Purchasing is cost consultant for non-traditional services
Purchasing influence over the non-traditional buy at Intel has resulted in an additional 20% in direct savings to the bottom line for 1999 alone, says Fred Thiele, international operations manager, corporate purchasing.
By Susan Avery -- Purchasing, 1/13/2000
For a company with a history of excellence in supply management, it's only natural that purchasing's involvement spreads until it touches virtually every dollar spent on outside goods and services. Such is the case at Intel, a recipient of Purchasing Magazine's annual Medal of Excellence Award in 1993, where purchasing continues to improve supply value by taking over spending in non-traditional areas.Purchasing's successful influence of the marketing communications spend at Intel (including negotiations with actors and production companies for television ads) in the early 1990s opened the door for buyer involvement in sourcing other non-traditional services such as relocation, human resources, training, and employee benefits. As is typical at many companies, purchasing was not initially greeted with much enthusiasm by these functions--until relocation needed buyer assistance with an auto-leasing program.
Since that time, purchasing has negotiated a series of agreements for general and administrative (G&A) services the operation had not been involved with previously--the auto-leasing program, for instance, several HMO plans, and a stock-option program, among others. These efforts have resulted in an additional 20% in direct savings to the company's bottom line for 1999 alone. (For 1998, direct savings added another 9% to 12%.)
A high-level initiative at Intel, purchasing involvement in sourcing non-traditional services is supported by Leslie Culbertson, vice president and director of materials, and Roger Whittier, director of corporate purchasing. With a proven track record in procuring direct materials and capital equipment, the company is looking to translate these successes into the non-factory indirect world, says Fred Thiele, international operations manager, corporate purchasing. "Our ultimate objective is achievement of lowest total cost for all companywide purchases, regardless of their label."
As such, corporate purchasing has shaped its sourcing strategy for the non-traditional services around commodity management, globalization, outsourcing, and clear linkage of the results of buyer efforts to the company's financial picture.
Thiele works with buyers who influence the non-traditional buy, about $3 billion annually. This figure, he points out, represents 12% of Intel's net revenues of $26.3 billion, 17% of operating costs and expenses of $17.9 billion, and a 25% increase from 1996. It is, he says, undoubtedly a formidable and growing component of the company's overall cost structure, making it fertile ground for solid commodity and supplier management.
The impact of purchasing's effort here is not insignificant. Saving 20% in G&A expenses Thiele figures results in an additional $0.18 EPS (earnings per share) or $5.18 in per share in stock price at a conservative P/E ratio of 28.8. Involving purchasing in the non-traditional service buy, he says, results in $13 billion to $17 billion in enhanced market capitalization.
Thiele, who has practiced law in the state of Arizona and has earned an MBA with a concentration in finance, joined Intel in 1996. Since that time, corporate purchasing has dedicated personnel to support purchasing of human resources/training, external work force/consulting, benefits, relocation, and other G&A services, adding three full-time commodity managers in the past 18 months. Ten buyers are now responsible for the $700 million worldwide annual marcom spend alone. "The group has grown tremendously," Thiele says.
Influence grows
As Thiele recalls, corporate purchasing had almost no influence on G&A spending until about 1994. These groups did their own buying--often with little regard to total cost, quality or availability. Many times a group didn't even have an agreement in place with a preferred supplier. After purchasing's success with the "MARCOM" (advertising, media, print, literature fulfillment) spend (PUR: Apr. 20, '95; p. 49) buyers approached the human resources group. Until this time, the two functions had had a relationship, albeit purely tactical, with purchasing placing a few POs (purchase orders) for HR, mainly so that suppliers could receive payment in a timely manner.
HR brushed off a more strategic partnership with purchasing until the relocation services group needed assistance with the auto-lease program. The group had been administering a costly rental program for company "inpats" and was "short-handed" at the time. The program provided Intel employees with long-term rentals (six months to two years) through an agency at a cost of $850 per month.
Thiele approached the spend and that of other non-traditional services with strong commodity management strategy. For the auto-lease program, he put together a cross-functional team of representatives of finance, purchasing and other "stakeholders" to track the market, research suppliers, and develop an RFP (request for proposal).
But first Thiele had to build trust into purchasing's relationship with relocation. "Our new customers weren't used to having a partner," he says. After 2-3 months, the team presented its data to management. Its solution: convert the rental arrangement into a leasing agreement, establishing a "relocation fleet" of 180 autos and 20 mini-vans. At $400 per month, its new negotiated rate with a leasing agency was less than half of what the company had been paying in rental charges.
