Strategic redesign: How Glaxo Wellcome improved procurement

By By Christopher Reilly -- Purchasing, 9/7/2000

In the early 1990s, procurement at Glaxo Wellcome Inc. underwent several changes designed to streamline processes to make its purchasing function more efficient. Strong growth in pharmaceuticals in recent years and the expectation of more growth in the future made procurement restructuring a necessity.

Over a period of five years, Sam Straight, Glaxo Wellcome's international procurement group director, North America, implemented a plan to improve the way the company buys a wide variety of goods and services. The plan, which was designed to run for two years and then refined over the remaining three years, consisted of many improvement thrusts. With an eye toward making procurement less tactical and more strategic, Straight was able to reap many benefits, including cost reduction on the order of $200 million over five years.

A time for change

Glaxo Wellcome Inc.'s procurement function was not working as well as it could have. Continued double-digit demand growth in the pharmaceuticals market and the growing financial success of Glaxo Wellcome created a problem for procurement. More requisitions, purchase orders and approvals were coming into procurement than the existing staff could handle.

"We were operating like most pharmaceutical purchasing departments at the time, with too many requisitions being written, too many purchase orders being mailed, too many receipts and invoices coming in and checks going out for the goods and services we buy," says Straight. "Essentially, we were about to strangle on paperwork."

To handle the paperwork, the majority of the company's purchasing personnel were involved in the tactical, administrative duties. There wasn't time or enough manpower to work on improving processes, buyer/supplier relationships, or being more strategic in their sourcing, according to Straight.

And with the acquisition of Wellcome in 1995, Straight knew that unless some critical changes were made to the current procurement situation, matters would only get worse as business grew. It was time to act. Though Straight was given approval to hire more personnel (enough to almost double the current procurement staff) he didn't want to travel that route.

Rather than expand the staff to handle the growth, Straight had some other measures in mind to overhaul the entire department, streamline the way goods and services are purchased, improve quality and service, and save the company money.

He explains: "We knew that our spending was growing. And we expected it to reach about $3.5 billion in the next few years," he says. "We realized that if we kept going the way we were, the number of purchase orders being mailed out would increase from about 12,000 to 14,000 per year to about 250,000 by the end of the decade. Our first task was to develop measures to reduce that volume," Straight says.

Straight felt that if procurement could remove a lot of the requisitions and purchase orders for the low-end purchases, it would also have more time to take a close look at contracts development with preferred suppliers. "It became clear that we needed an electronic system to track these areas," he says.

The first step

The first step toward reducing the paperwork handled by procurement was to institute a procurement card system. In collaboration with disbursements, cards were issued to most of the 1,400 cost-center managers, along with authorization to purchase up to $2,000 worth of goods or services. The goal of this program was to eliminate the need for procurement to be involved in small purchases. "We were looking to improve velocity throughput," Straight says.

Together with the finance department, Straight says that procurement lobbied the company's executive management committee to increase the amount that the cost-center managers could spend within their budgets without requiring additional approval. Straight says that eventually these cost-center managers were given up to $250,000 to spend within their fiscal budgets in this manner.

"A lot of purchasing departments have a control mentality," Straight says. "We decided that that wasn't the direction we wanted to take." However, some restrictions were developed for the procurement cards. Straight says that the company didn't want non-purchasing employees buying non-approved software or furniture, for example. He explains that for these non-approved purchases, cost-center managers would be "locked out" of completing the transaction.

But while this control was necessary, Straight says that the system offers a lot more freedom to customers than in the past. Prior to the procurement card system, Straight says that any purchase, no matter how minor, could require as many as two-dozen signatures to gain approval. Essentially procurement cards let customers (other business units and department within Glaxo Wellcome) order what they want from pre-approved suppliers, within certain limits, without purchasing involvement.

Now, with the procurement cards and the streamlined approval systems in place, and monitored by the company's auditing personnel, Straight says that they have taken a tremendous number of transactions off the plate of procurement and removed a lot of the paperwork required by both the procurement and the disbursement departments.

For an idea of the amount of paperwork purchasing saved itself through the use of procurement cards, Straight gives this example: In 1999, Glaxo Wellcome spent about $3.5 billion. Straight says that a lot of that money was inter-company spending, but for all of the products and services purchased in the U.S., only 3,000 purchase orders were written and mailed for all of last year.

A few steps further

"When you give people the authority to purchase what they want, when they want it, from whom they want, you run the risk of inflating the supplier base, because each procurement manager and customer will naturally develop their own list of preferred suppliers," Straight says. "This had major problem potential, because procurement had already committed to a goal of 20% annual reduction of its supply base."

To solve this problem, Straight began to develop an application on the company's intranet where procurement personnel in the company's North American operations could find those suppliers that management had qualified and deemed "preferred."

