PPG tests the outsourcing waters
Glass and coatings giant finds outsourcing can work well for energy and has potential in chemicals and other areas.
By Alan R. Earls -- Purchasing, 8/13/2009 2:00:00 AM
When it comes to outsourcing the purchasing function, Jim Polak, the recently retired as director of general purchasing for Pittsburgh-based PPG, is a believer. He and his company have made substantial forays into the world of purchasing outsourcing with the help of third party experts and, with a few exceptions, the results have been great.
PPG, which has more than 140 manufacturing facilities and affiliates across more than 60 countries, is a global supplier of paints, coatings, optical products, specialty materials, chemicals, glass and fiberglass. And its shopping list is long. "Five years ago I first talked to our purchasing group and said that we needed to [outsource certain purchasing spend areas]. My concern was with the highly technical areas where it is hard to hire the right person. I believed those categories were an excellent opportunity to look at outsourcing," Polak says.
But change didn't happen immediately. "When you think about outsourcing specific areas of purchasing, people can get a bit nervous," admits Polak. One of the initial areas targeted for outsourcing was the purchase of telecommunications service, a task that was delegated to Cannon Group, but with the reassurance to internal buyers that "If they had a problem with an outsourcer our people knew they could talk with us," says Polak.
That first outsourcing project went well enough and ended up being accessed disproportionally by some parts of the company. To ensure equity, Polak says he went to the groups within PPG such as IT that had made the most additional requests to Cannon and told them they would have to provide additional money. "Because they liked the way their requests were being fulfilled, they agreed," he adds.
"Although the incremental funds we got from the IT service group for our telecommunications buyer wasn't a lot, it was enough to make up the balance," he explains.
Going deeper
With the telecom experience successfully under his belt, Polak moved on to outsourcing a piece of the chemical purchasing process. "In terms of buying chemicals, we mostly buy huge quantities and we always have buyers internally that deal with those purchases," says Polak. However, the small quantity items were often much more problematic and it was there that Polak wanted help.
With those goals in mind, Polak and PPG tried "a few" different buying services. Unfortunately, says Polak, none of them really worked out. "They really wanted to handle the volume chemicals that we were already comfortable buying ourselves," he says. What's more, with the small quantity chemicals the buying process is complex and it can be very difficult to achieve savings. "Everyone wants to deal with the large dollar purchases but no one wants the small, multi-transaction small dollar items," he adds.
Polymers—a relatively small volume item—also proved to be problematic. In fact, Polak says the relatively limited scale of polymer buying never made outsourcing a serious consideration for PPG.
A home run
Energy buying, though, was another matter. After the market's rough ride from 2007 to 2008, the last straw was when the person who handled energy purchases for PPG took another position. Rather than replacing him, "We decided to see what expertise was available from third parties," says Polak. PPG talked to three different companies with the goal of getting the same or better expertise than they had had on their own at or close to the cost of hiring another in-house expert. Eventually the list was narrowed to one company, Delta Energy.
At first, he says, there was a lot of reluctance to embrace a third-party provider. However, he says, mandating change soon turned into managing change.
"Initially we found internal users were reluctant but that changed once they got a taste of the expertise that was on tap." In fact, it wasn't long before Delta was inundated with requests for support from PPG staffers. "In this case most of our people quickly recognized that the expertise was there," he says. And news travels fast. "In a company like PPG facilities start to talk to other facilities and word gets around that the outside buyer really is the expert."
While Polak says that outcome is exactly what he wanted, the downside was that Delta eventually determined that they needed to be paid more for the level of service they were providing. Determining whether to pay up or to try to limit use of the service became a balancing act for PPG.
Making outsourcing work
Although PPG has had mostly positive results from outsourcing, Polak says success is not guaranteed. It takes work. In selecting outsourcing providers, for instance, he says buyers need to do their best due diligence. "You can never be entirely sure that what they present on paper or the way the present themselves is what they can really provide," he says. As a result Polak "definitely checks references and tries to talk to companies that the buyer has worked with in the past."
"The proof usually comes in the first six months to a year. Are they delivering savings and, more importantly, are they bringing you new approaches to buying that you weren't even aware of," says Polak. In the best cases, Polak says he has found that external experts can come up with ways of buying "that hadn't even occurred to us, and if you don't see some of that in six months or so, you should be concerned."
When things don't work out, it's also important to make sure you are have an out. "Contractually, we try to protect ourselves by having a clause that allows either party to terminate the agreement with notice," he says.
Polak sees pros and cons to outsourcing. The pros are that in areas where there is a need for deep technical knowledge that may not reside internally—energy for example—it takes a very long time to build internal expertise. On the other hand, the difficulty PPG has repeatedly discovered with outsourcing is that the workload for a resource can be too great.
"With an internal person the limits of what they can do are clear, but an external resource usually has multiple individuals available so when you are hammering them with requests, they want to oblige you and they may end up doing far more work than a single individual would have done within your organization," he says. As a result, Polak says while it is great to have the external expertise available it is important to define what you really need and find a balance between savings on purchases and spending on expertise.
Ultimately, the outsourcing project needs to be cost effective. At PPG, as at many other organizations, the purchasing function is always asked to hold the line on costs or even reduce costs. "The purchasing function is a standalone overhead group and we always make the case that we must control our own costs, too, but when our experts are actually saving us money we have to make sure when we cut our spending we don't actually end up hurting the bottom line," Polak says.
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