CPOs focus on sourcing, spend management
Mike Verespej -- Purchasing, 3/3/2005 2:00:00 AM
For Denise Clarkson, director of purchasing, advanced sourcing, procurement planning and e-Procurement for TRW, her focus is to continue to aggregate and centralize spend in order to increase spend visibility throughout the auto supplier's entire global procurement organization.
For Honeywell, the top issues are total landed cost, supplier performance, spend compliance, and ranking/rating suppliers against their peers and across the business based on price, quality and delivery.
At Hewlett-Packard, procurement is looking to deliver $1 billion in savings in supply chain and materials costs, to simplify and standardize supply chain information, to improve product availability, order and supply visibility and predictable delivery, and to increase cash flow by $1.7 billion through reductions in the cash-to-cash cycle.
Semiconductor manufacturer Agere Systems, with the comprehensive internal knowledge of market pricing it's built up over the last three years, is working to develop solutions to compensate for the impact on its business from the currency situation and higher prices for oils and precious metals.
Alcoa simply has its eye on low-cost sourcing in other countries.
The initiatives differ from company to company, industry to industry. But procurement tacticians, speaking at the ProcureCon spend visibility summit and strategic sourcing conference last fall organized by Worldwide Business Research, all have the same objective. Take dead aim at addressing the procurement and sourcing issues that confound or challenge their companies as they deal with the economy, the buying climate and the price climate in 2005. They have their sights set on developing strategies to make sure their organizations remain leaders in how they purchase goods and raw materials.
Improving data
At TRW, Clarkson has a number of initiatives. She and her organization have developed a baseline spend for each commodity that's broken down by region, product line, manufacturing location, supplier location and production location. As part of that assessment, buyers and commodity managers break down the price of each commodity by raw materials, labor, overhead, depreciation, tooling costs, energy costs and freight/duties. They also assess the supplier base, look at capacity constraints and utilization and assess whether there are opportunities to reduce costs. Over 90% of TRW's spend is now conducted through online tools.
"We are globally organized with lead directors for each commodity that conduct global price benchmarking and assess where are the best world-class suppliers," says Clarkson.
It doesn't stop there, either. TRW has supplier scorecards updated monthly that track savings from each supplier and show quality targets, performance, certification status, peer rankings and indicate a supplier's overall rating. "On a monthly basis," says Clarkson, "we track what we spend, with whom, where it is spent and how much is spent by component or raw material."
Like TRW, "supplier performance is very high on our list of priorities," says Tom Linton, chief procurement officer of Agere Systems. "We have a quarterly business review of suppliers with input across the company. With our strategic suppliers, we give them a scorecard on their performance and they give us a scorecard on our performance as well."
With regard to pricing, Agere has developed a cost-competitive index by commodity and holds monthly cost meetings where the procurement team goes through the outside influences in the market that are driving prices up or down. "We focus not on the best price, but what the price is within a market and look at prices based on our market index," says Linton. "I do a deep dive on every commodity each quarter and do it, in aggregate, on a monthly basis. Gone are the days when you negotiate annual (price) deals (in the electronics industry). The real savings comes from focusing on all commodities on a monthly basis."
Similarly, Dennis Lemon, who retired in January from Honeywell where he was director of supplier quality, says Honeywell is focusing hard on data because total landed cost has become, in his words, "a big, big strategic issue."
"We have gathered data from 140 sites within the company and have 190 to go," says Lemon. "And, as you start giving data visibility to people throughout the organization, you begin to add greater functionality (to the purchasing process.) So we are increasing the velocity of the data aggregation from monthly to weekly. As we do that, we are looking at capturing more indirect spend analysis, we are looking at total cost analysis and optimization, we are looking at the risks involved in global supplier management and we are looking to assess on-time delivery to request and not the date promised by the supplier."
Understanding spend
With a corporate mandate to use the supply chain as a competitive advantage, information is also critical to Hewlett-Packard's procurement initiatives—particularly since the company annually spends $40 billion on materials, $5 billion on contract manufacturing and original design manufacturers and $1.7 billion in electronics industry logistics procurement.
But, as Greg Shoemaker, vice president of central direct procurement at HP, is quick to point out, "size and scale alone do not get you anything. You have to understand your spend profile—that is, what you spend with whom and how much you spend for each" component, product or raw material.
And, as others at the conference agreed, Shoemaker says that "you have to get the absolute best cost. It is not just what is the best price for a widget worldwide, but it is what additional features should we pay more for and what is the total cost" when logistics, inventory positions, delivery and other factors are calculated into the equation.
Alcoa, for example, explains Doug Sparks, sourcing solution manager, is now building "comprehensive business unit spend analysis data to identify low-cost country sourcing opportunities, determine the real savings potential and the degree of difficulty" in changing sourcing suppliers and locations. "We have to teach people how to make total cost of landed ownership decisions and how to properly make award decisions that factor in transportation costs and currency cost conversions," he says
But perhaps, Mark McDaniel, vice president of procurement and logistics for the Halliburton Energy Service Group, sums up best where leading procurement departments need to focus.
"Many (procurement) transformations start with strategic sourcing. But you must sustain it and move into supplier relationship management to get them to add value and not just sell to you at a low price. The single most difficult challenge is to get procurement to add value at the beginning of the process, not just cut costs."
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