Strategic suppliers keep juices flowing at Tropicana
By By Susan Avery -- Purchasing, 11/2/2000
Few in purchasing seem to truly understand the meaning of the word "partnership." Fewer still can make these relationships with suppliers work: Oftentimes it seems "partnerships" touted by buyers and suppliers alike fall quickly by the wayside.
This is far from the case at Tropicana Products Inc., Bradenton, Fla. Purchasing's success in the early to mid-1990s with its strategic supplier program for MRO has led managers at the juice processing company to extend its reach over the annual spend to include the capital buy.
For the $20 million annual maintenance, repair and operating spend, 14 strategic suppliers provide Tropicana with nearly all of the goods and services needed to keep the company (which has its own train, glass-producing plant, and co-generation plant to produce electricity and steam) operational. That's more than 57,000 items. And the suppliers help purchasing keep this spend in check. Over the past six years, as the company's annual revenue rose by 70%, spending on MRO has decreased by 50%.
Working with the strategic suppliers, purchasing has helped to lower inventory levels and improve service levels. On-time supplier performance is greater than 99%. And purchasing has automated the MRO buying process. Greater than 99% of transactions between the company and its strategic suppliers are conducted via EDI (electronic data interchange).
Since they are not processing paper transactions, Tropicana's MRO buyers have become more involved in cross-functional teams for maintenance projects. These efforts have resulted in cost savings of $1.1 million for 1999 alone.
"Our strategic goal," says Paul H. Kemp Jr., purchasing manager, MRO/capital, "is increased operational efficiencies through increased uptime." In other words, downtime is not an option.
A division of PepsiCo Inc. since 1998, Tropicana produces and markets its juices in North America, Latin America, Europe and Asia. As one of the few truly global juice businesses, the company has nearly 6% of the world juice and juice beverage market. In the U.S., Tropicana accounts for more than 41% of the $2.7 billion U.S. chilled juice market.
Efforts to rein in MRO buying began in purchasing about 10 years ago. When Kemp joined the company in 1990 as a buyer with responsibility for MRO, Tropicana's purchasing strategy for the category was based on the competitive bid. "We were using some systems contracts," says Kemp, "but we had no real partnerships with suppliers."
Setting out to change this thinking, Kemp put together a strategy that developed partnerships with suppliers. It called for consolidating the supply base, while improving deliveries and customer service so that end users within the plants receive MRO items when they need them, just in time (PUR: Aug. 14, '97; p. 106). In three years, the strategy helped reduce purchasing costs by 25%.
Currently, Kemp's team for MRO consists of three buyers: Barbara Stewart, Melissa Powell and Wanda Proveaux and procurement coordinator, Kathy Fisher. Kemp reports to Jim Eicken, vice president, global purchasing.
"Today we are supported by top management," says Kemp. "They've seen the results. The vice president of manufacturing sees benefits of reducing the contractor base and has been very supportive."
More responsibility
In 1998, Kemp was given responsibility for the capital purchase. He says that capital then was similar to MRO in 1990: Purchasing's role in the buy was mostly transactional. "It's a buy with a big budget that was expanding so rapidly," he says, of capital, a purchase that for Tropicana is about 10 times larger than MRO. "Purchasing had no strategic plan for capital. Buyers simply rubber stamped the POs."
So, Kemp hired a staff of buyers with experience at capital purchasing. On his team for capital are three senior buyers: Jay Costa, Allen Smith, Mohan Singh and a contract coordinator, Gail St. Hilaire. With purchasing dedicating a lot of time to the capital buy, the company soon started to see results. "Like MRO, capital over the years never showed cost savings," says Kemp. In the first year, purchasing helped realize $3 million in cost savings. In the second year, savings amounted to $7.4 million.
Of 1999, Kemp says, "We had a good year. In MRO, we saved $1.1 million."
Strategic suppliers
For MRO, Kemp opted to outsource the buying process to a few, select distributors or strategic suppliers rather than to a large, national integrator. He believes that by using a big integrator, Tropicana would realize a decrease in its service levels and lose control of its supplier base, management of its data, and tracking of its cost centers. "We want to know how much it costs to operate our equipment," he says. (Outsourcing costs include a service fee and freight charges.)
