Integrated supply chain management has become a way of life at Cessna Aircraft Co., Wichita, Kan.

As recently as 1997, the aircraft manufacturer had little strategic supply chain process. Relationships with suppliers were adversarial (except in engines and avionics) and it showed: Contract prices rose 3% per year, incoming quality was running at 50,000 parts per million (ppm) and on-time delivery was 65%. Buyers spent their time placing POs and expediting orders.

While Cessna was successful at producing and marketing business jets (it had 50% of the market), shareholder and customer expectations were rising. Management realized that if it wanted to maintain the company's leadership position, Cessna would have to shift gears. Charles B. Johnson, president and chief operating officer, recalls, "As our supply chain processes house the majority of our cost, it was necessary to create a more strategically aligned supply chain that yielded the most competitive quality, delivery, flexibility and value." His strategy: Transform a tactical materials department into an enterprise-wide supply chain process.

The man for the job was Michael R. Katzorke, senior vice president, supply chain management, a seasoned purchasing veteran who had worked for such companies as AlliedSignal and Honeywell. Under his leadership, the supply chain management organization at Cessna has created a long range strategic plan and cross functional commodity teams that have worked to rationalize the company's supplier base; developed a tool called Maturity Path Development that aligns supplier strategy with that of Cessna's; revamped the company's sales, inventory and operations plan (SIOP) improving performance to customer expectations and reducing inventory turns; implemented use of Malcolm Baldrige National Quality award criteria and Six Sigma quality tools to drive improvement in supplier performance and introduced a value analysis/value engineering process that encourages supplier involvement in removing cost from the supply chain.

Katzorke and the supply chain management team have involved the company and its suppliers in supporting Cessna's corporate "High Five" objectives of total customer satisfaction, world quality standard for aviation, breakthrough operating performance, top 10 company to work for and superior financial results.

In the past five years, these activities have yielded such outstanding improved business results as:

• 86% improvement in supply chain quality.
• 28% improvement in material availability.
• 113% improvement in production inventory turns.
• Significant cost take-out in the supply chain through a strategic supply chain management process integrated into Cessna's overall business plan.
• 62% reduction in production suppliers from the transition of phase-out to growth suppliers.

"These achievements have translated directly into improved customer satisfaction and improved financial results for the shareholder," says Johnson. Aircraft quality is significantly improved. Defects resulting from supplier quality issues are down, reducing the number of production test reflights. Parts availability—which five years ago was about 65% to schedule—is consistently at 99%, while inventory turns continue to improve.

Cessna concluded 2002 with the highest revenues ($3.2 billion) in its 75-year history. While the aircraft manufacturer is experiencing some challenges related to the economy in 2003, it still introduced two new aircraft (Citation Mustang and Citation CJ3) late last year to ensure future growth.

"Perhaps the biggest achievement of Katzorke and his team," says Johnson, "has been the engagement of the organization in the Cessna supply chain transformation process from a transactional purchasing organization to an integrated full supply chain process."

For these reasons Cessna Aircraft Co. is the 2003 recipient of Purchasing magazine's Medal of Professional Excellence.

Three years into the transformation, Katzorke conducted a survey of Cessna employees. From experience, he knew that implementation of integrated supply chain management typically starts to stall out after two years. The reasons, he says, are simple: Senior executives in supply chain management tend not to act like business leaders (who manage one of the more important functions in a company; purchased materials make up at least 50% of costs at most companies) and they build the process on the strength of individuals and don't engage the entire organization so that the process becomes a way of life.

The survey results affirmed some of Katzorke's concerns. Although he and his team had made huge strides toward transforming the purchasing organization, Cessna employees saw processes implemented by the group as a passing initiative. "Our failure to communicate left some thinking that we were only after short-term savings, while others thought we were not worried enough about the short term," he says. "For breakthrough change, we needed the vision, skills, incentives, resources and action plan fully linked across the entire business."

