Cross-divisional teamwork nets big savings
UTC's aerospace divisions work together to come up with common specs and tolerances so they can leverage spending with their shared supply base. The result: about $250 million in savings—and deeper relationships with suppliers.
By Paul E. Teague -- Purchasing, 9/7/2006 2:00:00 AM
Recently, UTC's aerospace divisions concluded negotiations on a major contract with Pall Aerospace that is a dramatic example of the benefits of leveraging a supply base. Pall, a company with a varied line of products that has supplied filters for all three of UTC's aerospace divisions, agreed to a master terms agreement that features year-over-year regressive pricing, volume discounts and attractive payment terms.
In return, Pall gets not only additional business but also a 12-year agreement that provides the supplier a first look at all new programs from the aerospace divisions, plus assistance from UTC quality clinics and instruction in UTC's ACE (Achieving Competitive Excellence) operating system that the company credits with ensuring world-class products and processes.
Over the last several years, leveraging activities such as that have brought in about $250 million in savings for UTC. Beyond that phenomenal number, though, is the fact the company and its suppliers benefit from a deeper partnership that allows each to take advantage of and further develop their technical strengths.
There is nothing new about leveraging spend to get better deals from a supply base. But leveraging presents special challenges to a multidivisional company with a decentralized purchasing operation like UTC.
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Rick O'Donnell: "The real magic is helping the division doing the smallest buy to get the same advantage of leveraged buying." |
The $43-billion company has seven divisions, five of them (Carrier, Otis, UTC Fire and Security, UTC Power) in unrelated businesses. But the three aerospace divisions—Pratt & Whitney, Hamilton Sundstrand and Sikorsky—share a supply base and use enough similar parts families, says Rick O'Donnell, director of UTC aerospace supplier management, that with a little work leveraging the buy becomes possible.
The bulk of that work is done by the separate companies, and it's coordinated by the aerospace subcommittee of the corporate Supply Management Council. O'Donnell is the facilitator for the subcommittee, which includes vice presidents of procurement from each of the aerospace divisions. Both the Supply Management Council and the aerospace subcommittee meet monthly. A quality-control executive is a standing member of the Council.
“There are about 10 major aerospace parts families and 30 sub-part families,” says O'Donnell. Most of the leveraging, though, concentrates on about half of those component families. Among them: bearings, fasteners, castings, forgings, fabrications, machined parts and compressor airfoils.
 Beth Schwarz: "There is total agreement on the need for commonality." |
The trick, of course, says Beth Schwarz, vice president of supply chain management at Pratt & Whitney, is to develop common engineering specs. That requires engineering support, which in some companies can be hard to get. Not at UTC, says Schwarz.
“We have an engineering module center vice president (Dave Carter) who is responsible for supporting operations by driving manufacturability and cost reduction, and an engineering vice president (Paul Adams) who is committed to a one-company approach when it comes to specifying parts,” she says.
Under the direction of Carter and Adams, engineering works with specific commodity managers who, in turn, lead teams composed of representatives from each division who work with those commodities, such as fasteners. The teams review their respective requirements and establish commonality on specs and tolerances where they can so they can use the same part or family of parts.
Once they have identified areas of commonality, the team negotiates with chosen suppliers. “We tell the suppliers we're going to make the next purchase together and we will work with them on requirements, but we expect the right pricing across the board,” says O'Donnell. “The division doing the biggest buy gets an advantage, but the real magic is in helping the division doing the smallest buy to get the same advantage.”
The meetings among the divisions to find agreement on specs aren't without some disagreement. “But,” says Schwarz, “there is total agreement on the need for commonality.”
It helps that the players have worked together through the Supply Management Council. The monthly Council meetings are formal affairs with specific agendas, and they generally last about six hours. Council members also travel together on occasion to tour UTC facilities and visit key strategic suppliers. The next trip will be October 18, to India.
It's also general-information sharing. Through the Supply Management Council, divisional purchasing staff exchange war stories and best practices. And that helps not only in the management of current suppliers but also in their vetting of suppliers in emerging markets, such as China, India, Brazil, Eastern Europe and Turkey.
“These are areas where we currently sell product and plan to sell significantly more products in the future and we need to buy product from those same markets,” O'Donnell says. He has assigned four members of his staff to work on emerging markets identifying supplier capabilities and coordinating in-country supply management activities. “One thing we don't want, say, is to have Pratt Canada learn that a supplier can't meet our high standards, and then two years later have Hamilton Sundstrand go to that same supplier not realizing what we learned the first time around.”
Help in tough times
For all the advantages leveraging of suppliers brings to UTC, the suppliers reap benefits themselves that go beyond simply a steady stream of business. UTC takes care of its suppliers when they hit tough times. That was the case recently with a sand-casting company that ran into financial trouble.
UTC sent one team that represented all three divisions over four months to help the supplier with logistics, deliveries, continuous improvement and Lean implementation. This was better than sending three teams, each representing the interests of one division. “We flattened and prioritized our schedules so they could focus on the right needs,” O'Donnell says.
It wasn't strictly an altruistic act. If the supplier failed, some key parts would have been jeopardized, affecting critical customer deliveries. Still, O'Donnell says, UTC spent only 20% of its time worrying about what to do if the supplier closed and 80% supporting the supplier technically and operationally to insure survival. The supplier survived.
“When it comes to leveraging,” O'Donnell says, “it doesn't matter what the dollar value of the part is. If it's required to build a product for one of our customers, it has a tremendous impact.” And so do UTC's leveraging and supplier-management activities.
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