Square D looks to suppliers for cost management
Throughout all of its consolidation effort, the company still maintains that its suppliers must provide supplies that are as good if not better than its competitors.; Square D/Schneider Electric is focussing more than ever on keeping costs down, and its cost management strategy is making the company turn to its suppliers for help.
By Brian Milligan -- Purchasing, 1/13/2000
Work with your suppliers to cut costs. Empower them and make them part of your corporate philosophy. Develop systems that will make the global economy work for you. Involve suppliers early in design projects and efforts to reduce cycle time. But do all this in a way that allows you to reduce and manage overall costs, while still keeping leading-edge technology.Trying to do all these supply initiatives at once seems like a tightrope walk. But Square D/Schneider Electric is focussing more than ever on keeping costs down, and its cost-management strategy is making the company turn to its suppliers for help. "Cost is our next frontier," says Vic Venettozzi, director of strategic purchasing.
Square D/Schneider Electric is an Illinois-based supplier of products and services for power transmission and distribution. The company is known by its four international brands, including Square D, its flagship brand.
To manage costs most effectively, Square D/Schneider Electric obviously does not treat all commodities the same way. To begin its commodity management process, the company uses a two-by-two "decision matrix" that shows the cost of the commodity on one axis, and risk to operations on the other. Each commodity is then placed in the matrix.
The basic matrix approach is a common basic building block of popular purchasing strategies and helps companies as they draw up their own supplier-base strategy. It features four distinct quadrants labeled: competitive, strategic, critical supply and non-critical supply. Each quadrant places different priorities on cost, productivity generation, tactical performance and electronic commerce.
Each quadrant dictates that a different overall purchasing strategy be employed for each commodity based on the commodity's position in the decision matrix. For example, natural competition is likely to exist if a commodity falls into the "competitive" quadrant. "That is, Square D doesn't need to create competition," says Venettozzi. "The market has done that for us." A commodity that has been placed in the competitive quadrant of the matrix may end up being purchased from several sources.
"This type of thought is used throughout the various commodities we purchase, and again, different types of purchases will mandate different purchasing strategies," Venettozzi explains.
Once commodities are placed in the matrix, company representatives design a supply-base template for that commodity. These templates contain information about the supply base for a given commodity, such as pricing from various suppliers, supplier capacities and capabilities, and e-commerce capabilities, for example.
Managers at Square D use the templates as a comparison tool. They can look at the template and see that certain suppliers are performing and producing better than others.
Some suppliers--those considered "preferred"--also are given the chance to look at these "populated" templates so that they can compare themselves to others and look for ways to improve or differentiate themselves. The company shares this information in an effort to foster entrepreneurial thought within the supplier base, helping suppliers differentiate their offering to Square D/Schneider Electric.
Venettozzi says that throughout the year, Square D/Schneider Electric managers compare suppliers of a given commodity to the supply-base template. As they conduct the comparison, they search for opportunities to rationalize the supplier base or tweak the system in other ways.
"Obviously, there can be too few sources, or too many. Or suppliers that have been included in the template may not be performing as needed," Venettozzi says. "This constant comparison is used to hone the supplier base and to consolidate the base via a structured approach rather than simple total-number goal setting."
Focus on suppliers
The focus of this process points back to the suppliers. On one level, the company clearly sets its expectations with suppliers. But conversely, it expects suppliers to take their own initiatives and rise to new levels. This philosophy underlies virtually all of Square D/Schneider Electric's supplier relationships.
For example, Venettozzi notes how the company decided to develop an aggressive strategy when it came to purchasing labels.
"We share all of this with the suppliers so they understand how we are going to buy," Venettozzi says. "But we let them know there are other quadrants available. We say, 'Here is the price, the contract, bid me another year. You can stay here and achieve your destiny.'"
Venettozzi says some suppliers, based on the needs and goals of Square D, raise their performance through this process. Example: Tennessee-based TTL Corp. looked at what was relegated and then took over a large segment of the company's label purchasing needs.
"They said, 'What if we take the initiative to understand your buy, do value analysis nationwide, give you a total package, the software you need, printer ribbons, and then we give you all the labels and expand your company to follow you across America?'" Venettozzi says.