He and his team stayed the course, performed gap analyses and beefed up their communication efforts within Cessna. While they had already created a storyboard that explained the place of every individual at the company in the supply chain strategy (PUR: Sept. 7, '00; p. 42), they also built a Transformation Center through which they continue to communicate the vision of integrated supply chain management. Top management, commodity team members and others are trained in the room regularly. Katzorke and his team also put together a video and pamphlet that convey the message.

Katzorke's vision for Cessna's supply operation consists of these processes: sustaining production (i.e., planning, order launch and expediting of existing production), strategic sourcing (supplier selection, negotiation, improvement and integration) new product development (developing new aircraft and incorporating suppliers' latest technology and products) and materials management. In 1997 he planned to have a fully integrated supply chain management system in place at Cessna by 2002.

To make the transition from a largely transactional materials management process, he beefed up professionalism of buyers on the staff, encouraging them to pursue educational opportunities (if they had their high school diploma, he recommended that they earn their bachelor's degree; if they had a bachelor's degree he suggested they return to school for post-graduate education) and to earn professional certification such as the CPM awarded by the Institute of Supply Management. For some positions, he recruited purchasing professionals from other companies with world-class supply operations.

Recently, Katzorke re-aligned his staff—borrowing an idea from such electronics companies as Intel and Dell Computer—so that there are "two (supply chain leaders) in a box" (on an organization chart). One supply chain professional manager for, say, avionics is responsible for strategic sourcing of the commodity while the other manages the sustaining production piece of the equation. Both share total responsibility. He's set up the organization this way to help facilitate professional training and succession planning.

Necessary to turn Cessna's vision of a fully integrated supply chain into a reality are cross functional commodity teams. Made up of representatives of supply chain management, manufacturing engineering, quality engineering, product design engineering, reliability engineering, product support and finance, the teams work to drive supplier improvement and integration of suppliers into Cessna's design and manufacturing process. There are six commodity teams for direct materials and one for indirect materials and services. Each team has a strategic plan (STRAP) tied to the CEO's strategic objectives which is updated annually.

Leaders of the commodity teams and the purchasing specialists on the teams report directly to the supply chain management organization. While Katzorke concedes that commodity teams are not a new idea, members of the teams work full time on their assigned commodities and report to managers within their functions. Their job is to represent the team to their function and their function to the team.

Once created, the teams wasted no time. First, they rationalized the supply base (from 3,000 to 132) into growth (suppliers whose share of Cessna's business will grow), provisional (suppliers whose future prospects as Cessna suppliers are cloudy) and phase-out (suppliers whose business with Cessna is about to end).

Second, the teams formed long-term partnerships with the growth suppliers, aligning the supply base contractually in terms of objectives, strategies, process and data. Today, growth suppliers receive 77% of Cessna's business. Third, using the Maturity Path Development document (a data-driven decision making, annual improvement tool), they work with the supply base on continuous improvements in quality, cost, delivery, service, inventory and technology. And, now, the teams are integrating suppliers into Cessna's design, manufacturing and other key processes so that they become an extension of the business.

In 1998, management recognized that Cessna's Production Sales and Inventory Process was severely lacking. How it worked then was relatively simple: Marketing told the factory it could sell x number of airplanes and manufacturing produced them. "We were over-driving the master schedule," says Rod Anderson, director, supply chain planning process, who led the design and development of a new sales and operations planning process that significantly improved scheduled performance and reduced inventory levels.

"We consistently had more inventory than we needed," says Anderson. Because the company carried about 30 days' inventory of each part it purchased, he estimates that Cessna had about $60 million in unneeded inventory at that time. Inventory turns were less than two (1.9). Scheduled performance (delivery) to customers was an abysmal 33%. Certain planes were 13 days late going out the door.

Cessna management began working with consultants to assess the company's MRP (materials resource planning) system and later develop a formal Sales, Inventory and Operations Planning (SIOP) process. By the end of 1999, the new SIOP process which included demand and supply interactions as well as capacity planning was up and running. "One of the smartest things we did was to link our major suppliers to the process," says Anderson. Now, the Cessna senior leadership team attends monthly SIOP meetings about potential changes to the production plan.

