David L. Callahan
David L. Callahan, Principal Buyer, The Timken Company Gaffney, SC 29341, 864/ 487-2648
The Issues. Our company is in the midst of change. This change is not in the nature of a from-to movement; from some former structure to a new and different one. Rather, the change is a shift in philosophy from the rigidity of fixed state hierarchy and "long-standing" procedures, to an acceptance of "change" as a necessary, ongoing mechanism for continuous improvement. As business goals and strategies are redefined, the Procurement function must be evolving to meet new expectations. Three years ago, The Timken Company, Gaffney Bearing Plant, began this process of decentralizing the Procurement function. We installed a paperless purchasing and material control system. A new accounting system was also brought on-line. We have adopted a JIT approach for Procurement; inventories and lead times have been drastically reduced. Hundreds of items have been moved from the Storeroom crib into shopfloor, point-of-use, binfill programs with key suppliers. Obsolete and redundant inventory items have been identified and removed and we are working to drastically reduce our supplier base. In short, we are developing a culture of decentralized control and employee empowerment.
Within this environment, we have been challenged with difficult questions:
The reengineering of both our organizational structure and our manufacturing process has taken place during a time of soaring sales and business activity. Within Procurement, our staff has been reduced and many roles and responsibilities have changed. We wanted to streamline Purchasing to minimize support activity delays, and to improve our competitive position in the market. Change has been accomplished through a process to plan, implement, and review. Radical, fundamental changes have taken place within a very short time. "Hindsight" shows us that we have accomplished some remarkable improvements and are reaping big savings from new system efficiencies and logistical arrangements. We also have found that some important issues may not have received proper attention. With experience, and new insight, even greater savings might be possible.
The Opportunity. We want to review the past three years activity. Our goal is to help others assess and refine their own plans and strategy for change and continuous improvement in the Purchasing process. We have encountered some unexpected obstacles and found some surprising opportunities. We intend to cover several issues and openly share the good and the bad of our experience. The key issues are these:
Issue 1. We felt that fundamental changes could be quickly implemented to capture big savings in transaction costs and reduce inherent delays in the handling of purchase requests.
Experience: Several years ago, we needed an average of 17 days to process an order request and issue a purchase order. Today, on-line requesting security is given to every associate. Our purchasing software enables a requestor to cross-reference thousands of records to find the item they need. Then they may generate a request for some quantity and assign appropriate accounting data to their request. Finally, the requestor sends this request instantly on-line to Procurement. If the request is for an inventoried item, the issue is made and inventory records adjusted. If the item is not in inventory, an electronic or faxed purchase order is sent to the supplier. All these steps can now happen within minutes. In years past, dozens of people were kept very busy manually processing handwritten requests and creating printed purchase orders to be mailed to individual suppliers. In contrast, new system efficiencies have allowed our small staff to handle the review, approval, receipt and issue of over 156,000 transactions yearly.
Issue 2. We moved many items out of the Storeroom, and have created bin replenishment programs at the point-of-use on the shopfloor. Intended results were reduced transactions, lower inventory, time saved by requestors, and elimination of non value-added administrative support activities.
Experience. We assumed that there were many more positives than negatives associated with shopfloor replenishment programs. We targeted the hidden costs tied to a transaction. With binfill activity, one transaction could cover many different items and quantities actually being purchased. Hundreds of lower cost supplies are handled as a single weekly payment. Binfill items are already expensed and do not reside in an inventory account, so we no longer need to cycle count the items or work at maintaining adequate on-hand quantities. Shopfloor requestors work more efficiently; they no longer waste time traveling to a central parts issue location. We can keep our associates busy in their assigned areas with commonly needed items immediately available around the clock. This parts management scheme cuts machine downtime and saves wasted effort. Another benefit is that valuable Procurement resources are free to address more critical concerns.
Issue 3. Bin replenishment programs require clear guidelines and defined procedures to achieve maximum benefits. Actual dollars spent for items coverted to bin-fill programs will probably increase. Beware of potential accounting problems with the replenishment programs.
Experience. We started bin replenishment programs without written agreements. In each case, lists of items to be replenished were developed by shopfloor associates; the items were generally low cost and high use within the area to be serviced. Selected suppliers were asked to provide a quote for the items based upon a continuous replenishm`ent service program. After a supplier was selected, joint meetings developed target quantities, delivery schedules and billing periods for program activity. There were no signed agreements; no time guarantees. Suppliers were advised that all programs were open to competitive quotes at any time. Once initiated, Procurement's role became minimal; working to ensure that problems were resolved and obtaining periodic price checks. With experience, we have found that a written procedure is needed. Basic rules and guidelines must be developed to govern all replenishment programs.
