AGERE SYSTEMS: Data-driven spend success

Using market intelligence to drive procurement savings to the bottom-line

By Mike Verespej -- Purchasing, 3/17/2005

To Agere Systems, spend analysis and controlling spend isn't just developing and updating an extensive database of what it spends and with whom so that it can lower costs. What separates the Allentown, Pa., semiconductor manufacturer from others is that its focus is not just on the prices its pays—but the underlying drivers that impact those prices.

That is, they put intensive scrutiny on how crude oil, prices of precious metals like gold and copper, and the value of the yen in relationship to the dollar are driving up the prices of the raw materials that are needed to make the products that they sell. Combine that with an elaborately detailed cost-commodity index that looks in depth—and virtually continuously—at the market price of each commodity it buys, and it's easy to see why Agere has emerged as a leader in spend analysis.

Spun off from Lucent Technologies a little over three years, the procurement team at the $1.9 billion semiconductor company produced a $110 million contribution in fiscal 2004 to the company's budget and today enjoys a forward and backward look at 100% of its direct material spend.

For spend control and performance-linked evaluations, Agere generates backward looking data (historical spend reports) from data captured at time of payment by the Oracle AP module, using third party software called Business Object Tool, where information available in Oracle may be extracted for data analysis.

Agere's spend analysis capability will be further enhanced when it migrates to Oracle 11i this October this year. When that occurs, its Business Object Tool will be replaced by Oracle products—Discoverer and Daily Business Intelligence. In addition, Agere's B2B system collaboration hub with its direct material suppliers using E2open software enables them to capture spend at time of goods receipts and gives them full visibility to the direct material spend committed year-to-date.

Forward looking spend forecasts two years out with real time views are developed using sales and marketing demand captured from Oracle Systems software that is fed into the internally developed Agere Business Planning Tool (ABPT). ABPT translates customer orders into the type and quantity of wafers and packages data by time period (week, month, quarter, year) on a real-time basis. This demand information—coupled with bill of material and purchase prices—gives Agere a detailed material spend outlook for the next two years. Together with revenue information and other overhead data, ABPT is able to project product margin and provide detailed financial analysis.

The net result: $70 million—$29 million of that from direct materials—was removed from the budget in fiscal 2004. The procurement team also achieved another $40 million—$7 million of that from direct materials—in cost avoidance and soft savings in 2004.

"I knew what I wanted to do," says Tom Linton, who joined Agere as chief procurement officer in September 2002. "It was [akin to] a Greenfield situation and we wanted to do everything right the first time."

Linton first got full support of the executive team, starting with the chief financial officer (CFO). "That was critical because it allowed us to prohibit any spending in the company that didn't have approval of purchasing."

Then, to gain control of spend, Linton took several initiatives.

"I knew that we needed to start by identifying what we spend," says Linton, "but equally important I knew that we needed to develop a commodity cost index so we could know where we stood in terms of our buying price vs. the market price."

"Once we identified where we had issues, then we looked at what we had to do about it," says Linton. "And we could look at our options to get cost out or bring cost down: obtain lower prices, change materials, change the amount of material used, do value-added engineering."

Being in the electronics and semiconductor industries, Linton also knew that it was just as critical "to understand the underlying factors that drive changes in the prices of the raw materials" needed for its products—particularly since Agere was in the process of shifting from a company with 14 fabrication plants to one that today largely sources its silicon wafers.

"We use a lot of products from the Far East, for example, so currency issues impact our price of purchased materials," says Linton. "We try to make sure that a lot of our sourcing is from countries where there is going to be less of a currency aspect."

"There is also upward pressure," Linton points out, "from precious metals and oil prices on the materials, molding compounds and resins we buy."

"We are like a boat floating on the ocean waves," asserts Linton. "We have to try and understand what is beneath the boat and predict when the next wave is going to hit" and impact prices. "It is the difference between riding the surf and getting underneath the surface. You have to break down any component by material composition, by the currency situation, by the petrochemical situation."

There's also another point of competitiveness that Linton believes serves his procurement team well. Rather than work out of corporate headquarters in Allentown, Pa., Linton is based in Singapore, where he heads a team of nearly 60 procurement professionals who operate everywhere from Orlando, Fla., to Taipei, Bangkok and Munich. "Because we are located in Asia, we are closer to the situation [and our suppliers] as situations develop with regard to sourcing."

Although Linton heads Agere's efforts, he is quick to credit his team. He works closely with Chen Seok Ching, global sourcing manager, who's in charge of the cost commodity index (CCI) and Tang Weng Chee, Agere's A&T procurement director. In addition, each of Agere's 12 key commodities—which account for 80% of its $1.4 billion annual spend—have commodity leaders that report directly to Linton. Six of those 12 commodities involve direct spend.

