Intel retools its materials organization
Transforming an organization to face global realities is one of procurement's big challenges. Here is how Intel transformed, and the results.
By Susan Avery -- Purchasing, 7/17/2008 2:00:00 AM
When Craig Brown took the reins as director of the materials organization at Intel Corp. in the spring of 2006, right away he had to make some tough decisions. Average selling prices of the semiconductors the company makes were falling and competition was heating up. The giant chip maker was taking a hard look at how it was doing business and beginning to make some much-needed, yet painful, changes.
Those changes consisted of downsizing the operation, including materials, and streamlining internal processes. Two years later, Intel is leaner and stronger: First-quarter 2008 revenue was $9.7 billion, up 9% year over year, and operating income for the same period grew 23%.
The materials group is helping to contribute to the bottom line by keeping prices the company pays for direct goods competitive through tough negotiations with suppliers and getting involved early in product design and development. As important, the materials operation is applying savvy demand-management principles to the indirect (services) buy. For instance, working with stakeholders in each of the company's businesses, the materials group has helped reduce Intel's spending on its contingent workforce, and it is taking the same approach to travel and some IT outsourcing areas.
“We can fight globalization or we can figure out how to do it right,” says Brown of change he's helped bring to the materials organization. “There's more energy now. Some shows up in the financials and that's great. But, sometimes, we as managers only look at cost savings and sourcing results. We have to keep one eye all the time on the people. They're the reason we're successful.”
The plan
To figure out how to do it right, Santa Clara, Calif.-based Intel hired an outside consultant to review its operation. The consultant determined that the company had become bloated in some of its support functions, including materials.
“We were doing things our way and winning for a long time,” says Brown, who has worked at Intel mostly in purchasing roles for the past 26 years and assumed his current post in June 2006 upon the retirement of his predecessor. “Then, the market shifted and we found we couldn't afford to do things the way we always had. There was a leaner way of doing it.”
Based on the findings, Brown developed a plan to get the materials function back to basics. Unfortunately, it included reducing the size of the organization by 35%. While there always had been redeployments at Intel, letting people go was something entirely new to long-time employees. “But we had a huge organization with committees everywhere and a bureaucratic decision-making structure,” he says. “In a way, we were choking ourselves. Fewer people were negotiating and bringing real deals to the table.”
In attacking that bureaucracy, Brown developed a plan, keeping two points always top of mind: Getting materials back to zero-based budgeting and developing and retaining the skilled purchasing professionals working in the organization.
More global
At Intel, the materials group reports to the manufacturing organization. It's always been the case. Now, however, the group has a decidedly more global flavor.
What also didn't change is Intel's commodity management approach to its buy. The company purchases approximately $17 billion annually in direct and indirect goods and services. This figure includes a $4 billion annual capital-equipment spend. Brown is responsible for direct and indirect purchasing, but not capital equipment.
The materials organization today numbers 1,500 employees worldwide, down 30% from its peak. Approximately 20% of the current staff is comprised of individuals with sourcing engineering backgrounds. The sourcing engineers are involved in the design process as early as the pathfinding stage, when staff evaluate design alternatives. They work with suppliers to refine supply-base-generated ideas and propose alternatives of their own. In fact, Intel's sourcing engineers file hundreds of invention disclosures and patents each year.
And while commodity or category teams have had a global orientation for some time now, Brown is transitioning them to become less U.S. centric. “We have a goal over the next two years to shift six percentage points of headcount in the materials group to lower-cost regions, specifically Asia, because most of our suppliers and all our assembly/test facilities are located there,” he says. Now, the organization is 53% U.S.-based and 47% based in Central America, Asia and Europe. Brown says the shift to Asia will occur through attrition.
One challenge to hiring skilled purchasing professionals in the Asia region is a high turnover rate. While Intel likes to hire recent college graduates and train them for the posts, the company also needs more individuals with experience for senior management levels jobs in the region. “While we are finding key players and taking them under our wing, sometimes, despite our good name, we lose them to other multinational companies in the region,” says Brown. “But we are making progress.”
How they buy
Intel's commodity teams have been in place for a while and Brown says that they are performing well. On the direct materials teams are representatives of Intel's engineering function. Because the product lifecycle is short, the teams concentrate their efforts on designing for cost.
Through the indirect teams, the materials group works closely with key stakeholder groups such as human resources or IT. Its role is to negotiate with suppliers and manage contracts. Stakeholders' role is to develop the company's requirements and present them through the materials organization to the suppliers.
Direct and indirect teams alike follow a formal strategic sourcing process. As part of that process, the teams track supplier performance and those that meet the company's rigorous measures are honored each year with the prestigious Intel supplier continuous quality and improvement (SCQI) or PQS (preferred quality suppliers) award. This year, 13 suppliers received the SCQI award and 35 the PQS award at a banquet held at company headquarters in March.
Top-performing suppliers also receive a larger share of business from Intel, Brown says, adding that consolidating the company's supply base continues to be a key focus of the materials organization, especially on the indirect side. As he sees it, improvements to the company's online catalogs that help guide employees to preferred suppliers should help. Now, about 200 suppliers (both direct and indirect), represent approximately 80% of Intel's annual spend.
In addition to the annual supplier gathering, the materials organization meets every two years in each of the regions in which Intel operates to share best practices and network. And, for the first time in 2007, Brown held a conference for his organization's 165 materials managers. At the event, he presented his expectations for the group.
What's ahead
On the tactical side, Brown is working to further automate the purchasing-transaction process. This part of his organization is centralized at two locations: one in Costa Rica, another in Malaysia. Improving purchasing efficiency will allow the materials group to shift resources to other more strategic areas such as sourcing and negotiating.
Intel uses SAP ERP (enterprise resource planning) software. The materials organization has developed a spend analysis/management tool based on that platform called global procurement reporting. The materials organization, Brown says, is very disciplined about creating orders in the system with both UNSPSC (United Nations Standard Products and Services Code) and Dun's number.
With that information, the materials group has detailed data on every dollar the company spends. “If we didn't have the data, we would not have been able to suggest the plan to reduce staff augmentation. It's very powerful,” Brown says, adding that having such information at hand puts the materials organization in the unique position of being able to see the company's spending and determine opportunities to reduce costs.
As such, Brown is meeting more frequently these days with the company's executive leadership. “I can show that materials has a vision to shape Intel's bottom line. We can make a difference by improving revenue based on our ability to ramp product or reduce costs.”
In addition to standard price reductions on the company's direct materials purchases, the materials organization is tasked with cutting costs by applying demand management principles to some areas of indirect spending such as HR, IT and sales and marketing. With HR, it is collaborating on travel.
Rather than asking employees to not travel, Intel is working to change the culture of the company by offering use of new telepresence rooms. Employees can use the rooms for meetings instead of getting on an airplane. “It's not a negotiated savings, it's reducing the volume of spending,” Brown says. “Our leadership likes that. It's part of the transformation.” Also: With IT, the materials organization is involved in discussions on outsourcing.
“We have a new attitude and new behaviors,” Brown says of the materials organization today. “Going forward, we're looking to other areas of the company. We want them to recognize that we are not a cost center. We represent supplier knowledge and collaboration. If they have a problem, we are better able to solve it by aligning with a supplier than not. We are gaining credibility and are able to fill that role.”
See also:
Strategic sourcing case histories: How They Buy archive
Spotlight shines on key suppliers
11/19/2009Intel's SCQI lifts all boats
11/20/2002Intel charged in antitrust lawsuit
11/04/2009
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