To qualify as strategic, suppliers must meet stringent criteria. They must be best in class, customer-driven, competent and proactive at introducing new ideas in both process and product. They also must have the best available personnel on staff and leading-edge computer systems in place. (For the strategic suppliers, Tropicana holds each year a Supplier Roundtable where best practices among suppliers and strategic goals are shared.)
Strategic suppliers provide Tropicana with such groups of MRO items as pumps, electrical/electronic equipment; pipes, valves and fittings; safety supplies; and a host of others.
If the strategic supplier is not responsible for stocking an item ordered by a requisitioner, the supplier will send the order directly to a manufacturer. As far as Kemp is concerned, strategic suppliers no longer sell to Tropicana: Suppliers that maintain an on-site presence are "subject matter experts" that work closely with maintenance on interchangeability of MRO parts, new product training and recommendations for longer component life." Still, there's competition left in the equation. Second-tier suppliers and some manufacturers compete among each other for business from the strategic suppliers.
Tropicana has an open-book policy with its strategic suppliers. "We have full audit rights," says Kemp. "They have become a strategic part of what we do. I think we picked them right."
Over time, strategic suppliers have become more familiar with the plants and the people who work in them, says Kemp. "They've become more strategic. For example, every year, we do a summer rebuild, in which we take half the juice operations down. For this effort, Tropicana depends on Motion Industries for power transmission products. Motion pre-buys bearings, chains and sprockets for us. Our volumes can be so large that we impact supply across the U.S. Motion preplans in January and places orders for the parts in March. Suppliers are on notice for bearing volumes. Our on-site representatives have been attending planning meetings and fully integrated into our maintenance team for several years and have developed historical data patterns that allow them to position our requirements well in advance of purchase-order placement."
Ninety-five percent of the company's transaction volume is sourced through strategic suppliers, of which there are 14. Tropicana used to have 1,000 suppliers for MRO. That's 80,000 requisitions a year. Some 8,400 POs are processed annually, down from 40,000. Greater than 99% of the POs issued are done so through EDI. Time it takes to process an order has gone from 30 days to less than one day. (Purchasing still does the occasional spot buy.)
Kemp recalls a time recently when a couple of his MRO buyers were out of the office, one was on vacation, another was on medical leave. "There wasn't anyone here, but it didn't matter. Our 700 internal customers can have full confidence that their requirements will be processed. Meanwhile, purchasing can be involved in more strategic activities such as negotiating with suppliers." For instance, purchasing is involved in tri-lateral negotiations with some strategic suppliers and their OEM suppliers.
Maintenance on MRP
The company's maintenance operation runs on MRP (materials resource planning) software. So, with over 50% of maintenance requirements being on demand and not inventoried, "planning is huge," says Kemp. (Tropicana owns its inventory.)
Here's how the system works: The system (SAP's cmms), which drives purchasing, contains part leadtimes provided by suppliers. Maintenance planners create work orders, from which the system orders parts when needed: It releases a requisition for the parts at the beginning of the supplier's leadtime. "To do planned maintenance, the bill of materials and leadtimes must be accurate," says Kemp.
Data integrity is the foundation of the system. Tropicana maintains a centralized equipment listing and Part Master file for its plants in Florida, California and New Jersey. Purchasing designates the supplier and pricing for parts listed on the bill of materials in a centralized Vendor Master.
A work order is implemented in one of three ways: automated, planned and emergency. "Automated work orders are for predictive maintenance on equipment," says Kemp. "The mechanic does not need to go to a terminal. The requirement generated from the bill of material is sent right to the purchasing system, which transmits the requirement to the supplier." About 256,000 work orders were processed last year.
"Planned maintenance is different in that we may need a particular part for a piece of equipment which is not on a regular maintenance cycle. And, as for emergencies, today there are very few. In the past, we often received up to 20 emergency shipments a week for bearings alone. We actually had a full-time buyer just to process emergency orders." Tropicana uses a purchasing card for about 5% of its transactions. All p-card purchases are for miscellaneous supplies. Replacement parts are all purchased through the cmms/Purchasing System only.
