The top buyers speak

Your future rests with your suppliers.

By Doug Smock -- Purchasing, 6/19/2003 6:00:00 AM

What are the common denominators of a great procurement and supply chain organization?

We asked our Editorial Advisory Board at our annual spring meeting and a summary of the transcript is published on the next several pages. Some common themes include:

• The future of your company rests on a strong, positive relationship with the highest-possible-quality supplier base. As a result, you may want to carefully consider what attributes you seek if you tap into new e-sourcing tools such as automated requisitions or reverse auctions. Leverage is great, but focus on the right issues.

• Measure results carefully using financial benchmarks that tie in to your company's P&L system. Remove the words "cost avoidance" from your vocabulary.

• Explore all areas of spend for improved management. Intel even achieved significant savings in health care and prescription drugs.

• Eliminate complexity in the supply chain. Make sure you standardize across the enterprise and tap into industry standards whenever possible. These are hard lessons learned in particular by the electronics and telecommunications sectors in the last four years.

An audio version of the Advisory Board meeting can be heard at www.purchasing.com in the archives of the Global Procurement Conference. Go to keynote sessions I and II.

PURCHASING: Would each of the members of our board comment on how far down the road are you on achieving leverage. Is this a big goal of yours this year? What do you estimate as the total potential leverage in your company, how far do you intend to go and how far are you?

RUDZKI: Really the first step in the road of achieving leverage requires a good factual understanding of what it is you buy across your organization. This can be a real challenge in large companies with different legacy systems, but there are some great new tools out there that are helping companies build a spend map without redoing all of your legacy systems. So that's step one. The second step involves, quite frankly, altering human behavior. You'll need to get buy-in from within your organization to the simple idea that the optimum result often means that procurement people and their local stakeholders move their local interests into second place. The third step involves interacting intelligently with your current and prospective suppliers (strategic sourcing). And, the final step in achieving leverage relates to aggressive monitoring of internal compliance and eliminating maverick spend. If you can't deliver the volume the supplier was expecting, your leverage in future discussions will be severely diminished. Those four factors relate to internal leverage within your business. Once you have your internal act together, you can consider consortium buying with other companies.

PURCHASING: Do you leverage just in North America, Bob, or do you leverage globally?

RUDZKI: We leverage many things globally as well.

BREVES: At Alcoa we deployed what we call comprehensive leveraging, which means we did complete analysis of our spend and we agreed together with our lead teams that represent each of our business units what the proper leveraging level would be for each category. All of our strategic materials are bought on a global basis. We have global sourcing teams for that. For the other things we decided that was something that should be bought at the North American level. An agreement was made up front on leveraging and all of that has been rolled out through strategic sourcing teams and we found that only about 10-15% of the spend really should be left at the local level. No more than 15% really should be sourced by individual plants. Everything else should have a higher leveraging level. We wanted to make sure that we were leveraging it at a level that really made sense for that particular spend. This year we're taking it a little bit further. In addition to the strategic commodities, we're looking through all of the services and indirect spends and deciding much of those spends should be done at a global level so we're going to spend the amount of commodities that are being sourced globally.

PURCHASING: How do you determine what is the 10-15% you leave at the local level?

BREVES: It's based on the nature of the commodity and the nature of the supply base that can support that commodity. They are things that tend to relate to the local area, things like janitorial services, some mechanical or electrical contracting might be just regional around a couple of locations and even some of those we're finding that there might be ability to leverage.

BERRYMAN: At Harley we have a first priority with our suppliers and it could be perceived as directly opposed to this whole issue of leveraging. The first priority is preservation of existing supplier relationships. So how do you leverage something against that sort of commitment to suppliers? So when you think about that, because the leverage has to happen. You have got to have a long crow bar and we really translate the length of the crow bar through the technical competency of the players that we're doing business with. And if they bring a technical competency that is world class, best in class, however you want to characterize that, then there's absolutely no reason in the world that they can't be competitive in the areas of performance on quality, on cost, on timing, on technology and it really puts the impetus on that supplier to know and understand their industry and to bring that knowledge to the relationship and to help us understand what they know about their gaps and what they are doing about their gaps. Now, that sort of leveraging takes longer.

