How suppliers make money for PPG
"Every supply chain has a weak link. Often, this lies in a procedure you have grown accustomed to." --Margaret H. McGrathvice president, purchasing PPG Industries
By Christopher Reilly -- Purchasing, 2/10/2000
PPG Industries, a major manufacturer of paints and coatings and industrial chemicals based in Pittsburgh, Pa., does a large portion of its business supplying the automotive industry. To achieve and keep preferred status with customers in the automotive industry, PPG must reduce costs 5%/year, which has become standard for suppliers to automotive manufacturers.As a participant in the innovative and much-talked-about score (supplier cost-reduction effort) program, instituted in 1989 by Chrysler Corp., (see article in Purchasing's August 14, 1997, issue) PPG learned firsthand the long-term value of providing incentives to suppliers to reduce costs for continuous process improvement.
"We have been a participant in Chrysler's score program as one of their suppliers since the program's outset and have been achieving their goals consistently for years," says Margaret H. McGrath, PPG's vice president of purchasing and distribution. "We need help if we are going to continue to meet their requirements, so we began to think, if we can reach Chrysler's goal as a supplier, our suppliers should be able to do it for us."
This thinking led to PPG's creation of the "$AVE" (supplier added-value effort) program. Instituted in November of 1998, the program was modeled after some of the basic principles of score and received Chrysler's endorsement at its launch.
$AVE is a structured supplier management program that asks suppliers to reduce PPG's total cost of purchases by 5% annually through the submission of innovative ideas. These ideas may involve a wide range of opportunities to streamline supplies and eliminate waste. And like score, the program's true value lies in getting suppliers to think "outside of the box" for continuous improvement, which may lead to cost savings throughout the supply chain.
Used in conjunction with PPG's quality and excellent supplier programs, $AVE has been responsible for the generation and implementation of more than 220 innovative supply improvement ideas from more than 700 supplier submissions in its first year. These innovations led to PPG total cost reduction on the order of $15.7 million.
Cost-reduction submissions come from more than 170 suppliers that participate in the program. And according to McGrath, most idea submissions come from the 100 suppliers that account for the bulk of PPG's regular business.
$AVE principles
While participation in the program is not currently mandated by PPG, suppliers are strongly encouraged to participate if they wish to reach PPG's excellent-supplier status.
"Suppliers are the key to our success," says McGrath. "We want to work with them to create a winning environment. Since more than 60% of our sales is attributed to materials, transportation and services, our supply relationships offer the greatest potential for adding value through innovative and effective cost management throughout the supply chain," she says.
"What we value from our suppliers is not just the fundamentals of supply--quality, delivery, documentation and good commercial value--but also improvements in intangibles, such as increased innovation and responsiveness," says McGrath. "$AVE works toward that."
Some of the $AVE program's basic principles include:
- Fostering closer relationships with suppliers.
- Reducing total material and supply chain costs.
- Improving quality, technological innovation and cycle times.
- Promoting continuous process improvement.
"It's designed to be a win-win program under which suppliers help identify and eliminate waste in the system without reducing their own margins," she says.
In terms of developing win-win situations, McGrath outlines some key benefits provided by the $AVE program:
- Promote new ways of doing business.
- Provide cost-saving efforts resulting in lowest total cost.
- Focus on value-added activities.
- Provide improvements in teamwork and enhanced supplier relationships through better understanding of expectations and needs.
- Provide insight into opportunities in the marketplace.
- Consolidation of the supply base.
- Provide improved product consistency through sharing of best practices.
- Provide a tool to monitor supplier performance.
As with Chrysler's score program, PPG's $AVE initiative aims at 5% cost reduction realized in terms of innovation. "The 5% cost reduction should never involve us having to get into an all-out fight with suppliers over pricing," McGrath says.
"Many of the proposals that we have accepted and implemented have nothing to do with supplier prices," says McGrath. In many cases, they involve reductions in PPG's costs.
"In any supply chain, there is always a weak link. Often, that weak link lies in the interactions with suppliers, or doing something in a way that you and the supplier have grown accustomed to," McGrath says.
"$AVE aims at innovation, allowing suppliers to comment on things that aren't necessarily part of their existing business with us, and point out room for improvement and opportunity throughout the supply chain," she says.