Still in place today, the agreement saves relocation $1 million annually.
"Our success helped opened the doors to HR," says Thiele. "Relocation spread the word that purchasing is not just about buying on price. Now, we were being viewed as skilled project managers with capability to execute policy."
So much so that Thiele points out that purchasing support of human resources has grown from a 0.5 headcount in 1996 to 4.0 in 1999. Purchasing's influence, which has penetrated nearly every corner of HR (relocation, benefits, training and staffing) now extends to more than $250 million in total HR expenditures.
Next: Benefits
Approaching the benefits group within the company, however, met with some resistance. "Intel is very proud of its total compensation package," says Thiele. "Benefits told us 'Thanks, but no thanks. We are different. You don't understand us. We will stay in touch.'" Purchasing did precisely that--when an opportunity presented itself.
Benefits needed purchasing assistance with preparing an RFP for an HMO for a site in Dupont, Washington. "Savings resulting from this project were negligible--$1,400," says Thiele, "but our success at developing and executing the RFP helped build a level of trust which led to yet another opportunity." This time, in helping to administer Intel's stock-option plan.
In 1997, the company changed its stock option policy to cover all employees. In doing this, the grantee base exploded from 11,000 to more than 60,000 employees worldwide. The original plan was administered internally by 3-4 employees.
Again purchasing put together a cross-functional team of representatives of finance, treasury, human resource, payroll, legal, accounting and others. This time the purpose of the team was to conduct a "make versus buy" study, results of which showed that ongoing internal administration would be prohibitive. "We determined that it would take about 24 employees to administer the program, and, even at that figure, we could not assure legal compliance," says Thiele. Having made the decision to outsource administration of the stock-option plan, the team next put together a scope of work that precisely defined the company's myriad requirements.
"We next went out to the marketplace looking for potential suppliers," says Thiele. "Since the plan has to be administered in 44 countries this pared the number of suppliers capable of implementing such an agreement down by 80% to 90%."
Narrowing the supplier base down even further to two providers, the team used a supplier scorecard with a weighted matrix of key areas to make its selection decision. Capability to provide customer service worldwide as well as currency conversion were the determining factors, says Thiele. "We wanted to ensure that an employee in Malaysia received the same service as an employee in Arizona." Results of this effort yielded direct savings of $1.4 million in the first year of implementing the agreement. Thiele also negotiated contractual performance metrics with the supplier that put a portion of the supplier's fees at risk for nonconformance with baseline standards.
Building on success
In putting together an RFP for administration of Intel's retirement plan, corporate purchasing's next project, a cross-functional team followed the same methodology used by previous teams for the stock-option plan and the auto-leasing agreement. For the retirement plan, the team drafted a 123-page RFP that it sent to five or six suppliers potentially capable of implementing the agreement. "Suppliers responded to this RFP in a binder format," Thiele recalls. "It took 3-4 binders for each response. It was astonishing. At our receiving dock, the team had three pallets of boxes waiting for it."
Again, the team created a supplier scorecard that ran about eight pages in length. This scorecard contained 20 categories, including quality, availability, cost, reporting, miscellaneous (legal compliance), etc. "We conducted supplier site visits with the two semi-finalists to validate our preliminary assessments. As it turned out, the company with the highest score will become Intel's new retirement-plan administrator in the second quarter of 2000." Estimated annual savings: $1.1 million.
"Now, we are regarded within Intel as a key partner," says Thiele, "and have credibility with customer groups who refer to us as cost-conscious consultants." For relocation, in fact, purchasing recently influenced a "destination services" cash benefit given to relocating employees from $1,000 down to $700, based on cost benchmarking data. Typically this stipend is charged back to the operations unit of the affected employee.
Purchasing's next challenge, Thiele says, is to grow the base it has developed. "We haven't fully penetrated HR or G&A. Then, there's the company's legal spend, some of which can be viewed as a commodity purchase. General contract or employee law, for instance, can be done by any good litigator." (Protection of the company's intellectual property is considered an Intel core competency.) Again, corporate purchasing plans to start with small projects and use successful results to gain support of the internal customer.
Another challenge for purchasing related to growing its internal customer base is to ensure a smooth transition among personnel. "Intel encourages job rotation," says Thiele. "The company wants its employees to take risks." In so doing, purchasing must put in place a sound succession plan for its commodity managers. "We want to maintain the good will we've built up with our internal customers."
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