BREVES: If I can add on to that, I think that our strategic sourcing process would address that because you do have to consider that in your selection factors and you need to decide on those up front to bring objectivity into the process and that's just one of the steps in the strategic sourcing process that's followed. Past performance means a whole lot.

KATZORKE: I think to me the challenge here in these kind of economic times is doing the right things for today and still doing the right things for tomorrow. We can do some of those right/wrong things today to make the numbers today and they could be out on a vector of maybe 45 degrees, but they can't be out on a vector of 180 degrees. Absolutely the wrong things to do for the future, and in terms of the leverage aspect of that, many things can be leveraged besides price. We want to leverage the behavior that's going to drive the results today and tomorrow and the behaviors are things that are going to take cost out of that supply chain rather than just squeeze the margin and to Garry's comment, the relationships are essential to be able to change the behavior to then generate the results, not only today but tomorrow, so that leveraging can happen around behaviors and not just around numbers today. The behavioral change will drive the numbers.

BREVES: Future capability of the supplier has to be one of the selection factors.

STEWART: I think a good strategic sourcing program embodies all of that, though. At Invensys we've sort of just started on the journey so we have had to recreate the whole thinking process and educate people. Certainly there's significant opportunity for us to leverage. We've got over 49 teams globally. But then on the other hand, there's this whole relationship kind of activity that we're doing with suppliers that are there for the long term and you all know who they are because you have them as well as I do. I think it's important to have the conversation in the correct context when you're having it because there are a lot of people that we're trying to educate out there that could misinterpret this whole leverage play.

BREVES: Right. I think leveraging is far more than just price. One of the things that we look for that we're going to talk about later in some of the discussion is the ability of the supplier to support our processes, what we're looking for as far as the process, and their ability to support that so it's far more than just price.

RICHTER: I think following up on what everybody said here, I think people look at leveraging differently depending on where they are in the process of getting toward world-class procurement. If you have 300 suppliers globally of office supplies, there are five of those that are world class and you need to find those five and you need to center your business into a much smaller grouping. If you have already rationalized yourself and you have two or three suppliers of forgings, then your job is to benchmark the world, help them with training and to make sure they stay world class, but it's a completely different situation. Leveraging is different depending on where you are starting.

KATZORKE: I think, too, that partnership concept needs to be focused on the end customer. The objective is to sell more of the products at the end of the chain and if we have that thought, that drives all the partnerships up and down that supply chain from ore to product obsolescence. Then we're going to have the right kind of relationship so that's key.

PURCHASING: A lot of suppliers think purchasing people are still too price focused, particularly in today's economic environment. Are they off base or am I just dealing with the best of the best here? Are too many of our colleagues focusing too much on the price part of the equation?

RICHTER: When you talk about the thousands of corporations in America alone, absolutely too many are still focused too much on price. Price is tempting to a purchasing person so it's easily measured and the other issues of quality and technology and delivery are harder to measure and harder to project into the future.

PURCHASING: If you are a buyer stuck in the system where you are still very price focused, what kind of advice can you give?

KATZORKE: I think it's about leadership. You know, we have to have the courage in bad times to still do the right stuff for the future and balance of leadership is what is really key. It's our job to educate our bosses to make sure that we keep that balance between the future and the present. They think in terms of absolute dollars and that's the right thing to do. We have to make the numbers, but on the other hand, our stockholders would like us to make the numbers tomorrow, too.

METTY: I do think we also have an obligation to educate. It's challenging to learn how to translate the value that an effective procurement organization can bring. It's tricky business. What I found that works—in addition to articulating the bottom line impact in terms that everybody understands—is translating the value that effective supplier relationships can bring to an organization in terms of market share. For example the responsiveness of the supply base that you created and its ability to respond to an unplanned increase in requirements. We need to articulate that value to the head of sales in the organization.

PURCHASING: Do we talk too much about cost?

KATZORKE: I think we talk too much about taking cost out from the same places over and over again. I think Roger has a neat story about what he had done relative to some non-traditional areas relative to health care.

