"It's not always easy implementing new strategic sourcing programs, even when you have the support of top management," says Mark D. Steele, vice president and director of purchasing and supply management (PSM) at metalcutting tool producer Kennametal Inc. That's especially true when a buying team is implementing a reverse auction on a complicated high-speed tool steel buy for seven plants in the U.S., the U.K and Israel that could eliminate the current lead supplier—who also happens to be a big corporate customer.

Kennametal is a $1.8 billion (2001 sales) company known for metalworking tools and wear-resistant parts. Metalcutting tools—inserts, end mills, drills, reamers and taps— are made from cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials that are particularly resistant to heat, abrasion, pressure and wear. Tool holders, tool holding systems and rotary cutting tools are made by machining and fabricating steel bars and other metal alloys. Twenty percent of the company's $750 million spend last year went towards direct materials. The biggest raw materials purchases were alloy and high-speed tool steel, steel forgings and castings, and metallurgical raw materials such as tungsten, tantalum, titanium, niobium and cobalt.

"Prices at times have been volatile," says Steele, "so we must exercise great care in the selection, purchase and inventory availability of raw materials." Eventually, the annual cost of tool steels was reduced 10% through a better-organized buy that saved the Latrobe, Pa., firm more than $2 million—and maintained a good relationship with its incumbent key supplier. Still, looking back, this year's buy could have been a disaster. "The whole thing could have gotten very ugly very quickly," Steele says. That's because his purchasing and supply management team was in uncharted territory.

First, high-speed tool steel is a highly engineered and expensive product that is available from a limited number of producers worldwide. Second, Jim Cebula, director of global purchasing and travel at corporate offices in Latrobe, Pa., and procurement specialist Dan Paradis, steel purchasing team leader at a manufacturing plant in Evans, Ga., were using a new analysis of corporate spending to leverage a multi-plant purchase of five grades of high-speed tool steel. Third, the PSM staff was working with FreeMarkets of Pittsburgh to organize a global Web-based reverse auction for this specialty steel product group that in the past had gone mostly to one supplier.

While all this was happening, market prices for steel had fallen at historic lows, but future pricing for steel was far from certain. In fact, the purchasing and supply management group recognized the possibility of rapid-fire steel price increases shortly after the late January auction—if the government closed its Section 201 steel trade investigation in early March by imposing tariffs and quotas on the essential tool steels.

"We would have liked to know we were going to be operating in an open steel marketplace with no tariff implications, but we weren't sure this was going to be the case," says Steele. "We figured that if the 30% tariffs the domestic mills wanted did come about after the bids were accepted, we would have to renegotiate the contracts substantially." And, with all the uncertainty, "it was possible that none of the potential suppliers we had identified would want to touch the bid," adds Paradis. So, special language about price and supply renegotiation was inserted into the request-for-bid documents to deflect any potential supplier worries.

However, the idea of the tool steel reverse auctions did chafe inside the sales organization, especially since the company's existing prime tool steel supplier also bought a lot of Kennametal's range of tools, tooling systems and engineering services. "We were accused of being too aggressive and of not paying attention to a major customer," says Steele.

Despite the internal furor, "the PSM group continued to operate under its corporate edict to achieve significant cost savings and consolidate the supply base," says Steele. Markos Tambakeras, chief executive, recently told shareholders that the company "will continue to make supply arrangements that meet the future planned operating requirements in a cost-effective manner." He also said he expects the PSM team "to continue to implement sourcing programs that cut the company's costs through cost reduction initiatives in long-term purchase contracts." And, there is a corporate goal to reduce the supply base from about 8,000 to less than 2,000.

A prime goal of Kennametal's PSM group has been to buy as one company and not as a group of separate companies. "When it came to revising the tool steel buy, we were looking at reducing total cost," says Paradis, "but we also wanted to end up with the best supplier or suppliers who would be able to satisfy the exacting needs of all the affected manufacturing plants." The purchasing group had some experience with electronic procurement of metals—as it bought forgings and castings through a reverse auction last summer—but not at the level of complexity of the tool steel buy.

High-speed tool steels are very expensive items and can sell for as much as $10/lb. Kennametal typically buys $20 million worth of this product—70% in hot rolled or drawn coil form under ½-inch and 30% in round bars from .048-inch to 4-inch—to support 1,015 different parts. The company buys two grades of molybdenum-based tool steels, two grades of molybdenum-cobalt tool steels and one grade of tungsten cobalt tool steel. Atop that, the tool steels being purchased—mostly grades M2, M7 and M42—were going to be used in manufacturing plants in Evans, Ga. (near Augusta); Clemson, S.C.; Greenfield, Mass.; Lyndonville, Vt.; Rockford, Ill.; Pachuca, Mexico (near Mexico City); Sheffield, England; and Shlomi, Israel.

