Motorola leverages its way to lower cost
By placing purchasing under one umbrella, Motorola has reduced it supplier base by 20% and cut material and service costs by more than $500 million in one year.
By James Carbone -- Purchasing, 9/16/2004 2:00:00 AM
Until last year, Motorola was reluctant to wield its purchasing clout with suppliers despite the fact that it buys about $18 billion of materials and services per year.
For most of its 75-year history Motorola left purchasing up to its individual business groups and facilities although there were many components, materials and services that were common across the company's business units. Motorola was clearly losing out on opportunities to leverage its purchases and cut both direct and indirect materials costs.
But all that has changed. Last year, Motorola began its journey toward a more centralized purchasing structure under the leadership of Theresa Metty, who was named chief procurement officer for the company. Metty had previously headed up purchasing at Motorola's personal communications sector, the company's cell phone unit.
Metty set an ambitious goal of reducing materials costs by $1 billion in three years and began implementing proven strategic purchasing initiatives including leveraging company-wide purchases whenever possible. Metty and her team also set up commodity teams, increased use of e-sourcing and worked with new product development teams to use standard parts and reuse components in multiple designs.
While Motorola's efforts are only about a year old, they are already bearing fruit. The company has reduced its materials costs by $550 million, making it likely that the $1-billion three year goal will be met ahead of time.
"I didn't think it would be a one-year journey. I figured a three-year journey," says Metty. "But in the first year we are well on the way to a billion."
The key to Motorola's success has been establishment of a corporate purchasing structure and use of key supplier management and cost cutting initiatives.
"We have brought more structure around commodity teams and are leveraging our categories of spend," says Metty. "We are doing spend analysis. A year ago spend analysis data did not exist. We now have access to better quality data so we can make intelligent purchasing decisions," she says.
A lot of cost savings that Motorola has realized over the past year has been with indirect materials, including industrial supplies, facilities, software, travel and fleet among others. In fact, between 50%-60% of the savings so far has been with indirect materials, says Metty.
DK Singh, vice president and director strategic sourcing indirect procurement, corporate, says there are a lot of opportunities for savings with indirect materials because so little had been leveraged at Motorola in the past.
"I came here about a year ago and some of the things I saw were surprising and shocking," he says. "Basically thousands of people were doing their own buying. We did not have a global team in place. To me it was chaos."
By leveraging common commodities across the company, Motorola has saved millions. Case in point: software. Motorola had 65 different agreements globally with one supplier for the same software license. "The spend was significant. Each sector had a need for the software," says Singh. Motorola's software team worked with the supplier and negotiated a global agreement for all of Motorola, saving more than $40 million or about 50% of what Motorola had been paying for the 65 different agreements.
Motorola has consolidated purchases in other indirect areas including travel, fleet, facilities, cafeteria services, legal services, industrial supplies and marketing.
Besides consolidating its purchases of indirect materials, Motorola is also consolidating its buying operations globally.
"In Asia, we have 27 buying centers now, but we expect that to be one in 2005," says Bonnie Sullivan, vice president and director, indirect procurement, corporate. In the U.S. in 2002 we had 10 and now we have five. "We want to redeploy those resources to support strategic activities."
To reduce procurement cost and to control indirect purchases, Motorola uses its total integrated global e-requisition system, which is powered by Ariba software, says Sullivan.
It automates the purchasing process so requisitioners can use the system to buy indirect goods from electronic catalogs. "If something is not in the catalog, a buyer will take a requisition and route the purchase to a preferred supplier," says Sullivan.
Fewer suppliers needed
By leveraging purchases and emphasizing use of preferred suppliers, Motorola is not only reducing its material cost, but cutting its number of suppliers. A year ago Motorola had about 44,000 suppliers and now it has about 36,000, according to Metty. Motorola's top 25 suppliers get about 50% of its business. In 2002 less than a third of business went to the top 25.
"It's crystal clear we still have too many suppliers. It's not surprising given the number of people who could make commitments in the company in the past," says Metty. "When you have thousands of people who can buy you're going to have a lot of suppliers. It's nobody's fault, but that is changing."
However, Motorola does not have a goal to get to a specific number of suppliers by a certain date. "If we leverage effectively and we get involved early in decisions, the byproduct of that will be fewer suppliers, but that is not the goal," says Metty. "The goal is to leverage ourselves to take cost out. The only way to do that is to channel more purchases with fewer suppliers," she says.
Motorola is leveraging its purchases on direct materials, but using other initiatives to reduce cost as well. For one thing, Motorola is signing more long-term agreements with suppliers for strategic commodities such as flash memory and other semiconductors. Long-term contracts often result in lower cost for Motorola and guarantee continuity of supply.
"I believe in long-term contracts; they're good for us," says Andy Winterbottom, vice president, semiconductor procurement, corporate. "They tell the supplier that we have indeed something they can take to the bank for more than six months."
Motorola's long-term agreements are for three years and they are evergreen, which means they will be extended if terms and conditions are met and both parties want them extended.
With long-term agreements Motorola agrees to buy a percentage of its requirements from suppliers. "If requirements are two million pieces, we may contract to buy 25%," says Winterbottom. "If our requirements go up, they get more business. If they go down, suppliers share the pain."
Motorola isn't signing long-term deals just with suppliers of leading edge technology. Some of Motorola's business units like commercial government institutional services (CGIS) need trailing edge technology for the equipment they make.
"We are wise to keep trailing edge suppliers involved. We make long-term agreements with them as well if it is important to preserve supply continuity," he says.
Let's renegotiate
As Motorola commodities teams have taken shape over the last year, strategies for some commodities have changed and Motorola has renegotiated some long-term agreements with suppliers.
