Midmarket company paves the way to strategic sourcing

William Atkinson -- Purchasing, 5/4/2006

For the majority of procurement executives who work in small to medium-sized companies, the concept of strategic procurement may sound like something of value only to large corporations that can devote massive of resources and manpower to the idea, then benefit from the resulting powerful leverage positions. Pennsylvania-based New Enterprise Stone & Lime Co. is admittedly not one of these large conglomerates, but the company continues to explore best practices in strategic procurement like companies many times its size.

"We are a midsize company involved in aggregate mining and road construction," says Richard Skonier, corporate purchasing manager at New Enterprise. After attending a seminar on strategic sourcing a couple of years ago at a large corporation, Skonier realized that, while his company didn't have the financial resources or the vast manpower that was available to large corporations, the concept of strategic sourcing could still be applicable to his company.

"I felt we could find a way to modify the elements of strategic sourcing to make them functional for a company of our size," he reports. In fact, Skonier felt, only two modifications needed to be made. First, the effort wouldn't need to involve as many people as would be needed in a large corporation. Second, the team wouldn't need to go into as much detail on some of the projects to gain similar benefits.

Before he started making improvements, Skonier assessed the existing organization and processes at New Enterprise—a decentralized company with several locations. A lot of purchasing was being done by the local sites.

"Everyone seemed to be going in a different direction," he recalls. "The people doing the buying had their own favorite suppliers and didn't share information or ideas."

Because the "buyers" didn't have professional backgrounds in purchasing, many of them focused their attention simply on finding, then buying, what they needed, without looking at opportunities to reduce the total cost of ownership. "In addition, since we are decentralized and tend to be located in rural areas, most of the people who were doing the buying were used to purchasing from the same places they had always purchased," he adds.

About a year ago, Skonier began looking at some of the items that represented the largest dollar spends for the company, such as conveyor belting and idlers for the conveyors. He then created a team of five people including a representative from purchasing, safety/environment, two people from the locations who actually dealt with the products being purchased, and a supervisor from that segment of the company. The team identified the top two or three existing suppliers in each of the areas to purchase these items. The team then held fact-finding sessions to determine what the company was paying for the items.

"We looked at the total cost of ownership, including environmental/safety and logistics issues," reports Skonier. The team then arranged for these suppliers to come in to make presentations on what they could do for New Enterprise if the company were to give them its total volume.

Skonier found that one benefit of implementing strategic sourcing strategies in a midmarket company was that everyone on the team knew each other from the beginning, something that isn't always the case in large corporations. "As such, our team members could be open with other from the beginning," he says.

One of the biggest concerns among team members was possibly moving volumes away from longtime supplier partners. They were concerned that, if the new supplier was located further away, there could be delivery problems (a classic symptom of localized procurement organizations). To address this concern, Skonier explained to buyers that many companies consider "local" purchasing to be using suppliers on the East Coast.

"Anything that we could get in one day via less-than-truckload was local as far as I was concerned," he says.

With this concern addressed, the team was more willing to work together to identify the best supplier for each commodity. In addition, once they realized the efficiencies and savings that everyone would gain, they were even more supportive of the processes.

And because the input was coming from the buyers in the field via the strategic team, the resulting strategies were very close to home in the eyes of most buyers.

Suppliers also tended to be supportive, because they saw the benefits of getting more of New Enterprise's business and developing closer relationships with the company. Of course, some of the suppliers were concerned with the issues related to local buying, when they were the local suppliers themselves. Skonier and the team helped objectify the concept, though, by challenging these suppliers.

"We would tell them 'Sure, we would like to be able to buy locally. Since you are local, you should be able to give us better total cost of ownership with things like reduced delivery costs, faster deliveries, etc.'" says Skonier. This encouraged suppliers that had previously been favored by default to realize the importance of being more competitive in order to retain the business.

As a result of New Enterprise's strategic sourcing initiative, the company is now enjoying better pricing from its suppliers. It is also enjoying better inventory arrangements. "In a lot of cases, we no longer have to stock certain parts," explains Skonier. "The suppliers are willing to stock the more common items for us at no charge."