Supply chain management at Otis reins in global spending
By By Susan Avery -- Purchasing, 6/1/2000 2:00:00 AM
As an operating unit of United Technologies Corp., Otis Elevator Co. has a goal for its purchasing operation: Reduce costs by $180 million on an annual spend of $2.5 billion.
Ron Hendricks, vice president, supply management, is working to achieve this goal by applying supply chain management strategy across the organization, which operates in 222 countries and territories. As such, Otis, which is based in Farmington, Conn., is UTC's most global company. It operates 35 major manufacturing facilities and has more than 60,000 employees, most of whom work outside the U.S. Other UTC companies include Pratt & Whitney, Carrier, Flight Systems (Sikorsky, Hamilton Sundstrand) and International Fuel Cells. UTC is headquartered in Hartford, Conn., and had revenue of $24.1 billion in 1999.
With about 22% of the world's elevator market, Otis manufactures and services elevators, escalators, moving walkways and other horizontal transportation systems. The company's revenue for 1999 was $5.7 billion, 78% of which was generated outside the U.S. More than 1.2 million Otis elevators and escalators are in operation throughout the world. Some of its more well-known installations include the Petronas Twin Towers in Kuala Lumpur, Malaysia, which are the world's tallest buildings; the CN Tower in Toronto; the Eiffel Tower; and the John Hancock Center in Chicago.
Hendricks, a long-time UTC employee, has worked in materials, marketing and purchasing positions at Pratt & Whitney Canada. In 1994, he joined Otis as director of purchasing for North America at its Bloomington, Ind., facility. There, Hendricks started to pull together a structured way of managing the supply chain. Then, Kent Brittan, who was chief financial officer at Otis, moved to UTC to take the post of vice president, supply management. Steve Page, who used to be CFO at UTC, became president of Otis. In 1997, Hendricks assumed his current position at Otis headquarters in Farmington, Conn.
Since assuming the post of VP supply management, Brittan has been working to make purchasing a core competency at UTC. He's put in place commodity management teams to help direct purchasing activities at each of the company's operating divisions.
The driving force behind the UTC programs at Otis is Hendricks and his team of seven area supply management directors. This global team is charged with looking for ways to optimize the company's supply base. As such, they are ensuring that Otis's suppliers are among the best in the world, i.e., that they provide the company with the highest quality goods and services available.
What makes Hendricks's job challenging is the fact that Otis is such a global company. To meet the cost-reduction goal set forth by Brittan, he needed to shift thinking about how purchasing is run at Otis. That is, he's taken an operation that has been essentially decentralized and turned it into one that has some elements of centralization. Hendricks says he wants buyers working in local offices to make their own purchasing decisions with guidance from a central buying operation.
Meanwhile, Brittan, working with UTC's president council, has restructured the corporation's purchasing organization with each operating division meeting together as a companywide purchasing council. Global commodity managers have responsibility for production and general procurement goods and services.
More than two-thirds of UTC's spend is in the U.S. For Otis, just $500 million of its annual spend of $2.5 billion is based here. Therein lies Hendricks's challenge: how to meet corporate objectives from a global standpoint.
"Elevating" the function
When Hendricks assumed his current post, Otis was operating some 35-40 factories worldwide. These factories, which range in size from $30 million to $300 million in annual sales, were purchasing local products from a local supply base. For production commodities, he figures there were between 300 and 500 suppliers per factory. For a single commodity, there may have been six or seven suppliers. The factories competitively bid each of the commodities using a different process. Each site also had in place different supplier qualification processes. No one, he recalls, was truly managing the purchasing process. "At most factories, purchasing was not considered a core competency. Purchasing reported to someone in manufacturing. There was no strategic purchasing to speak of."
At the Otis headquarters in Europe, there were 22 people working in purchasing at a central location, buying mainly non-production goods and services. "They were doing the best they could," says Hendricks. "If they could reduce prices a bit, that was fine."
