Partners in cost management

Purchasing at PPG consolidates the MRO buy, selects the right strategy for the situation, and collaborates with suppliers to impact the bottom line.

By Susan Avery -- Purchasing, 11/2/2006

Working closely with MRO suppliers impacts the bottom line in more ways than one.

For sure, consolidating maintenance, repair and operations (MRO) goods and services purchases with a few select suppliers brings savings in the form of price discounts, says Tim Underhill, president of Underhill and Associates, a consulting firm that works with purchasing and distributors on total cost of ownership, strategic sourcing and supply chain management issues in Tulsa, Oklahoma.

But more important in the long term is the establishment of close collaboration between purchasing and MRO suppliers. Together, buyers and suppliers can reduce costs by streamlining processes, increase revenue through enabling less downtime and higher productivity, and improve performance through on-time delivery and customer satisfaction.

That's why buyers in companies such as Cisco Systems, Palm Computing and United Technologies are forging close ties with their direct suppliers, and now the trend has moved to the MRO arena. Indeed, Purchasing's 2006 MRO/Indirect Strategic Sourcing Benchmark Study identifies collaboration with suppliers as one of the four key practices that differentiate the best performers from the rest.

At Pittsburgh-based PPG Industries, purchasing even has a specific program that has buyers and suppliers working together more closely than ever. It's called $AVE (Supplier Added Value Effort). Through the process, purchasing challenges suppliers to implement annual value-added/cost-savings proposals equaling at least 5% of their total annual sales to PPG.

In part through the program, purchasing collaborated with power transmission supplier Applied Industrial Technologies on a project that required tear down of some large valves. Working together they reduced the time it takes for the project per valve by one hour and about $1,000. The plant had 30 valves. Savings is approximately $29,000.

“It's a nonprice and nonproduct change,” says Danny Hemperley, senior manager, strategic sourcing, indirect materials at PPG. “It's looking at the process and what we can do to improve it.”

Close relationships with other suppliers have helped in other ways. One preferred supplier submitted a suggestion to $AVE that reduced costs by $160,000 for one lighting project by negotiating discounted pricing for new fixtures and fluorescent bulbs with a manufacturer.

PPG didn't get MRO suppliers to provide such ideas overnight. Five years ago, the company took a new look at its MRO purchasing activities and decided to take a commodity management approach to the buy at its facilities throughout the U.S. and Canada. In other words, they decided to centralize the MRO buy.

It was the first time they tried such an approach armed with spend data and they've been successful. While PPG doesn't publicly release savings figures resulting from implementing sourcing strategy, Purchasing's estimates of benefits puts the company firmly in the middle category of top-performing purchasing operations identified in the 2006 MRO/Indirect Strategic Sourcing Benchmark Study conducted earlier this year, with double-digit savings. The Purchasing study asked participants to cite measured value delivered to the bottom line through strategic MRO sourcing—be it through improvements in productivity, performance, competitiveness or cost.

While slightly more than half of the more than 300 purchasing professionals polled place themselves in the category that delivered less than $1 million worth of total value, 44% claim between $1 million and $100 million worth of value. Another 5% can measure more than $100 million in value.

The study also finds that these top-performing operations have centralized MRO sourcing activities and are using best practices to achieve results. Buyers at these organizations have reduced the supply base, standardized business processes and use of MRO items and work closely with suppliers. Since embarking on their current MRO sourcing strategy five years ago, Hemperley and his team have identified these best practices and are applying them where they make sense throughout PPG.

In addition to MRO, Hemperley who was named to Purchasing's All-Star MRO Buy team for 2006, also purchases manufacturing services, automotive OEM glass attachments and outsourced purchasing services for auto, industrial and aerospace customers. A mechanical engineer by trade, he's worked for PPG for 35 years. He reports to Jim Polak, director of general purchasing.

Like other MRO purchasers, Hemperley and his team face many challenges. Among them: the sheer number of MRO items needed to keep facilities running, volume of transactions and internal customers' emotional ties to long time incumbent suppliers.

“Early on, we had to make decisions on how to group items logically, considering ways parts are sold and how we intend to use them,” says Hemperley, who uses data enhancement tools to standardize item descriptions based loosely on the UNSPSC (United Nations Standard Products and Services Code). MRO categories for PPG consist of: electrical; bearings and power transmission; rubber and gaskets; industrial supplies; fasteners and pipes; and valves and fittings.

With a spend analysis tool from Ariba, purchasing collects data across locations, categorizes it and uses it in commodity or sourcing initiative events—that is, bid process, reverse auction or negotiations with suppliers.

