SPECIAL REPORT: Eaton approaches indirect buy with collaborative spirit

Global supply teams MRO, capital equipment, energy, travel, IT, office equipment and supplies and fleet spending.

By Susan Avery -- Purchasing, 9/10/2007 9:31:00 AM

Two years ago, the supply chain management organization at Eaton decided to take indirect materials and services procurement to the next level.

The supply chain group, led by Rick Jacobs, was managing national agreements for some indirect materials and services. But it wanted to become more involved in the company’s businesses and regions and enter into global agreements, where it made sense to do so.

So Jacobs hired Shawn Pecor, whose work experience includes six years in the purchasing operation at Citigroup, the financial services company that sources mainly indirect materials and services. Pecor’s charge: To build a more centralized global procurement structure focused on meeting requirements of internal customers.

“We reached out deeper into the organization,” says Pecor, who is now director of global procurement for Eaton’s electrical group in Pittsburgh. “We integrated ourselves with the business units and with other individuals in the supply chain organization around the world to leverage the spend and create a more central focus.” In addition to his new duties of global commodity management and sourcing, he’s also responsible for indirect spending at the Pittsburgh facility.

To date, the supply chain management organization is meeting cost reduction objectives for indirect of 5% year over year. It’s also hit targets for reducing the supply base 15% year over year.  

“Certainly the way we approach indirect is with a collaborative spirit across the business units and the regions,” says Pecor. “That’s an ongoing process that we focus on and we think is critical to our success.”

Some areas where they’ve been especially successful are:

• Energy management services. The indirect team has partnered with a supplier with whom it had a national agreement in North America. As a result of closer collaboration with colleagues at the business units and in the regions, the team has expanded the relationship with the supplier to include Europe and South America. The supplier manages close to 150 utility service providers for Eaton and provides technical support to the factories. It is integrated into the company’s internal processes, working with personnel to reduce energy consumption and greenhouse gas emissions, helping to meet corporate environmental objectives.
• MRO chemicals and fluids. One supplier supports more than 80 facilities worldwide, providing Eaton with about 5,000 items produced by more than 200 manufacturers.
• Information technology. The team has negotiated a global agreement with one supplier that provides desktop and laptop PCs. This has helped standardize technology as well as the delivery service model improving efficiency and contributing to cost savings.  

“One prereq to making this happen is creating an awareness, providing the business units with visibility into the indirect materials and services spend,” says Pecor, whose strategy is to share data that show supply base reductions can result in greater cost savings as well as create higher service levels.

Today, Terry Wahlgren, global manager of indirect materials and services, is responsible for Eaton’s $1.5 billion annual indirect spend that consists of MRO, travel, fleet, office equipment, office supplies, information technology (IT) and telecommunications. The supply chain management organization influences about 60% of the company’s indirect spend.

Wahlgren coordinates and leads a global corporate team of category experts, or commodity managers, that works with colleagues at the business units, where one or two indirect commodity managers oversee spending.

The supply chain management organization also is establishing regional experts who watch over indirect spending in Europe, South America and the Asia Pacific regions. These supply chain professionals work directly with their colleagues in corporate and the business units.  

Wahlgren’s objective is to leverage Eaton’s indirect materials and services spend across the business units and regions to provide a service delivery model that balances local needs with enterprise leverage and process consistency.

Cross functional teams of 6-10 individuals representing indirect supply chain from the business units as well as key stakeholders or customers use a traditional multi-step strategic sourcing process to select suppliers. A supply chain category expert leads the team.

During the supplier selection process, the team looks for a supplier that meets these criteria: financial stability; ability to satisfy quality, delivery and service expectations; e-commerce capability, and, equally important, has a culture and values that match those of Eaton as a company.

“In addition, from a business unit perspective, we look for suppliers willing and able to participate in the IDEAS (Innovation Drives Excellence, Achievement and Savings) program, providing ways to increase productivity in their process or offerings to guarantee year over year cost savings for Eaton,” says Pecor, who explains that gaining efficiencies in indirect consist of more than simply negotiating a lower price. Rate of consumption and determining specifications are two other areas that the supply chain management organization’s internal customers need to be aware of as the company leverages the indirect spend.

Through the IDEAS program, one MRO supplier has suggested use of an improved coolant that can be recycled to reduce consumption as well as cost.

The indirect team holds regular performance reviews with the company’s strategic suppliers. In most cases, the supplier provides a dashboard of KPIs (key performance indicators) that the team reviews and monitors. “Together, between the business units and across the regions we look at opportunities to improve performance with the supplier,” says Wahlgren.