Manage suppliers to improve cycle time
James D. Fite, managing director, SABRE Group supply management, is responsible for all of AMR's technology purchasing, $540 million annually.
By Susan Avery -- Purchasing, 5/21/1998
Shortly after assuming his post as vice president of corporate purchasing at AMR Corp. in 1992, John MacLean conducted a thorough audit of the company's supply management operation. What he found was that AMR, parent company of American Airlines, AMR Eagle, and the sabre Group, was doing business with about 17,000 suppliers, an unwieldy figure, but not unlike that of many buying operations at the time.MacLean surveyed internal customers on his operation's responsiveness as well. Results showed that respondents believed cycle time was too long. In their eyes, says James D. Fite, managing director, sabre Group supply management, it simply took too long for us to get them the items they needed to do their jobs. "Take desktop software, for example. Often it was six weeks before our internal customers received what they needed."
Reporting to MacLean, Fite is responsible for all of AMR's technology purchasing, some $540 million annually. He buys personal computers, gate readers, printers, maintenance and distribution services, software, and mainframes/client servers not only for internal use at AMR, but also for use by customers of the sabre Group as well.
The sabre Group is comprised of the sabre Travel Information Network, which provides electronic travel distribution services to travel agencies, corporations, and consumers, and sabre Technology Solutions, which provides a variety of services such as data processing and facilities management, telecommunications, and desktop installation and maintenance to outside customers. All told, the sabre Group generates more than $1.7 billion in revenue annually.
Historically, supply management has always been involved in the technology purchase at AMR. But, prior to MacLean's arrival, buyers spent much of their time processing transactions. "We needed to change our focus," says Fite, who explains that MacLean is working to systematically apply supply management strategy first developed in manufacturing companies to AMR, a service company.
"Now, the operation is involved in managing supplier performance and continuous-improvement activities," says Fite. Applying supply management strategy to AMR's annual purchasing tab of $4.7 billion has resulted in nearly $500 million in savings since 1994. (Other big purchases at AMR include fuel, airport & customer services, and aircraft maintenance.)
In technology, Fite is working specifically to reduce the supply base, shorten cycle time, and improve customer satisfaction in three big commodity areas: desktop software, desktop personal computers, and proprietary printers (for use within the sabre Travel Information Network).
Start with software
From responses to MacLean's survey, Fite and the buyers within his group learned that internal customers often bypassed the company's purchasing process entirely when they needed a new software package. Because they found it quicker and cheaper to do so, they often bought the items on their own from one of many retail outlets in the area that carries software.
Why was the ordering process so cumbersome? To learn the answer to this question, Steve Ford, manager of supply management, used process mapping to scrutinize all of the steps involved in the software purchase. Redesigning the process and locating a software reseller onsite at AMR headquarters in Fort Worth, Texas, eliminated 14 steps of a 22-step process.
With software, there is a lot of repetitive ordering (for such packages as Microsoft Word and Powerpoint), says Ford, as well as 'gee-whiz' buying of new applications. "It takes time for the supply management operation to research and track down suppliers capable of filling these special kinds of orders. Rather than do it ourselves, we turned the process over to a supplier whose core competency is filling software orders."
Now, through AMR's Software Express desk, which has been in place since 1994, internal customers may readily obtain availability information and price quotes for software they require. To make a purchase, customers place orders for standard products from their desktops via an electronic catalog system that had been developed earlier for office supplies.
Searching for a distributor to provide such integrated supply management services, selection criteria of Fite's group included economy of scale/purchasing power, willingness to locate a representative on site, and capability to interface with AMR's information system.
The impact to the end user of implementing the new process "was phenomenal," says Fite. Cycle time has been reduced from 5-6 weeks to 24-72 hours for 90%+ of software orders. And by leveraging the buying power of the supplier, he is "confident of obtaining year-over-year cost reductions consistent with what the market is doing."
Supply management reviews supplier performance quarterly. Recently, Fite recalls an instance in which the software supplier had been missing target delivery dates. Meeting with the supplier, he learned that a training department within AMR was ordering large quantities of software training manuals. Since the supplier did not typically keep these manuals in stock and was not aware of the ordering in advance, delivery often was late.