WHITTIER: Well, the fact is that purchasing does own costs in the eyes of the organization. But that doesn't mean price is the only way to deliver it. You have to go look where you can add value. At Intel we started wandering into nontraditional areas of spend more than a decade ago and got involved with our marketing communications spend, advertising media and health care benefits. We have been able to add a lot of value by looking at the scope of work, what you're getting for it and looking at some competitive benchmarking, not just in what you are paying but also in what you are providing and are you going too far? Are you not doing enough? Are you focused on the wrong things? Can you still consolidate your leverage, say, for prescription drugs if you want to deal with benefits by trying to channel the business through some specific suppliers to become a bigger customer. Then you can lower price and everybody is happy. Their margins are the same or perhaps improved and our costs are lowered.

BERRYMAN: Actually, I think we do ourselves a disservice by simply talking about leverage in the context of cost because the conversations that occur within a company that are really stimulating and motivating are around the product, around process, around technical competencies and when we enter that space, then we've got a whole different attention level to those who we're speaking with.

WHITTIER: The fact is, you asked a question, Doug, about cost. "Are we focused on cost too much?" Mike said we're too focused on maybe some of the wrong things or the same old thing, price. I think we ought to be proud of the fact that we manage cost and cost ought to be one of the things do well. In the last technical downturn a lot of companies got hammered with some large write-offs of raw materials as the value of those products dropped. The companies that had progressive supply chain management didn't have those big write-offs and that's because we had built flexibility in the way we ran our business and it played for everybody very well in that aspect. So I think we ought to be proud that we manage cost but we need to expand that definition and look at total cost; the cost that it takes to do business as you manage the supply chain.

PURCHASING: Does the flexibility derive from software, electronic systems, relations with suppliers or something else?

WHITTIER: Well, it's all those things and then some. If you have an effective supply chain, you're talking to your suppliers, they know your changes in demand when you know. You're driving to very low inventory levels and those inventory levels must be low, not just at your company, in my case Intel, but you can't just move that inventory back to their channel because you can't manage inventory well. Then they are sitting on a huge shelf as well. So you really have to get progressive about coupling up the supply chain and everybody moves in unison.

CARSON: I think in a lot of ways it really comes down to a corporate discipline that runs a thread through some of the things we've talked about. We've talked about folks being more strategic in their approach. We have talked about looking at the whole process and pulling it together. I think from our standpoint, a lot of it was understanding what the inventory was, understanding information systems so we could categorize it, understanding what our rules of practice were going to be, understanding the relationship with the suppliers so we knew what we were going to keep and what we weren't going to keep and then having a single voice with both our supply base and with our business so that we understood what our strategy was going to be all the way through. And it was coming to work and doing that everyday for an extended period of time that helped us really manage our inventory to a much better place than it was.

PURCHASING: Bob, could you offer any insights on what Bayer's strategy is in the area of inventory management?

RUDZKI: Bayer has been focusing a lot on working capital programs, including payment terms initiatives with our suppliers and inventory programs. On the inventory side we basically look at that as one more opportunity for suppliers to distinguish themselves against competitors. We open up the opportunity to our suppliers in RFIs and RFPs and in face-to-face discussions. We find that suppliers in general are able to be much more creative than we had historically assumed to be the case. So inventory programs, whether it be vendor-managed inventory or actual inventory consignment programs are becoming a much more common element of our commercial discussions.

PURCHASING: Theresa, is supply chain elasticity a big issue at Motorola as you take over your new responsibilities there?

