Managing costs in a high-price era

Handy & Harman's Global Procurement Council is restructuring to optimize corporate-wide procurement leverage.

By Tom Stundza -- Purchasing, 2/17/2005

The Handy & Harman Global Procurement Council has a game plan for 2005, and it's to retake the cost-control initiative lost to the 2004 price spike in raw materials. That's why supply management professionals gathered recently at corporate headquarters in Rye, N.Y., to reinvigorate cost-reduction strategies that include cooperation commitments from suppliers that go beyond simple price-reduction efforts.

Increasingly, economic realities—such as the 2004 price spike of steel commodities—are forcing companies to make purchasing more cost efficient. "We have to buy better than the competition," says Bob Murphy, who heads the Handy & Harman purchasing council. "We have to work harder to source quality materials, goods and services at the most competitive cost advantage." While that's easy to say, it will take work, he admits. "We have to have all the buyers on the same page, striving to deliver 5% to 6% in cost reductions," says Murphy. "It is essential we secure support of key suppliers in an effort to reduce costs up and down the supply chain."

Handy & Harman's business segments manufacture wire, cable and tubing products fabricated from stainless steel, carbon steel and specialty alloys; electrogalvanized metal products for the appliance and construction markets; precious metal brazing products and precision electroplated materials and stamped parts, and other engineered materials supplied to the construction, energy, water and electronics industries. One of Murphy's goals is to get purchasing managers to improve buying through a better understanding of market economics that impact end products and materials supply.

With annual sales of $500 million, Handy & Harman's purchase spend is an estimated $250 million. Using analyses coordinated by Lisa Timon, procurement analyst, the supply management team has visibility to all levels of spend from an aggregate of all business units down to the detail of each location. Access to such information has allowed Handy & Harman to assess areas of synergy and target areas of opportunity. As a specific 2005 initiative, its OMG Inc. unit will hold a summit meeting with top suppliers "to present a strong message to the supplier community that long-term partnerships need to be redeveloped that go beyond price—and again are win-win relationships," says Murphy, whose corporate duties include being corporate vice president of steel purchasing. This initiative will serve as a pilot.

Handy & Harman's family of companies are big buyers of steel, nonferrous metals, precious metals, chemicals and plastics resins and corrugated packaging materials—many of which have become highly volatile commodities. The individual companies have to manage costs from national contracts for freight services, travel costs, office products and other MRO (maintenance, repair and operations) goods. So, Handy & Harman's Global Procurement Council was created in 1998 to optimize corporate-wide procurement leverage. "What upper management wanted was purchasing to create a sense of community, a focus on buying excellence, within a decentralized business environment," explains Murphy. The firm's 16 companies operate as individual entities and vary widely in size; so, purchasing personnel per unit ranges from one to seven.

That's why the Handy & Harman's Global Purchasing Council has a new challenge: To sell cost-reduction ideas, to sell revised purchasing programs to decentralized manufacturing operations, and then to sell them to the supply base. "It's a team effort across all business units which require continual communications and reinforcement of strategies and goals," says Murphy. "The issue is more than price; cost is the big problem—so, we need to legitimize cost pressures to be able to reduce them."

One goal for the Global Procurement Council's small staff is to keep accurate and timely marketplace information in front of the company's purchasing personnel since, Murphy believes, "knowledge is power in negotiating prices." He also wants to develop and maintain what he calls lots of purchasing talent. "We need people who understand purchasing pressures and the need to drive prices/costs down. These are difficult times. It is essential we have purchasing professionals who grasp the issues and possess the tools to impact the business in a positive way. Quite simply, there is no room for those who don't," Murphy says. "We don't want clerks; we need strategic thinkers who can execute and are not afraid to roll their sleeves up and dig for opportunities. That's a mantra that was made clearer by the recent steel pricing crisis."

At the corporate conference and in follow-up interviews, Murphy emphasizes that the corporate procurement council will be a vehicle to develop awareness and opportunities of synergy for national agreements and for lowering costs and putting a cap on escalation of costs. He says the company's buyers will make more use of such appropriate indices as those available at P URCHASING magazine's Business Intelligence Center.

"We want to allow only for those increases that are pertinent to the costs of operations," explains Murphy. "Otherwise, suppliers will try to raise price on whatever wave is in effect and get away with what they can get away with." That's why Handy & Harman now has an emphasis on developing or tightening contracts and executing long-term agreements "designed to protect the firms from sharp increases, from runaway price increases."

