Supply strategies help level the playing field
By Christopher Reilly -- Purchasing, 10/7/1999
Fierce competition for market share among paints and coatings producers requires that purchasing professionals develop supply chains for optimum performance. In this market, if you don't enjoy the resources of being the biggest kid on the block, the strength of your supply chain can mean the difference between success and failure.For many companies, getting the most out of the supply chain involves creating a centralized purchasing structure, reducing the supply base, and developing strong, long-term relationships with key suppliers to leverage price, improve quality, reduce leadtimes, and remove costs from the system. For smaller companies that must compete with much larger players, these steps can be crucial.
Three years ago, Benjamin Moore Paint Co., based in Montvale, N.J., restructured its purchasing function and instituted strategies that have allowed the company to more effectively compete with paints and coatings giants such as Sherwin-Williams Corp. (Sherwin-Williams had 1998 sales in excess of $4.93 billion. Benjamin Moore's 1998 sales were about $700 million.)
To accomplish this, senior management at Benjamin Moore began gathering information on the company's own operations and those of the competition. Benchmarking was conducted and the company took a close, cross-functional look at its supply base. The following points were earmarked for change as Benjamin Moore began restructuring its purchasing strategy:
- Centralize the purchasing function to eliminate clerical waste and improve operations.
- Drastically reduce the supply base.
- Develop long-term joint buying agreements with key suppliers to leverage price.
- Work with suppliers to reduce costs and maximize the efficiency of the supply chain.
- Improve quality by aligning with world-class suppliers committed to quality improvements.
- Develop a gains-sharing system to reward suppliers for their efforts.
Purchasing at Benjamin Moore
When Allen Hagstrand joined the company as director of corporate purchasing in 1996, he found "a decentralized and fragmented purchasing structure," he says. "At the time, there were 13 national Benjamin Moore sites and four in Canada," Hagstrand says. "Each facility had a buyer who would essentially secure materials from their supplier of choice, with the help of two purchasing assistants to handle clerical functions. Suppliers were approved by R&D for technical considerations, but there could have been four or five suppliers of the same commodity material across the country," he says.
At the outset, Hagstrand's primary goal was to replace the old purchasing structure with a centralized department to gain financial leverage with suppliers and maintain a high level of quality. "We had several hundred suppliers," he says. "Some of our locations were buying direct from manufacturers. Other locations were buying the same materials through distributors. There was zero financial leverage," Hagstrand says.
"Financially, it's difficult to compete if you're not big enough to effectively leverage your capacities and dollars with suppliers," Hagstrand says. "Also, from the distribution side of the supply chain, 'Big Box' players such as Home Depot and Sam's Club are really impacting the coatings market. We're trying to think outside of the box," he says.
Under the old structure, Hagstrand says that the company also had a difficult time ensuring consistent quality of materials sourced. "Because Benjamin Moore is a national company, we have to make sure that the product made in Los Angeles has the same degree of quality as the product made in Newark. In this business, we're pushing for consistency," Hagstrand says. "So for Benjamin Moore, materials purchasing had to be standardized."
Purchasing's structure
Benjamin Moore's current purchasing structure consists of buyers at the plant level, who essentially manage incoming materials to support the plants. Site-level buyers report to four purchasing professionals who have specific commodity materials assigned to them. Those "buyer coordinators" act as liaisons between buyers at the individual sites and Hagstrand. Hagstrand reports to the company's vice president of operations.
"It took about a year to set up a central purchasing structure and supplier reduction initiative at the company," Hagstrand says. "We had to do a lot of value analysis and research to determine which suppliers would best support our operations, and which would work with us on a long-term basis."
Hagstrand says that setting up the new purchasing structure and changing the way the company managed its supply chain was not without some initial opposition from employees who had become used to the old setup. "There was some 'push-back' from the local levels," Hagstrand says. "There always is when you change the way you do business. But perhaps what made the transition a little easier was that it was not dictated by senior management. We explained the new process and the benefits to our employees and asked them to try it," he says. "After trying it, if people didn't feel that it would work, we would take some time to focus on their particular aspect of the process and make changes where necessary."
