Every three months, corporate commodity managers and purchasing directors at Schneider Electric North America (SENA) get together for an intense brainstorming session: They thoroughly re-examine their commodity strategies and look for competitive advantages. "You've never experienced anything like it," says Vic Venettozzi, vice president, purchasing & real estate, SENA. "We've got the best buyers in the business. Out of these sessions come the purchasing strategies that have our competitors scratching their heads."

The commodity managers have responsibility for developing a supply base by design for their respective commodities. To manage their supply bases, commodity managers have at their disposal an arsenal of purchasing tools and processes such as supplier development & analytics, material value analysis and engineering, incoming supply chain management, and manufacturing realignment (outsourcing), among others.

Using these tools, the SENA purchasing organization rallies around one very clear objective: Work aggressively with key suppliers to consistently produce an industry-high level of productivity-generating opportunities. "We ask suppliers to contribute a fixed minimum percentage of their annual sales to SENA in valid productivity generation opportunities," says Venettozzi. "Although the supplier is not responsible for executing them, they must make the effort to help uncover the opportunities. Then, once we decide to pursue a given project, we ask that the supplier support us in the realization effort. It's tremendously successful. But it's really no more complicated than that."

Venettozzi defines material productivity as cost savings that cannot be eroded by inflationary trends. Savings resulting from newly negotiated agreements, for example, with suppliers that sell SENA the same material at a lower price is identified as deflation.

Headquartered in Paris, France, Schneider Electric is a global electrical equipment manufacturer with 2001 sales of approximately $8.7 billion. The company's North American division, headquartered in Palatine, Ill., had sales of $2.7 billion in 2001. Schneider brands in the U.S., Canada and Mexico include Square D, Telemecanique, Federal Pacific, Federal Pioneer, Modicon and Merlin Gerin. Schneider Electric's global annual spend is $3.7 billion. SENAS annual spend is $1.1 billion.

In his post, Venettozzi is responsible for purchasing, real estate, transportation and incoming supply chain management for the U.S., Canada and Mexico. He also serves as representative to the Schneider Electric worldwide purchasing council, which consists of his counterparts representing the company's European and Asian divisions (PUR: June 6, '02; p. 17).

With previous experience in operations, Venettozzi began his career in purchasing at the Micro-Devices Division of Emerson Electric in 1985. He then moved to Hitachi America before coming to Square D in January 1991 as purchasing manager—new business development (Schneider purchased Square D in the early 90's). He was named vice president, purchasing & real estate for SENA in January 2001, and is currently based in Nashville, Tenn.

Venettozzi reports to Joellyn Willis, senior vice president of operations, SENA (Willis reports to the CEO). Formerly vice president of purchasing and real estate, Willis was responsible for creating SENAS purchasing organizational structure and developing an initial purchasing strategy six years ago. Her five-year plan was completed two years early, then updated by her successor, Wes Hawkins. Today, Hawkins is a SENA vice president of operations.

Key to the purchasing operation's success is the fact that "we do not have to spend time winning over senior management," says Venettozzi. "Joellyn gained executive support early on, and this has been a cornerstone of our success in building our organization and strategies ever since."

Each of SENA's 30+ manufacturing locations has a core purchasing group as well as an Incoming Supply Chain Management (ISCM) team, led by an ISCM supervisor reporting to the location's purchasing manager. If a factory contains a design center (of which there are five: Cedar Rapids, Iowa; Lexington Ky.; Raleigh N.C.; Smyrna Tenn.; and Monterrey, Mexico) it also has a specialized purchasing group dedicated to early supplier involvement and new product development. These new product-purchasing groups are supported by a staff-level purchasing manager who ensures consistency in processes across the organization.

"So, no matter where you go, depending on whether or not the factory is a design center, you will find the same organizational template and the same roles and responsibilities," says Venettozzi. Purchasing managers within the locations are responsible for incoming supply velocity. Buyers function as business managers for one or two of the top 90 suppliers. These individuals also have the lion's share of the responsibility for generating material productivity.

Other positions in the organization include professionals who buy such services as corporate travel, real estate, transportation and information systems. The purchasing organization also acts as consultant for other buys within the company (examples include fleet leasing and SENA's Nascar program).

"We get it done by making certain there are standard processes, practices and business rules. We insist our folks do not spend time reinventing the wheel...and if they find and fix a broken process, they fix it for everyone by securing the appropriate input," says Venettozzi.