"They understand our strategy," he continues. "The supplier came along, said, 'We don't want to be relegated here,' and outlined a course so that they were halfway down the path to a comprehensive source. They either conformed to it or found ways to rise above it."
In another example, Venettozzi observed how American Express brought its corporate-card relationship with Square D/Schneider Electric to a new level. American Express became a provider of travel services, onsite agency help, procurement cards, company travel cards and even software. "It is an example of how you can either be our corporate-card supplier or rise above where you have been relegated to," he says.
To continuously increase supply value, Square D/Schneider Electric attempts to work more closely with a smaller group of suppliers. Consolidating the supplier base to a select few will result in better productivity, the company believes.
"We have to be a lot more efficient with the ordering process and request-for-quote process," says Wes Hawkins, vice president of purchasing and logistics for Square D/Schneider Electric. "One way to do that is to set up good systems between yourself and a few suppliers, rather than working with 20 different suppliers. It makes that stuff a lot more efficient."
Hawkins says having fewer suppliers is the first step to keeping costs down. It is naturally easier to convey this need to a handful of suppliers, as opposed to a roomful.
"We look at the suppliers, their components, and how we can get those for less money," Hawkins says. "We sit down, work with the engineer, and look for an opportunity to redesign components. It's difficult to do that when you're looking at a specific part that you are getting from three or four different suppliers."
Going global
Before the company took this consolidation strategy, Hawkins says Square D/Schneider Electric would send out specifications to multiple suppliers and then analyze the differences between them before seeking quotes. For example, the company once had 31 plants supplying it with labels. The cost was extraordinary. Now, the company relies solely on TTL Corp.
These strategies have taken on new poignancy in the increasingly global economy. Hawkins says global competition is putting pressure on Square D/Schneider Electric and, consequently, its suppliers.
Hawkins says, for example, that a company can place a camera model out on the Internet and get quotes back from 100 different companies around the world that could supply its parts.
"There is no question it appears we are heading in the direction of global pricing," he says. "Suppliers will have to differentiate themselves in terms of services, speed of delivery and quality."
To deal with this, Hawkins says Square D/Schneider Electric is rationalizing suppliers on a global basis and, again, reducing its number of suppliers in North America. "We are working with all entities of Group Schneider across the world to achieve the same efficiencies and costs on a global basis," he says.
Venettozzi says when it comes to global competition, the company's incoming supply initiatives are just like its customer initiatives. To stay competitive, the company created a supply base and then worked at integrating suppliers into the design process.
Venettozzi explains that Square D/Schneider Electric uses a variety of models to involve its primary suppliers in the electrical system design process. Suppliers earn the right to be involved in design through exceptional tactical performance and productivity generation. Only then are they recommended for new product design participation.
And other opportunities for savings exist, too. "We will be working hard for the next two years to take suppliers who are responsible for inventory, understand how their processes flow, and how we can create processes that are meshed," Venettozzi says.
"To be able to meet our customer demands in the future, our manufacturing processes and external supplier processes need to be linked in terms of speed and flexibility," he continues. "If customers require us to deliver in half the time, which is not out of the realm, we want to be able to move an entire supply base and respond to that quickly."
An example of this speedy delivery can be found at DaimlerChrysler's engine manufacturing plant in Kenosha, Wis. Square D/Schneider Electric has provided DaimlerChrysler with electrical systems that power the plant. The company will now help provide the same service for a $624-million expansion at the plant.
Through this relationship, Square D/Schneider Electric actually becomes both a supplier and planning partner for the project.
At the plant, Square D/Schneider Electric is providing electrical packages that include distribution, industrial control and automation products. The agreement is unique because it gives Square D/Schneider Electric--the supplier--significant control and power in the agreement. Representatives from the company came into the plant, assessed its systems, and designed a process that is controlling the flow of electricity and logic into the plant's power distribution system.
"We are getting smarter," says Scott Chakmak, director of strategic accounts for Square D/Schneider Electric. "We have learned to step up and provide more than tools, but also creativity."
If supplier consolidation strategies are to work for Square D/Schneider Electric, the company must be able to reduce its supplier base to only those that can work within this strategy. A successful example of this came through the Indiana-based Small Parts Inc., which now supplies stampings to Square D/Schneider Electric.
