Cessna charts a supply chain flight strategy
A story that asks, "Can a smallish Midwestern aviation company succeed where the giants of industry failed?"
By -- Purchasing, 9/7/2000
Is integrated supply chain management the answer to corporate competitiveness? Or is it just another of those nifty ideas that ensure full employment for business consultants? Those or similar questions must have been common around the Cessna Aircraft Co. in Wichita, when in 1997 the company's Vice Chairman (now CEO) Gary Hay and President and COO, Charlie Johnson, announced plans to launch a new five-year supply chain management initiative and hired Michael Katzorke to head it.
After all, bigger companies than Cessna had tried and failed to build successful competitive strategies around the theory that proper control of a company's sourcing and supply is key to competitiveness. Making a conversion from a very traditional, conservative management structure to one that would make numerous and substantial changes in everything involved in purchasing, sourcing and supply chain management seemed for many to be an exercise in wishful thinking. Cessna, with sales around $2 billion, had neither the financial resources nor the clout of such industrial giants as GE, Honeywell, Motorola and GM. Management could readily see that a new supplier strategy might make it more competitive, but could a company the size of a Cessna-even operating under the Textron umbrella-make a strategy as complex as integrated supply chain management really work?
In theory, an integrated supply chain is a connected series of organizations, resources and activities involved in the creation and delivery of value in the form of both finished products and services to end customers and shareholders. Management of a supply chain involves the integration of all decisions that affect the design and flow of purchased items/materials/services into and through a corporate entity to finished products. In a supply chain strategy, internal and external materials decisions become part of a single sourcing strategy aimed at winning customers and increasing competitiveness. As explained by proponents, integrated supply chain strategies open up a whole new channel of resources to companies that intelligently deploy them.
Why the effort?
In addition to concern about whether Cessna could convert supply chain theory into successful practice was another question, "Why?" Cessna, a subsidiary of Textron, did not appear to be a company in need of radical changes. With a 57% share of the business jet market, it had good financials, a satisfied workforce, good customer satisfaction stats, an excellent reputation for quality, and generally high marks as an innovative company. Added to that, the company appeared to have successfully weathered the extreme downdraft that hit the general aviation industry for almost a decade from the mid-1980s to the early 1990s.
Still, there were plenty of things to worry about as Cessna and the general aviation business as a whole began its climb out of the doldrums in the early 1990s. One worry was that the general aviation business is a relatively small figure on the overall business scene. Even for Cessna, with its good market position, competition was keen in all the areas listed above and customers were raising the bar with higher expectations of quality and reliability, cost, delivery, service and technology.
As Hay and Johnson saw it, nothing short of a complete remake of the supply system at Cessna would give Cessna the competitive edge it needed to remain vital in the 21st century. For starters, Cessna was facing problems in these areas:
Supplier on-time delivery was poor (at around 45%).
Quality was suffering at the hands of redundant inspection and rework of supplier components.
Supplier prices and costs were escalating.
Hints of out-of-control vertical integration were becoming more numerous-in terms of such things as high production costs and parts redundancies.
Appropriate supply chain metrics were totally lacking.
Lack of integrated approach toward long-term commodity strategies for quality, cost, delivery, service , technology and inventory.
What Katzorke found
In his career in supply chain management, Michael Katzorke, vice president of supply chain management at Cessna, has seen a full transition of purchasing from paper-chewing transactional nightmares of the late 1970s, to some relatively sophisticated materials and supply management systems, to the beginnings of integrated supply chain management. Over the years he had picked up a store of invaluable insights and experience from some of the leaders of the purchasing/supply/sourcing function at such companies as Motorola, Honeywell, AlliedSignal and Sperry Flight Systems. In fact, he credits a good deal of his professional growth to aggressive benchmarking rather than academic achievement.
And as he settled in, Katzorke began to view the job ahead as a three-pronged one (see chart on page 44) made up of sustaining production (i.e. planning, order launch and expediting of existing production); strategic sourcing (supplier selection, negotiation and improvement; and new programs (developing new aircraft and incorporating suppliers' latest technology and products). His earliest impressions of Cessna in 1998 were of "materials management, circa 1975." Very typical of much of the aircraft-building industry in the late '90s, "Cessna's procurement organization was tied to transactions and was highly tactical-with a couple of exceptions. The exceptions, avionics and engines, were responsible for a handful of senior management to senior management strategic relationships. But even these relationships were strategic more by virtue of not being tactical and transactional than being the product of well-crafted long-term strategic agreements.
