Square D uses supply to end boom-bust growth cycles
By Tim Minahan -- Purchasing, 5/7/1998
These should be heady times for Square D Company. As a leading supplier to the construction industry, the $2.3 billion producer of electrical distribution, control, and automation products should be exuberant about the current surge in U.S. housing starts, which are at their highest level since 1987.Instead, the Palantine, Ill.-based manufacturer is busy overhauling its internal and supply management operations in an effort to boost its immunity to future economic downturns.
"As an electrical products producer we're tied to certain market indicators, such as housing starts and construction projects," says Joellyn Willis, vice president of operations for Square D. "Traditionally in this industry, we would flow with whatever the economic cycle happened to be. One of the things we've worked on in the past several years is to develop a strategy to continually grow the company in spite of economic cycles."
Strategy may be an understatement. Square D has literally rebuilt itself, aligning its business around customers and markets rather than by products or regions. Internally, the company has swapped its traditional business-unit structure for a more dynamic organization focusing on two general functional areas: sales and marketing and operations.
As head of all internal operations, Willis oversees purchasing, logistics, manufacturing, and advan-ced manufacturing. This single point of accountability has allowed Square D to more closely align its manufacturing and supply strategies. It has also forced the company to rethink the way it manages supply.
"We had always done a good job of driving both labor and overhead costs from our manufacturing processes and facilities, but we hadn't spent a lot of time on material, outside of negotiating price," says Willis, who was director of purchasing at Square D for three years before being promoted to her current post. "We realized that by better managing supply we could create our own growth drivers within the company, using the procurement function as one of the linch pins of the program, instead of always being at the mercy of the market."
When developing a strategy to improve its supply management, Square D didn't attempt to reinvent the wheel. Instead, the company worked with Michigan State University's Strategic Sourcing Management group to benchmark its operations against best-in-class procurement organizations, such as Chrysler and Honda of America Manufacturing.
Square D selected the best elements from these programs and rapidly assembled them into a sound supply strategy. Key components of this strategy include:
* Rationalizing the supply base.
* Establishing national, long-term contracts with key suppliers.
* Centralized, team-based commodity management.
* Implementing a company-wide supplier value-analysis program.
Down to the core
As Square D began examining its supply management process, one problem became glaringly apparent: "We were working with too many suppliers to try and affect much change," says Wes Hawkins, director of purchasing. "At the time, we had about 45 facilities in the U.S.--this is now down to around 30--and we may have had a different supplier for each one."
Square D launched what Hawkins describes as "a very aggressive rationalization program," slashing its production supply base by 75% to about 1,400 suppliers. The company has been able to obtain large volume discounts on key commodities, such as copper, steel, and plastics, by consolidating national purchases with the remaining suppliers. However, Hawkins says the benefits of rationalizing go beyond simple discounts.
"With fewer suppliers it's easier to share information, it's easier to forecast requirements, and it's easier for us to work with our suppliers on process and quality improvements, rather than just focusing on reducing price," says Hawkins.
More recently, Square D has implemented a program called "supply base by design" in which suppliers are aligned around specific groupings of commodities or materials, such as steel, copper, or fasteners. Purchasing personnel are pulled from appropriate Square D facilities into commodity teams, which often include representatives from other functional areas, such as quality or manufacturing. Each team is responsible for developing buying strategies and managing the supply base of its specific commodity or material. In some instances, buyers are dedicated full-time to a specific commodity, such as aluminum, copper, steel, and plastics. These buyer experts are then tapped to lead the commodity teams.
"We look at our needs from the standpoint of how we want to manage that buying base and we basically design the supply base around it," says Willis. "We determine how many suppliers we need to support each commodity or material group and develop a strategy for managing that base."
Commodity teams have become key to Square D's plan to bring new products to market quicker and more efficiently. Says Willis: "Purchasing works closely with advanced manufacturing, which is responsible for the manufacturing strategy of all our new products. This allows us to match purchasing strategies with manufacturing strategies early in the process."
Example: "Plastics," says Hawkins, "is one of our core technologies but we outsource some molding because of suppliers' unique capabilities. Purchasing has to work very closely with advanced manufacturing and manufacturing on the strategy or process that needs to be put in place to make this work."
Global plan, local touch
Like many leading manufacturers, Square D has established company-wide performance goals for its supply base. For example, the company is nearly halfway to its plan to cut material costs by 5% by the year 2000. However, unlike in the past, such gains won't be made on price cuts alone. "It became obvious to us that it is no longer satisfactory to just demand reduced prices from suppliers," says Hawkins. Under Willis' lead, Square D established a company-wide supplier-analysis program in 1996. Through the program, the purchasing group uses value-analysis tools to examine supplier processes and, with suppliers, develop strategies for removing costs and improving performance.
"There are so many different factors that impact the cost of material," says Willis. "We work with our supply base jointly on ways to improve how we use material, take costs out of our products, and improve our processes."
While the supplier-analysis program is a corporate initiative, buyers at the plant level are crucial to its success. "It's the responsibility of the plant level [managers] to work with our overall supply strategy to negotiate terms like delivery, quality, and leadtime with a supplier," says Hawkins, adding that these buyers are also responsible for tracking supplier performance. "It's more effective for us to set performance goals on a plant-by-plant basis because a 20% leadtime reduction in one facility can be much different than a similar reduction in another facility."
More to come
Square D is well on its way to implementing a solid supply strategy. However, like a true industry leader, the company sees room for improvement. "We've got a number of supply goals for the future," says Hawkins. "Our customers expect it from us."
One goal: Improve management of non-traditional items, such as office supplies, professional services, IT, and travel. The company has established a cross-functional commodity team to develop a primary supply base and performance measurements for non-traditional items. "It's an area with lots of inflation," says Hawkins. "So we're going to concentrate on getting good measurements in place and trying to manage those costs."
As part of the Groupe Schneider conglomerate, Square D also plans to implement new supply tactics globally with sister companies: Federal Pacific, Federal Pioneer, Merlin Gerin, Modicon, and Telemecanique. The companies already use common suppliers for some non-traditional and production parts and are developing global commodity teams to manage groups of suppliers in the future.
"Most of our opportunities will come from how we spec material into a new product," says Willis. "In the past, a Merlin Gerin circuit breaker might have had a different specification for plastics than a Square D circuit breaker did. Looking forward, we will do joint development to make sure our technical people have the same specifications so we can use the same types of materials across many products in different parts of the world."
Wills says Square D's new supply management strategy, coupled with its internal reorganization, will make the company "far less vulnerable to external economic influences." While that remains to be seen, one thing is certain: Square D has developed a world-class supply strategy that will allow it to operate more efficiently in the future.
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