How suppliers measure up for Lockheed Martin
The systems integrator uses six key focus areas to keep computer buying on track.
By Susan Avery -- Purchasing, 2/19/2004 2:00:00 AM
Lockheed Martin spends approximately $1.5 billion on computer hardware and software each year. With a buying tab this size, the systems integrator could easily strategically purchase these items from major OEMs. However, the company recently signed an agreement with a big hardware and software distributor that typically sells its products through computer resellers and retailers. Under the agreement, Lockheed Martin has access to purchase more than 250,000 SKUs (stock keeping units) from more than 200 hardware and software OEMs (original equipment manufacturer).
"One might ask, why would we go to a distributor when we could go straight to the OEM?" says Debra Pirozzi, director, Corporate IT Agreements for Strategic Sourcing Solutions, Lockheed Martin Corp., Orlando, Fla. "By selecting a major distributor, we leverage much of our IT spend with one supplier. In addition, we benefit from the discounts from the additional SKUs of the supplier's entire product market line."
While such leverage will clearly help reduce costs for Lockheed Martin, Pirozzi and her team also selected the distributor as the company's IT supplier for its expertise at logistics and fulfillment and the attention it pays to customer relationships.
Relationships are equally important to Strategic Sourcing Solutions. Pirozzi and her team us this "key focus area" to monitor performance of Lockheed Martin's IT suppliers. Other key focus areas are financial condition, customer service, technical performance, product coverage and price.
Corporate agreements
In her post, Pirozzi reports to William Burg, vice president, Strategic Sourcing Solutions. His organization works to leverage the company's spend and negotiate its agreements with suppliers of IT, direct and indirect materials and services as well as travel and transportation. The group manages more than 1,600 corporate agreements and an annual purchasing tab of $13.2 billion. [PUR: Feb. 5, '04; p. 27]. Of Lockheed Martin's yearly IT purchases, greater than 50% are under corporate agreements. Strategic Sourcing Solutions reports through the Global Supply Chain Management group and is part of the Corporate Shared Services organization.
Burg's group holds regular performance reviews with Lockheed Martin's major corporate agreement suppliers. At these meetings, Strategic Sourcing Solutions evaluates the company's spend with the supplier, along with such relevant issues as contract leakage, delivery and proposal support. The group regularly communicates the benefits of Lockheed Martin corporate agreements to its business sites.
Here is a look at each of its key focus areas and how the IT team uses them to monitor supplier performance:
Relationship management. In the past, Strategic Sourcing Solutions focused its energy on managing the company's agreements with its suppliers. Now they are expanding that concentration to include managing its relationships with suppliers. Corporate IT Agreements tracks its relationships both internally and externally on several different levels. With major suppliers, Lockheed Martin executives meet with supplier executives at least once a year. For most major suppliers, these meetings are with executives at the vice president level; for some others, the company's executives may meet with the supplier's CEO. "Building relationships at the executive level is a priority for us going into 2004," says Pirozzi.
She and her team are also putting more emphasis internally on the group's relationships with the chief information officers (CIOs) of each of the corporation's five business areas—Aeronautics, Electronic Systems, Integrated Systems and Solutions, Space Systems and Information and Technology Services. These executives help direct the standards of the corporation through the Information Architecture Board (IAB). Representing Strategic Sourcing Solutions, Pirozzi is a voting member of the IAB.
While the IAB doesn't mandate the standards, it does keep an eye on the company's technical requirements, especially those concerning networking and communications equipment. Products proposed for usage within Lockheed Martin go through an approval process to ensure that they fit within the company's Information Technology Architecture Framework. Pirozzi has drafted a process that integrates approved IT standards from the IAB into the corporate agreement process.
At the same time, Corporate IT Agreements ensures suppliers meet requirements of the company's employees who work overseas. "We are collecting contract terms and conditions for each country where employees are located to incorporate into our agreements so the suppliers can more efficiently provide them with IT products," says Brad Edwards, manager, Corporate IT Agreements.
