Aggressive sourcing slashes $199 million at Xerox

Non-production purchasing reins in corporate spending.

By -- Purchasing, 3/22/2001

Doing its part to help Xerox Corp. implement its turn-around strategy, non-production purchasing slashed $199 million of its annual spend last year. Its goal for 2001: to further reduce costs by another $347 million.

To be sure, this 13% cost-reduction target closely aligns with objectives set for the corporation by Anne M. Mulcahy, president and CEO. In fact, after a disappointing third-quarter earnings report, she announced last fall that Xerox would cut its costs by $1 billion by the end of this year.

Kate Hargather, vice president, non-production purchasing, leads the operation that has pledged to meet the cost-reduction objectives. Hargather is responsible for managing the bulk of Xerox's purchases, its $3.8 billion North American non-production spend, which includes such goods and services as computers (hardware, software and telecom); paper; facilities, maintenance and real estate; health benefits, consultants and training; marketing and communications; contract labor; business travel; and fleet services. Xerox's annual production buy, managed by Ken Syme, vice president, worldwide production purchasing, makes up another $4.5 billion of the company's $9.7 billion annual worldwide purchasing tab. Both VPs report to Robert Greenslade, vice president, global purchasing.

Greenslade, a 23-year Xerox veteran, has served most recently as vice president of production purchasing. He was named to his current post in January 2000. Hargather, whose background is mainly in manufacturing operations, has worked at Xerox for 15 years. She assumed her current position, after serving most recently as plant manager for one of the company's facilities in Webster, N.Y., in July 1999.

In addition to meeting critical cost-reduction targets, Mulcahy has tapped purchasing to lead initiatives that align with some of the company's other key objectives. While this is somewhat more challenging for a buying operation, Xerox non-production purchasing has put programs in place that match such objectives as improving cash generation for the corporation.

One of the programs purchasing has been involved with for some time now in this particular area is extension of payment terms to suppliers. Purchasing began extending pay terms to 45 days in the fourth quarter of 1999 after announcing the company's intentions to suppliers earlier that year.

In another effort that helps to generate cash for Xerox, purchasing is assessing the company's lease-versus-buy strategies for such traditional purchasing areas as office furniture, office buildings and other properties.

Mulcahy holds monthly operations meetings in which she spends time with non-production purchasing to chart business-unit progress against projected cost-savings targets. "She communicated to managers at the last meeting that they 'own' the cost-reduction targets and that they are responsible for implementation with support from global purchasing and company financial executives," says Greenslade.

He cites Barry Romeril, chief financial officer, as being "pro-active and a personal champion of purchasing's activities." Greenslade's boss, Ursula Burns, senior vice president, corporate strategic services, and Allen Dugan, executive vice president, worldwide business services, "also have been outstanding. I'd say we have the support of our corporate officers."

Still, Greenslade believes that purchasing "has a major challenge called culture change. Right now we have people's attention unfortunately because of our current business conditions. The trick for us is to get policy deployed while we have people's attention so that once things get turned around we have processes in place to manage the spend in a much more effective way than we had been managing it historically."

Aggressive sourcing

Non-production purchasing began its efforts to rein in corporate spending about three years ago. Then, top managers participated in benchmarking activities with neighboring IBM, where the buying operation, under the direction of Gene Richter, had consolidated its general purchasing activities. Richter, who has since retired from IBM, is a three-time winner of P URCHASING Magazine's medal of professional excellence, most recently as vice president and chief procurement officer at the big computer company (see www.purchasing.com, Sept. 16, '99). Closely examining the spend at Xerox resulted in management's move to devote more resources toward applying purchasing strategy to non-production buying activities.

"IBM took their general purchasing spend down dramatically from the late 80s," says Greenslade. "They looked at industry cost price curves and developed compliance measures in which there are major consequences if employees don't comply to the non-production purchasing contracts. I would say we've taken a fairly dramatic leap forward in the way purchasing is involved in driving net cash spend reduction. I don't think other companies have made as much progress."

Xerox global purchasing has developed a three-pronged strategy for the non-production spend that focuses on the sourcing, requisitioning and purchase-to-pay processes. At the heart of the sourcing strategy, which includes a focus on such activities as global spend analysis and the selective use of exchanges/auctions, is a five-step aggressive sourcing process.

