Take your measurements

Tracking sourcing efforts and supplier performance can lead to big savings

By Emily Kay -- Purchasing, 6/2/2005

A 65% reduction in industrial equipment expenditures and a 30% savings in travel budgets would be pretty cool at any company. At $37-billion multinational corporation United Technologies Corp. (UTC), it can amount to serious money. How serious? Some $70 million in savings for technology and telecom, and $65 million for facilities outlays.

Under the UT500 enterprise-wide general procurement initiative, UTC purchasers met their original mandate—to trim procurement outlays for indirect purchases by $500 million—one year ahead of schedule, in 2002. Procurement team members then proceeded to remove another $500 million in costs in 2003, and expect to save $300 million more by the end of 2005.

"We are on track to meet that goal," says Scott Singer, global general procurement director with Hartford, Conn.-based UTC. "We're pegged to UTC's core objectives, business plan, and capital markets, and everything flows from that," says Singer.

How did they do it? For starters, the purchasing groups developed company-wide relationships so they could understand different business units' needs. Sponsored by the company's chairman, chief financial officer, and senior supply manager, UTC's decentralized procurement organization works closely with cross-functional teams to ensure their efforts are in sync.

But metrics were critical. "UTC wanted to get even more focused on managing overhead expenses across the company," says Singer. "We pride ourselves on the ability—category by category and team by team—to tailor those metrics for the specific indirect goods or services categories we're working on."

UTC downloads total spend data into two homegrown data warehouses for spend analysis. Staff analyze information including supplier addresses, and commodity, accounts-payable, receipt, and purchase-order profile data for each supplier, commodity, or division.

Senior UTC executives manage general procurement efforts for expenditure categories that include travel; logistics; IT and telecom; engineering services; real estate; labor; and maintenance, repair and operating supplies (MRO). Each functional area may employ different cost-savings approaches but they all target the same corporate goals.

Among the approaches:

• UTC established an internal, web-based marketplace for surplus assets that lets users log in, search for, buy, and sell used industrial equipment. If such items don't sell within a month, they go out to industrial auctions where UTC supplier partners can purchase them. It accounts for a dramatic shift for employees who used to buy new gear, as well as a corporate-wide 65% drop in industrial equipment capital expenditure budgets.
• For chemicals expenditures, a hosted chemical-management information system helps UTC achieve significant inventory reductions and pricing ad-vantages through volume discounts across 110 facilities that use many of the same chemicals. The company can also manage environmental health and safety compliance more effectively and has consolidated purchasing practices.
• A third approach, for contingent labor, helps UTC augment its engineering workforce of some 15,000 engineers without additional spending. Outsourcing certain tasks at a lower labor rate and standardizing the procurement of engineering services lets UTC "buy significantly more with the same amount of money," says Singer.

Measurement is critical to all the approaches and help keeps procurement staff connected to the overall business objectives, Singer notes.

UTC's measurements efforts mirror other activities in industry. Those efforts are part of the trend to align procurement strategy with overall business objectives.

"You can't manage what you can't measure," asserts Anita Manwani, vice president and general manager of global sourcing with Agilent Technologies, a diversified, $7.2 billion technology company in Palo Alto, Calif.

Performance metrics also help determine future directions. "It's difficult to know where you're going if you don't have something to measure against," says Chris Sawchuck, senior director and practice leader for procurement and supply chain with the Hackett Group, a business-process research firm in Atlanta.

Evaluating essential performance data helps purchasing organizations implement procedures and deploy initiatives that benefit their overall companies. Indeed, procurement executives need all the budgetary and resource information they can gather to improve spending strategies, according to a recent report from Boston-based market researcher Aberdeen Group. Attaining such knowledge requires assessing "all aspects of their supply management operations," the report states, "and benchmarking their procurement competencies and infrastructures against industry peers and best-in-class performers."

The growth of global sourcing further bolsters the need to quantify and manage procurement efforts because delivery costs can escalate fast. "You may have direct materials floating on the Pacific Ocean or being air-freighted at great expense if they're shipped late," says Jeff Herrmann, chairman and chief marketing officer with SupplyWorks, a Bedford, Mass.-based software supplier. "All that has to be managed."

