Managing better to reduce costs at Welch's
Purchasing's efforts help increase profitability at a firm based on a purple grape cultivated to withstand the cooler climes of North America.
By Tom Stundza -- Purchasing, 7/15/2004 2:00:00 AM
The house where the Concord grape was developed 155 years ago still stands on Lexington Road in Concord, Massachusetts. Across town is the headquarters of Welch's Foods, the company whose name has become synonymous with Concord grape products. In that building, Bill Coyne is leading a procurement organization that is seeking to develop and implement innovative technologies that can enhance the efficiency of the firm's annual $300 million buy.
"You know, there is no magic 'silver bullet' that purchasing people can use to solve this year's problems of high prices and delayed deliveries for essential commodities," says Bill Coyne, director of purchasing and logistics at the world's leading marketer of food and beverage products based on Concord and Niagara grapes. "It's just a short-term supply storm we'll all have to weather."
Actually, the biggest challenge for purchasing at Welch's isn't tactical, it's strategic: How to best collect, analyze and transform raw data into usable information that will help the company reduce the cost of purchasing and free corporate funds for other uses.
The company's information technology department is installing Oracle's enterprise resource planning (ERP) software that includes warehouse management, inventory management, production and purchasing modules. "Our focus over the last four to five years has been on tools like reverse auctions that make markets more price-transparent and efficient," Coyne says. "With the Oracle implementation, we'll now be able to make transactions, communications and supplier performance measurement more efficient as well. The information will be the biggest benefit."
But that doesn't mean the company's procurement organization is sitting around for the planning systems to be operational in September. "We need to make the supply chain more efficient," Coyne says, "and cost-reduction is another important issue" facing the purchasing and logistics organization at the food and beverage company.
So, what the 15-member team are trying to do is develop a single strategic sourcing system or process—revolving around such electronic purchasing tools as reverse auctions—that can be employed across all spend segments. And he is driving his team to develop a logistics strategy that meets the demands of the supermarket and retail food industries for faster, more frequent delivery of smaller stock units.
Food and beverage, as an industry, generates supply chain problems because of its seemingly never-ending growth in annual sales in a consumer market where tastes and demand change regularly. "We don't want to follow a more traditional purchasing approach of executing different sourcing strategies for each spend segment," he says. "It seems to me that we probably will be better off improving the way we buy across all spend segments."
And everything the company does has to be quality driven. "It would make no sense for the materials that we purchase not to live up to the Welch's name and reputation for quality," Coyne says. "Things within Welch's usually are humming along in a fairly normal mode, but that doesn't mean we can't do things better." In fact, food and beverage industry analysts suggest that increased emphasis on agile manufacturing and asset maximization often strain existing production and supply chain systems. At the same time, there are new logistics considerations since perishability is a factor in moving raw materials to processing plants and in transporting finished goods to market. That's why the purchasing team is using such approaches as:
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Reverse auctions with Free Markets, which has generated significant savings over the past half decade.
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Hedging and other risk management techniques on natural gas and agricultural commodities.
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Alliances with key suppliers revolving around such requirements as service, pricing, quality and technological innovation.
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Sharing of "best practices" information with such non-competing companies, such as Gorton's of Gloucester, the producer of frozen seafood.
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Cross-functional sourcing teams.
"You want to get everybody involved in the process; in addition to procurement people, you also include research and development, quality assurance people and plant production," says Coyne. You want them to understand the process and get their buy-in very early—especially when the purchasing group is running an auction."
In coming months, the purchasing executives will continue evaluating other world-class procurement systems and e-commerce technology available—from the simplest auctions to the most high-tech product lifecycle management systems—to assess what is most valuable for their future needs.
Buyers support a thirsty public
Net sales for Welch's Foods in 2003 were a record $579 million of purple grape juice and a variety of value-added red and white grape juices, fruit drinks and concentrates, grape jams and jellies and fresh grapes. Information Resources Inc. says 2003 sales of Welch's Grape Juice alone were almost $174 million.
The 37th largest beverage company worldwide has been owned since 1952 by the National Grape Cooperative, a collective of some 1,400 grape growers who own and till almost 49,000 acres in the states of Michigan, New York, Ohio, Pennsylvania and Washington, and the province of Ontario in Canada. Special growing conditions are required for the successful cultivation of Concord and Niagara grapes and the cooperative says the growing regions have an ideal combination of soil, sunshine, temperature, climate and precipitation needed to grow the flavorful juice grapes.
