal customers on its value add to the company. Results were very good in this area as well (80+%), he says. "We found that associates think agreements negotiated by procurement are more favorable than those previously negotiated by the businesses."
In 2004, Procurement Services is implementing procurement software from Oracle and purchasing cards from GE Capital. Ruiz and his team selected GE Capital for an interface it created for use of purchasing cards with Oracle Procurement and its success at implementing new card programs. While Oracle Procurement will automate manual requisition processes, it will more importantly provide JM Family Enterprises with spend management and analysis capabilities. Ruiz expects to use Oracle Procurement's punch out capability to introduce e-sourcing to procurement's internal customers. Among these commodities involved in a pilot program are computer hardware and marketing services.
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