"Previously, plant-level buying groups bought specialty steel, but we discovered that 85% of the $20 million annual buy was going to plants in North America, all from one supplier," says Cebula. "The other 15% was being used at offshore plants, and was coming from several other suppliers." Interestingly, Kennametal's new "purchasing data warehouse" (a software system designed by Tigris Consulting of New York City) didn't show a wide variance in prices paid for virtually the same materials. "There already was a high degree of compliance with strategic contracts on the steel grades," says Cebula, "and that's often because the customers drive our use of certain grades." He explains that customers, when they are buying a certain tool, often say what they are willing to pay and that determines which tool steel is used.

Eventually, what is described as a "total cost RFQ" for the reverse auction, contained detailed high-speed steel specifications, estimated annual use volumes for all seven plants, such commercial terms as required delivery leadtimes, Kennametal's payment terms, expected supplier quality programs and even alloy surcharge language for any tonnage sourced outside the U.S. "Also, the RFQ stressed that we were offering a one-year contract but wanted two-year pricing detailed, so we can pick up the option if we choose to," says Steele.

Kennametal's commercial organization and steel-buying team probably shouldn't have worried so much. First, President George W. Bush's punitive steel tariff program excluded tool steel and domestic demand was down so deeply—33% last year—that the pool of suppliers submitting bids was larger than expected—a dozen from North America, Europe and Asia instead of three or four U.S. firms. Two high-speed tool suppliers were chosen after the online auction. And, as it turned out, the incumbent supplier was competitive enough to retain a lion's share of the new business. "Actually, we now have an improved relationship with this major incumbent supplier, " Cebula says, "especially in the arena of e-procurement activities."

The high-speed tool steel buy is just one of the company's newly coordinated global purchasing efforts to support the company's various business units and 45 existing manufacturing sites. Already, the firm now pays 18% less than it did before for forgings and castings, and has achieved 16% savings in cobalt-based metallurgical materials.

Back in 1999, global strategic management consulting firm McKinsey & Co. identified $35 million in potential savings with the purchasing group. Cebula says that "almost 5% of the firm's $750 million total annual buy at the time was left on the table, but could be saved by implementing strategic sourcing agreements with key suppliers." In fact, Kennemetal hired Steele in May of 2000 "specifically to pursue a global strategic sourcing program that would generate cost-cutting and cost-avoidance results." So far, Kennametal has achieved $26 million in cost reductions, and is on target to reach its goal of $35 million by the end of this year.

Kennametal had grown to become a market leader in metal-cutting tools in North America and Europe through a series of acquisitions. It now is expanding into a $2.1 billion sales company with the imminent purchase of the Widia Group, a manufacturer of metalworking tools, engineered products and related services in Europe and India. So, even with the purchasing cost cutbacks this year, the takeover will boost global purchasing in excess of $800 million.

A key difference these days for the PSM group's operations is that information on the company's spend is easily accessible and no longer spread out over four different enterprise resource planning (ERP) systems, as it was just two years ago.

Kennametal's PSM group now has the Tigris-based tool that has consolidated the spend data from the different systems into a single Microsoft Excel program and provides what Cebula calls "spending visibility."

Data analysis is fueling Kennametal's strategic sourcing process, Steele says, and is expected to help streamline the company's purchasing. Kennametal PSM uses the Tigris data in the online reverse auctions on tool steels and forgings and castings, and will use it later in additional auctions for other commodities. The buying team utilized such data to renegotiate a telecommunications contract which is saving the company $800,000 this year. Spend analyses also found off-contract buying; by ending that practice, Kennametal is saving another $600,000.

Also, the Tigris system allows buyers to check compliance with existing contracts and to develop supplier management and supplier rating systems. Now, Steele is exploring whether Tigris can provide the tools to reduce spending on packaging, to manage contracts electronically and to implement an e-procurement module.

Celula believes that the company's new, Internet-enabled buying activities were successful, "and the process resulted with learned lessions." For example, the buying team "learned that in the future, we need to be more collaborative and compromising with other stakeholders," Cebula says. "The traditional win/win benchmark really encompasses more than the buyer and supplier, to now include internal and external customers."