Transforming IT sourcing delivers savings for FedEx
"Technology is FedEx's greatest competitive differentiator," says William L. Gunn, managing director, IT sourcing (left). With Gunn is Bryan Wright, manager, IT (center), and Gregory A. Buchanan, manager of strategic software sourcing (right).
By Susan Avery -- Purchasing, 1/13/2000
Transforming information technology (IT) sourcing from a tactical to a strategic operation has helped save FedEx $50 million over three years.The transformation entailed a reorganization of both the sourcing and information technology operations. The changes included the creation of a Managing director of IT Sourcing, enhanced training and executive management support.
Four years ago, the sourcing operation at FedEx was not unlike that of many companies at the time. In a centralized sourcing environment, buyers spent much of their time on tactical activities, processing transactions for goods and services placed by other departments such as IT. As such, sourcing was not viewed by the company as a strategic part of the organization. After working with consultants at A.T. Kearney, management began to make changes in the way FedEx buys.
Among the changes was a breakdown of the company's annual spend into five areas: IT, air operations, vehicles, facilities and a catchall category that includes such buys as fuel and shared services.
To develop and implement sourcing strategy for the IT buy, FedEx named William L. Gunn, a 10-year company veteran, as managing director of information technology sourcing in November, 1996. FedEx spends about $1.3 billion annually on IT (including salaries).
Not only significant in terms of dollars and cents, "technology is FedEx's greatest competitive differentiator," says Gunn, pointing out that the Memphis-based express transportation company was the first to install desktop PCs loaded with its proprietary software at customer locations for ordering and tracking deliveries. FedEx also has a Web site that customers can access to track and trace deliveries. "To perform such real-time tracking," he says, "requires a massive IT infrastructure. Technology is the strong backbone of the company."
Gunn, who reports to Edith Kelly Green, vice president of strategic sourcing, and David Zanca, chief information officer, assumed duties previously performed by IT managers. As a member of "both the providing and customer teams," he's responsible for putting together strategies that deliver significant cost savings and managing and developing the supplier base. During the transition, Gunn spent a good deal of his time working with Zanca drawing up sourcing plans and objectives.
Gunn divided the IT spend into five distinct commodity groups: software licensing and maintenance; computer hardware (PCs, mainframes, servers); professional services (consultants, telecom, contract programs); electronic products (FedEx Super Tracker); and proprietary software (FedEx PowerShip). To manage these spends, he hired additional sourcing professionals skilled in such areas as software acquisition and supplier relationship management. His team puts together an annual plan for IT each June in conjunction with the start of the company's fiscal year. This, he says, becomes a working document for the IT sourcing operation.
As its relationship with IT evolved, IT sourcing needed to demonstrate how it added value. Buyers spent time at building relationships by communicating throughout the company the benefits of having sourcing involved in the IT purchase. "We have the best interests of the organization in mind, understand the business goals and objectives of IT, and want to help them to achieve them," says Gunn. "What we learned from IT was that they really didn't want responsibility for sourcing activities anyway."
One early success for the IT sourcing team is the development and implementation of a corporate PC program. For PCs, the team evaluated several supply options, such as whether it made sense to purchase computer equipment direct from the manufacturer or through the value-added reseller channel. The team decided to take a dual approach, to purchase PCs from both of these sources. Its reasoning: availability and competition. "In looking at the PC market, we determined that all suppliers are using the same basic internal parts that are interoperable with each other," says Gunn. "Availability is not an issue as it had been in the past. And, competition benefits everyone. Sellers are more sharply focused and FedEx benefits from a competitive pricing situation."
Gregory Buchanan, manager of strategic software sourcing, likes to compare sourcing activities Gunn is involved in now to how the operation was run in 1996. "Bill's was asked by the CTO to put together enterprise software agreements. This never would have happened three years ago."
Then, IT put together an agreement with Microsoft. Purchasing was called in to do the contract. Today, IT sourcing is assessing its forthcoming contractual relationship with the software giant, gathering information on its installed base, users, technology roadmap, FedEx's strategic plan, breakeven points, before making a recommendation to FedEx executive management.
At the same time, IT sourcing is developing an asset management program for software that will enable it to provide suppliers with rolling quarterly forecasts. This way, the company should be able to determine exactly where its resources are going and help strengthen relationships with suppliers. For suppliers, this will help take away any short-term anxiety; they will know precisely what to expect over the coming 6-12 months.
Equally as important as cost savings resulting from applying sourcing strategy to the company's annual IT purchases is development of new systems that provide FedEx with internal process improvements. For instance, Gunn's manager of Professional Services Sourcing, Bryan Wright, has developed a new system for internal customers who regularly source contract labor. First, he and his team pared down the supplier base from more than 100 suppliers to 14. Then, they put in place a process that uses the company intranet to accept data on employee qualifications required by the requisitioner. The system, in turn, has capability to provide requisitioners with three to five resumes that meet these qualifications. Previously, this process required five to 10 individuals to perform the same activities. "It's important to improve the process," says Gunn, "to manage relationships with suppliers."
For the corporate PC program, which uses a business-to-business e-commerce tool from Ariba, Gunn and his team helped define the process for acquiring computer equipment. "A system that's used internally to order IT goods and services is more responsibility than is usually handled by a typical purchasing professional," he says. "We have a lot of input in the decision-making process."
For a wireless program (cellular phones), IT sourcing leveraged the spend (everyone was buying cell phones, says Gunn), put together a national agreement, and centralized the acquisition process. "We understand technology and the marketplace and can apply what we know in different areas," says Gunn. Our record in delivering savings and process improvements have helped us be a success."
To select suppliers, IT sourcing uses an "elements of value" template. This template contains 150 criteria, including cost, quality, on-time delivery and ISO certification, which can be customized depending on IT goods or services being sourced. The organization keeps tabs on its suppliers with a quarterly scorecard that, again, may be customized for the IT goods or services being sourced.
Once the IT sourcing team sets its strategy, it's time to put the plans into action. This, Gunn says, is what sourcing is all about. "Eventually, I would like to move everyone within the group away from tactical to more strategic activities, such as leading a sourcing team, identifying cost saving or process improvement opportunities, and designing optimum solutions."
Recruiting, training and retention of well-trained and motivated sourcing professionals are key. "FedEx provides a nicely structured incentive program," says Gunn. For training, he and his team developed a curriculum in conjunction with Michigan State University that focuses on IT sourcing skills. Upon analyzing skill sets, buyers are provided with 100 hours of training that concentrate on these core areas: supply chain management, supplier development, supplier management and commodity management.
Within the sourcing function, Gunn sees several levels of competency necessary to achieve success. That includes the ability to lead development of strategy to implementation and ongoing management and supplier relationship development. "Individuals who are performing PO processing and administration duties need to be developed so they can accept responsibility for setting and deploying strategy and managing and developing suppliers. Otherwise, they won't be successful down the road."
Buchanan points out that individuals within his group who manage the sourcing FedEx proprietary software--the PowerShip product--require skills in finance and project management. Individuals, he says, need to be well-rounded business people who have a sourcing focus. Of the group of 55 individuals, 35 are devoted to core sourcing functions; the rest concentrate on outsourcing/project management.
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