More ominous from a supply standpoint, suppliers appeared to be operating in a divide-and-conquer mode with three sets of negotiation-specs with engineering, price with purchasing, and aftermarket with aftermarket support personnel. Purchasing, in effect, operated primarily as a tactical, transaction processing, price negotiating function. As a result, in areas vital for successful operation of the purchasing/sourcing/supply management process (i.e. quality, cost, delivery, service, cycle time and inventory), the company also was in the mid-1970s as far as results were concerned.
Up front
Communication, says Katzorke, is key to making strategies work. The more complicated the demands of the strategy, the more detailed they need to be. That he believes what he says on the topic is evident on entering the supply chain management department.
The first thing a visitor to Cessna's supply/purchasing/sourcing operation sees is its "supply chain storyboard." It explains Cessna's strategic supply strategy in terms of its relationship with everyone at Cessna-starting with parent Textron's initiative flowing down to every worker at Cessna. The purpose, says David L. Oppenheim, director of indirect materials and e-business, "is to relate to every worker how what he or she does is relevant to what shareholders of Textron and customers of Textron and Cessna care about. It's our attempt to make the strategy part of a living, breathing document."
At each level of the storyboard are baseline expectations, long- and short-term objectives, and statements of "keys to performance" indicators (KPIs). Enabling strategies and structures also are included, as are performance metrics and how they fit into the five-year plan. Indeed, all of the metrics on the board are reviewed at operating meetings held quarterly.
Structure
Early on, says Katzorke, it was apparent that Cessna needed to start thinking in terms of moving away from its traditional functional orientation to one that stressed the process. It needed to recognize the elements of the supply chain processes, take a hard look at the processes, people and structures, and then optimize everything that goes on in the supply chain.
First, though, he had to deal with the organizational structure of the supply, purchasing and sourcing activities. In addition to being organized functionally for tactical objectives, the structure was also very hierarchical and traditional in nature-in terms of both processes and people. "We had a workforce made up of good, solid, hard-working people," says Katzorke, "but they had been trained to take requisitions and make purchase orders out of them and expedite parts required for airplanes rolling out the door." Only about 17% of parts were on any kind of long-term agreement and work was spread across a supply base of more than 5,000 suppliers. Further, there was no definitive commodity alignment. Buyers covered multiple and sometimes unrelated technologies.
Among Katzorke's first moves was the installation of David L. Oppenheim as director of e-commerce and indirect materials and Ron Nussle as strategic sourcing director. Both had worked for Katzorke at Honeywell and AlliedSignal. Both spoke the language of supply chain management and e-business. Most important, both understood the need to break down old functional silos that clogged Cessna's supply arteries and replace them with a new structure that could facilitate the development of a supply chain management strategy.
Oppenheim, with a background in computer systems as well as purchasing systems, was assigned at the outset with the job of downloading all the data needed to really analyze what was going on in the company. If a supply chain strategy was to ever take off at Cessna, Oppenheim was standing at ground zero. Under the materials management system that was in place, no two numbers seemed to relate to each other, transactional purchasing was rampant, and the tools of e-business were basically misdirected toward achieving superficial objectives.
Nussle came with an engineering background, significant experience in supply chain management, and a reputation as an excellent program manager. In addition, he had considerable experience with value engineering and value analysis techniques-two tools that were expected to play an important role as an integrated supply chain management system matured in the company.
Nussle's first job at Cessna, however, was to lead the transition from a relatively weak functioning materials management system to a supply chain management system. In basic terms, this meant taking such activities as purchasing, sourcing and supply management and organizing them as part of a supply chain management structure into a process. The vehicle for making this transition would be full time cross-functional commodity teams. Each team has representatives from seven different functional areas-purchasing, manufacturing engineering, quality engineering, product design engineering, reliability engineering, product support and finance.
"More than anything the mandate for the commodity teams was to drive supplier improvements and integration of suppliers into Cessna's design and manufacturing processes," notes Brent Edmisten, process leader for systems commodities (engines, avionics and aircraft systems). The strategy to this and the key performance indicators were spelled out in the strategic plans (straps) of each commodity team. Each strategic plan is tied to the CEO's strategic objectives and is updated yearly. The plan provides an outline of each commodity group and all the suppliers, spend, etc., along with key processes and resource process maps.
"In essence, the strategic plans are overviews of what's involved. They spell out the long-term objectives of strategic sourcing; established specific strategies; long- and short-term targets; and processes to drive and measure the rate and trends of improvement-i.e. quality, engineering, product support, finance, manufacturing and materials. Item by item, they fashion roadmaps for the year telling what each of the commodity teams will be doing, how they will support their plans and objectives, and list the key performance indicators that will be monitored to gauge the rate and trend of improvements and comparisons to world-class benchmarks."