Suppliers have clear visibility to production plans. Using software provided by ESIS, San Diego, Calif., suppliers have capability to log onto a secure Cessna Web site to receive production forecasts 18-24 months out, followed by ship trigger releases. The software automates processes for purchasing transactions (i.e., PO, change order) as well as provides suppliers access to blueprints and STARS (Supplier Tracking and Rating System) data. Brian Hayes, senior e-business analyst, says that the system provides suppliers with capability to print bar code shipping labels enabling Cessna to scan the bar codes for paperless receipt. About 95% of Cessna suppliers use the system; the remaining 5% use traditional EDI (electronic data interchange).

Adding the new SIOP process and use of a simulation tool called Web-plan helped the supply chain organization identify some areas of capacity constraint. One was the paint shop. "There was $230 million of revenue in the plan that year that we weren't going to receive because of a constrained resource," says Anderson. "We had to either back off the production plan or figure out a way to get those airplanes painted. It was the first year we started outsourcing. Another area was upholstery. We started sending planes and kits to suppliers to have them put the interior in the plane. We would have not known to do that if we hadn't gone through the formal process and rationalized our internal capacities."

On-time scheduled performance to the customer is now 85+%. On-time manufacturing performance going out the door is consistently 99+%. Inventory turns have increased to 4.5.

With production plans in sync, supply chain management tackled the inventory problem. Although Cessna analyzed its inventory annually, it didn't apply this knowledge to its order policies. Katzorke's approach was simple. First he and his team created a safety leadtime for every C part—manufactured or purchased. (While C parts make up the bulk of inventory, they are low-dollar parts. Conversely, A items are high-dollar items). Then they reduced lot sizes of S&A parts by 50%. A parts represent 80% of Cessna inventory dollars; B parts make up 15% and Cs are 5%. An S is 50% of 80%; it represents 40%. Relatively few part numbers are labeled S, about 2-3%.

Although C items represent 5% of inventory dollars they make up 80% of part numbers. "It's where we can continually run short," says Anderson. "So what Mike did was guarantee that we would never have a shortage of a C part. We didn't have to worry about it. We could focus most of our effort on the S&A parts."

Within six months, shortages were down by 50%. By the end of the year, that number rose to 75%. Today, shortages are 0.6% of the company's total part number base of 50,000.

At the same time, Mike Crabtree director, sustaining procurement, supply chain management, implemented a root cause and corrective action system, a formal process through which buyers categorize each of the shortages (i.e., master schedule issue, bill of materials, supplier issue related to late delivery) and issue a report back to the individual responsible for the area which may have caused the shortage.

"We used to spend an inordinate amount of time in shortage meetings," says Crabtree, a 26-year Cessna veteran. The meetings with 10-12 people would take about 2-3 hours. "I'm proud to say that I haven't been to a shortage meeting in more than two years."

Use of supplier managed inventory for such commodities as hardware also has helped Cessna to eliminate inventory. The hardware supplier, managing 10,000 to 12,000 part numbers, is required to have predetermined amounts of material in a forward stocking location.

Perhaps one of the more significant of Cessna's initiatives for its growth suppliers is led by Brent Edmisten director of strategic sourcing. The Maturity Path Development (MPD) document focuses on one or two key areas for improvement (i.e., quality, reliability, scheduling, cost, leadtime etc.) in a given year.

To ensure commitment to the continuous improvement effort, the document, which is not contractually binding but an annual plan, is signed by each member of Cessna's commodity team as well as members of a similar team made up of representatives of the supplier company. The two teams meet regularly (monthly or quarterly depending on the contents of the MPD). Tools available to the teams to help improve performance include Textron Six Sigma quality tools and lean manufacturing (optimization of production and converging processes via waste elimination, improved quality, and/or reduced cycle time).