Chen also manages a broad array of spend analysis at Agere, conducts market analysis and ensures that verified savings are integrated into Agere's financial plans. She looks at historical spend by supplier and by customer demand going forward. She does it by supplier for each raw material and uses outside sources that also assess market prices. "The CCI index makes sure you are headed in the right direction and that you know when to take action."

"We do our own analysis and line it up against market information," says Linton, so that the procurement team has a data base of prices—based on marketing intelligence—that can be a starting point for discussions with suppliers when prices needed to be adjusted.

"That way, the discussion is not just some procurement guy banging on the table, but someone who comes to them (the supplier) with market [stats and facts] that they know they need to react to in order to be competitive."

Tang manages Agere's direct materials and capital expenses for Asia, including Agere's assembly and test (A&T) facilities in Singapore and Bangkok. He helps teams analyze purchase volumes, the Delta between the prices Agere is paying and what the industry is paying and determine what needs to be done. If the cost is viewed as too high, part of that equation is to determine why. For example: Is someone using an inefficient process? Is there a price premium because Agere uses different specifications than competitors, etc.

"After the team determines the issue, it puts together an action plan to either identify a new source, change a process or material, or work closely with the supplier and do value engineering to lower the suppliers' cost," says Linton.

In addition, Agere has put in place strategic sourcing cross-functional teams that "focus on cost, quality, price, service, delivery and technological and technical capabilities," says Linton. "Each product or commodity can have 45 to 60 subelements based on materials and components. And we have different teams pulling the information together."

Agere and his team are religiously focused on the task at hand. Spend data is collected and classified by time period, countries, suppliers, commodity teams, subteams, item descriptions, technology, package type, part ID and buyers. It is additionally classified by commodity team and commodity subteam. Data collection is pushed down to the project level to properly align expenses, resources and costs.

The procurement team analyzes the data and determines price competitiveness against the CCI. And it uses that cost model to identify and project future costs. In combination with market intelligence that it gathers from selected outside sources, it can readily assess where market prices are headed so it can head off price increases and seek price cuts from suppliers almost as quickly as there is a change in that direction. "We can formulate appropriate strategies—price negotiation, value engineering, material/scope changes, source changes and design competitive costs into new products—to achieve greater competitiveness," says Linton.

"I examine every commodity each quarter in a deep dive, and monthly, do it by aggregate. Gone are the days when you negotiate annual deals. The savings comes when you focus on all commodities on a monthly basis."

Additionally, at the beginning of the year, says Linton, "we break down all the supplies we will need into commodities, set commodity goals, and develop a plan at the commodity level."

The other part of Agere's spend management strategy: develop solid supplier relationships and develop strategic partnerships with the 14 suppliers that represent 50% of Agere's annual spend.

"I am a big believer in using strategic suppliers," says Linton, "because they realize that they are not going to be thrown out and that you will help them maintain their competitiveness."

"We build partnerships with them, share cost background with them and help them take costs out, but keep their margins up," says Tang. "That makes it win-win for all."

In addition, adds Linton, Agere works with strategic suppliers to do whatever needs to be done to keep spend in line. "You can work with them to reduce the amount of material, change processes and change materials," says Linton. "That's how you get your biggest savings."

Indeed, Agere has developed a list for suppliers so that they understand the impact of using materials not on the preferred list. "We now give suppliers a menu of preferred things," says Linton. "That is, if they use x, it will cost them 10% more. Or, if they use this process or this material versus the preferred process or material, it will cost them 15% more." That also helps suppliers evaluate new materials or processes to see if they will lower total overall costs.

It also uses scorecards to evaluate suppliers, works with them if improvement is needed, and rewards them with Strategic Supplier Awards at an annual awards presentation and strategy session at its Lehigh Valley Central campus.

Companies recognized in 2004 include: Chartered Semiconductor Manufacturing, honored for its commitment to cycle time reduction, e-business initiative, development of new production methods and yield improvement; Synopsis, chosen as best-in-class for general procurement, for its broad portfolio of software solutions focused on flexibility, mix and price, and Oracle, chosen as the most improved supplier for how it achieved cost and resource alignment in a new platform upgrade. Eastern Co. Ltd. was chosen as the company's Outstanding Supplier and the best supplier in the direct/indirect materials category.

Critically, Agere doesn't focus on just cutting costs, but verifying—and bringing—savings down to the bottom line. "We keep foremost in making our decisions how much of that cost [we] can flow to the bottom line," says Chen. "We identify and look at our expenses each quarter based on that, and that is how the company makes its decisions."

To keep that focus, each time procurement produces a savings, says Linton, "she [Chen] goes to the CFO and verifies that it was not just a casual savings, but that we are turning saved dollars into a bottom-line savings."

The net result: spend analysis and controlling spend has become more than just a cost-reduction tool at Agere. It's become a way for them to achieve competitive advantage and increase profitability.