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Big companies struggle to act their size

Few companies take full advantage of leveraging opportunities.

By Anne Millen Porter -- Purchasing, 11/1/2001 7:00:00 AM

In 2000, the nation's 250 biggest purchasing operations for manufacturing shelled out an estimated $1.66 trillion for goods and services. But new research by PURCHASING Magazine suggests that only one in four of these large companies may be making best use of their potential buying power by pooling purchases across multiple business divisions and/or locations and placing this aggregated demand with a relatively small number of high-performing suppliers.

Asked to estimate the percentage of total corporate spend that, they feel, has been fully leveraged to date, a sample of 27 big-company purchasing executives returns a median of just 57%. And, while a handful of these big spenders claim to have fully leveraged more than 90% of their company's total spend, many more place their estimates below 50% (see chart for breakout by quartile).

The averages go up a bit for certain spend categories. For example, the median leverage estimate for raw manufacturing inputs is 66% vs. 78% thought possible on average.

Logistics is next on the list. The large-company purchasing leaders participating in PURCHASING's benchmark study claim to have leveraged, on average, 64% of the dollars they spend to move goods. The relatively high level of success for logistics may be a function of the industry consolidation and formation of national service providers that began after transportation industries were deregulated back in the late 1970s and early 1980s.

Large companies also show somewhat more success in leveraging their capital equipment (61%) and T&E (60%) buys, which, by virtue of their separate general ledger and tax treatments, may be easier to quantify and control on a company-wide basis.

Not surprisingly, the averages are somewhat lower for operations-related spending such as office supplies (59%) and MRO/energy (45%). Where MRO is concerned, large purchasing organizations appear to be struggling against huge numbers of line items and a profound lack of national suppliers with sufficient depth in terms of product line cards. With energy, it appears that most U.S. companies still see their utilities (natural gas and electric) as bills to be paid rather than commodities they might source strategically. (This will change, perhaps, as these industries progress toward deregulated, more liquid markets in coming years, allowing more national commodity and service providers to be born.)

For office supplies, the relative lack of effective spending leverage among large companies seems more a function of the decentralized nature of departmental budgets and spending authorities in large corporate hierarchies—a problem that is being resolved, albeit slowly, through deployment of enterprise e-procurement technologies.

Why leverage

While many of the nation's biggest spenders have logged limited progress to date, the execs participating in Purchasing's new benchmarking project on strategic sourcing say, overwhelmingly, that increasing their leverage with suppliers is a goal they are pursuing actively.

Cost reduction is, hands down, the main reason for bringing sizeable purchasing power to bear in the marketplace. Dan Enneking, chief procurement officer for NCR in Dayton, Ohio, remarks that the company's formal process for strategic sourcing has essentially "doubled the annual rate of savings from our procurement spend."

But beyond huge potential cost benefits, execs surveyed by PURCHASING cite plenty of other motivations for aggregating company-wide demand for goods and services. These include opportunities to:

• Achieve better nonprice terms with suppliers.

• Reengineer and improve business processes,

• Integrate supply chains,

• Improve product designs and manufacturability through standardization,

• Develop suppliers and improve their performance on such measures as quality, and

• Improve overall customer satisfaction by making finished-product quality more consistent.

In pursuing greater spending leverage within his company, Donald Buchanan, materials management manager for the Dallas-based energy company, TXU, is looking to lay the groundwork for "process improvement throughout the supply chain—from order, to receipt, to payment."

Bob Barber, senior director of corporate purchasing for Santa Clara, Calif.-based 3Com, says wielding the company's considerable buying clout yields, "lower overhead costs (for transactions, supplier maintenance, and reporting), focused and standardized expectations, and resource-rich relationships."

The director of purchasing for a national airline remarks that, "With a rationalized supply base, it's easier to manage supplier performance."

IBM is one giant corporation showing extraordinary success in leveraging its spending company-wide. The payoff, according to Javier Urioste, director of global procurement, business operations, has been "the ability to maximize cost savings, improve integration with the supply base, and enhance the value add of procurement to internal clients such as development, manufacturing, Global Services, etc."

Jim Scotti, vice president of global procurement for Halliburton, an engineering and construction interest based in Houston, says, "With over 90,000 employees worldwide, our greatest benefit comes from global consistency of products and processes." However, Scotti notes that, "the dollar savings is also a significant benefit."

In addition to lower costs, consistent quality and better delivery terms, the procurement executive for a major semiconductor concern says the company's work at leveraging its considerable annual spend has led to "reduced development time and costs."

The director of supply management for a big chemicals concern says another benefit of leveraging the company's spending has been "a greater opportunity to participate in consortium [buying] relationships" with other companies.

The supply chain manager for a large defense contractor believes his pursuit of corporate spending leverage will lead to "process consistency, horizontal integration, cost savings and quality consistency."

Common denominators

Among the companies claiming high leverage success rates already, several common themes emerge from PURCHASING's preliminary research.