METTY: I have been quoted as saying that product complexity is the root of all evil in the supply chain and it impacts a supply chain in so many ways and therefore, impacts the business in so many ways. Complexity occurs when every product is designed with a clean piece of paper from scratch and no components are reused across the entire portfolio of the products. Complexity also occurs when there's little thought given to using industry standards whenever possible. Another problem is when the unique features of the product have to be built in on the factory floor instead of in a configuration center moments before the product ships to a customer. It limits supply chain elasticity and it forces you to build incredible amounts of inventory that always lead to excess and obsolescence problems. But I think the more concerning thing is that it really limits your ability to be responsive so when there is an opportunity to pick up some additional points of market share and somebody guessed wrong about what product we would be selling—if there isn't the opportunity to use the same components in one product that we're using in the one that is now in demand, you have missed a tremendous opportunity. So we have had an enormous focus in Motorola over the last year and a half on reducing complexity. In fact, we call it our war on complexity because we think it's that serious and we need everybody to climb up out of the bunkers and onto the battlefield and get engaged in this war. It affects all of us. It affects the sales people. It affects cash flow. It affects the shareholders in earnings per share. I can't think of an initiative that's going to drive more money to the bottom line either through increased market share or lower costs—all while freeing up cash. This lets you invest in the right things instead of inventory that gets less valuable by the hour.

BREVES: Just an additional comment on something said earlier. I think we have to work with our suppliers to implement lean manufacturing techniques to truly take inventory out of the chain, not just push the ownership to them. I mean that's really more of a permanent solution and so we are doing that and have had some real successes and we're definitely planning to expand that.

PURCHASING: Any examples you can give us, Christie?

BREVES: Well, you know, Alcoa is based on the Toyota production system and we have deployed that internally and we're now looking to make the connections with our supply base and our customers to take inventory out of the whole chain. We have specific examples. We reduced our inventory with one of our coatings suppliers by about 25% of the previous inventory and we also decreased leadtimes more than half through implementing the Toyota production system principles with that supplier.

PURCHASING: Garry, Harley has a great model involving suppliers in supply chain problems and design. What are some of the things you are doing with your suppliers to handle these bumps in demand? How do you pass off some of this responsibility or manage the risk across the supply chain.

BERRYMAN: Being responsive to the marketplace is key and we respect that to the degree that in the life cycle planning of our products we have a cross-functional team that in many cases is headed up by marketing, combined with design engineering, supply management, finance and manufacturing.

The whole key for us is that we're not the fastest to market, but we're the first to market and when we go to market, it is absolutely going to be in a sweet spot of what the customer is expecting because we've done our research and then it's a matter of executing against that plan. We can't afford not to have winning products. The life cycles of our products are long. They are expensive to develop, and to manage that risk, we take it way upstream in terms of the life cycle's development and bring all of the knowledge that we have around that customer expectation to the development of that new product and the way that we structure that product in its manufacturing processes, whether it is through the supply side or through the integrated manufacturing side of our business, plus the role that we have with our dealers.

KATZORKE: Last year when the aerospace industry had probably one of its really worst years, we had the best year in the history of our company and the reason was primarily because we had the market issues well identified and the ability to build those fairly rapidly and refresh our products and services. And the way that we do that, similar to what Garry was talking about, is extreme focus on that new product development aspect that aligns every aspect of this organization into program teams. In the automotive industry we call them platform teams, but to be able to deliver those new products in the right place at the right time is the key to our success. I think now we're starting to focus more on the operational side of that to not only have the right products but to be even more efficient in producing those products.

CARSON: We have started to have monthly demand planning sessions with our suppliers. We take our key strategic suppliers and we go through our monthly demand plans. At least they have some sense for what is happening down the road. This is in addition to the Web portal information that tells them exactly what their inventory status is and what they need. They can start some preliminary planning ahead of the actual demand pull. We've gotten some good feedback from that. They really appreciate the information and it gives them enough detail so they can plan their own supply chain.

PURCHASING: And Lucent has kind of an unusual way of doing that, too, don't they? Aren't the demand forecasters parts of supply networks organizations? Could you explain that model a little bit, Joe?

CARSON: Actually, it's expanded to include the customer delivery organizations and the actual order takers are part of our team as well. That really helps us understand what is happening right on the front line with the customer teams. They work directly with the customer teams, all that demand information gets fed in through our demand planning organization and then gets connected back to my team and out to our supply base.

STEWART: Just along those lines, as I said, we're at the beginning of this whole concept but we're trying to implement a rigorous sales and operations planning process, which means the sales guy doesn't just get to dump the sales order into the planning process. There's some accountability for the orders that he's driving, so that when we end up with inventory it is not just our problem, but it belongs to all of us. It's critical for us because particularly in the downturn in a lot of the markets that we play in, we've got caught with a lot of inventory.