And while PPG's $AVE program was modeled after Chrysler's score program, the two programs differ in a couple of aspects. Chrysler offered to split cost savings, realized through score idea submissions, with the supplier on a 50/50 basis. "$AVE is targeted at generating sustainable win-win situations in the marketplace," says McGrath, but adds that because value-added idea submissions come in many shapes and forms and can result in direct and indirect cost savings, $AVE measures these contributions separately and credits suppliers based on overall implemented savings.
PPG's $AVE process is a way in which suppliers can differentiate themselves from their competitors over the long term and to evaluate and select suppliers for future business.
When PPG evaluates suppliers' performance, the value of $AVE initiatives implemented by suppliers is credited toward their evaluation and should result in more business for the suppliers.
Another difference is that, with the $AVE program, cost avoidance is not measured.
"I chose not to include cost avoidance as something we monitor in the $AVE program, because it is a difficult line to follow," says McGrath. She explains: "If a supplier offers to defer a price increase for two months, that's a nice cost avoidance, but couldn't we have negotiated that anyway?" McGrath says. "By deferring that price increase, where is the extra value that they're providing?"
Step by step
"The $AVE program is automated," says McGrath. "We issue secure Internet identification to those suppliers who participate in the program and have access to the Internet," she says.
The suppliers can use their identification to access one of PPG's Web sites, which is dedicated to the $AVE program. There, suppliers submit their cost-cutting ideas and proposals.
But the program is not restricted to online input. "If a supplier does not have Internet access, we accept proposals via Fax, or through a call to our purchasing agents," she says. "Any way that suppliers choose to get an idea into the hands of our purchasing staff is acceptable."
Once the proposal is entered into PPG's automated system, it is screened by purchasing personnel--typically a purchasing agent--to determine whether it may be dealt with by purchasing. If it is an idea that deals with product design or another corporate function within PPG, that proposal is routed to the proper business function and the right players within that business function or business unit.
Once the idea is in the hands of the proper people, it is determined whether it will be accepted or rejected, or if more information is required. If it is accepted, it may be put directly into practice, or a project may be created to address the idea.
Responses go back to the supplier through the automated system, or by other means, and a supplier report card is generated by PPG. The report card includes the number of proposals the supplier submitted, the number of proposals that were implemented, and how close the supplier is to reaching the 5% annual cost-reduction target.
"We follow up on the status of projects and ideas received through the $AVE program through in-house and external management meetings conducted on an as-needed basis," McGrath says. This is one way in which supplier performance is monitored, in terms of reaching the 5% goal.
"Depending on the type and scope of the $AVE proposals, these meetings may be conducted at the worker level or at some of the more senior levels," she says. "This also depends on the ebb and flow in the number of $AVE proposals received at that particular point in time."
Sometimes the meetings involve cross-functional representation. "I have conducted $AVE meetings with the general managers of our business units, where we discussed proposal status," says McGrath. "Some people in the plants have had meetings directly with safety personnel, engineers and so on. It's a multi-layered system, and the meetings can comprise all business functions--depending upon who needs to get what information," she says.
Value-added proposals
McGrath characterizes most of the improvement proposals received from suppliers as offering direct or indirect cost benefits to PPG. Some proposals may result in the reduced cost of a particular product or involve the elimination of duplicated steps in the supply process. While she says that emphasis is placed on those cost-reduction opportunities that result in direct, measurable, bottom-line savings, "[Improvements in] both areas are valuable to us," she says.
As an example of a direct value-added proposal initiated under the $AVE program, McGrath says that one of PPG's chemical suppliers looked at what they were offering along with the additional services required before the product reached PPG. "They offered to consolidate two activities and provide us with the total package at a reduced cost," McGrath says.
Another example is a supplier that offered to look at possible efficiency improvements that could be realized through product substitution. "Where we were using two separate products for a particular process, the supplier found the opportunity to substitute one product that could do the job of both," McGrath says. "This gave us the opportunity to buy in higher volumes, which significantly reduced costs."
