SPECIAL REPORT: Hub-and-spoke teams change the way commodities are purchased
Direct materials are bought through strategic sourcing initiatives, functional partnerships with a smaller supply base and calculated performance metrics.
By Tom Stundza -- Purchasing, 9/10/2007 11:17:00 AM
A few years ago, the cost of benzene chemical spiked and Eaton’s buyers at plants worldwide were faced with a plastic resins supply base that wanted major transaction price increases to offset the cost escalation of this raw material. At about the same time, Eaton’s corporate philosophy in Cleveland was changing to promote a leaner, more manageable supply base willing to provide materials based on predictive-pricing parameters that smoothed out the sometimes severe price cyclicality of resins and other commodities.
The benzene-pricing issue was resolved after quite some supply-base negotiations but the changes in Eaton’s corporate supply chain philosophy have endured. In fact, since 2006, the philosophy has changed to get the four manufacturing businesses—truck, fluid power, automotive, electrical, which operate independently—to engage in as much of a single strategy as possible when sourcing commodities and production materials. The purchasing system has been redesigned so commodity procurement groups have clear policy and direction based at least in part on manageable total-cost models. That means a change from a reliance on competitive bidding by plant purchasing managers to predictive pricing formulas developed by new hub-and-spoke commodity teams that can be implemented with a smaller pool of preferred suppliers.
“All of our predictive pricing and supplier-reduction models were developed internally at headquarters with information gathered from our operations worldwide,” says Jeffrey L. Thompson, director of commodity management and supplier performance. For example, by determining a global pricing databank for key resins, the buying team knows how the commodity is priced worldwide, what it costs to ship to certain locations and, in the case of injection molders, what the final part should cost to make.
This price-and-cost awareness system already has reduced resin costs by $700,000 since implementation in 2006—whether they bought from producers, compounders or distributors—and has since been expanded to cover all of the manufacturing materials and commodities purchased. The biggest commodity buy is steel (sheet and rod), about $2 billion annually. “There isn’t a standard manufacturing-grade of steel metal that we don’t buy from mills and service centers,” says Thompson. The other commodities, in order, are copper, aluminum and titanium, plus iron and aluminum castings.
“We’re keen on being in line with corporate objectives at all times,” says Thompson in an interview. “The raw materials organization and all its members match up supply chain activities with our corporate manufacturing and engineering systems. And, then, we can work with preferred suppliers to help them meet commitments of predictive pricing and on-time delivery of quality materials.” Not only has this approach worked in global sourcing of plastics, but it also helped the diversified industrial manufacturer deflect recent explosive increases in the cost of steel and numerous nonferrous industrial metals.
The supply chain management innovation in Eaton’s hub-and-spoke commodity-team approach was one of the reasons the $12.4 billion (2006 sales) company was chosen as the 2007 winner of Purchasing magazine’s Medal of Professional Excellence. Corporate and supply chain strategies come together in the hub-and-spoke teams, and it’s where much of the leveraging of suppliers begins. “In fact, the strategic activities of the teams are focused on reducing the supply base--who should be kept, who should be eliminated--and on accelerating cost savings, says Thompson.
The hub-and-spoke teams include supply chain members from each business group and for every key commodity group purchased—metals, electronics, plastics and packaging. Each team develops a single commodity strategy that integrates supply chain and business strategy, according to Thompson, who was interviewed in his role as supervisor of the supply chain/procurement organizations covering all raw materials—some $4.5 billion annually in metals, chemicals, plastics and other manufacturing requirements and packaging.
The goal isn’t for one homogenized supplier of each commodity, says Ragsdale, but a group of best-in-class suppliers working with what is known inside Eaton as “a community of commodity experts.” “The complexity of the Eaton businesses and the raw materials we source means we have to respect the individual needs of each business, and the hub-and-spoke systems allows us to do that.” The key, he says, is a clear, centralized procurement policy that reduces Eaton’s costs while insuring the company’s materials needs.
The biggest single commodity the metals hub-and-spoke team buys is steel (about $2 billion annually). Other key metals are copper, brass, aluminum, titanium, silver and various powder metal, cast and forged metallic products. So, others involved in the discussions were Ian Campbell, manager of strategic metals commodities; Mark Cox, manager of procurement and supply chain management, Eaton Fluid Power Group, and Kris Hertlein, commodity manager for metallic raw materials used in the hydraulic operations of Eaton Fluid Power Group.