Hendricks looked to the new UTC structure as a model. As he saw it, Otis needed "to elevate" the purchasing function: To meet corporate objectives of having "a favorable impact" on the bottom line, the new supply management operation had to become more involved not only in making buying decisions, but in helping manage the business as well.
Hendricks visited each Otis site. He worked with Otis's senior management in each of the 16 major factories around the world to designate one individual to serve as the purchasing representative for his factory. These individuals would attend regional purchasing meetings.
Since Otis is organized into seven areas around the world, Hendricks worked with each of the company's senior area executives to appoint an individual in his respective area to represent it, forming the supply management area directors committee. (The seven areas are: U.S. and Canada, Latin America, North Europe, South Europe, Central and East Europe, South and Central Asia, and Japan.) He met with the supply management area directors and told them what he needed most from them: cost reductions.
Hendricks worked with a supply management consulting firm to develop a process for purchasing from local suppliers. What he had in mind was to have each area purchase in a similar manner. Once complete, he spoke with his area directors about starting to deploy the process from the bottom up.
The supply group's next focus: Quality. Until this time, there was no standard for qualifying suppliers. Again, Hendricks wanted everyone in each of the areas to use the same method to qualify suppliers. For this to happen, the team put together an eight-step sourcing process and set up training centers worldwide. Each of these centers would provide training in the local language with simultaneous translation. The training process began in March 1998.
In putting together a world-class purchasing organization, Hendricks figured his next focus would be measuring buyer performance. Again, the area directors stepped up to the plate and came together in Milan, Italy, for a three-day meeting. The group realized that to succeed they would need support from outside the supply management organization. So they invited representatives from other parts of the operations group, including engineering, quality and manufacturing. Also attending the meeting were staff functions such as HR, legal, and communications.
"We asked them to talk about something not everyone understands," says Hendricks. "People brought to the table their local problems, and we made fundamental changes to the way we do things. We developed a timeline and determined performance metrics. It was one of the best discussions I ever had on this topic. What we had to do was change the fundamental way in which we work for this to happen. We built a model that would show over time how it should be done."
The 4 * Program
The process that Hendricks and the team is using to take his operation to "world-class" is called the 4 * Program.
Since implementation in December 1998, the 4 * Program has helped the operation to meet several objectives. With it, purchasing has reduced its (production) supplier base from 4,600 to 2,200 and reduced costs by $124 million. That target was $63.7 million. Other metrics the process is helping the operation to meet: percent of spend under long-term agreement (45.4%) and on-time delivery rate (90%).
The program has four stages: "basic beginnings," "moderate development," "limited integration," and "fully integrated supply chain." Most world-class purchasing operations are situated in either the second or third stage. Otis's target is to be in the fourth stage.
At that stage, which Otis is positioned to reach by the end of 2002, the supply operation should have a supplier base of 500. More than 30% of these suppliers will be "full service." More than 98% of the spend will be under long-term agreement. On-time delivery will be 95%. Cost savings will top $200 million.
The four stages contain 12 steps. The first, "basic beginnings," includes 1) improve supplier quality and 2) leverage purchases to reduce cost and number of suppliers.
The second, "moderate development," includes 3) implement supply base organization (tactical, strategic, supplier development), 4) develop supply management leadership plans worldwide, 5) establish cross-location sourcing teams and source internationally, and 6) develop and deploy field purchasing strategy and implementation plan.
The third, "limited integration," includes 7) utilize full-service suppliers, 8) involve suppliers early in the procurement cycle, 9) implement a process to procure non-product goods and services using Internet-based applications such as Otis.com and UTC's FreeMarkets.
The fourth, "fully integrated supplier chain," includes 10) utilize fully integrated suppliers, 11) ensure cross-enterprise decision-making of supply management issues, and 12) make timely insourcing/outsourcing decisions to maximize supply chain capability.
While many of the activities within each of these stages are occurring simultaneously now at Otis, Hendricks and his team are directing their energy in 2000 to the second stage.