Integration
In oversimplified terms, Oppenheim's initial objective was to give Cessna supply/purchasing/sourcing managers the data needed to begin the four-phased strategic sourcing process. His mandate: to give Ron Nussle's commodity teams the tools needed to be analytical and factual in determining which suppliers they were going to do business with in the future.
As Cessna moved into supply management, notes Oppenheim, everyone was aware that there are many cost factors to be considered. But only as the company began getting deeply involved in the supply chain management process did they realize the complexity of actually reducing costs-both up-front development costs as well as production and aftermarket support. A great deal more is involved, says Oppenheim, than pushing costs back on suppliers. As Oppenheim sees it, "If a supplier is forced to reduce its price by eating its margin, costs are not reduced but only moved...and will bounce back again and again." Those doing the buying and sourcing needed a better understanding of the tradeoffs involved in reducing costs of materials and services. And Cessna believes in helping suppliers reduce cost and not just engage in "margin transfer."
As Oppenheim explains it, his "first job was to go out and find out where we were at." In May of 1998 these were some of the characteristics of the supply chain that were identified as dragging on its operating efficiency:
The company's use of part descriptions was totally antiquated. Part descriptions were used to identify technology instead of the other way around. If, for example, a hose was called something other than a hose, it often was difficult to locate it in a department database. As a result opportunities to transfer technology from one product line to another were poor, part standardization efforts frustrated, and leveraging potentials unexplored.
Practically all data was resident in mainframe reports that depended on information services (IS), notes Oppenheim. In many (if not most) cases existing reports were unfocused and "pretty useless" for supply chain decision-making. "They dealt more with what an accounting person would want to see"-i.e. how many dollars are past due?
Long horizon purchase orders were used to predict the future. But buyer planners selectively worked MRP messages and suppliers had no visibility of true MRP requirements. As a result, it typically took 35 days for the system to respond to MRP signals and purchase orders were placed with long horizons and used to predict the future.
All parts carried the same inventory levels (30 days of supply) regardless of value. As a result, the company's inventory overhang was too large. Inventory was high largely because the master production schedule was being overdriven to produce a lot of "just in case" inventory.
Manual systems were used for generating paper-based requisitions, requests for quote (RFQs) and analysis, and purchase orders.
Manually generated paper-based requisitions were used.
Roughly 99% of the department was working on tactical issues.
Related departments-e.g. receiving and accounts payable-were swimming in paper and redundant processing.
Quarterly reporting of performance data was mailed to suppliers. The process was good but weighted down with paper and filled with errors. In addition, data was not used in making supplier selection or used to help suppliers improve.
Early results
Where is Cessna today in its quest to bring integration to the supply chain process? For starters the company has established a four-tiered hierarchical commodity system that can be used to identify technology and apportion part numbers to commodity codes.
And it also has installed a system called Mapper that essentially is an executive information system and data warehouse. Basically Cessna took data from all the various systems on the mainframe, put them together into one data warehouse, and built an executive information system that allows users to type in a question and get back an answer immediately or transfer the data to Excel and perform other similar functions. This compares to putting a request to IS and six weeks later getting back a paper report. Now end users go from their desktops to the intranet, type in a request, and information comes back in a flash. This allows sharing of MRP schedules electronically, using ship trigger releases.
Where tools and integration meet
At the heart of these and the many purchasing-specific programs that are being installed are electronic data interchange (EDI) systems, which Oppenheim feels are critical for company-to-company integration. In the past, use of EDI had been hindered by many financial and personnel implementation problems-especially among the smaller suppliers.
Oppenheim solved the problem by hiring a third-party company to develop a Web page for those suppliers who don't have EDI systems. He concedes that while the price for memory and computers has gone down significantly, many very small suppliers will never have IT departments. And because Cessna wanted its smaller suppliers to get the same benefits of its larger suppliers, all suppliers were given the choice of using EDI integration or a Web-enabled application that mimics EDI. Either way, Cessna pays for the installation of the enabling technology, which suppliers can, if they choose, use with other customers. In any case, the company now refuses to do business with fax, paper or phone calls.
"We went out and developed a whole suite of EDI transactions," notes Oppenheim. "Most mom and pop operations don't recognize they're using EDI, but underneath the Web form it's all EDI. Cessna now gets the true benefits of integration. There's no rekeying of data and associated data entry errors. There's no time delay."
The enabler for all the benefits that got put into place was a general cleanup of the MRP system with schedules shared electronically and the use of ship trigger releases. Suppliers are being given a true visibility of Cessna's 24-28 month forecast. They now see the net change from week over week and only need to manage the exceptions.