Financial condition. Strategic Sourcing Solutions assesses suppliers in this area based on financial data filed with the Securities and Exchange Commission for public companies and Dun & Bradstreet's Supplier Evaluation Rating for private companies. If any suppliers are determined to be at financial risk, then the group communicates that risk to the businesses. "We notify transactional users of potential situations so they in turn can mitigate their own risks," says Edwards.
Customer service. Strategic Sourcing Solutions looks at a supplier's performance in several areas. Among them are: delivery, invoicing, proposal support and general supplier responsiveness.
Edwards developed a process for the IT team by which members of the team, called project managers, hold quarterly meetings with Lockheed Martin key business sites to learn more about issues or opportunities that arise in these areas. If an issue or opportunity warrants it, the team holds focus meetings with representatives of the business sites and supplier personnel. If necessary, the team will bring the issue to the attention of personnel at the vice president level at both Lockheed Martin and the supplier company.
Technical performance. Lockheed Martin sites may maintain their own technical point of contact relationships with the company's computer OEM suppliers to work out issues when they arise. When an issue requires assistance of the IT Corporate Agreements group, the sites contact Pirozzi and her team. "Occasionally we will visit a supplier location to perform joint root cause analysis or use lean manufacturing and Six Sigma tools," she says.
Product coverage. As with the technical performance measure, Lockheed Martin sites maintain relationships with suppliers that ensure they receive products to meet specific requirements. Pirozzi may get involved when issues cannot be resolved between the site and the supplier. Recently, the team worked with a major software provider to resolve an issue regarding licensing which would have had significant impacts to a critical program.
One area of particular concern to the team is product obsolescence. That is, the decision of some OEMs to no longer provide support for some of their older products. "We're focusing our efforts on developing a process to obtain technology road maps early on from suppliers," says Pirozzi. "That way, we will know in advance when a supplier is moving a product into a nonsupported category.
Benchmarking
Benchmarking pricing of IT goods and services differs from most other direct materials purchases in that technology changes so quickly that it tends to leapfrog itself. While Strategic Sourcing Solutions keeps a price history, the group generally can't benchmark the same technology year over year. Likewise, the market base changes so they have to keep a close eye on that as well.
After a review of the market, current technology trends, and benchmark pricing, Lockheed Martin generally enters into IT contracts with suppliers that lock in prices by discounts off list prices based on the benchmark findings.
If suppliers don't provide the company with competitive pricing, they don't warrant a corporate agreement. "Even with an installed base, if the supplier is not giving us good pricing we may not issue them a corporate agreement," says Pirozzi, explaining that "although a corporate agreement is good for both parties because of the transactional benefits, we operate on the philosophy that a supplier's discount structure and terms must warrant a corporate agreement."
To benchmark pricing, Strategic Sourcing Solutions looks at its own historical data, special proposal pricing (for a particular business area), a comparison of discounts received by its government customers, through the Government Services Administration, and its competitors through various benchmark pricing services.
Price competitiveness benchmark
| Product and discount exhibits | LM Corp disc avg | GSA disc avg | LMC spend (M) | LM % of spend¹ | LM wght discount | GSA wght discount | LMC/GSA delta | CEI2 wght discount | LMC/CEI delta | Avg. savings |
| SOURCE: LOCKHEED MARTIN CORPORATION |
||||||||||
| Product 1 | 35.0% | 26.26% | $8.40 | 35% | 12.25% | 9.19% | 3.06% | 8.75% | ||
| Product 2 | 28.0% | 17.17% | $3.60 | 15% | 4.20% | 2.58% | 1.62% | 3.75% | ||
| Product 3 | 5.0% | 1.01% | $4.56 | 19% | 0.95% | 0.19% | 0.76% | 4.75% | ||
| Product 4 | 18.0% | 4.00% | — | 0% | 0.00% | 0.00% | 0.00% | 0.00% | ||
| Product 5 | 34.0% | 4.00% | $7.44 | 31% | 10.54% | 1.24% | 9.30% | 7.75% | ||
| Total | 24.0% | 10.5% | $24.00 | 100% | 27.94% | 13.20% | 14.74% | 25.00% | 2.94% | 8.84% |
What is Strategic Sourcing?
12/03/2007Lockheed Martin: Negotiators Inc.
02/04/2004
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