Microsoft takes steps to world-class procurement
Purchasing rises to meet cost-savings challenge issued by CEO Steve Ballmer
By Susan Avery -- Purchasing, 4/3/2003 2:00:00 AM
Microsoft is closing in on exceeding a $1 billion cost-savings goal.
Issued by CEO Steve Ballmer nearly two years ago, the companywide challenge called for the savings to be achieved within 24 months. The software giant is on track: It has chalked up savings of more than $825 million in 20 months.
This achievement would not have been possible without the help of worldwide procurement led by Don Jones.
When Jones took the position of general manager, worldwide procurement, Microsoft Corp., Redmond, Wash., late in 2000, the group was focused mainly on improving efficiency of the company's transaction processes. With the help of IT, procurement developed a set of online tools for use by employees to buy indirect goods and services such as PCs, marketing and advertising and travel. Use of one tool, MS Market, helped to lower PO costs to $5, saving about $7.3 million annually (PUR: Jan. 25, 2001; p. 48).
MS Market is the foundation of Microsoft's "distributed" approach to purchasing that leads company employees to buy goods and services provided by suppliers managed by worldwide procurement. Employees have buying authority to set spending limits.
"Our online tools are so advanced that we pushed the buying function out into the business units," says Jones. "Orders don't flow through procurement, nor do we select all suppliers for the businesses. What we do in procurement is guide employees to do the right thing." Microsoft has seven business units: Client, Server Platforms, Information Worker, Business Solutions, MSN, CE/Mobility, and Home & Entertainment. The purchasing tab of these businesses for both direct and indirect goods and services is about $10.5 billion annually.
In guiding employees to do the right thing, Jones and his group are:
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Increasing worldwide procurement staffing by 50% in 18 months, including hiring such proven purchasing professionals as Ken Litton, formerly vice president of sourcing at Rockwell International, and G. Winston Smith, previously supplier diversity director for AT&T. Microsoft also has strengthened reporting structure of its worldwide procurement organization. Now, buying groups in Asia report to Jones.
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Enhancing MS Market and launching MS Spend, a tool to capture spending activity by UNSPSC (United Nations Standard Products and Services Code) of each of the businesses.
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Introducing MS Vendor Program, a supplier management tool, to a wider base of the company's suppliers at a vendor summit held last summer and ex panding use of a supplier score card.
Shrimp and weenies
"Steve Ballmer and John Connors (Microsoft chief financial officer) laid down the gauntlet," says Jones of the company challenge to reduce costs by $1 billion in 24 months. He explains that over time Microsoft has had three cost-savings initiatives. The earliest was called "shrimp and weenies." A second, "taming the cost beast" was led by Bob Herbold (formerly chief operating officer) and helped spur the procurement operation to develop the online tools MS Market, MS Invoice, MS Expense, MS Vendor, etc. The third, kicked off by Connors, focused on driving increased earnings per share through decreased spending. Management determined that this last initiative ought to be an ongoing effort. It has evolved into the company's Continued Fiscal Improvement program.
All Microsoft employees are involved in the Continued Fiscal Improvement program. The CFI breaks out the company's annual spend into 10 distinct groups. Each group (i.e., localization services—translating Microsoft products into multiple languages—call centers, marketing, operational infrastructure, Xbox, etc.) has an executive sponsor and an annual cost-savings goal.
The CFI encourages the businesses to approach Jones and his group for assistance in cutting their spending to meet their goals. (Adherence to procurement policies and procedures is not mandated at Microsoft.) Until CFI, management measured performance of each business on its contribution to company profits. Now, the businesses have the cost-savings goal to meet as well. "Procurement has become a way to get to that goal," says Jones. "It's created a lot more pull for us."