Meanwhile, Cessna has been automating the purchase-order requisition and the purchase order. As a result, we don't need an army of buyers placing POs and all the other paper, so those freed-up workers can be used for more strategic assignments. The suppliers end up as the planners and buyers who manage the fulfillment of their own parts. The job of Cessna's supply organization is to train suppliers on how to do that. "In the past they waited for the PO to tell them what to do," notes Oppenheim. "We had to train them on how to use the MRP forecast, integrate that into their business as if it were a purchase order, and give us feedback."
Today Cessna has a 50-50 mix of manually generated and automated requisitions. Full automation will take some time as Oppenheim and crew work through a lot of issues and business practices that built up over time on human interfaces. Meanwhile, the use of RFQs also is being phased out as partnering practices replace bid/buy practices. "The RFQ process assumed constant reordering based on requoting. RFQs are no longer in the middle. We want to know who's the best and sign that supplier up to a long-term contract."
At midyear, 79% of the department was still working on tactical issues, but that is in the process of rapid change. For example, while the receiving department still enters the manual packing slip to receive the PO, and accounts payable manually matches the PO to the packing slip and invoice, Oppenheim's group has started experimenting with five companies to eliminate most of the paper matching with a system that replaces human checking and matching with an automated system using barcodes.
Looking ahead
By May of 2002 Cessna plans to be using the world standard (unspc) commodity codes instead of its own. (Companies throughout the world have started using the uniform codes.) This world standard will be part of Textron's overall efforts to leverage the parent company's advantages of scale. First, however, Textron's sister divisions need to start acting in an operational mode and to talk together in a common language. The opportunities, as Oppenheim sees them, are practically limitless in such areas as standardization and a number of smart Internet and extranet applications. Other changes expected in this timeframe:
POs just won't exist. "We'll have blanket orders to capture the dollars and MRP will send ship triggers that say 'ship these parts.' Suppliers will have seen all of this coming on their MRP or pull signals from the factory."
Cessna is moving quickly to collaborative planning. Today it is doing one-way planning: "Here's our schedule, go do something with it." As Oppenheim sees it, collaborative planning means that "When I send an electronic file to a supplier, I immediately get a file back that bounces off their inventory. It tells me what's available to promise what we can do and can't do. It allows me to do simulation through the supply chain and ask 'what if?' questions."
Collaborative planning will also be aided by supplier visibility of true MRP requirements. As the factory is converted to lean manufacturing (optimization of production and converging processes via waste elimination, improved quality, and/or or reduced cycle time) manufacturing push will be replaced by Kanban pull and ship triggers.
Oppenheim also expects to reach 98% on automating the materials process.
By May of 2002 Oppenheim expects to offer real-time lookup capability for supplier performance on the Internet. This will replace the monthly stars 2000 reports. "Suppliers with many parts have said to us 'I want to be able to type in a part number and look up rather than go up through this huge electronic system.' So we're installing an extranet that will replace all the paper forms we use with suppliers today and put them on the Web page.
Four phases of strategic sourcing
Also on Katzorke's hot list of things that needed to be done to improve the external supply team and the supply chain department were:
Implementation processes and systems to reduce transactional costs and free up personnel to attack strategic opportunities.
Increasing the professional development of staff.
Rolling out a VA/VE process modeled after Chrysler's score process.
Vast improvement of quality through the implementation of Six Sigma programs and Baldrige Award criteria.
The most pressing strategic and time-consuming set of issues as Katzorke saw it was getting the strategic sourcing process launched. Involved was the role of suppliers. The company's relationship to suppliers needed to be changed radically and definitively in these four areas (see chart above):
Rationalization-figuring out who are the best suppliers for each technology. First step was deciding who's the best in each commodity and determining whether Cessna was doing business with them. If the suppliers we're doing business with today are not the best, can they become the best with coaching?
Focusing the business on the right suppliers. In simple terms supplier partnerships needed to be established with selected suppliers. Part of this included shifting business from the competitors of their preferred suppliers to their suppliers. As Cessna shifted from a policy that said value is created from competition to one that said it was derived from productivity gains, the policy needed to be demonstrated in deed as well as in word.
Improving those key suppliers as they are rationalized. Suppliers often needed to be given help in such areas as quality, delivery, service, cost and technology/integration. Cessna also needed to really listen to its suppliers' ideas and feedback.
Integrating these suppliers into the design, manufacturing, e-business and product support.
Supplier quality was especially problematic with defective parts per million (ppm) sometimes running as high as 50,000. In many cases rejects were so numerous that they were quoted in percentages. Historically, quality out the door was reasonably good, but it was achieved at a very high cost. At every step of the way it appeared that the company was trying to inspect quality into product, often employing costly ad hoc fire fighting, redundant testing and much expediting.