At first, the move to centralize non-production purchasing was met with stiff resistance-like at many companies-especially for such non-traditional goods and services as marketing and advertising. To overcome this resistance, strategy councils were created, comprising the corporation's top executives, with global purchasing taking a lead role on supplier selection, rate negotiation, procedural usage and compliance management. Purchasing also plays a joint role in determination of specifications and standards.

"We help with the contracting," says Hargather, "taking the councils through the aggressive sourcing process for certain non-traditional goods and services. While we may not be the ultimate decision-maker in some cases, we are certainly at the table. Strategy councils have helped to bridge the gap between no purchasing involvement to active purchasing involvement."

While each of the steps of the aggressive sourcing process appears to be relatively standard fare for many purchasing organizations-establishing a baseline, developing specifications, soliciting and evaluating bids, negotiating contracts, and implementing and monitoring contracts-Hargather has concentrated her operation's resources on the first two (establishing a baseline, developing specs) steps of the sourcing process, both of which have helped reap impressive benefits for Xerox.

Non-production purchasing also is heavily involved in the company's requisitioning activities, a second prong of the three-prong strategy. "Unfortunately, today at Xerox a lot of people still have the power to buy," says Hargather. We are working to corral some of the spending through some directed requisitioning strategies. Among the directed requisitioning strategies non-production purchasing has developed and is now implementing: a site on the company's corporate intranet called X-buy where requisitioners can purchase non-production goods and services.

Purchase-to-pay strategies, the third prong, revolve around internal processes: from issuing a requisition to cutting a check for the supplier. The objective for these strategies is to have them all done electronically.

Concentrating at first on establishing a baseline for non-production purchasing activities, Hargather considers this first step of the aggressive sourcing process "a secret weapon" that a lot of buying operations don't take advantage of to truly leverage their spending. (Some of the tasks involved at this step include gathering data on costs, developing internal cost and performance benchmarks, outlining purchasing processes and analyzing current contracts.)

"It's all about data quality," says Hargather. "We put a lot of investment in the baselining process both in terms of this being a starting point in our process and where we are focusing some IT resources."

Once a baseline is developed for spending activities, Xerox uses Pareto analysis (and, later, upcoming contract renewal dates), to determine the goods and services to which application of the remaining steps of the aggressive sourcing process would provide the most benefit to the company. To date, more than 50% of the Xerox non-production purchase has gone through this process.

For some goods and services, such as commercial printing, which was the first to which non-production purchasing applied the process, simply consolidating the supplier base and writing contracts have helped reduce purchasing costs. The number of commercial printing services Xerox now uses is five. Before, it was 140.

For rental cars, "there are not a lot of big rental car companies that can handle an account the size of Xerox," says Hargather. So, non-production purchasing has to dig further for cost savings. What it did was develop improved specifications for purchasing the service.

"We wanted to know exactly what we were getting for $39.95," says Hargather. "We found out there were a few things included in the rate that we didn't want to pay for. We didn't want to pay for refueling the car, maximum insurance coverage, frequent flyer programs, or a higher-class car. So we re-specified the requirement internal to the company and made some policy changes, which we communicated back to the company. Now, there are consequences for not refueling a car before returning it. Re-specifying is another critical enabler."

Steps three and four of the aggressive sourcing process-soliciting bids and negotiating contracts-have non-production purchasing at Xerox involved in more traditional buying activities, although Hargather is planning on performing some reverse auctions for some goods and services in the coming months. "We've done a few on the production side, and in Europe, but this is a new area for the non-production side."

The final step of Xerox's aggressive sourcing process-implementing and monitoring contract compliance-are activities for which many buying operations typically spend few resources, says Hargather, adding that it isn't the case for Xerox. "Unfortunately, monitoring compliance hasn't helped our popularity, although it has been a very powerful tool for us to drive people to the contracts and to the [contracted] rates that we are trying to achieve."

Using commercial print services as an example, Hargather examined accounting data to determine which individuals within Xerox purchased printing services from suppliers not on the company's preferred supplier list.

