Timken executes indirect procurement mega-project
Global commodity management initiative developed at Timken.
By William Atkinson -- Purchasing, 3/13/2008 2:00:00 AM
Creating a centralized indirect procurement department in a Fortune 500 manufacturing company is no small task. Neither is creating a global commodity management initiative at a globally expanding firm. Even more formidable is the decision to outsource noncore indirect purchasing activities. Most companies might spread these projects out over several years. Timken Co. of Canton, Ohio, though, elected to combine all three into a multi-year "mega-project," realizing that, in many ways, the efforts were linked, and that it made sense to coordinate them with each other, rather than attempt to tackle them separately.
"My predecessor recognized the need to leverage indirect buy for the company's different business segments, because there was little differentiation," says Steven Lee, general manager of global indirect purchasing at Timken. "Office supplies are office supplies, and travel is travel." When Lee came on board, he continued with the implementation, helping to gain control on some of the spend that hadn't been centralized yet, including travel, meeting planning, and marketing.
As this was evolving, Lee then began to look at segmentation, determining what was core to its business and what was not. Timken conducted a detailed internal evaluation and found clearly it would not make sense to outsource activities and functions that were mission critical but this still left a lot of opportunities, because, according to Lee, about 75% of its indirect spend could be categorized as non-mission critical.
Next, Lee and his team looked at the company's ability to influence and control the marketplace in each spend area that was considered for outsourcing. "In the area of travel, for example, even though we are a Fortune 500 company, I don't believe even a Fortune 50 company has enough spend to make it worth having a travel specialist on staff that negotiates directly with airlines," he states. In addition, he believes, a person who does specialize in this activity would more likely be working for a travel company, not for a Fortune 500 manufacturing company. Lee wanted to find a company that specialized in travel, did it everyday, and considered it a core expertise. Such a company knows the dynamics of the marketplace well, tracks market trends, and knows when to take advantage of sourcing opportunities based on the timing of supply and demand.
The result was that Timken elected to outsource travel procurement, a large portion of marketing, transportation, MRO, and other indirect services (such as plant services), given that these were non-core and not mission critical.
Those that the company still considers to be core and mission critical (and thus not outsourced) are some strategic partnerships that have helped the company transform its organization, such as some domains within IT and some domains within financial services. In addition, anything that goes into the product is considered core, such as tooling and chemical management. "It would not make sense to outsource these, because we are already the expert in these areas," explains Lee. Second, the global supply base in these areas tends to be limited. Third, Timken already has successful relationships with all of these companies.
Progress is impressive: "We are about 85% of the way complete in terms of centralizing," states Lee. The gaps tend to be from a global and regional standpoint. "It can be difficult to get your arms around regional spend management on indirect services," he explains.
One key to success has been executive sponsorship and support. "Our CFO is strongly behind the efforts, which helps the different organizations be willing to relinquish control," he states. Another key has been the ability to develop strong business cases and value propositions. One value proposition focused on the value of strong centralized leverage. Another focused on the value of business process outsourcing, identifying what could be delivered internally at today's cost, vs. what could be handled externally and the associated cost differential.
Another key has been setting up requirements properly in the first place, and then monitoring performance. "After we outsource, we continue to conduct due diligence," he states. Timken creates a statement of work, a master service agreement, and a service level agreement. "We also clearly define metrics and then monitor performance," he adds. While contracts are written to allow Timken to get out of relationships if the outsourcing partners fail to perform to the required level, Lee doesn't believe it should be this cut and dry. He believes it also makes sense to include risk and reward financial components in Timken's outsourcing contracts. "In this way, there is a financial impact to the partner," he explains.
Financially, according to Lee, these deals have definitely helped Timken to secure its performance, while at the same time manage its internal costs more effectively.
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