Strategic sourcing
Much of the CFI savings realized by Microsoft over the past two years is the result of a strategic sourcing initiative put in place by worldwide procurement. Ken Litton, who joined the company about one year ago, now leads the effort. "Coordinating our sourcing activities across the businesses is Ken's focus," says Jones. (In addition to developing consistent methodology, he's also charged with putting in place procurement procedures and policies.) Take the company's print and packaging purchase, for example. "We are buying print and packaging for Xbox, Windows, Office, the mobility group and the Great Plains division," says Jones. "We need to be smarter about buying print and packaging as a company."
One of the first things Jones and his group did was create a procurement council consisting of key decision-makers and budget owners in each of the businesses. The council meets monthly to discuss procurement strategy, business goals and ways to align the two. Twenty minutes of each session are earmarked to share procurement best practices. Topics of discussion have included supplier invoice auditing, corporate social responsibility and supplier score cards.
Taking a strategic approach to the print and packaging buy (a $295 million annual spend), Jones and his group readily identified $30 million in cost savings. They also found another $40 million that they see as more challenging to achieve.
Some initial savings are the result of consolidating the company's spend on direct marketing services. As a company, Microsoft had been doing business with 15 of these suppliers that each works with 10-15 printers. Conducting an assessment of commonality among these suppliers, procurement found that only one printer was being used by more than one agency. "One of our key thrusts is getting our arms around our spend with tier-two suppliers and managing that without taking decision-making authority away from tier-one suppliers," says Jones, who helped narrow down the supplier base and negotiate agreements with five marketing agencies.
Procurement helped to reduce costs $19 million by consolidating the company's spend on blank compact discs (CDs) as well. One group was paying $1.20 per CD, while another was paying 20 cents.
Consolidating the post cards buy yielded similar results. Jones and his group found that the businesses had been purchasing post cards in six different paper weights and 11 paper sizes from 16 suppliers. "Each of these configurations carries a different cost," says Jones. "We worked to find a way to reduce the number of variables that impact the cost of the cards without sacrificing creativity of the marketing team."
Cost savings resulting from leveraging such purchases as print and packaging and trade shows and events (which netted a 17% reduction) has been relatively easy to achieve for Jones and his group who are prepared for challenges that call for true collaboration between the businesses. Recently, they started working on consolidating the company's telecom spend, a big buy for the IT (for the corporate network), MSN (who buys and resells it) and Xbox groups (for online gaming).
Jones says that many of these efforts are "Mom and apple pie" for most procurement organizations. At a recent roundtable meeting of chief purchasing officers, he recalls that many of his peers are challenged by data integrity and transaction efficiency. "We're actually very good at that," he says. "We need to work on methodology and programs and policies to do good procurement. We're building off a great foundation with our MS Market and MS Expense tools. It makes this job a whole lot easier."
MS Spend
At the same time, worldwide procurement has enhanced MS Market, the company's internally developed tool for placing orders electronically with suppliers, working to improve such behind-the-scenes activity as supply management and related workflow. One area that's been updated: the process to add new suppliers to MS Market.
Until one year ago, it was an accounts payable function. If an employee needed to add a new supplier to the system, he or she simply sent the supplier a form. The supplier returned the completed form, AP processed it and the supplier was added to MS Market.
Now, the process takes place within MS Market. The supplier completes a new supplier questionnaire (NSQ) online. The NSQ is routed to a commodity team that manages the category of spend. The team determines the rationale for the addition. Rather than simply add another new supplier to MS Market, the team often directs the employee to a supplier already in the system.
The procurement group also is introducing use of the UNSPSC code within MS Market to help the company better track its purchasing activity.
Employees use MS Market to purchase many indirect goods and services (personal computers, advertising and marketing, etc.), about $6.8 billion annually. Until recently, employees would use the tool to shop by "flipping through suppliers."
Commodity teams have worked to create a "decision tree" for categories of spending that lead users of MS Market through a series of questions to suppliers managed by worldwide procurement. The tool now requires a bit more work of users, to break out their spending into separate categories, i.e., an event at a golf course can be broken out into such categories as food, facility, facilitator, etc. Each category of spend is assigned a "friendly name" UNSPSC code.