To remedy the situation, supply management got both the training department manager and the supplier together to work out a process for ordering the manuals so that they would arrive onsite in time for scheduled training classes.
PCs & peripherals
Although many of the same principles apply to the desktop personal computer and peripherals purchase (low dollar, high transactions), Fite says he approached this commodity from a slightly different angle.
Responsible for purchasing roughly 50,000 PCs (plus workstations, printers, etc.) annually, Fite's group provides computer equipment for internal use to 110,000 AMR employees worldwide--from gate agents to reservation agents to engineers (The sabre Group itself has 5000 employees); travel agencies, who are customers of the sabre Travel Information Network; and to external customers of sabre Technology Solutions.
Implementing supply management strategy in several stages, Fite's group, led by Irma Todd, manager of supply management, first outsourced a warehouse operation that had been managed by AMR to a supplier with advanced capabilities in running a distribution center. Next, they selected a supplier with systems capabilities to process orders for computer equipment from external customers (those purchasing sabre Group services).
In order to meet promised delivery dates to external customers, the supplier's capabilities have to be flawless, says Fite. "Cycle times have to be short. Inventory controls have to be tight."
Fite says, "At the time, we had to ask ourselves whether it was to our advantage to do this internally or to go externally to our suppliers. Since managing a distribution center is not one of our core competencies, we decided that it did not make sense to make additional investments in our internal systems."
Looking at purchases flowing through his department, Fite next questioned whether "we wanted to carry and manage not only inventory of, but relationships with, hundreds of suppliers. By leveraging relationships, we can reduce our supplier base."
These decisions "led us to reduce the number of people necessary to process orders internally, took us out of the inventory management business, and led us to substantially reduce cycle time. It used to take 15-30 days for our internal customers to source a desktop PC system. Now, leadtimes average three days. It also substantially reduced warehousing costs."
Satisfied with results of applying supply management strategy to the desktop PC system purchase, Fite identified another bucket of commodities--cables, connectors, and other peripherals--that appeared to be within another supplier's core competency. As a result of implementing this strategy earlier this year, purchasing has been able to reduce its supply base by another 50-80 suppliers, and is expected to reduce costs by 15%.
Proprietary printers
Most recently, Fite and his group have applied supply management strategy to the printer buy. Not standard laser printers most buyers are familiar with, these units, for use at sabre Group airline ticket counters and travel agencies, print tickets and boarding passes, encoding information on magnetic strips. "This is a highly specialized, unique product," says Fite.
As such, the printer not only has to conform to the sabre Group's requirements and industry standards, but to those specific to each airline or computer reservation system as well. Looking to gain a better understanding of these requirements, Fite put together a cross-functional team made up of representatives of supply management, engineering, marketing, and operations.
Knowing that it wanted an entirely new printer, the cross-functional team began to search for a supplier that it could work with to develop one that meets these demanding requirements. "We needed to identify suppliers with this capability--who's in the business, who's going out of business, who our competition is using," says Nancy Walker, printer commodity manager. "This is the kind of discussion you get only with a cross-functional team."
Approaching several suppliers with whom AMR had done business with in the past, the team presented its requirements. "We told them that we'd like to start from scratch, redesign the printer with totally different price points. We also stressed that we wanted to build quality in up front. Printers are a big driver of our maintenance costs," says Walker.
Entering into a joint agreement with a supplier, the team took the project from conceptual requirements through an engineering phase through to prototype development and testing. From supplier selection, the entire process took about 15-18 months. The team introduced the new product earlier this year, at a price point 30% lower than the printer the company had been purchasing previously.
Not only is the team happy and satisfied with the results of the project, but the supplier also is excited to be first to market with the product. It gives the supplier a competitive edge. While it's too soon to determine cost savings for the product, Fite says that the supplier's performance (cost, quality, delivery, responsiveness) will be measured under AMR's SE2000 report card (PUR: Oct. 9, '97; p. 35).
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