There have been some successes already. One initiative aggregated the transportation spend and negotiated national agreements for less-than-truckload (LTL). This resulted in a reduction of carriers from 93 to seven, delivered more than $2 million in savings in year one and an average $1 million in savings each subsequent year. Further savings have been achieved on agreements covering parcel delivery, air and ground package delivery, industrial gases, office supplies, travel, and miscellaneous MRO (maintenance, repair and operations) goods.

Murphy maintains that "effective purchasing and successful cost management this year will require a recommitment to communications," explaining that it's not just interactions between buyers and suppliers but also between buyers and internal production, sales and marketing, and financial personnel.

That's because the raw materials purchased range from carbon and stainless steel, nickel alloys and a variety of high-performance alloys to silver, gold, copper, zinc, nickel, tin and the platinum group metals, plus various plastic compositions. All have become subject to severe price fluctuations and availability issues. U.S. spot-market steel prices, for example, exploded by 94% in 2004, according to Purchasingdata.com, while nonferrous metals prices jumped by 68% and chemicals and plastics both rose by 29%.

Murphy is hoping that the affected Handy & Harman firms will offer preferred supplier status, long-term relationships and other incentives to companies willing to become involved in cost-reduction programs with its different business units (see box).

Products made by these firms are sold to industrial users in a wide range of applications such as the electric, electronic, automotive original equipment, computer equipment, oil, refrigeration, utility, telecommunications, medical and energy related industries. "Purchasing especially needs to be a filter to the sales organization because a lot of end-product prices didn't move last year even though raw materials did—and did so dramatically," says Murphy.

Since the corporate culture at Handy & Harman requires purchasing and supply chain professionals to engage in continuous improvement efforts, it constantly looks for ways to do things better, "even when existing ways work," says Murphy.

A mantra within the Handy & Harman Global Procurement Council is that cost-control, cost-avoidance and cost-management must be an integral part of supplier selection, commodity management and future needs planning. "The need is to link strategic cost management efforts with other supply management, manufacturing excellence and product development or redesign efforts," asserts Murphy.

Cost issues came from a confluence of other issues—prices and availability of raw materials, regional and global demand and production, for example. So while steel, nonferrous metals and precious metals were the issue in 2004, chemicals and resins are spiraling upward in price and overall costs in 2005. Atop that, supply and demand issues for energy have not yet been resolved. "The upshot is that suppliers can help educate business units and site buyers", he says, "and they can all work together to create good competitive supply agreements."

Among his tasks, Murphy is also vice president of materials and administration at OMG Inc. in Agawam, Mass., a leading manufacturer of fasteners and roofing products for the commercial and residential construction industry which changed its name in January from Olympic Manufacturing Group. He says "the 2004 metals crisis drove home the notion not to abandon existing suppliers, to develop ultimate relationships."

Among the other lessons learned, he says, is that buyers and suppliers actually need to be straight shooters. "We demand lots of integrity in price negotiations, both from us and our suppliers, but we also have to avoid knee-jerk reactions that end supply relationships because prices were too high and give the business to people who've never done business with you before."

This isn't to say that Murphy or other Handy & Harman purchasing managers aren't studying suppliers' performances to find places where costs can be reduced or removed. They are no different than the majority of supply chain executives who still rank supplier rationalization as the key supply chain strategy that they intend to emphasize over the next four years. "We definitely need our buyers to step up their diligence in reviewing supplier performance or in finding new and better suppliers, if necessary," Murphy says, "since the whole supply landscape is becoming slippery globally; so, finding competent suppliers requires a global awareness of who is capable of supplying our needs now and in the future."

And that's why global sourcing is being expanded with purchasing professionals coming on board already in Bangalore, India, and soon in Shanghai, China. Sundara Raman "Subbu" Subramaniam joined the Handy & Harman global procurement team in December with 17 years of supply chain management experience in Asia. A mechanical engineer, he has worked for Bosch, Becton Dickinson and General Electric Transportation Systems in India and China.

He says some procurement opportunities with Indian suppliers exist because English is the business language, and there is available raw materials to make parts from high-quality carbon and stainless steel, copper and aluminum. "Since quality systems there meet world standards, there are some opportunities to consolidate Handy & Harman buys with suppliers there," he believes, although it will take some negotiating to get companies there interested in export activities at globally competitive prices.