Using procurement to feed the bottom line
By restructuring and consolidating MRO buying, the procurement team at Pilgrim's Pride has helped reduce operating costs substantially
By Susan Avery -- Purchasing, 3/3/2005 2:00:00 AM
In less than 16 months, Pilgrim's Pride's integration of its latest acquisition, ConAgra's chicken division, has had a clear upward impact on the sales, profits and market share of the Pittsburgh, Texas, chicken processor.
Record sales of $5.36 billion in 2004 more than doubled the sales of the previous year and marked the company's eighth straight year of sales growth. It's also now the undisputed number-two poultry company in America with more than 15% market share, processing approximately 30 million birds a week, which translates into more than six billion pounds of poultry a year.
Procurement has played a large role in the success of that integration. Under the direction of Tim Thomas, senior vice president, procurement, Pilgrim's Pride has:
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Centralized buying responsibility—include purchasing activities of the ConAgra acquisition—at the corporate level.
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Successfully implemented SAP at all of the company's 180 locations, so now they all use the same purchasing system to place orders for goods and services.
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Created a purchasing council which meets regularly with executive management.
In addition, poultry processing purchasing veteran Ron Pittington—hired by Thomas as procurement director, mechanical—has built from scratch in the past year an MRO (Maintenance, Repair, Operations) operation, hiring category managers and negotiating national contracts with preferred suppliers. He and Thomas together created the post of purchasing specialist to implement the contracts at Pilgrim's locations across the U.S. and Mexico.
"We still have work to do, (but) we have seen tremendous rewards," says Thomas of the procurement operation, which, among other things, is responsible for an annual MRO buy of $275 million. It is contributing positively to Pilgrim's bottom line and has helped the company surpass its savings goal from the integration of its acquisition. In just 10 months, it reduced operating costs in excess of its original three-year target.
Corporate initiative
Critically, Pilgrim's Pride is not looking at procurement as an avenue toward one-time cost savings, but sees centralizing procurement as a corporate initiative going forward.
Ingredients and packaging purchasing have long been centralized at corporate headquarters. Thomas, who has worked for the company since 1986, was hired to aggregate spending and negotiate corporate contracts with suppliers. First, he tackled corrugated packaging, then carbon dioxide and maintenance supplies.
But consolidating the MRO buy poses its own challenges. At the plant, a downed production line can mean millions of dollars in lost sales. Plant buyers, working with their colleagues in maintenance, have close relationships with local suppliers they can call when there are emergencies to replace a part. However, multiply that by x number of plants and a procurement operation finds itself with hundreds, if not thousands, of local suppliers, in its database. If the company is using multiple purchasing systems, then collecting and analyzing spend data to consolidate the buy, and make sure that the prices paid are a good buy, it can be a nightmare.
To help meet the challenges, Thomas brought on board Pittington, who has nearly 35 years of experience in purchasing—much of it in MRO buying for the poultry processing industry. Within a year after Pittington was hired in 2002, Thomas and his team began efforts to restructure procurement, working particularly to centralize purchasing of MRO goods and services. They soon had a pilot up and running at one location where the plant buyer took on a new role as purchasing specialist.
But these efforts went on the back burner when management announced its decision to acquire the ConAgra chicken division. Thomas and his team spent the next few months working to integrate the buying operations of the two companies. Along with consolidating procurement activities, they also helped implement SAP's ERP software so that all locations would use one purchasing system.
Today, in the newly structured operation, three procurement directors with expertise in specific spend categories report to Thomas.
To date, Pittington and his group have consolidated spending and negotiated national contracts for six categories of MRO spending, including bearings and power transmission products. Their goal: put together another six contracts in the next few months that can be fully implemented in 2005. On the packaging/operations side, nearly 90% of the spend is under contract. All told, the figure is 75%.
In selecting a supplier for MRO goods and services, Pittington says that Pilgrim's is not searching for a company to sell it widgets. "We need suppliers that will come into this facility, help us identify opportunities and share them across the company," he says. One example: Procurement is collaborating with one supplier to better manage costs by setting gear ratios that make motors run more efficient.
Based on his experience, Pittington created categories within his area of responsibility by evaluating the MRO buy in terms of size and scalability. In so doing, he also examined the skill sets of the purchasing professionals he was hiring as managers, making decisions based on the strengths of the individual's talent and experience. "If we're not being productive, we're not being true to the company," he says.
This is why the pipes, valves and fittings (PVF) category at Pilgrim's Pride includes items needed to support the company's welding activities and refrigeration operation. The purchasing professional responsible for PVF is experienced at buying industrial gases so it made sense for Pittington to assign him the commodity to manage. "An expert in the field understands the industry's profit structure and doesn't have to chase down several purchasing scenarios," he says.
Implementing contracts
In Thomas's eyes, negotiating contracts is relatively easy. It is in the implementation that procurement operations often fail. "For a corporate contract to be successful, there has to be a willingness at the plant to make it work." To ensure this, Thomas meets regularly with the purchasing council to inform management of contracts that he and his team have negotiated, the resulting benefits to Pilgrim's, and their plans to deploy them across the company.
At each Pilgrim's complex, which consists of one or more plant/s or one or more feed mill/s, is a purchasing specialist. (In most cases, Thomas named the individual who was serving as plant manager at the complex to the new specialist post. Before the restructuring, the buyer was responsible for filling the plant's maintenance requirements.)
Pilgrim's purchasing specialists don't do any buying, but they are responsible for everything that comes into the complex. They are the liaison between corporate procurement and the complex. They help implement corporate contracts. They provide the complex with purchasing expertise—lending objectivity and consistency to the plant's supplier relationships, especially with regard to new capital equipment purchases. They help resolve service issues.
"We want the specialist to be in the forefront and for people in the plant to bring issues to him or her," says Thomas. "Then, if issues arise, the specialist can lead the charge back to Ron and his group."
Pittington recalls a problem one plant had with a plastic table top belt. The complex called and tried to convince him that he needed to purchase the part through another supplier. He discussed the issue with the purchasing specialist who upon evaluating the situation learned that the belt was not operating properly because it had become covered with ice.
Another location didn't want to switch suppliers after Pittington's team negotiated a new corporate contract. "We understand that it's hard to break a relationship with a long-time local supplier," says Pittington. We talked to the buyer and explained buying items on contract provides the company with the benefit of a 30% reduction in cost."
Next on the radar screen with regard to suppliers? Thomas and his team plan to develop a formal program to measure supplier performance through SAP. That would complement and augment the certification program for packaging and ingredients suppliers it has had in place for a long period of time.
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