When we went back and analyzed that, it was because of the planning process up front that wasn't accurate, and the incentive process for the sales people. They had incentives to get orders. Now, whether that order got delivered or it got cancelled somewhere along the way was not their problem. They had already gotten paid so we've gone back, fixed their incentive process, created an integrated sales and operations planning process, which I think will help us when business begins to turn up because you have the same kind of problem; you can't get it out quick enough when the market goes the other way so right now we're trying to get rid of it and when the marketplace comes back we want to be able to be neutral. We want it to flow in and flow out as quickly as we can possibly make it so we've got a rigorous activity going, which also forces a lot of people in the organization to talk to each other and communicate better than they have in the past, including engineering.

KATZORKE: Marketing has an accountability to sell the demand that they have forecasted. Supply has an accountability to produce the demand that was agreed to and the whole organization has an accountability to make sure that the financials that come out of that plan are integrated and linked together and then you have an integrated real plan that's going to produce financial results.

BERRYMAN: Are our companies clear around the management policy of this issue of responsiveness to demand? There's management policy in terms of work structure. Do you work five days a week or do you run four by 10 and then run a weekend shift as well? What is the flexibility around labor relations? There's a whole issue of poor competency and what do you do internally and what do you do externally.

I think as leaders in this supply management side of the equation, we get impacted by the absence of clarity around that management policy more often than not and so we have a responsibility to bring that to the table and to help the organization understand the significance of being clear about that policy and when you put those policies on the table, the finance guys, the engineering organizations, the sales and marketing folks, it really creates some energy and it's not negative energy. They really want to understand and be part of the solution set and we invite that opportunity through these sorts of management policy elements and if we define them well, if we understand the scope of those policies and begin to reflect them back on the role that we have and tackle them internally, the progress that can be made is just phenomenal.

CARSON: Just to pick up on that, I totally agree. If we do a good job of articulating the value the supply chain brings, that in itself, that winning will generate more winning from the supply chain perspective. Nothing tells a story better than the income statement. If because of that advanced planning you lower your inventory, you improve your balance sheet, you see gross profits go up then, you get a lot of attention at a board level, and the company's policies and practices adjust accordingly, relative to the supply chain.

WHITTIER: An effective supply chain management can do so much. The fact of the matter is for years industry has kept inventory raw or finished goods because it can't predict demand or it can't predict supply. At least in our market we have never gotten good at predicting demand. I mean, total units out may be close but the mix is awful. The mix changes. The value of a very flexible responsive supply base with some of the ideas that were mentioned at Motorola. That allows whatever inventory you have to be directed at a different part allows you to keep that inventory and be responsive to the marketplace. We might as well just accept the fact that we can't control the consumer demand but we certainly can control supply and variability through not just expecting our suppliers to deliver on 24-hours notice but through progressive ideas like that.

KATZORKE: I think Christie talked about lean in her business and how important drilling that into your supply chain was. How did you do that?

BREVES: It's a lot of work. You have to train the suppliers to be able to do that and it takes a lot of time. You have to really work to define the connection, the flow path and then you really can take out inventory because you don't have all the waste in the system and a lot of it is communication and collaboration that all of you have touched on. It's understanding each other's business, communicating in a more binary fashion.

PURCHASING: Do you have staff people dedicated to that, Christie?

BREVES: We don't have nearly enough. This is a new area of focus. We've had some cases and some business units where they have done a real good job in isolated cases but we want to expand it more across our supply base and so we're proving the business case to get the investment and the resources to do it.

PURCHASING: Which brings us to the next point: how do purchasing people, supply people, how do you make your case to senior management to get the resources necessary to do all of the great things that need to be done?

KATZORKE: You have to visibly tie everything that you do to the movement of the needle on the income statement or the balance sheet. It's just that simple. Make every activity that you want to do, make every enabling activity that you want to do well understood and visible in terms of how do you move the needle. If you do that you'll get the support.