For instance Intel was the primary supplier of flash memory to Motorola. "We reduced the amount of share because we were over invested in Intel and we needed to leverage more room to develop more competition," says Winterbottom. "Intel is a great supplier, but there are other suppliers out there and competition is what keeps everybody healthy and alert." Motorola has been negotiating with another semiconductor supplier for flash. "When the agreement is completed it will be for flash, logic, linears and other parts they provide," he says.
Commodity teams have been instrumental in formulating strategies and negotiating term long-term agreements with suppliers. However, they have also worked with new product development and engineering on technology roadmaps to reduce cost.
"By having commodity teams in place across the business we are starting to influence which suppliers and which parts get designed in," says Metty.
"We want engineering to talk about the technology requirements. We want product people to talk about the consumer experience. Then procurement says, 'Here's what we can do from a strategic sourcing standpoint'," she says. "Everybody has to be comfortable about those sourcing decisions particularly on products that use leading edge technology."
Declaring war
Commodity team members work with engineers to use more standard parts and to reuse components that have been used in other designs. "It's part of our war on complexity," says Metty."
Early in the design of a new product, Motorola determines the complexity level of the proposed product-the more complex a product, meaning it has many nonstandard and new components, the higher its complexity index will be. An index of 1.0 is best in class.
"If it is worse than that, say 1.1, 1.5, or 2.0, the proposed product stops right there," says Metty. "We say we have to fix this because it is not going to be a competitive product from a supply chain and cost standpoint."
She says by putting in the complexity index in the product design process, designs that are uncompetitive from a supply chain view are caught much earlier than in the past.
Motorola wants to use standard parts because they are less costly than custom parts and result in more leveraging opportunities. "With capacitors and resistors, there's no reason you can't use industry standard," says Metty. "When you use industry standard parts, life gets a lot better for us. Inventories go down and excess obsolescence almost goes away. If you don't use industry standard parts, when the product lifecycle ends, anything left over goes into the dumpster," she says.
Sometimes standard parts can't be used and a custom component needs to be designed in. "If you can't use an industry standard part, then at least reuse the heck out of custom parts," says Metty.
Reusing parts means to design the same parts into multiple products. Doing so also allows Motorola to leverage more of its spend because the company is buying more of the same components.
Motorola has developed a master line of preferred components that engineers can review so they know which components should be considered for new designs.
Motorola's efforts to reduce complexity are paying off. "We reduced complexity by 30% over three years," says Metty. One example is batteries. Several years ago, Motorola had 140 different batteries for its cell phones. Today it has 30.
The next step for Motorola to reduce product costs and complexity is to get suppliers involved with Motorola's technology roadmaps, says Metty.
"We tend to design everything ourselves and haven't traditionally involved suppliers in design." However, that will change as Motorola outsources more.
"Little by little we are turning modules and subassemblies over to suppliers for such things as displays and flip assemblies," says Metty. "Suppliers are the experts. Why do we need to micromanage that element of the supply chain? Suppliers will be able to optimize designs."
She says letting suppliers do the design for subassemblies will free up Motorola to work on more strategic issues that are important to customers. At the same time, it will allow suppliers to be innovative.
"The supplier may have a better way design a subassembly to reduce cost and to uncover things we probably never will," says Metty.
Sourcing electronically
While involving purchasing and suppliers in design has helped reduce costs so has e-procurement, says Rob Harlan, senior director, eProcurement, corporate.
"E-sourcing enables 20% of the savings that we bring to the table," he says. "Last year we had $11 billion direct material spend and $9.8 billion was electronically quoted and about $2.8 billion went through reverse auctions," says Harlan.
He says Motorola has realized savings through reverse auctions because there is price transparency. "Suppliers see the best bid and who has it. That has been beneficial to us," he says.
But there are other benefits as well. Using an application called Motorola Internet negotiation tool (MINT) for electronic requests for quotations (RFQ) and reverse auctions, Motorola has reduced its cycle time for quoting by about a third, he says.
He says Motorola will quote out about 1,000 semiconductors electronically four times per year. "We can have one or two people load the parts in our electronic quoting tool and suppliers have a certain amount of time to quote back to us," he says. Without the tool, more buyers would need to be involved and it would take days to get quotes from all the suppliers for the components.
In addition e-procurement allows buyers to focus on parts or suppliers than need more attention in the quoting process. "For instance with stampings, we set up eight auctions, 30 parts each for 240 parts," says Harlan. Buyers can quote those out and focus their time on the higher runners."
Metty says some suppliers don't like the transparency of reverse auctions, especially if there are only two or three suppliers. However, she says, 40% of the time "we recommend a sourcing solution who is not a low bidder."
She says e-sourcing is a tool that frees up buyers to have "the right conversations with suppliers. It does the grunt work that frankly no human being could do. It's not about outsourcing sourcing," says Metty. "We want to free buyers up and spend time with suppliers and do technology roadmaps and things that no machine can do."
While Motorola has made great strides in leveraging its purchases and reducing costs, there is still more work to do. Metty says forging even closer relationships with key suppliers will be important to Motorola's success.
Motorola will have a supplier advisory board to help improve its performance. "The board will consist of a handful of suppliers who will be open to us and tell is what we do well and what we don't do well. We will put that in place. It will help us along our journey," Metty says.
Motorola's commodity councils
| Direct | Indirect |
| Source: Motorola |
|
| Semiconductors | Capital equipment |
| Batteries/energy | Telecommunications |
| Plastics | Logistics |
| Printed circuit boards | Marketing |
| Foundries | Facilities |
| Assemblies | Services |
| Accessories | Software |
| Displays | Industrial supplies |
| ODM-external mfg. | Travel and fleet |
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