In one instance, the avionics commodity team was working to integrate one supplier that wanted to be included in Cessna's 5-, 10- and 15-year strategic planning meetings so that it could better design future products. "A very focused" effort on the part of the supplier improved its quality performance from 25,000 ppm to 10,000 in one year, says Michelle S. Wolford, purchasing specialist, avionics commodity team.

The MPD helped drive improvements for both teams. On several occasions, the supplier came to the Cessna plant in Wichita to walk the production line to determine causes of underlying quality issues. "What we learned is that while we asked them to improve their quality to us we were the ones who were sometimes damaging their components during our installation process," says Wolford. "So, they turned around, asked us to reduce that damage and helped fix our process. They helped take waste out of our business. It's been a very effective process."

Using the MPD, the two teams also worked during the same period to increase reliability for the supplier to 95%.

While Cessna's Supplier Tracking and Rating System (STARS) did a good job at monitoring past performance (delivery, quality, reliability and cost from a 3-, 6-, 9- and 12-month perspective) it provided little indication of a supplier's future performance.

"It was like looking in a rear view mirror," says Don Beverlin, director, supply chain management, systems commodity group. "We needed a way to look forward and we saw the Baldrige criteria as a way to do that." At a supplier symposium in 2000, Katzorke and his team introduced use of Baldrige criteria for assessing performance to the company's growth suppliers.

In simple terms, Baldrige assesses business leadership, strategic planning effectiveness, customer market focus, information analysis, human resources focus, process management and business results. Cessna uses it also to help prioritize the application of such tools as Six Sigma with its suppliers.

After Baldrige training and assessment, suppliers are asked to develop and submit to the supply chain management organization an action plan to improve their scores. "We ask suppliers to choose one or two items which we will re-assess the following year," says Beverlin.

Heads Up Technologies, Carrolton, Texas, provider of electronic components and systems to the aviation, transportation and other industries, and a Cessna growth supplier used Baldrige criteria to improve its quality and reliability performance to the point that the supplier is now more closely involved in the aircraft maker's product development activities.

Rob Harshaw, president & CEO, Heads Up Technologies, traveled with a group of three (of 30) employees to the Cessna plant in Wichita for Baldrige training. While the company's initial assessment was less than what the supplier had expected, it was in line with Harshaw's evaluation of his company's capability.

He identified "a valued workforce" as key to Heads Up's competitiveness and learned through the assessment that he was not managing this important asset as well as he could. Another area for improvement: The supplier had no formal process for communicating information to its employees. "From the assessment, I understood why my business was operating in an entrepreneurial fashion," he says. "Although I brought in professional managers I was stifling them by not having a process in place." Making the change brought results "almost immediately."

Number of emails and telephone messages received by Harshaw decreased significantly. "So, I had more time to think about strategy," he says. "I began to see that the company's design efforts should have been focused on different areas. Making a change translated to the bottom line quicker than I thought. I saw financial results in 2 1/2 years."

Heads Up Technologies started to hold quarterly review meetings with its suppliers and worked to make its supply chain more transparent to Cessna. At the same time, the aircraft manufacturer's commodity team began sharing its plans with the supplier. "We asked him to manufacture products for us that were perhaps not in his specific area of focus but that we thought he had the expertise to manufacture," says Beverlin.

"It was clear that we would have mutual savings quickly if we did that," says Harshaw. "So, we moved some of our support and repair facility resources into our engineering department. As a result, we are more of a product development company now."

The next time the supplier went through an assessment, it tripled its score.

At this year's supplier conference, growth suppliers were given a 4% cost reduction target achievable through value analysis or value engineering (VA/VE) or Six Sigma tools.

VA/VE includes such activities as: evaluating redundant processes, considering alternate materials, eliminating unnecessary features or operations and searching for component commonality.