Also interviewed was Randy Ragsdale, global commodity manager for plastics and packaging, a $300 million annual buy. His team has been working to develop a global sourcing game plan for the 20 or so commodity and engineering-grade resins and various packaging materials that the three dozen members of the worldwide hub-and-spoke plastics and packaging teams buy. These teams buy more than 2 million pounds/year of resins—primarily acetal, PBT (polybutylene terephthelate), ABS (acrylonitrile butadiene styrene), and nylon 6,6 plus numerous injection-molded plastic parts.
Materials hub and spoke
The hub-and-spoke commodity team concept was started to drive the single Easton strategy of cross-functional buying systems to replace old silo-buying processes. So, hub-and-spoke commodity teams have been implemented formally since 2006 to integrate commodity and business strategies, to cut in half the 10,000 direct suppliers by 2010 also to help boost productivity by 5% and establish strategic relationships with remaining preferred suppliers—judged to be world class in quality, delivery and service.
“Since there’s really no relief in sight of a high-priced and volatile global commodities environment,” says Cox, “we also work with commodity suppliers to minimize the economic impact by adding value to what we buy.” He says that buying value-added materials “minimizes economic increases and allows the team to work with engineering and suppliers on cost reductions.”
Thompson says the idea of buying value-added from preferred suppliers is simple: “What else can they do for use than just supply the same old commodity product?” Cobalt-bearing materials used to make engine valves are extremely expensive. When cobalt underwent a significant price hike, the materials group brought in product engineering, buyers, mill suppliers, manufacturing engineers, marketing and financial personnel for planning and coordination of new materials with less cobalt.
Another example is how the source of valve-grade specialty steel for automotive worked with the Eaton cross-functional team to develop new alloys “that are unique to market, yet get the same performance from the older, higher-priced metal,” says Cox. Another example is that Eaton switched from an aluminum casting with porosity issues that had to be fabricated to a cast-and-machined part. “The concept is to let the experts do the work, yet the discussions are done in an atmosphere of cross-functional collaboration of supply chain, engineering and marketing personnel,” says Thompson.
On each hub-and-spoke team, the hub is the business group with the highest dollar purchases in the commodity. The spokes are the remaining businesses. Typically, the buyers brainstorm about buying synergies, discuss suppliers’ performance and potential capabilities, review supplier ratings, propose commodity product-consolidation plans and suggest ways to resolve supply chain problems.
Among other things, the materials teams act as clearinghouses for information and communication, and for resolving problems with suppliers worldwide. Eaton’s global sourcing content has more than doubled in recent years to 30%, yet the hub-and-spoke team approach has cut offshore sourcing costs by 20%.
“The idea is to make the supply base more manageable,” says Cox. “We all need our supplier relationships to be positive and we strive to develop companywide materials procurement and management programs that will work across the enterprise. For example, Cox says the procurement personnel in the fluid power supply group “are working hard to reduce the number of suppliers because quality is so important, and too many suppliers means too much complexity of products and materials.” He also suggests that excess suppliers “present too many challenges for purchasing that can be eliminated when the supply base is leaner.”
Usually, the hub-and-spoke teams do their commodity planning cycles to meet immediate (single-year) requirements and five-year strategic plans. “This allows for implementation of one-year fixed-price contracts while still developing five-year strategic supply chain procurement planning programs,” says commodity manager Hertlein. “This includes ongoing supplier-rating programs, cross-functional commodity needs planning and coordination of plant-level materials needs with corporate commodity supply-development projects.”
Buyers are rated on a “fairly rigid, traditional and numerical system” of parameters—product quality, on-time delivery, competitive pricing, technical services, continuous improvement and overall fit with company’s win-win philosophy.” As part of the analytical process established just this year, commodity suppliers are reviewed by location, financials and performance.
Campbell says that’s because “another key goal of our hub-and-spoke teams is to turn raw materials suppliers into multidivisional suppliers servicing more than one business unit whenever possible.” That’s one reason there’s a lot of what Ragsdale calls “target pricing” exercises to see if suppliers can meet Eaton’s predictive-pricing goals. He says “the teams run the models on just about everybody.”
There’s another reason for that, he adds: “There are no negotiations by intimidation, so we aim for specific and accurate numbers from our statistical models. In that way, we can understand our suppliers’ finances, understand their specific commodity cost and develop cost-savings programs while allowing our suppliers to make a reasonable profit.”
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