Mirroring sales, purchasing at Goodyear emphasizes market research
Buyers at Goodyear become expert in materials, equipment, goods and services so they can reduce purchasing costs when negotiating contracts even in volatile pricing environments. Their role models: sales organizations.
By Tom Stundza -- Purchasing, 10/5/2006 2:00:00 AM
This past May, Goodyear Tire & Rubber Co. introduced the first automobile tire with an outer sidewall made from a woven composite fabric of carbon fiber. It was tough getting enough material to meet the scheduled manufacturing needs for the Goodyear Eagle featuring the Akron-based company’s new ResponsEdge technology. That’s because commercial aviation and performance racing use the lion’s share of this material.
So, for more than a year, Goodyear’s global procurement organization used its “market intelligence strategy” to learn the ins and outs of the carbon fiber world. Upshot: “We were able to source the needed carbon fiber in a market that was very short of supply,” says Gary A. Miller, vice president of purchasing and CPO at Goodyear.
Miller’s purchasing team gets its market intelligence the old-fashioned way: by researching public reports, the Internet and talking with personal contacts to learn about plant locations and capacities, materials specs and cost structures. It’s similar to the way marketing and sales teams operate, which is no coincidence since Miller hails from a sales and marketing background. Miller is convinced that purchasing is a mirror image of sales and marketing.
“The things you want to understand about your customers in the sales organization are the same things you want to understand about your suppliers in a procurement organization,” he says.
Known best for its tires (and it sold more than 226 million of them last year), Goodyear also produces several lines of belts, hoses and other engineered rubber products for the transportation industry and various industrial and consumer markets. Annual sales are close to $20 billion. The company operates more than 100 plants in 29 countries. To keep them humming, the global purchasing organization buys $10 billion annually in materials, equipment, goods and services.
“My leadership team and I spend a lot of time on purchasing and supply chain strategy because a systematic plan of action is important in achieving global cost competitiveness,” says Miller in a recent interview with Purchasing. But, the programs that have to be designed to achieve competitive advantage through better buying don’t just happen, he insists, and neither would the purchasing tactics that should flow off the strategies.
So, Goodyear’s procurement organization has:
• Organized for global buying,
• Developed the market intelligence that even finds out what it costs suppliers to make every major group of raw materials,
• Negotiated most contracts on a global basis and in cost-effective ways,
• Moved up and down the supply chain to buy the raw material’s raw material whenever possible,
• Maintained a constant vigil that finds the right time to transfer local and regional buying to global purchasing.
|
The purchasing gameplan is based on the corporate target of more than $1 billion in gross cost savings by 2008 through product reformulation, reduced raw materials spending, expanded low-cost country sourcing and various manufacturing, administrative and warehouse.
“When you’re buying several hundreds of millions of dollars of key manufacturing materials, you have to come up with a global procurement strategy,” says Miller. “To do that, you have to have market intelligence that gives you the kind of information you need to implement the strategy, to make the strategy work.”
Market intelligence helps buyers understand a specific piece of business and the levers that can drive purchasing efficiency in that business, says Miller. “If you want to ensure you are buying in a cost-competitive manner on a global, regional and local basis, you have to be organized.”
Goodyear’s procurement operation is a matrix organization with general managers responsible for major commodities. The natural rubber buy is based in Singapore but the rest are based in Akron: synthetic rubber, fabrics, steel cord, pigments, chemicals and oils, carbon black and fillers, and indirect spending, which Miller calls “anything that doesn’t go into a tire.”
|
The purchasing organization also has regional purchasing directors in each of the global regions “who have responsibility for the business units they serve as well as the corporate global purchasing organization.”
Stripped of all their titles, Goodyear’s procurement staff members basically are buyers who are taught to discover everything they can about their suppliers—from plant locations to materials or products being made, from the plant capacities to their cost structures, as well as their suppliers and their customers.
“Those things are absolutely critical to develop and maintain cost competitiveness,” Miller says. “You have to know and understand the market and have market intelligence on a global basis to buy globally at the highest level. We try to have a significant mount of knowledge of the markets from which we’re buying.”
 Automotive Buying Report Nissan pushes suppliers on quality GM strives for consistent metrics Suppliers tighten their own supply bases |
Extensive commodity and market data is a foundation to all procurement strategy efforts of Miller’s purchasing management team. “It’s difficult to have a well-developed strategy without having a good understanding of the marketplace in which you operate,” he says. Why the emphasis on market intelligence? “The more deeply you can understand everything about what you’re buying, the more effectively you can evolve a strategy.”
Miller says Goodyear can develop better cost-competitive strategies when the company’s purchasing managers negotiate globally. And it doesn’t matter where the supplier companies are located because negotiations with suppliers encompass Goodyear plants or offices in all of the regions the tire company operates—North America, Latin America, Europe and Asia.
