Services need strategy too

by John R. MacLean -- Purchasing, 2/16/2006

In the world of manufacturing, where I have my roots, commodity strategies are standard procedure. You identify the commodity, research the market, profile the suppliers, establish metrics, look for trends in the marketplace and identify strategies that will drive value for your business.

Coming to a service company, such as American Airlines, I was first surprised to see the diversity of what we buy. It is not a case of parts, components and widgeectrum from services at the airport (baggage handling, catering, ramp management and cargo administration) to services to run the airline (aviation charts, weather forecasting services, aircraft maintenance services and fuel delivery services). We even buy interesting commodities like coffee futures, beef tenderloin and Godiva chocolates.

Each of these commodities is a value opportunity to the airline and requires focused management by the purchasing department in conjunction with the user department. But as I delved into these areas, I saw that the same issues kept coming up:

• Suppliers knew more about us then we did about them.
• Costs were going up with no strategy to manage that cost.
• We knew little about the marketplace for each commodity.
• We had no process in place to manage the number of suppliers we did business with.

Something had to be done and we stole shamelessly from our counterparts in manufacturing. The challenge in services is to identify the commodities and who the potential suppliers are. This can take much discussion and research.

We have done a lot of training to help our commodity managers develop concise profiles that can be captured on a one-page template. The second challenge is to identify strategies that are useful for services and generate value for our business. We have spent considerable time brainstorming ideas. Our people are very creative and we now have a segment of our training dedicated to sharing ideas across the organization. We have over fifty strategies that may apply to a service commodity for our commodity managers to choose from and we add to the list every year.

Annually, we venture into new territory—creating value-focused strategies. This year we have been successful in taking a service we paid $12 million a year for and transforming that service into generating revenue for our company. We have also transformed suppliers from being in a single-service business to providing multiple related services in a given geographic area.