As Katzorke noted in his early impressions of Cessna, the supply base, itself, had a maturity of people, processes and structure characteristic of the mid-1970s, and it needed to be changed from a supply chain standpoint. To be sure, the supply base had a fair number of suppliers who were doing a lot of the right things in terms of lean manufacturing, global sourcing, and TQM and applying Baldrige criteria effectively.
But along with the Honeywells and Pratt & Whitneys were all the little mom and pop shops that didn't know that the Baldrige wasn't another brand of soft drink. In fact, Cessna had a pretty high degree of variation in its supply base. Most were very dedicated and loyal to Cessna. They also were very used to saying "yes" to whatever Cessna said. The problem was that some of what Cessna said it wanted sometimes wasn't in anyone's best interest.
In elementary language, it needed to get its entire supplier-buyer relationship on a data-driven basis. To do that Cessna took stars, which is its supplier tracking and rating system, and completely revamped it. It changed its definition of "good" and began rating suppliers and sending monthly reports to the CEOs. Today the monthly report is e-mailed directly once a month to CEOs.
The supply chain management organization also began holding supplier conferences emphasizing common messages on increased expectation of quality collaborative engineering and productivity. As the conferences began to make their points Cessna gradually was able to significantly raise the bar in terms of what its expectations were.
Perhaps the most significant of all of its supplier initiatives was its use of key performance indicators (KPIs) with what it calls its maturity path deployment document (MPD). Starting with supplier selection and moving up to an annual planning cycle with key suppliers, the tracking of annual planning and the award of the business associated with that is very specific, detailed and data driven in terms of the decisions that are made. It takes much of the subjectivity out of the process.
Also in the supply base area, financial integrity became considerably more important in supply chain management. Since there weren't many really good tools available to measure financial health, commodity team analysts developed a process to take a good hard look at the key suppliers and include that in its rationalization process. The commodity team financial analysts also monitor long-term agreement suppliers' financial health on a monthly basis.
One of the next steps involved developing a focus on supporting new products. In that arena Cessna borrowed from Xerox and others in formulating a process cross-functionally in the company that put in place gates and phases very similar to Xerox's vaunted process, which integrates the new-product development process cradle to grave in the company.
People and performance
Early in the change process Katzorke's team began working on developing and broadening the vision of those in the supply organization. Relationships were formed with Friends University, Wichita State University and Arizona State University for the purpose of developing some of the basic tools needed for supply chain management. Also set in place was a policy that mandated that exempt employees in the materials organization have either apics or napm certification or a college degree. The idea behind the move was to bring about a quick upgrading in the professional development of the company's supply chain staff.
Another important addition to the staff at this time was Brian Blunt, whose title of supplier process improvement director somewhat understates his importance. Blunt's job was to bring Six Sigma to the supply base. (Six Sigma, a federally registered trademark of Motorola, translated into roughly 3.4 defective parts per million. This compares to average of four sigma of more than 6,000 defective parts per million.) As Blunt got started on his program to improve the velocity of supplier improvement, it was decided that Cessna should adopt Six Sigma as a standard for the entire company (see box on page 58).
Six Sigma was built into Cessna's materials quality strategic plan. As a result, it was possible to link supplier development to key performance indicators (KPIs) at an early stage. It developed a set of balanced metrics for analyzing and reporting supplier quality that result in a poor quality index number-pqin.
The balanced pqin number is the result of blending such volume-sensitive metrics as ppm and total volume of rejects with metrics that identify where in the factory rejects occur. Thus, a reject discovered at early stages of the process is not as damaging as one found late in the process.
The metrics, stresses Blunt, are important for Cessna in the allocation of its limited resources. The processes involved in making products with high pqin numbers can be targeted, analyzed and changed. Six Sigma provides a structure for analyzing and improving the culprit processes. It provides a way to analyze and improve processes in the supply base. At the same time that it is analyzing and improving supplier processes it can work with supplier teams. This also helps suppliers develop personnel within their facilities and learn how Six Sigma methods are employed.
pqin is calculated by the number of units rejected times a rejects origin factor. The "ROF" changes as the product goes forward through the process. So, if a product is rejected at incoming inspection, the rejection factor would be 0.1. If the reject occurs at the primary assembly, it would be 1.0. At final assembly it would be 10. In addition there are the significance factors of the reject-whether they are functional rejects or documentation rejects. Leadtime is also taken into account by price, because value-added activities typically have higher prices.
It also became apparent in the first year that the organization's planning systems were extremely weak. Especially important was the need to develop better readings of demand and the way requirements were generated. The solution: A way was found to bring the sales and operations planning process into the supply chain organization. Rod Anderson, director of materials planning, led the design and development of Cessna's sales and operations planning process that is making considerable headway in inventory reduction and schedule performance.