Tracking performance
Service is a big part of predictive and planned maintenance. To keep tabs on the system, Kemp and his team of MRO buyers track on-time supplier performance, which is part of purchasing's vision statement for both MRO and capital. Currently, supplier performance and pricing accuracy is 99+%. "It takes a lot of planning to get the leadtimes right in the system," says Kemp. The system processes between 400 and 500 transactions a day.
Strategic suppliers monitor their own performance, using criteria provided by Tropicana. For on-time performance, the suppliers track the arrival of the part at the plant, using the delivery date on the PO. "We allow them to be early," says Kemp. "However, we may tighten this up."
Equally as important is pricing accuracy. "We are ready to begin ERS (electronic receipt settlement) and EFT (electronic funds transfer), using software provided by Oracle," says Kemp, who expects 93% of these transactions to be automated. "There will be no human intervention. In order to get to this point, we need extremely accurate pricing."
Currently, strategic suppliers send their prices (Motion alone provides the company with 34,000 items) to Tropicana via an Excel spreadsheet. "They put the prices in their own programs, comparing them side by side," says Kemp. "Using exception reporting, we had just 34 exceptions the last time we checked. Pricing accuracy is vital when we go to ERS. Our agreement with our strategic suppliers is that we pay on our pricing which arrives via the EDI feed." Software Tropicana uses is DEC EDI for Digital Current Purchasing.
While pleased with the success he's achieved to date with the company's EDI system, Kemp says he's looked at much of the e-procurement software currently available. "I want to stay in front of the wave. I want my group to be the best of the best." In speaking with representatives of the numerous e-commerce organizations, he has asked how their systems could enhance Tropicana's system. "They tell us that at this time we are ahead of the curve, however, in 2001 there will be back-office enhancements that may help us collect information into our equipment history records.
Purchasing via Web sites is very efficient for businesses without the infrastructure to handle an automated purchasing process. My concern with allowing our labor force to utilize Internet sites is that at Tropicana we focus on labor efficiencies and maximizing wrench time. While it is nice to go to Web sites and point and click, is it cost-effective to have several hundred employees placing orders online? Or is it more cost-effective to have a small group of professionals with a very automated low-cost process handle those requirements and keep our craftspeople focused on their skills? Our purchasing philosophy is to buy lowest life-cycle cost, which includes the cost of procurement. Also, Kemp questions the effect that a reverse auction would have on Tropicana's efforts at standardization in MRO, however, he is open to the concept in commodities and areas where standardization is not affected.
The company does, however, use the Internet for office supplies (it has an agreement with Boise Cascade) and on a limited basis with GE Supply. "Mostly users are going online to look for information. They're pulling down schematics."
Cross-functional teams
The MRO buyers represent purchasing on 18 cross-functional teams. In 1998, Tropicana introduced Maintenance Optimization, the next generation of its Maintenance 2000 initiative. (Maintenance 2000 required greater than 99% on-time delivery for MRO parts.) For this endeavor, Kemp is on the steering committee, led by Don Antenore, vice president of manufacturing.
At the same time, purchasing also heads up the materials and services division of the Maintenance Optimization team. Meetings of this team, which include representatives of operations, engineering and finance, are held weekly. As its original goal, the team figured on identifying projects that would help save the company $1.1 million. To date, it's identified projects that would result in $4.2 million in savings. It's booked projects that will save $2.4 million.
One project, for example, involves converting OEM parts to generic commercially available parts. Another helps to increase life of bearings from one year to two years, with a guarantee from the manufacturer that the bearing will last that long.
"We focus on life-cycle costs," says Kemp. "Many purchasing groups focus on purchase cost only, which can incent the buyer to make short-term decisions on price and neglect life-cycle costs, which yield long-term benefits."
Integrating capital with MRO
Now, Kemp and his buying teams are working to integrate capital purchasing with MRO purchasing.
"The time of greatest negotiation leverage for MRO is when we purchase a large piece of capital equipment, so the capital group goes after it," he says. "This will substantially hold down costs." For example, he says that buyers now have more leverage to negotiate for lower cost of repair parts, extended warranties and maintenance cost caps.