Once the responsibility of supply chain management, VA/VE was moved at the beginning of 2003 to the purview of engineering, headed by Phil Hedrick, vice president, engineering. First, he made VA/VE activities a professional development goal for himself and his staff. A supply chain professional and a representative of the finance organization report to him, ensuring unison of supply chain management and engineering. Hedrick holds weekly strategy meetings with supply chain management and finance to monitor VA/VE activities of the six direct materials commodity teams. On the supply chain management side, Bryan Blunt, director of supplier development, keeps an eye on supplier VA/VE activities.

Identifying unnecessary costs is relatively easy for the supply chain management team to do, but engineering has a different view, says Hedrick, a 36-year Cessna veteran, of the recent move. "Naturally, we don't want a design change to unfavorably impact the quality or reliability of a part. But we can make changes to processes. Until recently, suppliers didn't have opportunity to suggest VA/VE projects. Engineering simply sent them drawings to build a part and they built it. Now we are opening up communication with suppliers."

The commodity teams work with suppliers to gather ideas submitted through the company's Web site in these three areas: design, manufacturing and business to business activity. Cessna has devoted additional engineers to VA/VE activities, who use a five-year NPV (net present value) analysis to gauge viability of a proposed change. Once approved, engineering creates drawing changes which are then sent to a change control board that determines timing of the proposed change. "Once we capture the savings we get to book it toward VA/VE," says Hedrick. "We don't get to see the savings until after we procure the new parts." Then the supply chain management organization changes the PO or long-term agreement with the supplier and finance verifies the savings. Timing of the process depends on complexity of the proposed change; it usually takes about six months to one year to implement a VA/VE idea.

Lord Corp. is no stranger to VA/VE activities with Cessna. About two years ago, a Cessna team visited a Lord facility to learn more about its manufacturing processes and identify ways they could work with the supplier to help reduce costs. Lord products help mount the engine to the airplane and reduce vibration from the engine back to the plane.

As part of the effort, Lord is sharing information with Cessna that the supplier wouldn't usually show customers, i.e., how it produces parts and costs associated with manufacturing processes. VA/VE activities have mutual benefits. "Finding new applications can help us expand their business while reducing our costs," says Hedrick. "We can look across all models and the supplier can do the same. Lord may be the best supplier of the components that we buy. But there may be another application for their products of which they are not aware. We won't know until we start asking questions of engineering."

Mapping the manufacturing process helps Cessna to see itself the way suppliers see them, says Hedrick. "We may be focussing on a particular part on a certain model, while Lord knows that it manufactures one part that is used on three different planes.

Says Rebecca S. Weih, aerospace sales manager, Lord Corp., Mechanical Products Division, Cary, N.C., "Cessna may be using one part on the Encore and a similar part on the Excel. But if Cessna is willing to make certain changes, we can perhaps start manufacturing the parts for both planes from the same raw material or maybe make both parts the same way. Traditionally, Cessna and its suppliers started work on detailed components from scratch, without reviewing parts used on another plane that could be used on the new product."

That was before Cessna deployed a fully integrated supply chain for the aircraft maker. As recently as 1997, Cessna had no strategic supply chain process. Relationships with suppliers were adversarial. But in the past six years, Cessna has transformed a tactical materials department into an enterprise-wide supply chain process. Cross functional teams have rationalized the company's supply base; they use the Maturity Path tool to align supplier strategy with that of Cessna's and Baldrige criteria and Six Sigma tools to drive improvement in supplier performance. VA/VE programs encourage supplier involvement in removing cost from the supply chain.

"Our objective is full supply chain integration," he says. "When we talk of supply chain we think of it as 'from ore to no more' with everyone in the organization understanding the importance of the process to the business. We are starting to truly get an integration of objectives, strategies and processes and data not just within our four walls, but also into our first and second tier suppliers."

While Cessna has endured its share of economic bumps this year, Katzorke believes that the company will emerge all the stronger "in terms of market share, profitability and overall customer satisfaction."

"Competition is no longer company to company," he says, of the road ahead. "It's supply chain to supply chain. A group of loosely coordinated companies cannot possibly compete with a supply chain that's fully integrated in terms of objectives, strategies, processes and data and linked to both customers and shareholders."