Welch's plants are in Westfield, N.Y.; Grandview and Kennewick, Wash.; Lawton, Mich., and North East, Pa. This, in itself, is a challenge for the materials planners and buyer/planners. "We are not in a position of constantly running out of supplies and such things because we have good materials resource and enterprise resource planning systems tied into our highly automated manufacturing locations and their high-speed production lines," Coyne says. "On the other hand, when you have ever-changing forecasts, there is room for error." (In fact, the food and beverage industry has been known to operate with a forecast error rate of 30%-35%." That's got to end, Coyne adds, and that gives "purchasing the opportunity to be the conduit of accurate information flowing from the market forecasters to suppliers to meet the needs of the end-product consumers."
"While we never buy on price alone, cost savings are an important part of our purchasing activities," Coyne says, "especially since we are tied to price-variable commodities, whether they are grapes, plastic resins, metals or other packaging materials." At Welch's, 59% of the buy is in packaging; 28% in fruit concentrates and 13% in sweeteners, flavors and acidic ingredients. Interestingly, the company's most important raw material isn't bought by the purchasing organization, since the owners provide the Concord and Niagara grapes. However, the company's buyers do source a significant amount of white and red grape concentrates.
Still, there is enough packaging material purchased—ranging from polyethylene terephthalate (PET) and polypropylene containers, to aluminum cans; from steel, aluminum, and plastic closures (or caps) to specialty juice containers—as well as other ingredients to justify what Coyne terms "aggressive contract language" to keep negotiation leverage within purchasing's realm. The purchasing team also has alliances with such suppliers as Cargill Juice North America Inc., San Joaquin Valley Concentrates and Graham Packaging.
Graham, for example, which supplies four sizes of PET plastic containers for Welch's bottled juices at three filling locations, also has been a recipient of the "Welch's Supplier of the Year" award. Graham Packaging played a key role in helping Welch's develop its newest packaging innovation, the patented plastic can. This new container, which marks the first packaging innovation for frozen juice concentrates since the introduction of the peel strip two decades ago, presents Welch's frozen concentrate consumers with convenience and affordability through the recyclable plastic can's microwaveability and competitive pricing.
E-commerce is nothing new
"What we need is to have this kind of relationship with more members of the supply base," Coyne says. In a recent year, Welch's purchased more than $67 million in packaging materials and food ingredients through FreeMarkets e-commerce marketplace. "Still, the key reason for utilizing reverse auctions is to promote competition," he says.
The food industry lagged behind other industries in using reverse auctions but the purchasing and supply chain professionals at Welch's have no problems with e-procurement; in fact, they've been doing reverse auctions since 1999. Recently, Welch's had to sift through 250 bids for a particular ingredient.
Coyne decided long ago not to make the first use of e-procurement technology to improve the efficiency of the purchasing transaction. "Instead, I elected to focus first on making the markets from which we buy more efficient and more price-transparent," he says. "We need to drive for lower pricing.
The high volume of potential suitors at e-auctions has a tendency to make Welch's long-time suppliers nervous, Coyne admits. "The main risk is that you could very well find yourself making more supplier changes than you did in the past. And making supplier changes can result in disruptions to your plant operations." However, in most cases incumbent vendors have continued to retain Welch's business.
He insists that a reverse auction is just a more efficient way of taking bids. "Our existing suppliers have defended their turf very aggressively. And it does take some time to develop a very detailed and good RFQ [request for quote]. But that time is well spent," Coyne says. "You want to make sure you have all of these bidders bidding on exactly the same thing. You don't want to have different bidders making assumptions as to what your needs or requirements are, or what it is they are bidding on."
The thing to remember is, you don't necessarily have to pick the low bidder," he says. "Considerations like customer service, quality and technical support—basically, all the other factors that go into supplier selection— are always factored in."
Big buys at Welch's Foods
(percent of top 10, fiscal year 2003)
| SOURCE: WELCH'S FOODS |
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| Plastic containers | 35% |
| Grape concentrates | 18% |
| Corn sweeteners | 9% |
| Metal cans and ends | 8% |
| Closures (caps) | 7% |
| Glass bottles | 7% |
| Corrugated boxes | 6% |
| Orange concentrates | 3% |
| Refrigerated cartons | 3% |
| Flavors | 3% |
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