"On our consumer side," McGrath says, "We have a number of warning labels on our paint pails. Through $AVE, the supplier asked why we present the labels in multiple places on the pail," she says. "By their suggestion, we eventually accepted an industry-standard tri-lingual label, located in one place on the pail. This labeling looked tidier in terms of packaging and resulted in cost savings."
Supplier-managed inventory is an example of another cost-savings proposal realized through the $AVE program. "It's a little tough to see the cost benefit up front, but [supplier managed inventory] is still valuable to us in time and resources saved, efficiencies realized, and the fact that we don't have to deal with the inventory," McGrath says.
"Ultimately reducing the total amount of inventory we use and improved efficiencies through better coordination of production forecasts are other indirect benefits," she says.
The following are some other examples of $AVE proposal cost-reduction opportunities:
- Supplier-provided financing, consortium procurement, and discounts and rebates.
- New products with enhanced performance capabilities.
- Material optimization, substitution, and value analysis.
- Equipment, process or yield improvements.
- Reduced product variability or quality certification.
- Improved payment terms, e-commerce capability and transaction paperwork elimination.
- Logistics optimization, bar coding and packaging improvements.
- Material consolidation, or supplier owned/managed inventory.
Common areas for improvement
In terms of monitoring supplier performance, McGrath says that what usually differentiates one supplier from another is the communication and true understanding of PPG's requirements. "Also of high importance is supplier responsiveness to things we may uniquely require," she says. "Some of our business units have increasing demand for consistency of the product delivered and detection of trace contamination," she adds. These are all areas that may be identified by the $AVE program.
"Generally, suppliers have a chance to excel in their response to problems," McGrath says. "Even superior suppliers have problems that occur every so often. The very best suppliers are able to jump on a problem very fast--that's where they differentiate themselves, and that's where $AVE can help."
For McGrath, providing new value to end customers is perhaps the area where suppliers can achieve greatest value improvement. "Through $AVE, we encourage suppliers to focus on PPG's as well as our customers' needs," she says. "Ideally, suppliers can provide a product that would be exclusive to us and to our customers."
"That doesn't happen in all cases, but where it is applicable, it has the most value for us," McGrath says.
Rewarding top performers
One of the ways PPG rewards those suppliers who consistently submit cost-reduction and process improvement ideas and have met or exceeded our 5% goal is to recognize them through the company's Excellent supplier program.
"The award involves a memento from PPG, recognition in news releases, and extra consideration and cooperation in discovering new areas for business together," says McGrath.
While many factors are considered in the naming of Excellent suppliers, such as the volume of purchase, McGrath says that at least one of the company's 10 Excellent supplier award winners for 1999 made it specifically because of their participation in $AVE and their performance in exceeding the program's 5% goal.
Have suppliers found it difficult to meet the 5% goal? McGrath says that, as with any program, there is a learning curve associated with the launch of a new program. "Some suppliers have had a faster launch than others, for a multitude of reasons," she says.
However, McGrath adds that one of PPG's business units chose not to put their suppliers into the $AVE program because they thought the 5% cost-reduction goal was too conservative. "Their goal for critical operations was for reduction of more than 20%," she says. "They thought that once they were able to achieve that, they would drop back to the 5% goal."
On the horizon
While in the first year of implementing the $AVE program, PPG has not fully introduced the program to its entire supply base. "It has been a question of how many suppliers we can realistically and effectively manage," she says.
Automating the system was a step in the right direction. The company launched it's automated online $AVE capability only about six months ago, according to McGrath. "Since then, there has been a substantial increase in the number of proposals submitted, as well as an acceleration in the learning curve of dealing with the program," she says.
"For 1999, $AVE was a discretionary criterion of our Excellent supplier program," McGrath explains. "But as the program continues to build momentum, we plan to make it a full-fledged requirement of the Excellent supplier Program. This is in the works for 2000," she says.
"In 2000, we will continue to roll the program out to our larger-volume suppliers for larger impact, and then we will move toward implementation for our smaller-volume suppliers," McGrath says.
"Of course, we will keep encouraging all of our suppliers to submit innovative ideas. Having said that, we have not turned down any suppliers that have heard about the program and have volunteered to commit to our 5% goal," she says. "We have had several of these enthusiastic suppliers volunteer for the program in the past year."
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