Proving value
Michael Jordan, president of Small Parts, says suppliers can make the cut at a company like Square D/Schneider Electric by proving their value in more than just one place.
"They identify the ability to bring more value to the effort than that of supplying a basic commodity such as a stamping," says Jordan. His company provides Square D/Schneider Electric with press and multi-slide stamping. "We had better be able to create value, be able to sustain forward momentum in the market."
Jordan says Small Parts was able to impress Square D/Schneider Electric with a multifaceted strategy. It provided Square D/Schneider Electric with engineering assistance during the design phase of parts and brought expertise in metal forming to the organization, providing support for different design initiatives. It likewise showed expertise beyond creating simple traditional metal stampings and helped the company make stampings using plastics and other components for sub-assembly.
Most important, Small Parts was able to convince Square D/Schneider Electric that it could support its initiatives on a global basis. At present, Small Parts is supplying the company's facilities throughout the United States. It is now working on a proposal to supply Square D/Schneider Electric's facilities in Thailand.
"We can support those initiatives in multiple places around the globe," Jordan says. "A traditional stamper can't do that and be able to build facilities in various locations.
"They were able to reap the full benefit of the value we could bring to this relationship," he continues. "You can talk about committing to building plants in Asia and Mexico and just flap your jaws about it. But this kind of relationship says there has to be a commitment on our behalf. We would go beyond conceptualization and go to the actual commitment of building facilities."
But can a company take such an initiative too far? Venettozzi believes so. He emphasizes that it can be challenging to cut costs and at the same time keep sustainable relationships going with suppliers. Cost-cutting measures and global demands can put a lot of pressure on suppliers. "What purchasing organization isn't under this sort of pressure today?" he asks. "But how do you do this without destroying the relationships you have made with your suppliers?"
The company's answer is to keep suppliers as much a part of the picture as possible. This means giving them clout--design input, control over inventory, and other things.
"All parts of every organization are under pressure to cut costs," says Venettozzi. "But I think that in terms of purchasing, we can help the total organization cut costs by having suppliers give us good quality, manage inventories across the companies, and look for those areas that will save money," he says.
To avoid damaging relationships, Venettozzi says Square D/Schneider Electric is doing all that it can to bring suppliers into the decision-making picture. It's a philosophy, he says, that empowers them and keeps them from being surprised by admittedly aggressive campaigns.
Venettozzi says the company has partly accomplished this through an aggressive, four-year-old productivity program. Through this program, Square D/Schneider Electric created a program called "strategic costs management." The organization makes sure that supplier contracts are "proper," that its users are complying with the contracts, and that the costs for all involved are closely managed. "We can have the greatest paper contract in the world out there. But if they aren't using that contract, what have you effectively done?" he asks.
Developing suppliers
Jordan describes the program as well coordinated and capable of teaching suppliers how to reduce costs while adding value. Most important, it keeps the suppliers in the loop on Square D/Schneider Electric's money-saving expectations.
"They created a group at the corporate level to provide strategy and parameters and initiate the actions," says Jordan. "As a result, it is a very coordinated matrix structure that is cross-functional, enabling them to move forward with this strategy. Many other companies don't create a mechanism to drive this sort of initiative."
But Venettozzi also warns that supplier relationships aren't the only thing Square D/Schneider Electric must worry about as it attempts to keep its eye on costs. The company is naturally under the dual pressure of controlling costs as it churns out products and services that are competitive, unique, and increasingly valuable. To leverage the value of its supply base for its customers, Venettozzi says Square D/Schneider Electric is launching initiatives in important areas. It is launching them in productivity engine works, total supplier quality management, and supply chain management initiatives. Productivity found within the incoming supply chain enables Square D/Schneider Electric to fund improved customer service initiatives and increase product features and overall value-for-the-money at the sales counter. The program is designed to heighten quality to the customer.
"We find we are able to build a machine with the external supply base and leverage that base to increase the velocity of the incoming supply chain," Venettozzi says.
But throughout all of its consolidation effort, the company still maintains that its suppliers must provide supplies that are as good if not better than its competitors. To keep up this level, Hawkins says Square D naturally works with only the finest suppliers. "We are getting much closer to those suppliers, making sure our systems are compatible," Hawkins says. "We have an advanced manufacturing group in our company that is spending more and more time with outside suppliers vs. our internal organization."
