Team-based buying strategytakes off in indirect materials
By William Atkinson -- Purchasing, 1/18/2007 2:00:00 AM
For a number of years, companies have used team-based buying strategies to better leverage direct spend. But similar team-buying initiatives on the indirect materials side tend to be a lower priority if they exist at all. And very few of the companies that do focus on indirect spend take the initiative to create formal team structures to manage improvements in this area.
But that’s what sets companies like Cessna Aircraft and Alcoa apart. Both Cessna, a division of Textron in Wichita, Kans., and Pittsburgh-based Alcoa realize the value in treating indirect spend as strategic and are seeing the benefits of such work.
Cessna’s team-based strategy is designed to help control indirect spend by implementing supplier development techniques. About five years ago, the company began going through some transformational initiatives, one of which involved creating direct material commodity teams. “About two years after that, we began to look at indirect material, which was an area we hadn’t focused much on before,” says Ryan Doerkson, Cessna’s director of strategic sourcing for indirect materials and services. “We decided to use the same concept of commodity teams to manage the indirect spend as we do on the direct side.”
 “We decided to use the same concept of commodity teams to manage the indirect spend as we do on the direct side.” —Ryan Doerkson, cessna’s director of strategic sourcing for indirect materials and services |
Shortly after that, the department introduced the concept of supplier development as a way to move the indirect spend management initiative forward. This was a concept that was already in place on the direct side. Cessna calls its initiative the Supplier Value Improvement Process (SVIP). One of the department’s process leaders, Rick Wilson, is in charge of SVIP on the indirect side.
“Rick sets the strategy and makes sure we are doing all the right things with suppliers,” Doerkson says. The department’s strategic buyers support this strategy, and they report to Wilson on a dotted-line basis. The result is that supplier development is considered to be part of their everyday responsibilities.
Cessna identifies opportunities for supplier improvement by reviewing the results of the supplier scorecard program, called the Indirect Supplier Tracking and Rating System, or ISTARS for short.
“We rely heavily on ISTARS results to help us identify areas for improvement,” states Doerkson. “If we notice a supplier having a problem achieving the performance we want, we may work with them to help them improve.”
Just as the program itself is based on a formal structure, the improvement tools are also based on a formal structure. Currently, SVIP relies on two basic supplier development techniques. The first is value analysis-value engineering (VAVE). VAVE is a structured method of exploring and innovating the detail of how value is created in a product. It was created by an engineer at General Electric in the 1950s. The second involves using six sigma tools with suppliers.
 Aerospace firm Cessna’s Indirect Supplier Tracking and Rating System adds value. |
“On indirect materials we may suggest a VAVE project to a supplier, and we may get involved with that supplier on the analysis and even the engineering to improve that part,” notes Doerkson.
To date, supplier reaction to the opportunities for improvement has been positive. “One reason is that we have approached it from a perspective of wanting to help them get better, and also as a way for us to get better,” he states. Another reason is that the department engages in a lot of communication with suppliers.
“Rick [Wilson] has spent a lot of time working with suppliers to get buy-in at the leadership level,” he explains. “This is especially important when it comes to getting involved in VAVE projects.”
Third, the department’s strategic buyers have been developing long-term relationships with suppliers, and they maintain and expand communication and opportunities to work together. Finally, while Cessna has its own leverage with indirect suppliers because of its size, it has even more leverage as a result of being part of Textron.
“Textron has an indirect enterprise team that helps the business units leverage their spend,” he notes.
Cessna has a strategic action plan for supplier development on the indirect side for 2007. This involves migrating toward an even more formalized process, which will be driven even more by ISTARs: Here is the scorecard on each supplier. “Ultimately, this process will no longer be driven by a project mentality,” explains Doerkson. “It will be a way of life for us.”
Alcoa utilizes teams for a number of procurement strategies, one of which is environmental, health and safety (EHS) spend. “We see substantial opportunities here,” says Christine Stallmann, global EHS commodity manager at Alcoa. “We also recognize the complexities involved in sourcing for areas such as waste management, air pollution control technology, and personal protective equipment.”
There are a number of regulatory and compliance requirements, in addition to Alcoa’s own strict safety standards and employee preference for specific products or suppliers. “We have found that the key to success is building a multidisciplinary team,” Stallmann says.
The ideal team includes procurement professionals, EHS professionals, and stakeholders from Alcoa’s business units—the people who order and use the products and services on a daily basis. “The more stakeholder involvement there is, the more willing they are to comply with leveraged agreements and the greater the savings are,” Stallmann says. The procurement team adds market intelligence, contracting expertise, supply relationship skills, and the technical knowledge to ensure that the selected products and suppliers meet Alcoa’s needs, as well as any regulatory requirements.
To date, suppliers have responded well. In fact, many have been complimentary of Alcoa’s team because it provides a mix of technical and procurement skills. This mix makes it easier for suppliers to hold discussions and explain their products and services, which leads to deeper conversations and understanding on both sides.
This collaborative model has also improved the way Alcoa purchases. The suppliers work together with the team to be sure they understand the company’s needs. Then, they can explain what they are able to offer.
Finally, they work with the EHS professionals and the procurement professionals to blend technical information with their procurement needs. “The result is that we end up with what is best for us, which is often also a win for the supplier,” reports Stallmann.
Alcoa has been able to quantify savings. “We set a goal across all EHS areas, and we have already been able to achieve it year to date,” she states. “In addition, we are seeing much stronger relationships with suppliers, and the suppliers are able to add more value than they did in the past.” Again, this is because of procurement, EHS professionals and stakeholders are working together.
One recent personal protective equipment (PPE) initiative demonstrates the success possible. A cross-functional team within Alcoa addressed five categories—hearing protection, eyewear, disposable suits, hard hats, and respirators. Results: The team was able to reduce the number of styles in each category by as much as 93%, while maintaining safety, quality, and choice in each category. Financial results: more than $4 million in savings.
To read about how Cessna won Purchasing’s 2003 Medal of Professional Excellence, click here.
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