Juice up the packaging buy
By By Christopher Reilly -- Purchasing, 6/1/2000 6:00:00 AM
In 1994, CPI Purchasing profiled the purchasing department at Ocean Spray Cranberries Inc., based in Lakeville-Middleboro, Mass.
The story, entitled "How purchasing provides a competitive edge," detailed the institution of supply-base reduction and supplier certification strategies at Ocean Spray, aimed at getting the most from fewer suppliers, careful budgeting and reducing total costs by $40 million, while adding value to the products they provide to consumers.
But corporate purchasing at Ocean Spray didn't stop there. In 1996, following the development of its supply-base reduction and zero-based budgeting strategies-zero-based budgeting is projecting the coming year's cost by benchmarking the lower of the last year's actual cost or forecasted cost-the company's corporate purchasing department devised a new cost-reduction strategy with a new goal to complement earlier programs and maximize the efficiency of the entire supply chain.
A new cost-reduction goal
As if the $40 million saved by the supply-base reduction wasn't impressive enough, this new initiative, termed Ocean Spray's worldwide strategic sourcing program, set out on a new cost-reduction goal: to work closely with suppliers to reduce purchasing's total costs by $50 million in five years. It was an ambitious goal, but by reorganizing the purchasing function, and through the development of a cross-functional approach to sourcing, purchasing at Ocean Spray was able to meet that goal in three years' time.
And the program also brought about some more far-reaching benefits. Based on its success, the program has led to a change in the way Ocean Spray interacts with its suppliers, especially when developing new products, and has placed purchasing in more of a leadership role at Ocean Spray.
Back in '96, James M. McDonough, director of purchasing at Ocean Spray, along with others within the organization, recognized the need to make more changes to the way the company purchases goods and services.
McDonough explains that before the restructuring, each purchasing manager's buying activities were specialized and organized into functional teams, arranged by buying activity. An example of that functionality could be seen in a division between corrugated and plastic packaging. "There was not much interaction between the specialized buying groups," McDonough says.
McDonough saw the need for more of a centralized purchasing structure to work toward common cost-reduction and quality improvement goals. "We decided on an approach with separate cross-functional teams, but with cross-pollination of the buyers working within those teams," he says. To explain, McDonough says that an assistant buyer may work on one project in ingredients procurement one month and on packaging procurement the next month.
"We started by bringing in some very talented purchasing professionals to complement the existing personnel in our purchasing department," says McDonough. He explains that bringing in new people caused some reassigning of some people's responsibilities and eventually led to some reassessment of the department's total spend and operations. "Essentially, we were looking to recreate the purchasing function," he says.
This began a period of information gathering. "We benchmarked the purchasing department of those companies that we considered to be world-class, both within our industry and without, and enlisted the help of a third-party benchmarking and consulting organization," McDonough says.
Based on purchasing's priorities, which focus on the quality, service, technology and total system costs not only received from suppliers, but also passed on to customers, purchasing at Ocean Spray began to develop its strategic procurement initiative.
With a blueprint of the plan, McDonough and the purchasing department began to create cross-functional teams to facilitate the program with suppliers. The teams were assigned to certain areas of the company's purchasing spend, such as ingredients procurement and packaging procurement. In total, 33 separate strategic goals were created and geared toward achieving Ocean Spray purchasing's $50 million cost-reduction goal.
"We then went throughout our organization and then externally to our suppliers, identifying the priorities, structure and goals we set forth," says McDonough.
A critical juncture was when the purchasing department presented the plan to senior management at Ocean Spray. Purchasing not only received validation from senior management that change was necessary and their approval in the development of the initiative, but was also given responsibility for the program and was held accountable by senior management. "It was determined that purchasing would lead the initiative from a tactical, strategic standpoint across the company's various business functions," McDonough says.
Cross-functional approach
One of the key points of the initiative's success, according to its creators, was the development of its cross-functional approach, which has helped purchasing develop stronger relationships with suppliers and with other internal business functions at Ocean Spray.
Close communications with suppliers was a goal before the institution of the worldwide strategic sourcing initiative. In the past decade, Ocean Spray has reduced its supply base from about 650 suppliers to about 160 and developed a system of supplier approval and certification.
The company now has a core supplier base of about 30 certified suppliers, which make up about 70% of Ocean Spray purchasing's total sourcing spend. The development of cross-functional teams under the initiative was designed to complement supplier selection and approval processes already in place.
While cost-reduction resulting from improvements in quality and the elimination of waste make up the thrust of the program, in many cases, the information sharing among the many functions of Ocean Spray's operations, and those of suppliers, have resulted in innovative strategies for new product development.
One example comes from the area of packaging procurement. "We were looking for a packaging product that would be innovative and would fulfill a perceived need on the part of consumers," says McDonough. "We looked to our supplier portfolio and challenged our suppliers to help us create a competitive advantage through the development of a new form of packaging."
Through the development of a cross-functional team, which included members of Ocean Spray's package development group-purchasing and research and development at Ocean Spray, as well as representatives from two of the company's certified polyethylene terephthalate (PET) suppliers-the companies met to discuss design ideas for the new product.