Nearly 2/3 of purchasing execs participating in PURCHASING'S preliminary study think that, given the chance, they could leverage between 75-100% of their companies total spend. Only 25% say they have succeeded in meeting this goal.

Perhaps the most important factor is the centralization of purchasing authority. Best leverage results seem to accrue to organizations with very high-level purchasing executives, for example, chief procurement officers (CPOs), senior vice presidents, and vice presidents, often with direct-line reporting to company presidents or CEOs, leading strong, authoritative corporate purchasing organizations.

IBM's Urioste, attributes the company's success to a global organization that was established with corporate support and consistent goals and objectives. "Corporate policy specifies that procurement is the only organization that can commit funds for IBM," Urioste says.

Halliburton's Scotti says "Implementation of a Shared Services organization with global functional responsibility has enabled us to leverage our spend in most areas of our business infrastructure (for example, IT, logistics, etc.)."

Michael Legg, director of contract maintenance for Union Pacific railroad, headquartered in Omaha, Neb., attributes the company's high success rate to a centralized purchasing structure that has been in place for 20 years. "Control of 'mission critical' materials is better managed through a centralized process," Legg says.

Likewise, the procurement exec for a semiconductor concern pins his company's success to "centralized purchases and corporate agreements and councils."

The director of supply management for a large chemical processor with 80-95% strategic sourcing rates over the spend categories surveyed cites "centralized strategic sourcing and targeted globalization initiatives."

Use of cross-functional sourcing teams is also common among the most highly leveraged companies. The global sourcing manager for one chemicals company claiming to have leveraged 80% out of a possible 90% of the company's total overall spend uses "cross-functional, corporate-driven, sourcing-lead commodity teams."

Technology is also helping to get the strategic sourcing job done in large, complex companies. For example, 3Com's Barber says, "We are now using a single SAP application worldwide, which dramatically enables our commodity teams to act on global data." The company, he says, has "systematic goals for supplier rationalization and leverage savings across all purchases including a wide variety of nontraditional purchases such as advertising, software, hardware, consulting firms, temp agencies and telecommunications."

Buchanan of TXU says the company has achieved substantial leverage using "automated ties to various work planning systems that transfer requirements to procurement and to established suppliers with little human interaction."

IBM's Urioste cites "implementation of e-procurement across the entire procurement process," as a big success factor in leveraging Big Blue's substantial spending. Likewise, Mark O'Bryan, vice president of procurement for Smurfit-Stone Container in Chicago, says the firm is achieving big leverage using "centralized procurement, an e-procurement rollout with common catalogs, and supplier consolidation and continuous improvement programs."

Deere & Co.'s R. David Nelson, VP of worldwide supply management, stresses the utility of deploying standard, articulated processes for strategic sourcing as well. "Where we have achieved high levels of spend leverage, we have strategic sourcing teams following a seven-step process that is either complete or nearly complete." By applying this process methodically, Nelson says the company expects to reach 90% leverage worldwide by 2005.

Finally, recognizing that few national suppliers can meet all the varied needs of large corporate consumers, the purchasing execs say concerted internal efforts at standardization—minimizing the number and variety of products and services consumed by the corporation—are a must if leverage is to be achieved to any great extent. For example, the manager of purchasing for a large energy interest has achieved 90% leverage by "performing spend assessments and standardizing products and services wherever possible."

Putting it all together, NCR's Enneking says, "We have put into place a technology platform to support sourcing operations and formal permanent cross-functional commodity teams. We have significantly rationalized our supply base and deployed formal supplier relationship and development programs. We manage procurement as a virtual line of business complete with top management quarterly reviews that are integrated into the company's strategic planning process."

The trouble spots

For the big spenders that have achieved less in terms of strategic sourcing, it's often simply a case of starting late. For example, the supply chain manager for a large defense contractor says the company is just now in the "launch phase" of a major strategic sourcing effort. "Major obstacles," he says, "are striking a balance between functional organizations that are designed for customer focus regarding speed and agility with a process focus designed to leverage company size."

Likewise, the purchasing exec for a big West Coast electric utility says the company has only recently established a plan for leveraging spending across the firm's operating companies. "Information technology products have been the initial target thus far. Opportunities exist with other types of goods and services but have not yet been pursued. While our unit is leading the effort, other operating companies have been less than enthusiastic," he says.

The relatively small number of truly "world class" suppliers with global presence is a big hindrance for some multinational firms, according to the sourcing professional for a petroleum refiner. "We've had difficulty identifying global suppliers," she says, especially ones that can service the company's operations in "remote areas." She suggests also that it has been difficult to convince all of the company's business units to see the value of leverage and to obtain the "active participation and support of management and operating companies' user bases."

The purchasing exec for a metals interest cites "difficulty in leveraging MRO due to geographic dispersion of facilities and the supply base."

The director of materials for an automotive company says his company has failed to leverage its purchases effectively because management has failed to commit adequate resources for the "intensive data scrubbing and collection," needed for effective strategic sourcing.

Averages for 2000

Top 250 Purchasing Departments

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