Some pushback also came from site-level buyers because the company proposed to discontinue business with some long-term suppliers. But Hagstrand explains, "Just because you're a long-term supplier doesn't mean that you're a technical or quality leader or innovative producer."
Streamlined supply
Another part of the initiative was to develop and improve relationships with the company's primary suppliers and single-source commodity products where feasible. "The ultimate goal was to set up long-term joint buying in a consortium-type of strategic partnership with suppliers to purchase high-volume, commodity materials," Hagstrand says.
To best meet this end, Hagstrand developed cross-functional teams made up of members of various business functions to maximize efficiency and smooth relations. But unlike most cross-functional teams that typically meet with the sales and marketing representatives of the supplier, and possibly include research and development people, Hagstrand's cross-functional teams also include the purchasing players on the supply side.
"We wanted to bring the suppliers' purchasing departments into the mix to gain their industry knowledge about the raw materials that go into the products we're buying," he says. "Also, there's an opportunity to work on projects that are common, for any other base chemicals that we buy," Hagstrand says.
Some of the benefits of this type of an arrangement, according to Hagstrand, include lower unit costs and improved quality of materials. "When you're single sourcing product and you're one of the supplier's major accounts, you tend to benefit from a lot of attention and a lot of resources from the supplier," Hagstrand says.
Other benefits are in keeping with the trend toward supply-base reduction. Fewer suppliers equate to less paperwork and less waste. As part of the initiative, Hagstrand says he was able to reduce the number of core suppliers from more than 70 to about 20. "As a result, we have saved a lot in terms of clerical reductions," he says.
"In addition, this kind of a relationship gives you a chance to think strategically with your suppliers and develop the synergies between your organizations," Hagstrand says.
For example: Hagstrand is involved in a joint-buying agreement with a supplier and one other manufacturer to buy corrugated packaging from one producer. The company also buys mineral spirits and four other commodity materials using this type of purchasing setup.
Aligning with the supplier and the partner company allowed Benjamin Moore to increase the total purchase volume of product from $5 million to about $15 million, which gained the company considerable purchasing leverage and volume discounts, amounting to overall savings in excess of $3 million.
But the gains of this type of materials sourcing don't come without an investment in time and effort. "My rule is that we do business with a supplier for at least two years before approaching them to develop a long-term agreement," he says. "If you don't establish a track record with the supplier in terms of how their quality, technology, innovation, and business culture tie in with yours, you're really just shooting dice."
Two percent and gains-sharing
Another strategy of Hagstrand's is to work closely with suppliers for continuous process improvement.
"We require that our primary suppliers commit to a 2% minimum annual cost reduction. This is achieved not simply by cutting price, but by working cross-functionally to improve processes and find opportunities to take costs out of the system," he says.
Hagstrand explains that if a primary supplier doesn't reduce costs by at least 2%/yr, the difference is deducted at the end of the year.
"Whether opportunities exist in freight, product enhancement, or other areas, we strive to improve quality and, in some cases, develop better formulations to get the most out of the raw materials we purchase," he says.
The program is not dependent on the market for paints and coatings, either. "Whether the market goes up or down doesn't matter. Suppliers still must help us reduce costs by 2%," he says. "It's a motivating factor that puts more than words in a process improvement program. Also, 2% is not that difficult a goal to achieve. The auto industry asks its suppliers for 5% cost reduction," Hagstrand says.
The next step is a shared-gains program, where if 6% is saved on materials costs, 2% would go toward the goal, and the remaining 4% would be shared between Benjamin Moore and the supplier. The gains-sharing program is scheduled for implementation at Benjamin Moore in the year 2000.
Put it in writing
Hagstrand emphasizes the importance of writing up a charter for any type of consortium or partnering scenario. The document should outline the intricacies of the process, the effective time period involved in the agreement, and the responsibilities of its participants. "Everyone involved must know their responsibilities and be held accountable," he says.
It should also provide a termination clause if the arrangement doesn't work favorably. These types of programs don't work if the supplier isn't bringing significant, viable ideas to the table. "You're not going to share a gain if you're the one coming up with all the ideas," he says.
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