"We created a procurement Web site," Straight explains. The Web site was to be used as a resource by the procurement department and its internal customers, as well as a link to its preferred suppliers. "On the Web site, we added a variety of templates for good procurement practices, information about obtaining a procurement card, processes for requisitioning, templates for good contracting practices, and how, ultimately, suppliers would be paid," he explains. "We then tied this back into our disbursements Web pages," he says.

"We also wanted to start paying our suppliers electronically. But in order to do that, we needed the suppliers to start giving us the information that they supply on paper invoices in an electronic format," he says.

Because Glaxo Wellcome's preferred suppliers exhibited varying degrees of computer literacy and understanding of how the process would work, disbursements enlisted the help of two outside firms. One firm would handle the electronic processing of data between the suppliers and Glaxo Wellcome. The other company would take the paperwork from those suppliers that didn't have the technological capacity, convert it to an electronic data stream, and then feed it to the other company in charge of transmitting it back to Glaxo Wellcome. Straight says that then his company would authorize payment and the electronic funds transfer would take place.

"Before this system, suppliers would get paid anytime from 10 to 30 days from the order receipt, depending upon the negotiated terms," Straight says. "But now, our electronic funds transfer system has the capability to pay suppliers in as little as 24 hours from the time of the order."

"That's worth something," Straight says. Paying suppliers early became a strong negotiation point buyers could use to get suppliers to remove some cost from the system. The rationale is that if the supplier is getting paid sooner, Glaxo Wellcome would lose that cash float and should be able to negotiate for some compensation.

Getting buy-in

When Glaxo merged with Wellcome in 1995, Straight was given management's approval to hire up to 75 people in the procurement department. But instead, he opted to keep the staff the same size and make a few major changes in personnel and workflow processes.

Straight explains the makeup of the procurement function using the analogy of a pyramid. "We had a lot of people at the base of the pyramid, responsible for the day-to-day tactical work such as tracking purchase orders, phoning in requisitions, etc.," he says. With a lot of administrative people at the base, there were much fewer purchasing professionals responsible for the more strategic sourcing tasks located at the top of the pyramid, according to Straight. "What we wanted to do was flip the pyramid," he says. "We wanted the small pivot point of the inverted pyramid to contain few administrative personnel, while the top was to be filled with many experienced, highly trained strategic procurement professionals."

But like many corporate management initiatives, getting buy-in from the staff wasn't easy. In fact, when the plan was proposed, it was met with apprehension. "People were very concerned that we were going to eliminate their jobs," Straight says. "It took a lot of selling, re-selling and reinforcing the plan in order to get the staff to understand that we weren't eliminating jobs, we were going to change them and provide a two-year on-site educational program conducted by the National Association of Purchasing Managers, (napm), he says."

For instance, Straight says that he changed the position of "purchasing specialist" into a combination of administrative and purchasing duties.

"We decided that we weren't going to have a lot of secretaries in the procurement department, so we gave these people some training and procurement authority, and we committed to growing them in the organization," he says. "We built a career ladder for them to climb, from purchasing specialist, to associate buyer, to buyer, to senior buyer and so on," Straight says.

After some initial fits and starts, which are natural consequences of learning a new system, Straight says that the staff became enthusiastic about the procurement redesign. Just as important is the fact that this has enabled the company's North American procurement department to keep it's number of personnel constant at about 45 people.

And while business has grown, the system has enabled this same number of people to handle about $3.5 billion in annual spending. This is one of the smallest procurement units in the U.S. pharmaceutical industry with one of the largest annual spends, according to Straight.

Consolidate the supply base

Running parallel to procurement's efforts at Glaxo Wellcome to streamline processes and improve the flow of paperwork was the goal to take costs out of the system by developing better contracts with fewer suppliers. Straight found that developing electronic tracking and business management systems was instrumental in developing more significant alliance partners.

"Back in the early 1990s," Straight says, "we had more than 2,000 suppliers of laboratory consumables for our research & development and quality assurance functions, and that number was growing." This is because the company's 1,500 scientists were buying their products from their favorite traditional suppliers.

To resolve the problem, Straight formed a team representing purchasing, facilities, research & development, legal, information systems, manufacturing and operations to conduct a laboratory needs assessment. "Ultimately, we were able to settle on one supplier to handle the majority of our laboratory consumables," he says, explaining that while some proprietary products must be sourced through particular suppliers, consolidating the majority of these products with one supplier eliminated a great deal of waste.

