Six Sigma helps Ring Power become a better supplier and buyer
By William Atkinson -- Purchasing, 4/9/2009 2:00:00 AM
Six sigma can be an effective tool for making improvements in an organization. However, the Six Sigma strategies are most effective when the entire supply chain does not understand, embrace and use them. A chain, it is said, is only as strong as its weakest link.
Industrial equipment maker Caterpillar made a decision in 2001 to become a Six Sigma organization throughout its entire supply chain, including its dealer network and supplier network. Chip Handley is vice president and Lean Six Sigma deployment champion for Ring Power Corp., a Caterpillar equipment dealer in St. Augustine, Fla. with 24 locations across the state. He says Ring Power followed Caterpillar's lead and launched its Six Sigma initiative in 2004 and has focused on people as much as processes in that growth.
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"When trying to create a new corporate culture, you need to get people who have been with the organization for years or decades to embrace a new culture of continuous improvement," Handley says. "At the time we started to implement Six Sigma, we had just merged two dealerships into one, and our new president realized this would be the ideal time to embrace it," he states. "The goal was to implement a fact-based, data-driven methodology that would utilize the best practices from both organizations."
At first, some Ring Power employees in the organization viewed the Six Sigma effort primarily as a Caterpillar initiative. Since mid-2007, though, Ring Power has been able to apply the process to its own operations and organization, creating a continuous improvement culture of its own that meshes with but does not exactly reflect Caterpillar's.
And while Six Sigma projects tend to focus on internal processes, some of them involve suppliers. Of course, for Ring Power, its largest supplier is Caterpillar, so that connection was already strong from the start. But another supplier helped Handley's team gain even more understanding of the benefits of Six Sigma. In addition to selling Caterpillar products, Ring Power also sells complementary brands (products from other manufacturers that do not compete with Caterpillar). One such supplier manufactures lifting equipment and was actually a Six Sigma company before Ring Power was, reports Handley. With that link also strong, Ring Power has met with that company's Six Sigma leaders to begin to work on a joint process, and they are in the initial stages of exploring opportunities for a possible Six Sigma project together.
For parts suppliers, which did not have previous Six Sigma experience, Ring Power came up with an innovative project focused on breaking freight costs out that has reduced costs in the supply chain for more than four years. "We wanted to reduce our freight expenses," explains Handley. "To do this, we worked with a number of our major parts suppliers to change the freight billing process."
For some of these suppliers, which typically send parts to Ring Power by small package carriers, freight was a profit center. That is, freight was sent via a "prepay and add" program, where the suppliers marked up the freight and charged it to Ring Power with the parts invoice. This allowed the suppliers to charge virtually whatever they wanted for freight and Ring Power did not have visibility into that cost.
"Our goal was to have freight be revenue-neutral," states Handley. "We just wanted to cover our costs, so that we don't lose money on freight, and then also be able to pass these savings on to our customers."
To achieve this, Ring Power opted for a freight collect program. This involved instructing the suppliers to charge the freight to Ring Power's package carrier account. By doing this, Ring Power would pay only the amount that was being charged by its package carriers, with no supplier mark-up being added on. "In other words, we now only have to pay for the part," Handley says.
This one step alone began to reduce costs for the company which it could then turn around to pass to its customers. However, Handley took the process another step further by doing some cost analysis investigation. During the "measure" phase of the Six Sigma process, Ring Power found that its package carriers had established different discounts at Ring Power's 24 locations around the state. "For example, we found that the same carrier had one rate discount in Ocala, a different discount rate in Miami, and yet another in Tallahassee," he says. "This was because local package carrier reps were calling on those locations, and the locations were making their own decisions."
To address this, Ring Power decided to make freight a global spend and worked with each of its carriers to make sure it had the best discount possible across all of its locations.
Combined, those two strategies (using freight collect and standardizing the rates) have reduced freight costs for Ring Power by more than 10%—savings that it can then pass on to its customers.
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As for the varying shipping discounts across 24 locations around the state? Well again, it doesn''t take Six Sigma or Lean to figure this out. An accounts payable or purchasing analyst should be on top of this stuff regularly. Speaking as a CPA, I can confidently say that this is pretty basic accounting and normally would be reviewed by Accounting Manager or Controller as a part of their monthly P&L oversight. Where were these folks and why were they not looking at it?
Lean and Six Sigma are powerful indeed. But let''s not try to complicate things more than we should. The simple blocking & tackling of basic managerial oversight is all that''s required to get to the "root cause" of this problem. No need to dress it up as Lean or Six Sigma.