We are adopting a team management approach to handle major suppliers and replenishment programs. Team management offers several benefits:
Bin replenishment programs are not a mechanism for spending reductions. We did expect that total spending on items would increase slightly, once they were moved into open-access shopfloor bins. However, we were confident that the transaction savings would be great enough to offset small spending increases.
In review, we have identified at least five characteristics that can drive binfill spending to higher than original levels. First is the added inventory when one item moves from one Storeroom location to be replenished in several point-of-use locations. Multiple inventories are inevitable and must be carefully planned for maximum efficiency. Second, pilferage. There are items which will note work in any binfill program; pocket knives, sunglasses, andWaterman pens are bad choices! There are very few items which do not have a use or value outside of the workplace and some losses attributable to petty theft will occur. Third, is waste or excessive use of the binfilled items when there is un-monitored access. The actions of Procurement, in creating binfill areas, might be sending a "We don't care about these items; no big deal" message. A fourth concern is the tendency for target quantities to increase unless there are tight controls. Originally, we allowed the target quantities to be revised by shopfloor request directly to the supplier; no Purchasing involvement. This policy has been revised because our shopfloor attitude was to increase the targets to meet increased usage. We want to be involved to question increases as an appropriate function of Procurement spending control. The fifth, and final, issue that can work to increase spending is additions of new or alternative items to the original list. Our first binfill programs allowed for new items to be included to the list by agreement of the shop associates and the supplier. This intended to allow for innovation and continuous improvement. However, we have observed that inappropriate items will migrate into the programs. Also, items added can sometimes be better characterized as change, but not continuous improvement. Oversight of item additions and deletions must remain as a Procurement responsibility.
Accounting issues must be considered while creating replenishment programs. If replenished quantities are expensed, an invisible "inventory" is being created. When binfill programs are operated in a true JIT fashion, there is rapid turnover of all items. When items are not carefully selected, some may not be used quickly. Also, for binfill programs, many items are charged to a single cost center; you may loose some ability to track every item cost to an individual person or machine process. Usage histories for individual items may no longer be available, except from supplier records. Judgments should be made by weighing savings potential against the loss of accounting detail.
Issue 4. Decentralized authority and empowered associates represent a change in the culture of the workplace. These changes will require different thinking and new paradigms. Culture or "mindset" changes will evolve more slowly than the pace of procedural change. Expect some opposition.
Experience. With an on-line Purchasing system, more associates than ever before have access to item price information. Open and direct contacts between the supplier and shopfloor associates allow for more information exchange than has previously taken place. Some people will focus on the price of an item and, based upon price alone, supplier choices and Purchasing decisions may be criticized. Item-by-item everyone can find a better price. Procurement needs to do a good job educating and communicating the many components of true cost. When the supplier base is reduced, that too will generate complaints. Engineers, for example, may feel limited in the selection of new items from new vendors. Some long-standing relationships between vendors and shopfloor contacts will end. The strategy to reduce administrative costs by reducing the supplier base, must be explained clearly and the rationale must be convincing. Last, an ethics policy and standards for supplier contacts must be implemented. Many companies will have a written policy communicated only to salaried associates or to those few with frequent customer or vendor contacts. Open access by suppliers will create the need for everyone to know and follow appropriate policy rules.
Issue 5. Change can make people uncomfortable. Changes in the Purchasing process and supplier arrangements will upset the predictable regularity and confidence born from "traditional" systems and methods.
Experience. New systems and new programs within Procurement have made it very difficult to maintain a high level of customer satisfaction. From our Procurement perspective, the customer is the purchase end user. For most Timken associates, dramatic changes in purchasing are coincidental to changes within their own departments and work procedures. It can be a frustrating challenge to keep abreast of all that is new. The temptation to be less than patient and helpful must be resisted. Mistakes and confusion will be repeated. We must press ahead in the pursuit of continuous improvement and still be tempered by the notion that we are providing a service to our customers. Diplomacy is a valuable skill for the purchasing professional, especially during change.
CONCLUSION. Experience is a good teacher. Having traveled the sometimes rocky road of change, we have gained insight. Our goals remain fixed while some tactics and strategies have evolved and shifted over time. For most attendees to this conference, our story is quite common. For most companies, the purchasing function is being transformed, staffs are being reduced and new efficiencies pursued. Many are moving to point-of-use programs and other arrangements which decentralize Procurement responsibilities and empower shopfloor associates. We offer the following basic checklist to fellow purchasing professionals traveling the road of continuous improvement.