"The side-handle, 1-gal bottle began as a front-end-loaded conversation about innovation, and became a design concept for the new product, which was based on Ocean Spray's brand strategy," says James Gramm, manager of Ocean Spray's packaging procurement.
Gramm says that development criteria for the new product were that it had to be different from the competition's packaging and add value for the customer. "We decided that we wanted a bottle that had a handle, was easily portable, non-shattering, and constructed of clear, hot-filled PET plastic," Gramm says.
The result, according to Gramm was "a significant long-term development effort to bring this technology to market and included an investment on the part of suppliers to deal only with Ocean Spray, assigning personnel and technological resources for the package-from concept to delivery.
The project was a success not only in the creation of a unique and profitable product package, but it also was a success in working closely with suppliers to develop a highly efficient supply route in bringing the product to market, according to McDonough.
The development of cross-functional teams also resulted in some opportunities for cost savings. "In the case of ingredients," says Kathy Speroni, manager of Ocean Spray's ingredients purchasing, "the development of cross-functional teams was a very far-reaching effort."
Here, teams comprised not only representatives of key suppliers and purchasing representatives, but also included other business functions such as marketing, research and development, product development, planning, distribution, operations, facilities and sales.
At the beginning of the program, Speroni says that the cross-functional teams would do a lot of brainstorming about a particular project or with a particular supplier to find ways to reduce total costs. "There were no bad ideas," she says. "Then we would come up with a list of ideas, ranging from the very general to the very specific, and purchasing would prioritize them," she says.
Based on the ideas, purchasing would then get together with the appropriate people from both organizations and form a plan for implementation. The plans often changed the way product was sourced, produced or delivered, and usually resulted in a cost savings or process improvement.
"For example, with the development of some of Ocean Spray's newer products, such as the 100% juice line, we knew we would begin to buy a lot more juice," says Speroni. Through the cross-functional teams, Speroni says that purchasing worked with certain suppliers to buy ingredients in bulk quantities, where applicable. Bulk buying, coupled with efficiency improvements in labor, inventory and processes, which were realized through purchasing's cross-functional approach, quickly resulted in cost savings on the order of 10%-15%, which totaled a couple million dollars. In some other cases, information gleaned through cooperation with suppliers has allowed Ocean Spray to source certain items in larger containers, which also yielded cost savings.
Purchasing skill set
An indirect benefit of the strategic sourcing and purchasing restructuring has been the development of the skill set of purchasing professionals at Ocean Spray, according to Jim McDonough.
"If you look at the composition and the skill sets of the purchasing professionals we had in place five years ago, compared to that of the people in place today, the competency levels would look a lot different," he says.
McDonough explains that because quality improvement is one of the key principles of the strategic sourcing initiative, almost all of the senior managers in Ocean Spray's purchasing department have a background in quality improvement or some other technical background. "That is by design," he says. "In addition, many of our managers also have technical experience as practitioners in our plants," he says.
"We wanted people in management who have real hands-on quality experience working in the plants, because this adds a whole new dimension of understanding as to how we buy, what we buy and from whom," McDonough says. "This type of experience has certainly been a catalyst to getting us to the next step in cost reduction and quality improvement, and has become something we look for in new hires," he says.
Other traits Ocean Spray's purchasing looks for include, "the ability to lead, which includes leadership of other business functions within the organization, as well as leadership of suppliers without," says Kathy Speroni. Other skills include the ability to communicate effectively, and the ability to leverage the use of technology to improve processes in the future.
An evolving process
McDonough, Speroni and Gramm stress that the success of the company's worldwide strategic sourcing initiative didn't come over night. A lot of hard work and participation were required throughout the supply chain to reach the $50 million cost-reduction goal in a little more than half the allotted time.
"Once we put the program in place, there was a learning curve," says McDonough. "But when we started getting results, the interest level in the program picked up considerably, and we began getting the support of people who weren't involved from the beginning," he says.
"In the first couple of years, we were mostly concerned with removing waste from the supply chain," says McDonough. But now that much of the low-hanging fruit has already been reaped, "we're ensuring that when we bring a new product to market, we're building the most efficient product-to-market strategy possible," McDonough says.
And while the goal of the program has already been met, that doesn't mean that the company's cost-reduction efforts have ceased. "There is definitely room for improvement," says McDonough. "Most of the savings to date have come out of direct materials along with raw materials and packaging," he says. "Those are areas in which purchasing had traditionally been involved."
With its eye on the future, corporate purchasing at Ocean Spray has stepped-up its efforts in cost reduction and is now putting its strategic sourcing initiative to work in business areas new to purchasing. "The basic principles of the strategic sourcing program, along with purchasing's influence, are migrating into other areas," says McDonough, "such as maintenance repair and operating (MRO) expenses."
McDonough comments on this change: "MRO was one area that purchasing was not involved in three or four years ago," he says. "It was highly decentralized at that time, but has now come under the corporate purchasing umbrella," he says.
The worldwide strategic sourcing initiative has given MRO purchasing a more strategic, centralized approach. In fact, the company is developing and testing some new methods of sourcing, which involve the Internet. Corporate purchasing is currently involved in testing of two Internet beta-sites, which will gather information pertaining to how MRO items will be sourced in the future.
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