“We also use optimization tools to understand supplier offerings and make the best contract award decision considering all variables,” he says “Imagine trying to understand a bid that includes 40 suppliers across 2,000 items and 30 different locations. We use optimization to look at different combinations of supplier bids and can make a decision in hours.”

Also, purchasing has automated many processes. For instance, the company uses pay-on-receipt to streamline payment. “We are interested in not only taking cost out of our process, but our supplier's cost structure as well,” says Hemperley.

Purchasing put together cross-functional commodity teams that include internal customers—the people who operate and maintain the company's facilities—in the analysis and sourcing process. “It gives clients insight into the supply chain and what it takes to make good decisions,” he says. “As a result, we receive support from the plants and businesses benefiting from our efforts.”

PPG's decision to centralize MRO buying helps reduce the supply base for some commodities and thus makes it easier to develop close partnerships. For instance, before implementing the strategy, there were more than 300 electrical suppliers. Purchasing quickly lowered this figure to six suppliers who provided 80% of the company's requirements. Continuing to consolidate, they reduced the figure again to three suppliers that now fill 90% of requirements.

In the supplier selection process, purchasing looks for a supplier capable of servicing locations throughout North America. If there isn't a national supplier, then the team selects regional suppliers. “We like the supplier to be a major player, a company with infrastructure, both brick and mortar and inventory, and leverage with manufacturer suppliers,” says Hemperley.

For PPG, a preferred supplier is one purchasing designates for a particular commodity. Take power transmission products, for example. Four years ago, PPG spent about $5 million annually on the category through three key suppliers and a number of smaller suppliers. Today, that figure is down to about $3.5 million with one preferred supplier.

A deciding factor in the commodity team selecting Applied Industrial Technologies as the power transmission supplier was a detailed implementation plan. In an example of a close partnership, Applied personnel visited 35 PPG sites meeting with end users to discuss tools for selecting and buying power transmission products, including use of an online catalog and purchasing cards.

There was reluctance among internal customers to using the new supplier. “But they realized they were getting a better price, as well as improved service, someone interested in their business and bringing in new ideas, all of which were missing in the other arrangement,” says Hemperley.

To manage the relationship, he and his team have quarterly meetings with Applied. “We've since renegotiated the contract,” he says. “This allows us to keep the relationship focused and moving in the right direction.” The supplier has received the PPG Excellent Supplier award five times, most recently in 2004 and 2005.

PPG measures suppliers on delivery, quality and ideas submitted to $AVE. Plants have access to a Correcting Adjustment Incident Reporting (CAIR) system. If a location has a problem with a supplier, personnel can input a supplier nonconformance notification in the system. Purchasing will work to learn root cause and work with the supplier to resolve it.

Looking for innovative and creative ways to reduce costs, PPG uses vending machines to dispense such MRO items as safety supplies at some locations. Purchasing also has some integrated supply arrangements and uses a third-party buying tool at some sites. They are implementing e-procurement tools throughout the organization.

Purchasing and manufacturing determine which strategy to use based on location. Hemperley says the decision depends on willingness and readiness of the site for change. “We work with internal customers and select a tool based on our understanding of their needs,” he says. “We take time implementing tools and try to build upon successes.”

The vending machines, which are located close to the job site, provide employees with access to supplies 24 hours a day. They use an ID card or personal code to dispense items. Such accountability helps manage consumption, which drops through use of the machines and tends to stabilize at that level.

Items in the vending machines are consigned inventory—PPG pays for them as they are used. Distributors handle restocking and can view use via the Internet.

Another way that PPG keeps MRO cost in check is through use of integrated supply arrangements. Through the arrangements, integrator suppliers provide labor, systems and management services. They handle many spot buys. Purchasing has set up the arrangements so that suppliers must submit cost-savings ideas or be penalized. The company has seven integrated supply arrangements in place, and hopes to double this number in the next year.

At other sites, purchasing uses third-party buying through which a supplier handles small-dollar purchase transactions. The reason for this approach was to help locations that did not have integrated supply. “Third-party buying allows us to use a single supplier for requests vs. many associates contacting many suppliers,” says Hemperley. “Our supplier provides items out of its inventory. In cases when items need to be sourced to another supplier, the initial supplier handles the transaction, including payment of a small fee.”

PPG is piloting the use of an Ariba e-procurement tool at three locations, and expects to roll out the system once it adds more supplier catalogs. “Our vision is to handle much of our buy through catalogs,” says Hemperley. Items in the catalog will be processed almost entirely without manual intervention. Items not in the catalog will be routed to a commodity or buyer for handling.

Purchasing also hopes to include in the new tool: visibility of storeroom catalogs. Previously, each storeroom was only visible to the local plant. This change allows plants to share information on common parts as well as inventory.