To stay on top of this, Venettozzi says Square D/Schneider Electric conducts an annual performance planning process that is modeled after the company's internal process. "I have an annual performance plan every year, and we replicate it for the supplier base," he says.
Through this process, Venettozzi says one of the purchasing professionals is assigned as a business manager. This manager then oversees suppliers at more than 20 locations and provides an inner performance plan so that they understand the tone of the relationship between Square D/Schneider Electric and the supplier. "We work hard to make sure these are individualized to move the supplier in the appropriate direction," Venettozzi says. "This is part of an overall total supplier management process. You have one plan, one contact, so if they want to know how they are doing, they call up your business manager, and they will run interference for you."
When Square D/Schneider Electric designs an alliance agreement, it works hard to understand what it will achieve above and beyond an already strong customer/supplier relationship. To make strong, strategic alliances, Square D/Schneider Electric develops high-level strategies that would be compatible to both companies. The company is very selective when it comes to employing its supplier-alliance relationship model. Through benchmarking, Square D/Schneider Electric has found that its primary supplier relationships are already at the level many companies regard as "alliance" quality.
Strategic relationships
Venettozzi says the company is increasingly recognizing the importance of these strategic relationships with suppliers.
"As we grow these relationships with suppliers, executives in our company have recognized that over the past couple of years, the interaction with suppliers means an increased commitment by other functions to turn toward the supply base and be interactive with them," he says. "Our advanced manufacturing organization can work in a Square D factory today, help with the process, and make the process get better."
He also says this constant interaction with suppliers keeps the relationship between the different organizations vibrant.
"I work with the Square D supply chain," he says. "I've worked in the factory in the morning and worked with the supplier in the afternoon."
Venettozzi says Square D/Schneider Electric now has an aggressive supplier council that works with seven suppliers at a time for a period of 18 months.
The supplier councils are made up of seven of the company's primary suppliers. Each council serves for about 18 months, meeting three to four times during that period.
Each council provides three things. It starts by using a core group of questions to begin each council's term.
"We begin by asking some core questions," Venettozzi says. "We look to see if the organization is showing the right approach to managing suppliers in every location, and that we are living up to our commitments."
The questions are designed to help determine how well the organization is living up to the strategy and supplier relationship guidelines that were established for Square D/Schneider Electric purchasing. The council also serves as a sounding board for any emerging strategies the company may wish to employ. The councils see "new" initiatives first and provide candid feedback on acceptance by the overall supplier base.
Venettozzi explains that after a council meeting, the group breaks into panels where company representatives are given the chance to ask supply-base questions. Venettozzi says this strategy has been invaluable for Square D/Schneider Electric.
"All purchasing directors are hearing what suppliers have to say in unabashed reality," he says.
"This is the first place we go with purchasing strategies," he continues. "It has probably done more for our strategies in making sure we are doing the right thing than any other single thing we have done."
Last of all, executives from functions other than purchasing use the councils to understand more about what their external supplier base can provide. They use the councils to provide more feedback on Square D/Schneider Electric strategies.
To be successful, Venettozzi says the company must make sure that customers are given access to new technologies through Square D/Schneider Electric's supply base.
"You have to have an awareness of technologies and embed that new technology in your design," he says. "Speed to market, new technologies. Those are the things that bring real uniqueness to the party."
Internet initiatives
To get the word out on its technology, Venettozzi says the company is increasingly turning its eye toward the Internet. Hawkins says the company uses the Internet to communicate with suppliers, process orders, and get requests for quotes. But it's not enough.
Venettozzi says 2000 will be a big year for Square D/Schneider Electric as far as e-commerce goes. The company depends on electronic data interchange (EDI), e-mail, Intranet and the Internet to launch its initiatives.
The company has also built systems engines that will automatically produce and distribute decision-quality data to its supply chain. Square D/Schneider Electric is also trying to automate its general purchases and put the appropriate purchasing power into supplier and customer desktops via a variety of Internet technologies.
The company is also moving along with its Web-based technologies to transmit production material needs to its primary suppliers.
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