(Criteria for supplier selection include the traditional cost, quality, and level of service in addition to commodity-specific requirements. One of the new elements emerging in supplier-selection criteria is the supplier's ability to bring Xerox technology breakthroughs to support the business. These evaluations could include such things as: the supplier's ability to provide commodity-specific technology such as in-transit tracking from transportation suppliers or the ability to status open job requisitions in contract labor.)

Then, purchasing published a print compliance report that was sent to top managers stating compliance of their operation to the process. "We started with 10% to 20% compliance, but once the report started circulating, we got calls from managers who wanted to know how to get off the list," says Hargather. "It took about six months to get to 100%, but we've been there ever since." Travel is another area for which purchasing publishes a monthly report that includes such monitored activities as advanced ticket purchases.

More than price

It takes more than lower negotiated contract rates to meet yearly cost-reduction targets. "Negotiation is purchasing's bread and butter," says Hargather, "then, it becomes usage and policy. We, in purchasing, at Xerox have done a tremendous amount of work to drive usage down. For instance, we've dramatically reduced travel expenditures by getting corporate executive support in saying we're not going to travel, suggesting conference calling and videoconferences as alternatives. In other cases, we've influenced the reduction of people going to events and the cancellation of big meetings."

Imaging a circular flow diagram, Hargather sees the process of meeting cost targets beginning with rate, then moving toward usage, which is driven, for the most part, by the operating units. The next step is to fundamentally change the business model around a certain commodity and re-engineer the business process. "So, you can go back to the supplier and say that you've re-engineered, say, for example, your logistics network, so you're more efficient. You can negotiate a better rate with the supplier, then it starts over again."

Clearly this cycle occurs over a matter of years for most commodities. This is the way that non-production purchasing at Xerox is working to convince people within the company that reducing costs is not about getting the last penny out of a supplier. "You really have to get beyond that," says Hargather. Usage reaches outside of the purchasing organization, however, and needs commitment from the top of the corporation.

"Our biggest success factor has been the involvement of the company's chief financial officer, Barry Romeril," says Hargather. Romeril, who has led the process from its inception three years ago, still meets with global purchasing "religiously" every month.

X-buy

For non-production purchasing's requisitioning strategy (its e-procurement initiative), Hargather has set three key objectives: The first is to enable total cost reduction through rate (i.e., drive the spend through contracted suppliers), usage (policy, compliance monitoring), and business process re-engineering. The second is to provide data to support strategic sourcing. Third is to reduce purchasing's transaction costs.

To meet these objectives, purchasing has deployed a number of different tools. For strategic sourcing, it is using Oracle Exchange (the company has implemented Oracle's ERP system), Global Data Warehouse, and new leverage strategies (i.e., reverse auctions.) "We haven't decided yet which auction tool we are going to use," says Hargather. "We've experimented a bit with Oracle and other auctioning tools."

For its requisitioning strategy, purchasing has a Web-based purchasing portal called X-buy Portal, Oracle's Self-Serve Purchasing software v. 5.0 (SSP5, the software company's catalog suite), and Requisite Technology's eMerge Catalog Content Management. For its purchase-to-pay strategy, the company is implementing Oracle's accounts payable module this year. It also has in place Oracle Purchasing 11 and uses both Web forms and EDI for transmission of POs.

A portal or Web page, the X-buy tool has no functionality in and of itself. For some goods and services, it provides requisitioners with capability "to punch out" through Oracle Exchange to a supplier site. Here, requisitioners have capability to place an order directly with the supplier via the Internet, i.e., Staples. For others, such as consulting services, the site provides detailed information including a preferred-supplier list on non-production purchasing's recommended buying processes. "We are trying to move most of the process inside the firewall using the Requisite cataloging process," says Hargather. Xerox began using X-buy in May 2000.

"When you think of all the things people need to buy, we only have a small percentage of those items on the site right now," says Hargather. "Our big focus this year is to get content to the point where we can turn off all the other ways to buy in the company. We are clearly a year or so away from that, but it's our goal." Although the site is in pilot phase currently, Hargather plans to have 95% of requisitioners using it by the end of this year.

"Again, our goal is to get to the point that this is all enabled in Oracle, so when the requisitioner goes into SSP5 to enter his or her order, it will go straight to the supplier," says Hargather. The entire process, including approval, will be electronic. Not only will this help to reduce transaction costs, it also will help to lower total costs by guiding requisitioners to Xerox preferred suppliers.