Strategic make or buy process
One of the early problems to be tackled at Cessna was the need to deal with the company's heavy reliance on vertical integration and its relatively poor performance in capacity planning. "We had to back up and look at ourselves from the standpoint of understanding what our key competencies were," says Mike Crabtree, director of sustaining procurement. "It seemed that we were just doing too much. We had no idea what our real costs were. All that seemed to matter was that business was good and we were selling a ton of airplanes."
However, as Katzorke's team matured in its quest to bring strategic supply chain planning to Cessna, it went back and looked at itself and asked: What are our core competencies? More important, it developed a strategic make/buy committee. Its purpose: Examine things that may no longer be corporate core competencies and identify capacity constraints. The committee spent nine months creating core-competency evaluations of every major category of parts and assemblies that go into an aircraft, then began putting together packages-whole families of parts and assemblies that might be outsourced to allow room for greater volumes of its core technologies and capabilities.
Make/buy and insourcing/outsourcing decisions, however, are seldom a simple yes/no proposition for Cessna. Many single parts, because of the relatively low volumes involved, are not attractive to suppliers. In some cases one way around this obstacle is negotiation of agreements covering assemblies of parts. In many other cases there just isn't the degree of expertise available that Cessna requires. And while labor does not appear to be an overt obstacle to outsourcing, it's apparent that the company is determined to maintain amicable labor relations as it mulls the pros and cons of outsourcing.
One of the first outsourcing agreements to be negotiated was with Alcoa. The long-term agreement was for all Cessna's coil, sheet and plate aluminum. As part of the negotiations for the agreement it was agreed that as Cessna developed more potential packages, Alcoa would consider establishing a local facility featuring electronic ordering and daily delivery. Cessna now has several similar contracts with small aircraft industry suppliers. These involve cutting to size and getting rid of shearing operation at Cessna's plant. Sheet metal comes in ready for forming.
Another agreement was with a metal tube distributor. Cessna has more than 1,800 materials with the company, which carries three months worth of supply. Cessna electronically sends the supplier a copy of its shop routing. The company gets on its computer, enters its code, takes a print of the shop routing instructions, goes to the bin, cuts the material, packages and bar codes it, and delivers it to the right machine every day. This agreement allowed Cessna to get rid of a lot of inventory and freed up about 25,000 sq ft of floor space.
Cessna also has some in-house suppliers. Honeywell, for instance, has a stockroom in house and makes deliveries directly to the production line as needed. All scheduling and ordering is handled directly by Honeywell, which along with other major suppliers participates in Cessna sales and operations planning process meetings directly.
The objective that gradually emerged was the development of a strategic make/buy process that would be effective in deciding core competencies, what Cessna should make and what it should buy. It took about a year to develop a consensus on what the process ought to be and then decide what in a general sense should be bought and what should be made.
Decisions at this level involving such things as core competency, economic capacity, supplier capability and corporate relations have to be addressed at the top level of the company. Where items are not part of the core competency and are still made in-house, the fundamental question that the strategic make/buy committee asks itself is: Is there a competitive advantage to keeping this technology in-house? Other questions that also get considered are:
Do we make it because we do it cheaper than anybody else?
Do we do it because there's nobody out there who can do it effectively?
Do we do it just because we've always done it?
Do we need to outsource it just because we don't have the capacity?
Do we have the capacity, but are we better served by spending our capital on something else?
In any case, co-chairs, Nussle and Rod Holter, director of manufacturing, have the responsibility of exploring all the alternatives and making recommendations. However, decisions on the strategic issues of make/buy require executive-level approval.
Supplier integration
With work progressing in revamping the supply base, Katzorke is turning more of his attention these days to phase four of the strategic sourcing process-integrating suppliers into Cessna's design and manufacturing process. "We've managed to get a preferred supply base defined and are now applying it to our first programs."
But throughout it all, he emphasizes that the objective is to deliver more value for the airplane customer at the end of the day. To that end the supply chain management organization is doing a number of things with commodity teams. First are supplier conferences, which are strategic communication vehicles and also teaching vehicles that are run on an annual basis. Another involves the setting up of a supplier advisory board. Launched this year, the board has representatives from nine companies who are key strategic suppliers to Cessna in various commodity areas.
One area that is expected to see a great deal more activity in the near future is the application of value engineering/value analysis principles under the leadership of Ron Nussle, strategic sourcing director. When Cessna first began the strategic sourcing process, most of the cost takeout was realized via the renegotiation route of contracts and coming from more penetration on agreements.
