When The Dow Chemical Co. (Midland, Mich.) announced its intention to acquire Union Carbide Corp. (Danbury, Conn.) back in August 1999, Dow promised Wall Street a $500 million savings, about a fifth of which would come from combined purchasing of feedstocks, goods and services. The acquisition became official in February of 2001 and, by June of that year, Dow's CEO Michael Parker had upped the synergy objective to $1.1 billion and boosted purchasing's goal to $150 million over a total of eight quarters.

Five quarters after the acquisition, Dow's Vice President of Global Purchasing Gregory N. Nelson (formerly with Union Carbide), says the purchasing group has already surpassed its $150 million savings goal by more than a third and still has a number of large corporate supply contracts and other synergy-related savings in the works.

One factor in this success, according to Nelson, is that the Securities & Exchange Commission's merger approval process took longer than expected, delaying the union for a number of months and giving the two companies plenty of time to plot their strategy. "We had a good initial plan in place and, with the delay in closing, we had plenty of time to improve on it," Nelson says.

For purchasing, part of that planning process meant convening a "clean team" of 14 retired purchasing professionals, seven from Dow and seven from Union Carbide, in Houston, Texas. The team was given the task of reviewing both companies' corporate supply contracts and identifying potential demand aggregation opportunities in five areas: raw materials, transportation, packaging, information systems and operations (MRO). "The day after the merger became official," Nelson says, "we were able to sit down and review the team's results."

The clean team's data wasn't perfect, Nelson notes. "In some cases, suppliers knew we were going to be merging, so they had done some advance positioning of prices and other things," he says. Also, "Because the team members were typically two or three years removed from the marketplace, they had made some assumptions that weren't quite correct because the markets had changed in the time they were gone."

Still, Nelson says the team's work saved his organization two to three months worth of work at a time when speed was of the essence. "The bull's eye may have been a little bit off center, but the targets were definitely identified and this allowed our transition team to move very quickly on some big savings opportunities," Nelson says.

The transition team did this by plotting its opportunities on a grid with size of savings on one axis and implementation difficulty on the other. The team then segmented its opportunities into four categories and attacked them in this order:

• Instances where the two companies buy the same products from the same suppliers. "These were easy savings to achieve," Nelson says. "We went out to the suppliers immediately and said 'Our volume is bigger now. We know which company was getting the better pricing and we want to do better than that.'"
• Instances where the two companies buy the same products from different suppliers. "In some cases," Nelson says, "we found that Dow was buying from two distributors and Union Carbide was buying from four. We wanted to go back to two, but it involved more work. In some cases, we had to make educated guesses about what our volumes would be because our information systems were not perfectly aligned."
• Instances where the two companies buy slightly different things from different suppliers. "Pumps are a good example for this category," Nelson says. "Here both companies had worked with engineering and maintenance to achieve some levels of product standardization, but we needed to harmonize our standards, we needed to get engineering involved and to work more closely with the various business units."
• Instances where the two companies buy entirely different things. "The work here involves a much more complex act of standardization or of creating market baskets of goods that can be delivered by single suppliers," Nelson says. In some cases, like packaging, he notes, some suppliers who had served both companies have proposed their own standardization plans. "The going forward strategy," Nelson says, "is to define more 'Most Effective Technologies' (METs), which are specifications that yield the lowest total cost across everything we buy and allow for greater aggregation of volume across our business units."

Helping the standardization cause, Nelson says, is a big push by Dow's executive management team to lower the company's conversion costs (costs at the plants). "The guys in manufacturing and maintenance are under a great deal of pressure to reduce their costs," Nelson observes, "and we've demonstrated that, by creating METs, engineering, maintenance and purchasing can successfully lower the total cost of ownership."

Also working in favor of Dow's acquisition of Union Carbide was the fact that both companies' purchasing organizations were centralized (although Dow's organization was considerably less hierarchical than Union Carbide's). Dow, Nelson notes, had centralized its purchasing organization regionally in 1993. Then, several years prior to its acquisition of Union Carbide, Dow went to a single worldwide organization. "Dow's business units felt there was an opportunity to aggregate spending globally," Nelson says. "They wanted to develop more leverage and prevent suppliers from charging us different prices in different regions. Now we leverage Asian prices in North America and vice versa. It also gives us a broader view of entire industries because we have people and expertise in different places, which allows us to manage supply risks more effectively."