Using "punch out, stay out," employees place their orders directly with suppliers on their Websites. After filling the orders, suppliers send Microsoft an invoice for the order through MS Invoice, an online tool for suppliers. These orders plus those for direct purchases (from such suppliers as Flextronics) pass through the SAP ERP (enterprise resource planning) system, R/3.
With the UNSPSC codes, Jones and his group have ability to "turn off" a supplier in a given category. Using a computer supplier as an example, he points out that employees may purchase tee shirts, IT consulting services and computer systems from the supplier using MS Market. Now, using the codes, procurement can set some controls to employee spending by limiting their purchases from such a supplier to servers, PCs and consulting servers. "If you want to buy a coffee cup, that would be another supplier," says Jones.
Between distributed procurement and adoption of the UNSPSC code set within MS Market worldwide procurement will soon have precise data on Microsoft's purchasing activity. Until recently, Jones and his group gathered some of this information from supplier records, while the company's finance operation could find it coded in the general ledger.
Microsoft's new spend management tool called MS Spend gathers data on purchasing activity of the company's businesses from MS Market. (For those orders placed through SAP, purchasing data is being inferred from GL coding on the invoice.) CEO Steve Ballmer intends to use this data to benchmark spending of the businesses.
While worldwide procurement has only recently started to collect data generated by MS Spend, some purchasing trends already are starting to appear. For instance, spend data show that in some cases the company has relationships with suppliers and their subsidiaries. "Looking at our advertising spend, we find that in addition to our largest advertising supplier we are also doing business with 11 of its subsidiaries," says Jones. "We took this information to the supplier and negotiated an agreement with just that supplier, not the other 11."
He recently demonstrated use of MS Spend at an informal meeting of purchasing chiefs in the Northwest. Every two or three months, these buyers from Paccar, Boeing, Weyerhaeuser, Starbucks, Nordstrom's and Microsoft get together to share best practices in purchasing.
Tying together many of these efforts is the Microsoft Vendor Program: worldwide procurement expanded its use to a greater portion of its supplier base last summer. The company also uses the title "vendor account manager" to designate those procurement professionals within the businesses with responsibility for managing a supplier's day-to-day activities and key performance indicators. Initially developed to manage Microsoft's marketing services suppliers, MSVP provides standard methodology, such as templates for standard contracts, for the company to do business with its suppliers. Now, more than $5.2 billion of the company's annual spend is with suppliers involved in the program.
MSVP designates suppliers as premier, preferred and provisional. (There's no check list for qualifying as a premier supplier; an evaluation considers several factors such as volume of business.) Used by Jones and his group to help drive more of the company's spend to fewer suppliers, MSVP has helped to narrow the supplier base for such categories of spend as localization services. For this category alone, use of the MSVP program has helped save $12 million.
The tool provides suppliers with access to Microsoft information. For the direct marketing spend of one of the businesses, use of MSVP has helped not only to reduce costs, but also to improve quality. "They were able to train a narrower set of suppliers on our brand and on how to use our logo," says Jones. "Not only did they see costs savings, but also a tremendous improvement in the quality of output from the supplier base."
Measuring Suppliers
New to MSVP: supplier score cards. Until recently, procurement was not involved in measuring supplier performance. But IT was. So Jones and his group took the work that IT had done and rolled out the score cards to the entire company. Now, there is a vendor performance score card in place for every supplier with which the company spends $10 million annually. Performance measures include: quality, value, service, innovation, delivery, organization health and supply chain management.
"We're connecting everyone in the company with the best suppliers through our tools and practices and then measuring performance of those suppliers," says Jones. "We are going to expose that rating to everyone at Microsoft who may want to use that supplier in the future."
The tool benefits suppliers as well. The company's largest, Flextronics, supports three of seven businesses. Each business asks the supplier for different measurements, data and requirements. "What we're hearing from suppliers is that it's about time that we're more predictable to the community," says Jones. "They are more predictable. It's a huge benefit."
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