Still the MRO buyers will continue to work on standardization efforts via the cross-functional teams, which include representatives of the company's strategic suppliers: Motion Industries sits on the company's maintenance optimization team.
For instance, the team is working with an OEM that suggested a more efficient valve for use at the Bradenton plant, which helped reduce costs by about $7,000. Another supplier, Unisource, suggested use of a different cleaning product that produced fewer chemical reactions. Use of this product helps save about $10,000. The list goes on: working with Motion on replacement bearing life, as well as standardization of 12,000 motors throughout the plant and standardization of fuses.
For the capital purchase, "it's the same philosophy as for MRO, but on a different scale," says Kemp. On March 1, he and his team entered into a strategic alliance with an electrical contractor, which purchasing will lead. A subcontracting team that includes Kemp and his team of capital buyers is led by the vice president of operations.
Consolidating the capital buy with strategic contractors has resulted in cost savings of around 18% to date. Kemp expects this to be just the beginning. "We're looking at doing some joint purchasing that may include sharing our strategic agreements with the on-site contractors, this will leverage our total spend. For example Prime Equipment, an on-site rental company that is supporting not only Tropicana but its contractors as well. Other efficiencies identified by strategic contractors are closer proximity of break rooms to job sites, which have provided double-digit cost savings, and sharing equipment between contractors, such as shared crane rental.
To provide the highest quality strategic sourcing...
to achieve the lowest procurement/life cycle cost...
through "World Class" processes...
while delivering premium customer service...
Annual spend: Approximately $20 million.
Professional and clerical staff: 5 FTE (full-time equivalents).
Strategic suppliers: 14. Ninety percent of transaction volume is source through strategic suppliers.
Number of requisition lines processed: 80,000.
Number of POs issued: 8,400.
B2B process utilization (via EDI): more than 99%.
At Tropicana's 2000 Strategic Supplier Round Table, Paul Kemp, purchasing manager, MRO/capital, presented the company's Millennium Award to Motion Industries, its first strategic supplier. Motion received the honor for being "willing to step out into new frontiers and explore new business practices." Over the years, the distributor has helped Tropicana to reduce purchasing costs by more than $6 million.
Stepping out into new frontiers is something Tropicana is doing as well. The company recently took its relationship with Motion to another level by entering into an agreement with its Tricom Services company.
A separate company since January 2000, Tricom provides purchasers with services the distributor had been offering its integrated supply customers. Drawing upon resources of Motion-seven major distribution sites, $367 million inventory-Tricom offers integration (supply chain management, full integration), consulting (business process re-engineering, strategic sourcing planning, site assessments/needs analysis, supplier consolidation), storeroom management (physical inventories, storeroom restructuring), and data management (electronic catalog creation) services.
Fifty-six sites nationwide use Tricom's integrated services, 20 of which are managed out of the company's Birmingham, Ala., office.
Typically, it takes about six months for a company to implement the service, which is then turned over to an on-site project manager who assumes responsibility for overseeing the operation. Tricom assists its customers with developing a group of preferred suppliers. "Working with customers to select suppliers is what makes a program successful," says Jim McCullar, president, Tricom.
With the service, a buying operation that had been transaction-based (issuing POs, expediting late orders, yearly blanket orders) eventually becomes more involved in supplier management activities (long-term agreements, reduced supplier base, cycle-time reduction).
Upon an assessment of current operations, a customer has the option of how he or she wants to manage the MRO purchase: commodity channel management, supply chain management, total integration and business process re-engineering.
With supply chain management option, Tricom manages the information systems, supply chain and payables process. (It uses proprietary software on an AS/400 platform.) Add the stores operation to the mix and Tricom provides total integration.
Needs analysis, MRO process re-engineering, integration of the supply base, and inventory rationalization make up the business process re-engineering option.
Mechanic creates a notification.
Maintenance planner creates a work order.
Work order specifies required parts basis BOM.
System transmits automatically (via EDI) requirement to designated supplier.
Supplier delivers against PO.
Receiving department receives physical goods.
Storeroom kits materials and delivers to job sites.
Accounts payable remits invoice.
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