BREVES: One thing that we struggle with sometimes, though, is what you had talked about earlier about balancing the short-term impact with the long term; that you don't immediately see the impact of it but long term you know it's the right thing to do because you know it's going to yield the benefits in the long term.

KATZORKE: But there's some of those right, right things you do to make those numbers today, and make no mistake about it. You have to make the numbers today. You won't be here tomorrow if you don't, but then there's some of those right/wrong things to make those happen today. Then you also have to do the right, right things for tomorrow to be able to continue to sustain that performance improvement, so the things you do today have to be on both vectors; achieve today's numbers and achieve tomorrow's numbers and I think we all know that. The problem has been the connectivity between all of this soft, squishy feeling stuff that we talk about in our processes, linking back to that balance sheet and the income statement in a very visible, tangible, quantitative way, and I think the quantitative aspect is key as well. Once you overcome that and gain the confidence of your leadership then not only do you have the right strategies but they are indeed delivering the numbers, you won't have the problem getting the resources you need to work the issues.

RUDZKI: I think Mike hit on probably the most fundamental challenge facing the procurement profession and it came up a little bit earlier: the easiest thing to measure is price change. It's on the old invoice, the old unit price. The new invoice has the new unit price and nobody is going to dispute what is on the invoice. The real challenge becomes how do you turn your tracking activity into something that really relates to the total income statement impact.

About a year ago at Bayer Corp. we spent a lot of time developing a system that measures three things. It first measures cost reductions from the procurement initiatives; that's to say the value provided by procurement and that's what many procurement departments report; and only that. We also measure the impact of volume changes on cost reductions and third, we measure and capture the market impacts that are unrelated to anything procurement is doing.

When you think about those three things added together, they give you something that should be very, very close to what is on the income statement. We also track initiatives from capital projects separately from the operating cost initiatives because capital project cost reductions won't show up in your income statement. Finally, never, never add cost avoidances to anything you report.

BILLINGTON: One of the things that we did is that the central procurement service is a fee-for-service model so if the business units don't pay us to do our activities, then we don't do it. So there's a burden of proof that we put upon ourselves and we use a return on investment so it's audited.

STEWART: I vouch for that because I'm going to a similar model where we pay for service and going out this year was my first year to convince people and I had to have a compelling story about what is the payback. Why are we doing these things and what are the metrics we're going to use to measure them? So I think it actually challenges me and my team to be more precise about how we do what we do.

PURCHASING: I'd like to change the discussion now to technology and supply. Christie, how do you use IT systems to optimize purchasing?

BREVES: Alcoa has made a significant investment into one common ERP system for all of our locations. We have more than 400 locations globally and we are in the process of rolling out one system and having one common technology platform has enabled us to develop standardized best practice flow paths for everything that we buy. Our objective when we started to do this was to decrease the amount of transaction support labor that was required while we still maintained the necessary controls, but it's really questioning some of the past controls because we really needed to decrease the amount of transaction support labor.

We had done a benchmark study with Hackett that said too much of our procurement labor was tied up in just trying to get transactions through the system rather than being more strategically focused doing more value-added activities. So we were determined to use the common platform to really look at our flow paths, how do we buy things from the identification of a need all the way through paying the invoice.

The purpose was to develop a standardized flow path based on the nature of the transaction so we looked at everything that we bought by category and developed the best practice flow path aimed at trying to reduce the amount of labor where we tried to use the system to do things electronically rather than using people having to touch it, so we really looked at do we really need a manual purchase order? If not, would an e-procurement ordering system do instead. Did you truly have to have it received? We tried to eliminate manual receipts. We certainly don't want to get hard copy invoices that have to be handled and processed and matched three ways in the accounts payable system unless that's truly needed for some control reasons and we also didn't want to do any more cutting checks. We wanted to do all ACH disbursements. We have already seen the impact of these flow paths that we can tremendously reduce the amount of labor that's focused on just trying to get transactions through. We really want our people to be focused on doing strategic activities and minimize the amount of time that they really have to work on just trying to get things through the system and we think this will be the key to realizing the productivity potential from the investment we have made in the common ERP system.

PURCHASING: Thanks very much.