Straight didn't stop there. The consolidation mentality led to some other lucrative single-sourcing contracts. For instance, in the area of temporary-employment services, Straight says that Glaxo Wellcome used more than 150 agencies at one time for its extremely diverse staffing needs. Again, by conducting a cross-functional needs assessment, it was determined that no one temporary-services provider could satisfy all of Glaxo Wellcome's temporary-employment services needs. "We asked the two top contenders in the bidding process to combine their businesses, creating a wholly owned subsidiary," says Straight. "This new business is now our key provider of temporary-help services. And we have more than 1,000 temporary employees currently in place throughout the company," Straight says.

Consolidating with one company standardized employee training and placement. The result, according to Straight, is a much smoother operation with one on-site point of contact. "Again, the whole thing is handled separately from procurement," he adds.

In the area of maintenance, repair and operating supplies (MRO), Straight says he was able to outsource every aspect relating to these items, including procurement. After working with an MRO supplier for several years, Straight says that Glaxo Wellcome finally decided to give the company the entire business. "We had such a good working relationship and cost basis for more than seven years with the company, we decided to outsource everything related to MRO with them," Straight says. According to Straight, the firm provides all on-site needs, including buying, planning, staffing, inventory control and project execution.

Another similar agreement was reached with a supplier of computer equipment and supplies. Straight explains that Glaxo Wellcome contracted a major reseller to represent every major manufacturer. Information systems personnel can requisition an order for a computer (provided that it meets the requirements established on the intranet for such purchases) and have it paid for and delivered without having to gain approval from procurement. "All the rules are set up," Straight says. "The information systems people police it, and we don't have to chase after it."

Contract management

Straight's system of reducing paperwork for procurement also was designed to improve the function's relations with suppliers through improved information exchanged between Glaxo Wellcome and its suppliers, as well as quality and performance tracking and benchmarking best practices.

As an example, when developing the supplier performance monitoring application for manufacturing materials, Straight hired a programmer who really knew the ins and outs of this type of interactive program. "We wanted suppliers to be able to access the system at any time to see how they were doing, and we also wanted our own quality-control people to be able to input information," he says. "The whole system had to be flexible and powerful, because we had some very finite criteria that we wanted to measure," he says.

"The application works like an interactive process improvement tool," Straight says. Data generated by the application is used in quarterly briefings with representatives of key suppliers. At these meetings, Straight discusses the suppliers' performance attributes. "If one supplier is doing an exceptional job in a particular area," he says, "We ask that the other suppliers take some time to benchmark their procedures and practices."

Using the data from the application, Straight has also built service-level criteria into some supplier contracts. Under these agreements, as long as suppliers continue to provide a certain level of performance as recorded by the application, the contract will continue to roll over each year. According to Straight, the longest contract his company has with a supplier is for 10 years. "Most fall into the range of one to three years," he says.

In the process of implementing an electronic business application with suppliers, Straight discovered some obstacles. The biggest problem with such an application was security. Straight says that he consulted his company's data security personnel and asked exactly what criteria suppliers would need to adhere to in order to ensure that data coming through the Web site's firewall would remain secure. "We also asked what procurement could do to prevent data sent back to suppliers from being intercepted or having its confidentiality otherwise compromised," Straight says.

Ultimately, the data security people built a security plan around Glaxo Wellcome's requirements. "Then we sold the plan to our preferred suppliers, outlining the criteria they would have to meet in order to continue to be a preferred supplier," he says. One of these criteria, according to Straight, was that suppliers design some form of online offering that is similar and compatible with Glaxo Wellcome's. "We wanted it to be familiar to our buyers and internal customers," Straight says. "Many suppliers could not make the grade, and as a result they are no longer suppliers of Glaxo Wellcome."

Another contract management application Straight made available on the company's intranet was designed to help internal personnel forge contracts with external service providers. "We set up contract templates on our intranet to give our customers the ability to engage a contractor," he says. "Provided that the contract agreement conforms to certain criteria, involving liability and insurance issues, the customer doesn't have to get the approval of purchasing in order for the contract to go through," he explains.

Future prospects

In response to the trend of manufacturers and suppliers turning toward developing electronic systems for their procurement, sales and order processing, Straight says, "There is an absolute need for companies to go this route. Long term, we'll see more and more companies turning to electronic channels for their order processing," he says.

In fact, during Glaxo Wellcome's procurement redesign and the implementation of the electronic business management, procurement cards and other systems, Straight says that he was approached by several third-party electronic business service providers.

Straight looked into what these companies had to offer and decided that what Glaxo Wellcome already had in place was beyond what these companies were offering. "The companies agreed with our assessment," Straight says. "But they also said that they'd be back."

"These electronic commerce companies continue to build better mousetraps," he says. Because of this, Straight adds that his company continues to take a hard look at what's available in terms of e-commerce in the pharmaceutical industry. "The steps that we have taken on our own will ultimately be outsourced," he says.

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