“They may not supply every plant in every region but they will supply our company on a global basis,” says Miller. “So, we will negotiate a contract with them on a global basis because we obviously want to take advantage of our economies of scale.”
While the Goodyear purchasing organization has been aligned since the mid-1990s to negotiate and buy globally, many of its suppliers are not, which presents a challenge. “Many suppliers don’t want us to negotiate globally (but) we push very hard because we constantly are looking at the portfolio of materials, equipment, goods and services we purchase and looking to expand buying from local to regional or from regional to global.”
The CPO says this approach is an extension of Goodyear’s philosophy of buying on an even larger scale. “That’s a constant process for us—looking to expand our buying to a larger scale because we want to take advantage of any economies of scale.”
Miller points out that the company’s strategy is bolstered by the fact that Goodyear is back-integrated into some key raw materials. That means the company makes some of what it needs, and buys the rest. “That obviously gives us a better window into the margins on these materials and that allows us to have more-informed negotiations,” he says. “And that gives us more knowledge to develop cost-competitive contracts.”
|
Goodyear’s buyers have a portfolio of options to use
In what has become the most volatile purchasing environment for commodity materials, Goodyear Tire & Rubber Co.’s procurement organization has developed a portfolio of buying tactics designed to keep prices as low as possible and deliveries as timely as possible. That’s important when 35% of the cost of goods sold is tied up in obligations to purchase raw materials through short term supply contracts at fixed prices or at formula prices related to market prices or negotiated prices. “I’ve never seen a more volatile time across such a spectrum of purchases as we have had recently,” says Vice President of Purchasing and CPO Gary A. Miller. In this environment where energy and commodity prices keep spiking, Goodyear has developed a portfolio of sourcing techniques, which he describes as “an array of ways in which we can purchase effectively.” Some materials are bought on a fixed-price basis, some on a price-index basis and some on a spot basis. “If you have a portfolio, an array of ways in which you buy a material, then you have an ability to use whatever method looks best for you,” says Miller. In that way, “if a product’s price goes up, what you have bought on a fixed-price agreement won’t increase; if the price goes down, the index will let you ride down with that price; and the spot price will give you the flexibility on at least a portion of your business to do whatever you want to do.” Miller believes these are “good purchasing tactics,” but adds that “I don’t see a lot of people using such an approach.” In fact, he says that “there still appears to be an overemphasis on spot-market buying, where you certainly are taking the risk on availability and price and not hedging any bets.” But he means hedging in a theoretical sense, since Goodyear’s corporate policies ban hedging as an actual purchasing exercise. Goodyear’s buyers also work to find substitution materials as a way to mitigate the risk of volatile pricing. Goodyear leads the industry in substituting synthetic rubber up to 15% of a tire’s need for natural rubber. The tire industry average is 8%. Goodyear’s technology and buying lead comes from quarterly skull sessions between purchasing personnel and the engineers and scientists at corporate research and development. “Developing the flexibility to move back and forth between the two types of rubbers is very important to boost cost savings,” says Miller. Another part of the portfolio is the length of contracts, which are linked back to market intelligence. The company may decide, for example, not to extend a five-year contract with a supplier if it’s known that additional industry capacity is coming on stream in a year to two. “In that same vein, if we understand that somebody is going to expand capacity, we may commit for a quantity of that expansion so the supplier will have guaranteed business from day one of operations.,” Miller adds. Yet another tactic is a low-cost country sourcing and Miller describes the company’s initiative there as “robust.” Actually, “we have been organized to take advantage of global procurement since the mid-1990s,” he says, when the company first started buying materials in Central and Eastern Europe. Later came buys in Russia, China and India. “We see all of them as places with the potential for us to source more and more raw materials,” says Miller. “Clearly, that is a direction we want to go, we need to go, to insure our global cost competitiveness.” One tactic that’s not in Miller’s portfolio for production materials is a supplier-reduction metric. He says, “there is nothing wrong with reducing your supply base in certain supply areas, but I’ve never been convinced that supplier reduction is good in key materials.” Miller sees supplier reduction programs working better in the area of indirect purchasing and “in areas where you have a high level of competition for business. In fact, it makes all the sense in the world in indirect.” Actually, Miller believes the recent push toward low-cost country sourcing by North American manufacturing companies has those firms adding suppliers. “When they start to source from the low-cost countries, the purchasing groups don’t cut loose their current suppliers,” says Miller. “They’ll reduce the offtake from the existing supply base, but they keep those firms active because there’s no confidence or certainty the new suppliers will get the materials delivered on a reliable basis.” Miller actually purports not to know the number of suppliers his organization uses. “It’s just not one of those things we are concerned about,” he says. “I’m much more concerned with how we can purchase more effectively. I haven’t been convinced that measuring the number of global suppliers that we have and then reducing that number on a monthly basis is a route to save us money.” |
Now Playing: 