As it moves forward in its supply-chain revamping, Katzorke foresees a greater emphasis on productive long-term agreements emanating from VA/VE supplier-buyer initiatives and projects. Where cost reductions in the past mainly centered around negotiated prices, in the future most cost reductions will be the result of supplier integration into solving design, manufacturing and quality issues. The emphasis will be on taking cost out on a long-term, lasting basis rather than through short-term price adjustments.
The thinking at Cessna is that as its supply base is rationalized and the company settles on its core suppliers, it will be able to spend more time working with those suppliers to take cost out of the product. In essence, that represents a larger focus on quality and a new program of joint design and VA/VE focus. Currently VA/VE is being used largely in attacking sins of the past-where the company didn't work together enough in the design process.
In the future, Ron Nussle sees greater use in terms of how numbers and data are used to optimize future designs and address up-front airplane costs and the functions that are provided to the customer. This change is made possible by the employment of the integrated product development process and putting the suppliers into that.
In essence, Cessna has moved from a mindset of annual price/cost escalation to one of annual productivity sharing and facilitating that by focusing more and more business on fewer and fewer of the best suppliers. A key part of this, says Katzorke, is what comes next: "Helping those people and having them help us take cost out of the product and the process so we can provide more value to the end customer and on a continuous improvement basis over the long term."
Currently Cessna is about two and a half years into its five-year changeover process. "If I thought about it in terms of where we were when we started," says Katzorke, "we started with a mid-1970s materials management department and today we're at a mid-1990s supply management setup. The good news is we're moving very quickly. The not so good news is we have a long way to go to be an integrated supply chain."
"But it won't take us that long. In another year we should be well into supply chain management. In two years we'll be up there with the best of them in the integrated supply chain process. I think we have all the right people in place. We have the processes in place. We have the leadership support in the company. Our whole internal infrastructure is coming together."
"Most of what we have done and are doing is not new thinking. Many companies have addressed the important area of supply chain management and failed. I think success is dependent on these two issues:
There must be an integrated supply chain strategy at an enterprise level. It can't be just a purchasing or materials strategy.
Once the strategy is established and deployed, we must stay the course. Too often the wrong metrics drive changes in strategy and behavior before the long-term benefits are realized. But staying the course doesn't equal rigidity. We need to flex with the tactical business situation and do the right things for today, today-and the right things to be ready for tomorrow, today. In short, deployment speed is a continual balancing act."
How well it all comes together will be watched with very great interest by many companies with resources that dwarf Cessna Aircraft Co.m
The integration of e-business tools into the fabric of the supply/purchasing/sourcing operation at Cessna is considerably more than the dubious use of some computer tools to reduce transaction processing. As the accompanying timeline shows, e-business tools are being used as drivers to achieve specific goals in the overall remake of the organization.
Rather than trying to install a set of generic tools, the Cessna team is selective and demanding in its approach to e-business tools. First the Cessna team lays out the problem, followed by possible solutions, and only after a plan of action is considered are tools selected to facilitate change.
FROM (May 1998):
Part description used to identify technology.
Mainframe reports-dependent on IS to produce.
Long horizon purchase orders used to try to predict the future.
Planners selectively work MRP messages.
Supplier has no visibility of true MRP requirements.
35-day (lag) cycle time to respond to MRP signals.
All parts treated the same regardless of value (30 days of supply).
Manually generated paper-based requisitions.
Manually generated request for quote (RFQ) and analysis.
Manually generated purchase orders faxed to suppliers.
99% of department working on tactical issues.
Receiving department manually matches purchase order to invoice to packing slip.
Quarterly reporting of performance data mailed to suppliers.
TO (May 2000):
Cessna commodity codes used to identify technology.
Mapper reports, online queries, intranet applications-decisions support.
Sharing MRP schedules electronically, ship trigger releases.
Suppliers act as planner/buyer to manage fulfillment.
Suppliers have visibility of true MRP requirements and are using three-day (lag) cycle time to respond to MRP signals for automated parts.
Robust ABC inventory classification-value-dependent ordering.
50/50 mix of manually generated and automated requisitions.
50/50 mix of manually generated and automated RFQ and analysis.
50/50 mix of manually generated and automated purchase orders electronically transmitted to suppliers.
79% of department working on tactical issues.
Receiving department manually enters packing slip data to receive PO 99% of time.
Accounts payable manually matches PO to invoice to packing slip 99% of time.
Electronic sending of STARS 2000 report monthly.
GOAL (May 2002):
UNSPC commodity codes used to identify technology.
Intranet and extranet applications-smart applications.
Purchase orders no longer exist-blanket orders capture dollars.
Collaborative planning-simulation through supply chain.
Supplier has visibility of true MRP requirements.
Kanban pull signals to support lean manufacturing.
Virtual inventory (consignment).