Take a make-or-buy (outsourcing) decision, for example. The purchasing director responsible for the plant involves both the purchasing manager and the location buyers in the decision-making process. He also enlists the commodity manager who has built the supply base by design for the commodity involved. The purchasing manager guides the outsourcing process while the commodity manager knits the agreement together. "That's how the organization works," says Venettozzi. "Work flows naturally up and down the organization like this all the time...everyday."

And how does the purchasing organization tie the needs of, say, early supplier involvement and new product development back to what the commodity managers are doing in their supply bases? At the beginning of the year, the staff purchasing manager of supplier development analysis meets with the company's Advanced Technology and New Product Development organization to understand their needs. He then ensures that the commodity managers consider these needs in their supply base by design templates.

Say, there are new products on the drawing board, and another plant is planning to outsource its molding operation. Yet another plant intends to double its volume. The commodity manager understands all these needs. He then works with the organization to make certain he can meet each one of these requests within his current supply base by design, or if it needs to be expanded or modified. "What we may end up with is a supply base by design with a 'blank' in one area of the template or another due to these discoveries," says Venettozzi. "Using our Total Supplier Quality Management (TSQM) tools, the commodity manager can perform a market survey, if needed, and when completed they apply our supplier selection tools to qualify the supplier."

To create a competitive advantage (and generate productivity), commodity managers all use the same tools to build their supply base by design. They include:

• The supplier development & analytics toolbox. The toolbox contains everything SENA purchasing needs to build its commodity strategies. Included are analysis tools to help identify sub-commodity strategies, plants coverage capabilities (based on analysis of the market), supplier annual performance planning (APP), business concentration level (% of the buy versus supplier sales), business consolidation level (% of the buy versus total commodity spend), overall competitiveness, and supplier status (primary, transitional, unique).
  The supplier annual performance planning is divided into two sections: tactical (which measures such metrics as delivery and quality) and strategic. On the strategic side, the SENA purchasing organization weighs heavily supplier involvement in new product development, global purchasing and capability to generate productivity.
  Each of the top 90 suppliers is assigned a mentor/business manager with responsibility for the supplier annual performance planning. The organization determines a supplier's status based on a matrix used by commodity managers to help set purchasing strategy for their respective commodities. As such, the supplier base is segmented into four quadrants based on the buy's volume and riskiness of capability to ensure continuous supply: strategic (high dollar, high risk), competitive (high dollar, low risk), critical (low dollar, high risk) and non-critical (low dollar, low risk).
  Currently, SENA purchasing lists approximately a dozen strategic quadrant suppliers in its supply base roster. One strategic supplier is Aurora Technologies, Inc. (ATI), Pacific, Mo., which fabricates insulation materials. Many of SENA's products contain at least some rigid insulation which is cut, drilled, punched or stamped into a structural part, insulator or barrier (ATI doesn't sell the raw materials to SENA, it sells the finished components).
  The supplier profile measures not only capability, but also potential. Says Venettozzi, "A supplier can rate comparatively high in capabilities and potential. Add their real-time performance, using our supplier annual performance planning process, and you quickly find which sources are realizing their full potential." A dashboard that considers profile scores, annual performance planning scores and other key supply base analytics, allows the purchasing organization to comparatively look at the total performance of multiple suppliers at a glance. "It doesn't give you 100% of the answers when new business is ready to be sourced, but it gives you a solid footing to begin the decision process."
  There are no hard and fast rules for business concentration, but the purchasing organization has ticklers. Say a supplier is providing 85% of one commodity. "A whistle sounds every time we review the supplier's business with SENA ," says Venettozzi. "It does not mean the level of business must change, but our commodity manager must prove that he or she has a valid supply contingency plan (meaning the supply base by design strategy can keep the company reasonably risk free)."
• Incoming supply chain management. As Venettozzi sees it, purchasing's responsibility for the supply of parts and materials ends with the point of consumption.
  Some of SENA's suppliers serve every North American location. In the past, that could be a nightmare for the supplier because each of the plants did things differently from a flow standpoint (one plant used kanban, while another one did not). Last year, SENA purchasing created kanban standards, which nearly every plant has implemented to date. Therefore, when a supplier hears a term such as "multicard system" they know exactly what it means and how to respond. Venettozzi's team is in the process of adding more tools to communicate demand, initiate flows, and receive materials. "It's all standard. You can go to any Schneider factory in North America and all the kanban racks and the cards, for example, will soon look the same."
  This year, the purchasing organization is perfecting many of its incoming supply chain management strategies. Common practices, such as third-party logistics, kitting, kanban standards, supplier visibility of the company's consumption/demand patterns, building of forecasting tools, completion of an EDI/internet highway, Schneider eMall (eProcurement system) and application of external supplier metrics and tools to intra-company suppliers, are all underway. At SENA, intra-company suppliers receive the same annual performance planning as do external suppliers, and are rated and managed similarly. "This is one of the more powerful things you can do in any company that has internal supply relationships," Venettozzi says.
  ATI, working with SENA supply chain management teams at each of the plants the supplier serves, has developed the capability to provide high volume as well as low volume parts to the production lines, just in time. The supplier also has developed sophisticated kitting processes for SENA's engineered equipment plants. Some electrical products, such as breakers, SENA makes every couple of seconds; other products can take a day or more to assemble. "What is amazing is that their supply responsiveness runs the gamut," says Venettozzi. "They serve all types of factories down to the point that they are doing it JIT no matter what our production flows appear to be in a given facility. That's rare. Some suppliers are exceptionally good at low volume production; others are very reliable at high volume. ATI is very diversified in their capabilities...they can profitably handle all types of flows."
  Manufacturing realignment (outsourcing). Any process in which material is produced, but not consumed immediately by the production line is seldom considered by SENA to be a core competency. The company made many of its decisions to outsource in the mid 1990s using a detailed multi-step process.
  Again, working with ATI, SENA came to a decision to outsource insulation fabrication to the supplier. Not a core competency for the company, the process has to be performed in a certain environment to maintain, among other things, air quality. "When we determined that it was something that did not fit our core competency model, we approached ATI and outlined our strategy," says Venettozzi. "They built an internal team that worked with our advanced manufacturing group and systematically moved insulation fabrication out of our factories and into their plants, one facility at a time. As a result, they consumed a previously in-house technology in 18 months."
  Now the parts arrive at the plant just in time for production. "If we were doing it in-house we would be trucking the raw material into the factory only to turn 15-20% of it into scrap." Now SENA no longer has to worry about scrap and waste disposal.
  At the same time, ATI located a new plant in South Carolina in close proximity to several heavy insulation-consuming SENA plants situated in the Southeast (Raleigh, Seneca, Columbia and Asheville). The ATI St. Louis facility serves SENA plants located mainly in the Ohio valley and Midwest.
• Material value analysis and value engineering. For value analysis, the purchasing organization has developed a process that attacks a specific part. For value engineering, there's a process that attacks a product. Both processes draw in SENA engineering, and the company has a certified value engineer on staff to instruct employees in the process, as well as the supplier base.
  Looking again at SENAS relationship with ATI, the company has at least one person on its staff involved in materials value analysis and value engineering projects for the purchasing organization. At the same time, SENA supports ATI with its lean manufacturing efforts. Some recent material value analysis and value engineering projects involving ATI include:
  1. The company's Monroe, S.C., location was experiencing problems with plastic molded combs. The tool was worn and needed to be replaced at a capital outlay of $50,000. ATI came in, reviewed the application and proposed making the part from standard sheet stock. ATI built models and participated in testing to verify the application. Total savings were $62,000 in unit savings with cost avoidance of $50,000.
  2. Square support tubes are used on products made at the company's Columbia, S.C., Dallas, Texas, and Chicago locations, and were specified from an obsolete plastic material which became difficult to get. As a result, prices were up sharply. ATI worked with SENA engineering to develop a replacement material that was in common use across the industry, at a lower price and in good supply. The supplier provided materials and sample parts for testing, contributed the testing effort and worked with engineering to get the product approved. Total savings of $36,000, plus correction of a major supply chain issue was the result.
  3. ATI worked with SENA engineering to develop a new one-piece barrier used on all products manufactured in Columbia, Chicago, and Dallas. The new barrier consisted of several parts, all of which had been supplied by ATI. Again, the supplier provided the design proposal, sample parts, and assisted in testing to get the parts approved. Total saving $76,000.
• New product anticipation. ATI also is invited to all of SENA purchasing's new product development programs. "That's the status they've reached," says Venettozzi. "We simply don't design insulation anymore without ATI telling us how to do it right from a material choice, design and manufacturability perspective." As other suppliers are invited to new product activities, ATI gets involved in the conceptual stage. As such, ATI is able to make a part that's designed for manufacturability in its plants, while keeping SENAS incoming supply chain in mind.
• Alliance development. An alliance allows SENA not only to do business with a supplier, but also accomplish other strategic objectives. "We approach the supplier about creating a strategic alliance for a set period of time, in exchange for SENA and the supplier accomplishing a specific task over and above the traditional primary supplier relationship."

Other tools used by SENA commodity managers are processes for general and capital purchasing, diversity supplier management and global/international supplier development planning.