The centralized structure, according to Nelson, allows Dow to put solid volume commitments behind its corporate deals. "Many large companies pursue 'center-led' sourcing strategies," Nelson says, "but that type of structure can make it difficult to deliver business to contracts. When the purchasing people work for the business units rather than purchasing, they aren't always required to buy from corporate contracts." At Dow, he continues, the purchasing organization is in a position to commit to specific volumes with suppliers. "That does more than simply win us volume discounts. It minimizes suppliers' demand risk exposures, which allows them to produce more effectively and to price their products more aggressively with less padding for risks."

To generate its volume commitment numbers, Nelson says Dow looks at both spend history as well as estimates being generated by its enterprise resource planning system. "We look at what we spent last year and work with the business units and functional organizations to predict their future spending plans. The forecast information comes right out of business units' strategic business plans."

Another plus for the acquisition, according to Nelson, was an early—and very firm—decision to make Dow's work processes the default. "Mergers often fail," he observes, "because there is too much time spent negotiating which practices will prevail. Here, we had a fundamental decision to keep Dow's processes—no arguments—because it was the bigger company and to change over would have been too disruptive."

That said, Nelson says the new purchasing organization did adopt some excellent practices from Union Carbide. One is the practice of buying corporate services (such as HR, marketing communications, travel) through the purchasing organization. Another is an aggressive asset recovery process that Union Carbide developed to catalog and sell off obsolete equipment. A third surviving Union Carbide practice involves a generally tighter alignment between Dow's centralized purchasing group and the various global business units. For example, along with having responsibility for one or two major commodities, Dow's raw materials supply managers are also assigned to participate on the business units' strategic planning teams (typically, they are assigned to the business units that are their biggest end users). This allows them to look for more leverage opportunities and to bring their market expertise into the business planning process as well.

Dow's global purchasing group is structured into three groups.

• Commercial. Eleven commercial directors are responsible for global negotiations on behalf of Dow. The commercial directors are spread from headquarters in Midland, Mich. to Houston, Texas, Europe, and Asia. Reporting to the commercial directors are supply managers that negotiate agreements with suppliers.
• Implementation. This group of regional purchasing managers is responsible for implementing Dow's global agreements at all of the company' sites. In North America, PMs are located in Michigan, Texas, Louisiana, and Alberta. In Europe, PMs are located in The Netherlands and Germany. There is one PM each for the North and South Pacific areas, and two in Latin America, based in Argentina and Brazil.
  The regional PMs have purchasing specialists working for them to implement global deals on site and do local negotiations for things (like labor) that are specific to a site that don't make sense for aggregated buys.
• Transaction. This group includes three regional transaction centers (Midland, Mich., for North America, Sao Paolo, Brazil for South America, and Terneuzen, The Netherlands for Europe). The transaction centers execute all Dow purchase orders, move information into Dow's enterprise resource planning system, receive all invoices from suppliers, verify all invoices against contracts and execute payments. "I think this is a pretty unique system," Nelson says. "Purchasing has responsibility from the time the decision is made to purchase something, to negotiating the contract through paying the supplier. Even at Carbide, we didn't have the payables. We were centralized, but we didn't have the payables group."
  At the end of the merger transition period, the purchasing group will be about 700-750 in size. "Our plan was to be at 800, but we've done a pretty good job of integrating the organization. We found a few more synergies and improvements, so the numbers are actually going to be less," Nelson says.

The group is collectively responsible for purchasing $11 billion worth of direct raw materials (excluding energy plus chemical feedstocks that Dow buys in very large quantities such as naphtha and hydrocarbons, which total another $6-$7 billion), nonenergy utilities like oxygen and nitrogen, MRO supplies for Dow's plants, all capital purchases for new projects, information systems, nontraditional buys such as travel, human resources, legal, marketing and communications, transportation and logistics.

As for documenting the savings it achieves, Dow uses a tracking and validation process that was itself validated by Deloitte & Touche back in 1998. A supply manager wishing to enter a saving into the database must obtain a signoff first from the businesses that are benefiting from the savings and then from a purchasing director. "Through the various checkpoints," Nelson says, "Dow's purchasing organization feels confident in reporting significant bottom-line savings back to its business clients."