"The first elements-improve supplier quality, leverage purchases to reduce cost and number of suppliers-we can do from the bottom up," says Hendricks. "We can implement these locally. For the next stage, we need to change the organization. We need to take an essentially tactical operation and change it into a more strategic one. This is difficult, but it needs to be done. What we need to do is change people as well."
By the end of 1998, there were strategic purchasing groups of 8-10 buyers in place in all seven areas of the world. In 1999, buyers who perform tactical activities were moved into manufacturing, and at least one supplier development manager was assigned in each area.
"By the end of this year, we will have 30% of the individuals working in purchasing focusing solely on strategy," says Hendricks. In 1998, 95% of buyers were considered tactical, with maybe 5% working on supplier development issues. There were no strategic buyers.
In this effort to help make supply management a core competency, Hendricks has support from top management. (George David, in fact, has in place a succession plan called the Leadership Development Plan, so that individuals entering purchasing at UTC have a clear idea of their career paths. The Leadership Development Plan is a UTC initiative for succession planning in all areas of the corporation. Supply management is one of the areas.) He hired and trained new purchasing professionals. Now, 40% of the individuals in purchasing have engineering backgrounds.
Next step in the second phase, Otis is working on cross-location/international sourcing. The intent is to have one or two teams working on this at the same time. "We've had three teams and they've all been successful," says Hendricks.
The teams need to gather requirements from Otis sites located throughout the world, understand customer needs, use tools available to get the job done. "We've got to understand the global markets," says Hendricks. "This is extremely challenging. We seldom find a supplier that can do business globally."
One commodity that the teams have worked on: traveling cable, the electrical wire used in every elevator installation. "We were using 42 suppliers when we started," says Hendricks. "Seven or eight of these are manufacturers; the rest are distributors. We put together a team of representatives from quality, engineering, finance and users. As a result of the effort, Otis plans to purchase traveling cable from two suppliers: one in the U.S. and one in Austria. One year later we are still implementing.
"Telling incumbent suppliers isn't easy," says Hendricks. "Every office buys the cable and has local suppliers that it uses."
Otis also has started to use UTC commodity teams in its move to do more global sourcing. It also is working with FreeMarkets, a tool the buyers are borrowing from the UTC corporate purchasing operation. FreeMarkets is an online auction site (PUR: Oct. 21, 99; p. S48).
At the third stage, Otis is starting to use more full-service suppliers. Full-service suppliers do more than sell components; they provide their customers with value-added services.
To implement a process to procure non-production goods and services, Otis is working with IBM to use its system to process transactions for non-production goods and services. (Use of this system is an UTC-wide initiative that Brittan's group launched as part of the corporate model. Otis is implementing as has Carrier.)
Looking out toward 2002, "once we've accomplished the other nine activities, "we can assign people to test out some of these things," says Hendricks.
At the company's Bloomington location, purchasing has fully integrated 12-14 suppliers that physically occupy space in the building. Buyers also are working with unions so that suppliers may deliver goods and services to point of use. And, in Japan, purchasing is doing value engineering around parts and processes that support parts with suppliers, while in Brazil, buyers there are working with suppliers on kitting of components.
HR helps recruit and train talented SCM professionals
Another key member of the supply management team: Ellen McGroary, director of human resources.
"Ellen plays more than a human resources role," says Hendricks. "She has supply chain focus and process to get the right people in place."
Supply chain managers now are recognized and respected professionals within United Technologies, says McGroary. "High-caliber people are interested in supply chain management. People see it makes a contribution to the bottom line."
At Otis headquarters in Farmington, Hendricks has a budget for a staff of 7-8 individuals. The rest of the operation (some 350 individuals) is located at sites around the world and are provided for by area operation budgets.
The type of individual Hendricks and McGroary look for to fill supply chain management posts is not the stereotypical buyer. They are searching for individuals who are strategic thinkers, individuals who recognize that there are risks involved in this endeavor. "We look for individuals with leadership qualities who can make business decisions," says McGroary.