With thousands of suppliers in 110 countries providing direct and indirect materials for its diverse businesses, and with offshore sales representing some two-thirds of revenues, Agilent is actively consolidating its global supply base to optimize pricing. The diversity of the company's four primary businesses, suppliers' abilities, and regions require numerous strategies.

"Because of the global nature of our business," says Manwani, "we must be able to leverage our purchasing across the company, provide visibility to what we're spending, with whom, and with which regions."

Agilent uses e-business and e-procurement tools from Oracle and Ariba to analyze and control global expenditures, saving $160 million in 2003 and $100 million in 2004 in indirect procurement costs after deploying a single Oracle system that simplifies the purchasing process. Agilent executives worldwide have access to spend data, which aids in attaining favorable pricing. The workflow functionality in Oracle iProcurement, a self-service requisition component of Agilent's overall Oracle deployment, supports purchasing's request and authorization processes, Manwani notes.

Companies typically rely on a slew of indicators to evaluate the abilities of their purchasing organizations. Too many measurements, however, can hinder firms' abilities to improve performance. The Hackett Group's Sawchuck cites a high-tech company known for its competency-measurement abilities that did little with the results it attained from rating some 25 key performance indicators (KPIs).

"You can't have 25 KPIs," says Sawchuck. "They were measuring everything but nothing ever happened. They were putting reports together and had all these efforts but nothing ever changed."

Senior managers must establish a handful of succinct procurement metrics and balance them across the enterprise to measure such factors as financial, operational, and customer-related functionalities, Sawchuck suggests.

Jason Mattson, senior buyer with Corixa, a $25 million biotechnology firm in Seattle, says critical metrics include contract spend compliance, requisition turnaround time, the number of requisitions the company processes, and on-time delivery rates. Using technology from SciQuest to assess purchasing initiatives, Corixa boosted its targeted spend from 35% to 75% "almost immediately," says Mattson. The software delivers detailed reports and "a vast array" of spend and contract data that helps Mattson control expenditures and negotiate favorable contracts.

Bethesda, Md.-based HMSHost, a food and beverage concessions purveyor to airport- and highway-based franchises, rates the execution of its current procurement activities by their impact on customers. "Wherever we can save a nickel on the front or back end," says Jeff Halper, HMSHost's senior manager of procurement, "it's routed back to help operators manage and improve what customers see in restaurants and retail stores."

Focused on reinvesting savings into customer-facing operations in 71 airports worldwide and 97 North American motorway travel plazas, HMSHost performs quarterly assessments of on-time delivery, delivery accuracy, and year-to-year costs for overall purchases.

Says Halper, "We focus on measuring [the cost of products] to make sure that overall expenses are minimized so we can redirect money back into the front end of the business."

Companies traditionally measure the performance of expenditures for direct supplies, but industry leaders focus efforts on assessing indirect spends as well. "Anything you spend resources of people, time, and money on is tied to overall [enterprise-wide] performance," Sawchuck indicates.

HMSHost uses accounts payable data from its Oracle (formerly PeopleSoft) software to determine expenditures for direct items like food and beverages, as well as administrative and other indirect costs. The majority of HMSHost suppliers include food manufacturers and distributors, office-supply stores, and uniform providers.

The company also loads procurement data from suppliers and its Ketera Technologies e-procurement software into a data cube to analyze outlays from suppliers and validate purchasing-card buys. To facilitate the analysis of purchases, Instill Corp.'s Instill Purchase Insight helps the company standardize product data across its food and beverage supply chain.

External benchmarking efforts also are helpful to validate internal procurement assessments, experts agree. Benchmarking helps companies identify opportunities for improvement, define goals and strategies to support the enhancements, and quantify potential costs and benefits of making such gains, says the Aberdeen report.

Concludes Halper, "you don't know what successful is until you see what others are doing. Twenty percent or 80% may be fabulous, but you don't know until you see what others are having success with."