98% implementation of automatic generated paperless workflow requisitions.
Automatic generated RFQ and analysis to support long-term agreements.
98% automatic generated purchase orders via Web.
29% of department working on tactical issues.
Receiving department scans bar code on package to receive order release.
Automatic electronic payment.
Real-time lookup capability for supplier performance via Internet.
Brian Blunt, director of supply process improvement, is responsible for Cessna's Six Sigma and cost of poor quality (COPQ) programs. As he sees it, Cessna has been especially fortunate in being able to profit from the lessons learned by such Six Sigma pioneers as Motorola, ASEA Brown-Boveri, GE and AlliedSignal.
Cessna began implementing Six Sigma in August of '99. And even though it is still a veritable neophite, Blunt speaks with pride of the momentum with which Cessna embraced Six Sigma. In August of '99 senior management went through an initial round of executive management Six Sigma training, a one-day training course in which senior leaders learned concepts of Six Sigma from an executive management perspective.
The meting of senior executives was followed in September by its first class or wave of champion training made up of 31 managers and directors. This three-day course involved much more intensive training regarding Six Sigma methodologies and implementation steps. Indeed, the champions were nominated from the senior leadership folks that went through the one-day training.
The way that it started was the senior leaders attended a one-day executive management training program and nominated the first group to attend champion training. That group then nominated the first group of expert candidates to attend a significantly more rigorous training in the details of Six Sigma and its tools.
In October of '99 the first wave of expert training began for 28 expert candidates. They received a great deal of training in such areas as problem solving, advanced statistical techniques, confidence intervals, process control and capability, measurement system analysis, and design of experiments. Candidates who are successful are eligible to achieve expert certification at Cessna.
In addition to the formal training, which was three weeks (one week per month separated by a month) three times, and during the time between the training, the expert candidates were put to work on practical projects designed to demonstrate expertise with Six Sigma tools. In addition to demonstrating expertise with the tools, the process tests the candidates on being able to create elite problem-solving teams. The training tests candidates on their ability to define projects, follow the trail of processes with regard to improving them, and to bring a project to resolution. Projects also must show a savings back to Cessna. What's more, the savings must be documented by the finance department-another painful lesson learned from previous Six Sigma pioneers.
That first wave of certification candidates finished its formal training in December. Most of the candidates are still involved in their projects, however, some have already completed their projects and have been certified. In February Cessna had its second round of management training. As a result of the company's intense attention to Six Sigma, virtually all Cessna's senior leaders have been exposed to the discipline from an executive management perspective.
Also in February Cessna began its second wave of champion training with 32 managers and directors attending the three-day training session. So as of June the company has 63 trained Six Sigma champions across the business, representing virtually every department in the business.
In selecting a Six Sigma project three criteria are used:
They should be manageable-i.e. candidate should be able to be completed with it (including changes implemented) in less than six months.
Should have measurable output-i.e. involve a process that has measurable output.
Should have a potential for cost savings.
Typically candidates work with champions in selecting projects for certification. A document called a Six Sigma project contract is prepared and signed. It gives the name of the project, gives a description of the project, lists key milestone dates, and carries the signatures of the expert candidate and the project champion. The champion, who is a management representative, is wholly aligned with what the expert candidate is working on and the timeline for completion. Completed project contracts are then reviewed by a Six Sigma council, which is a subset of the Six Sigma champions. Once the expert candidate has a signed, approved project contract, he/she is then eligible to attend expert training.
The target of Six Sigma is something called COPQ by the acronym-loving staff at Cessna. It stands for cost of poor quality and is the sum of costs associated with internal failures, external failures, and appraisal. Cessna conducts COPQ training for suppliers and during the training it makes the point that savings resulting from the application of Six Sigma principles goes straight to the bottom line. It demonstrates the point by contrasting a hypothetical company that does not address the cost of poor quality but stresses increased sales and a second company that does not increase sales but decreases cost of poor quality. The increase in margin for the second company is significantly better.
Blunt says Six Sigma is a philosophy, statistical measurement and a business strategy. As a philosophy it provides a unified business objective. As a statistical measurement it provides a common measure of effectiveness and business strategy that achieves breakthrough improvements using a problem-solving process. Its target is variation. The effect of decreasing variation is reduced COPQ. Thus, the ultimate target of Six Sigma is elimination of COPQ
Blunt, who is a believer in thorough communication, is detailed in his communication of roles, results, objectives and accomplishments of Six Sigma. A Web page that is virtually complete informs users of current projects, completed projects, certified experts, champions, Six Sigma forms, the project contract and the documentation template for Six Sigma projects. It also shows results of completed projects, project summaries as each one is completed, and overall results of the Six Sigma effort.
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