From within the company, Otis recruits individuals to work in supply chain management who have background in engineering, manufacturing, sales. Externally, the company looks for buyers who have experience in supply chain management with technical backgrounds. Supply chain management programs at Arizona State, Michigan State, Standford, University of San Diego are other resources.
Once at Otis, Leadership Development Reviews, or succession planning, identifies key posts and successors as well as high potential talent. Management forms development plans or actions geared at successors or high potential development opportunities.
Peer development education program provides opportunity for training in supply chain management.
On-the-job opportunities include heading up global teams, taking a problem or issue and using quality tools to work through to solution, managing across countries, interacting with senior management from the president to the executive committee. A recognition program, spearheaded by McGroary, is in place to reward individuals for their efforts.
Will the bottom line be favorably impacted?
A key member of Otis's supply management operation is a representative of the Otis finance department: Chris Adams, assistant controller. His responsibility: Validating cost savings resulting from projects put in place by supply management.
What Adams does essentially is work with a team of supply management finance analysts at headquarters to determine cost targets and whether the projects have a "favorable impact" on corporate profit.
Cost-savings targets are communicated from the headquarters to finance analysts supporting the supply management function at the area level and at the local sites. "Once we learn of the targets, supply management puts in place a series of projects at the sites to generate the cost savings," says Adams. "From the beginning we know what savings we should be realizing."
The headquarters finance team evaluates each project for savings potential. Using detailed documentation generated at the local level, the team determines the accuracy of the savings and whether they provide benefit to the company. To do this, they use purchase price paid before undertaking the project and compare it with price paid once the project is complete. Cost avoidance is not counted as savings. Supply management generates the cost savings and the finance team validates the projected savings to the company.
Area directors learn to trust one another
In rolling out a global supply chain management program you have to trust your counterparts, says Steve Gearhart, director of supply management, North America Area. "Five years ago, the areas competed against one another. We didn't share cost data with each other. Now, we are allies."
Torsten Gessner, director of supply management for Central European Area, agrees: "We work together to qualify suppliers. It's more cost effective. This is where the trust is coming from."
Gearhart's background includes having worked with Ron Hendricks at Otis's Bloomington, Ind., facility. He came on board in 1994, after having worked in quality and engineering positions.
Change occurring with supply chain management at Otis has been evolving, says Gearhart. "Bloomington has been a test bed for, among other things, value engineering. Project engineers from other facilities have visited to study what we've been doing in value engineering.
"We also have dedicated people who focus on supplier development," Gearhart continues. "We have 13 inplant suppliers at Bloomington alone. Initially, this was an experiment that ultimately led to Ron moving up to Farmington to roll out the program on a global scale."
As Gearhart sees it, the program is rapidly moving into UTC's global strengths. "We are using resources in other areas of the world. For instance, we are looking at suppliers in India that we hadn't worked with before. Constantly looking for new ways to do things and getting other people's perspective is a great benefit. And, it's easy to do-via e-mail."
With responsibility for overseeing supply management for the Central European Area as well as purchasing of electronic components, Gessner is helping to launch Otis's new organizational strategy. "Our traditional purchasing organization was decentralized," he says. "Our main objective now is to link into the UTC structure. Commodity management teams make sense for our spend."
Gessner, who has worked for Otis for 10 years (eight in manufacturing and two in his current position), has put together a staff, 80% of which he helped to recruit from outside of Otis. These individuals have backgrounds in IT, engineering and purchasing. Some work in Central Europe; others work on global UTC teams. Eighty-five percent of the area's annual spend occurs in Germany.
Like Gearhart, Ma WeiLi, director of purchasing for the Asia Pacific area, also has a background in engineering. This is a big change, he says, pointing to the focus on supply chain management that includes an engineering perspective. Like his counterparts, he meets regularly with other UTC companies like Carrier in his area to share best practices in sourcing, especially those focused on cost reduction and supply-base optimization.
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