NEW FLYER: Shifting into high gear
Data visibility and analysis pulls Canadian bus manufacturer out of a tight corner and back on the road to profitability
By David Hannon -- Purchasing, 3/17/2005 7:00:00 AM
It was not long ago that Canadian bus maker New Flyer Industries was heading into a tight corner that it might not be able to pull out of. In 2001, the largest producer of transit busses in North America was experiencing serious financial problems and its new owners were coming in to try to turn things around and get the company back on the road to profitability. As part of that major overhaul, company executives decided to bring in some new supply chain talent with the goal of gaining more control and visibility into its $400 million materials spend.
The first move was to shift David White, a former finance executive at the company, into the role of vice president of supply management. With several years of experience at New Flyer as the corporate controller, White knew the value of controlling spend and its impact on bottom line results. Not long after that, New Flyer brought in Michael Farrugia as the executive vice president of supply management. With a long background of purchasing and inventory management in the aerospace industry, Farrugia was viewed as something of a "hired gun" in revamping the way the company approaches its procurement. The two began working very closely to create a new procurement organization with new priorities.
From the very beginning, White says, the new procurement organization took the view that it needed to function as an independent business and take responsibility for its own finances. "We viewed it like we were running a separate $400 million company," says White. "We had to adhere to our budget and improve our cost control as a company within the company. We answered to shareholders about how we manage our budget. We became our own company with our own customers to serve."
To that end, this new "company" needed a chief financial officer (CFO), which is the role that White has taken on, leveraging his background in financial practices and controls and applying them to procurement. At the time, New Flyer's 30 procurement professionals were spread across three North American locations and were working under various levels of control. By creating a role with overall financial responsibility for procurement, buyers knew where the buck stopped. Letting each individual buyer and supplier negotiate pricing was not providing enough control for the procurement organization to meet its cost-reduction goals as a turn-around firm.
One advantage White and Farrugia had from the beginning was that all of the company's purchase orders were already in the existing Oracle ERP system. But the data, at that time, was not being reviewed or analyzed on a regular basis—it was simply being stored and White knew that true spend analysis would start with a deep dive into that data.
"We needed to set up a resource plan to match the strategic plan to make sure we had the tools to achieve our goals," says White. "We needed to make sure the database was in place—it was lucky for us that it was in place. All the spend data was going into this Oracle ERP system but no one was using it."
The goal was to review the existing spend data and then negotiate and consolidate the supply base in areas where the company was paying variable prices—and achieve one firm fixed price only for each part. White had the past two years' worth of data in the ERP system exported into a large spreadsheet (50,000 lines large) and some custom reports and pivot tables were developed with the help of the company's information systems staff for closer review and analysis. Data included the supplier, part price, quantity and the number of parts with each supplier. The data was further reconciled with the spend numbers in the company's financial system to ensure that all was accounted for. From there, White personally spent about two weeks reviewing the raw data and realized that nearly 20% of the items bought had multiple or variable prices.
"The initial dump of the data from the ERP into the spreadsheet was not difficult," says White. "Making sense of the data is what took the most time." New Flyer's internal MIS team created a spend report which White provided specifications for, which can be run by supplier to provide all the necessary data and shows past and future planned volumes.
To better manage the mass of data, the spend was divided into four major commodity groups that accounted for the vast majority of spend: metals, body/rubber and composites, electrical systems, and driveline/powertrain. One procurement specialist was assigned to each of the four commodity spend areas with the goal of "separating the ordering from the buying" in White's words. "The daily buying process and chasing the part that is short today will always get in the way of true strategic sourcing," he says. "There is always a short-term crisis that can block a buyer's view. For a project like this to work, there have to be some dedicated resources in place."
The procurement specialists were told where to focus their efforts and began inviting in select suppliers to renegotiate pricing agreements in person.
"We prioritized which spend areas were most important and established timelines and controls under which no one could close a deal with a supplier except David or me," says Farrugia. "We started from the top dollar down to make sure we had accurate updated pricing agreements in place. Our objective today is to get firm fixed pricing for everything we buy."
The visibility and analysis of the spend data helps in the negotiation process because now New Flyer knows what it has spent with a certain supplier in the past and what it is forecasting to spend with that supplier, or for that part, in the near future, based on its 20% revenue growth last year. Suppliers, in fact, are often blind to the volumes and data as well, according to White. When they see how much New Flyer does, in fact, spend with them in total, or expects to spend, they are often more willing to give better pricing or other value-added service. Accurate forecast data is perhaps most helpful because suppliers are able to run their operations based on a committed volume from New Flyer instead of the month-to-month ordering that took place in the past.
Meeting with suppliers in person to negotiate has not only produced better contract pricing, but also provided some new cost-reduction ideas. Some suppliers have suggested new materials, parts or other value analysis solutions in face-to-face meetings that may not have been brought to light in an online negotiation.
New Flyer has also discussed consumption rates internally and with suppliers as a possible method of reducing costs. For example, one metal fabricator was only running 1.5 shifts and not utilizing its very expensive, high-end equipment very well. New Flyer wanted the supplier to meet a certain price and even brought in its own financial staff to analyze the supplier's costs and equipment utilization rates. By putting the supplier on New Flyer's gas contracts at a better rate and making other recommendations, the supplier found its costs had reduced enough that it could meet New Flyer's requested price and volume. And in the end, the supplier was able to add two additional shifts to its operation and better utilize its equipment.
Another example of how increased visibility and analysis helps bring sourcing opportunities to light involves a small latch that New Flyer buys roughly 15,000 of each year. White says in the past, no effort had been made to find the best source or negotiate a better price, because in the old system, it showed up as one supplier providing one part. A deep-dive negotiation achieved a 70% improvement in overall cost on the part.
In MRO, New Flyer is working on a project that will hopefully be a test bed for other areas. It has selected one supplier to be the buyer or supplier consolidator for that commodity group with specific purchasing rules and people in place. New Flyer gives that supplier the requisition, and it shops the requisition to other suppliers to get it filled. The result: instead of managing 17 suppliers, New Flyer now manages one. The hope is to eventually work this into the production materials side as well.
The improved spend visibility is also helping New Flyer evaluate suppliers based on total cost instead of just price. Farrugia explains that increasing volumes to get better part price can increase the warehouse or inventory cost so the part price reductions are offset completely. Improved visibility and analysis of spend is helping train buyers at New Flyer to think differently.
"Often a buyer's bonus is based on how much they lower a purchase price," he says. "Buyers are not trained to think in terms of total cost. Under this system we can more closely monitor our freight and inventory costs because at the end of the day, they all contribute toward total cost. Anyone can drive purchase price down."
The results of New Flyer's spend analysis work include moving from having 50% of its spend on contract to now having 98% on contract. The project was reported to the board of directors from the start and was updated at every board meeting.
While New Flyer's approach to spend analysis may seem more labor-intensive than some other companies' approaches, Farrugia says going over the spend line-by-line helps procurement understand the company's business and supply base better. The "black box spitting out answers" will not provide the thinking behind the decision, he says.
"You need to do it the hard way before finding the right tool," says Farrugia. "You may become too reliant on the magical black box analyzing data and have no clue how that answer came out [and] not be able to decipher if that number is right or wrong."
Going forward, the new agreements negotiated are all loaded in the Oracle system so when a buyer orders from a given supplier in the system, a purchase order generated automatically includes the contracted price. If a buyer deviates from this process, an exception report is automatically generated and the invoice placed on hold.
Now Playing:
Super spend analysis
03/18/2004Editorial: Spend analysis leaders
03/17/2005
