Anatomy Of A Purchasing Revolution - Wellman's Story
Erv Lewis, C.P.M.
Erv Lewis, C.P.M., Director of Purchasing Wellman, Inc., Johnsonville, SC 29555, 843-386-8036, firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. On December 31, 1998, Wellman, Inc. Purchasing ended a 5-year strategic plan intended to transform and optimize the way purchasing is conducted within the Wellman organization. This article is intended to overview that process with specific emphasis on the state of Wellman Purchasing at the beginning, the major change initiatives, methods of approach, difficulties encountered, and the benefits derived.
The Starting Point. From 1987 to 1994, Wellman, Inc. grew by 600% through acquisition and expansion. Each site had a Purchasing staff of seasoned professionals that reported to site management and pursued a site-specific optimization strategy. From a single site perspective, this was very effective. However, no single site, acting alone, had sufficient volume in any commodity to realize the value that could be delivered under a larger volume, company-wide agreement. So, from a corporate perspective, there was little economy of scale and, consequently, little volume-related leverage with suppliers. This meant comparatively higher prices, duplicated effort, and generally lower Purchasing position strength. In short, given that Wellman was then a multi-site organization, then existing Purchasing organization did not optimally serve the bottom line. While the need for change was obvious to some, others did not realize the potential value of aggregating volume among sites and negotiating large-volume national agreements. Given those pockets of skepticism and the fact that sites operated with a high level of autonomy, Purchasing moved cautiously to identify a few areas in which to prove the strategy. That began in 1991 and, by 1993, the increase in purchasing contribution was so dramatic that a proposal for reorganization of Purchasing was submitted and approved.
The Strategy. The overall strategy was to organize site Purchasing departments into a single national team, aggregate requirements among sites, reduce the supplier base to a smaller, more manageable, size, and, where practical, use the larger volume to negotiate highly leveraged, national contracts in each commodity area. The strongest suppliers in each commodity area were identified and evaluated through comprehensive selection criteria. The top two were then selected for negotiation of a single-source contract under which the supplier would serve all Wellman sites in the nation. Where a national supplier was not available, we focused on a region. Where a regional supplier was not available, we selected a local supplier. Obviously, the larger the geographic coverage, the greater the volume and the more beneficial the contract terms. Each contract was negotiated as a mutually beneficial alliance. Wellman enjoyed significantly lower pricing, higher service levels, and a wide range of "peripheral benefits" such as warranty extensions, technical support, better terms, etc. Each supplier enjoyed significantly more business volume which, even with a lower margin on sales, permitted him to bank significantly more profit dollars. The target Purchasing environment was one in which:
- Routine Purchasing practice is standardized.
- Goods and services are standardized among sites to the fullest practical extent.
- Requirements among sites are aggregated for Purchasing economies of scale.
- Purchases are covered by highly leveraged, large volume contracts.
- There is a focus on administrative simplicity.
- Electronic interfaces, internally and with suppliers, are optimized.
Successful pursuit of the strategy required:
- A well-coordinated team effort involving all site Purchasing players.
- An integrated system linking Purchasing, Manufacturing, Inventory Control, and Payables.
- Consensus on key suppliers and support for national/regional contracts.
- A much smaller, optimized supplier base.
- Focused participation and support by a core of key suppliers.
Organizational Structure. Some felt Purchasing should be fully centralized, with all players operating from a single point. Purchasing players wanted the benefits of centralization while avoiding the downsides, which usually involve loss of sensitivity to site-specific needs. The decision was made to leave Purchasing Departments at the sites and form a council of site Purchasing Managers, chaired by the Director of Purchasing. Council members met in late 1993, agreed to aggregate and leverage volumes, and began the process of shaping the function into a single Purchasing "team".
Difficulties Encountered. Initially, the difficulties appeared to lie in the areas of getting consensus among site players on selection of key suppliers and negotiating contracts that, in some cases, were much more deeply leveraged than the suppliers were already experiencing with Wellman. Actually, the greater difficulties encountered were more centered in maintaining common focus and involvement in pursuit of a target end state that was, at best, 5 years away. More specifically, the greater challenges involved (1) satisfying the motivational needs of those less comfortable with long-term planning periods, (2) maintaining awareness, enthusiasm and motivation while pursuing objectives that required several years to accomplish, (3) skepticism on the part of some key managers about the value of the strategy, and, of course, (4) the usual resistance to change and perceived loss of autonomy.
Keys To Success.
The Strategic Development Plan. As the kind of change needed would present strong challenges, some of which would require several years to accomplish, there was need for a planning methodology that would facilitate innovation and keep everyone focused on the end state. We selected a 5-year period and used the model on the next page to guide the development process.
The model requires a mission statement and a "warts and all" analysis of the Purchasing function, to a point where Purchasing is profiled in terms of strengths and weaknesses, inside and outside of the function. Then, over several meetings, Purchasing players were asked to define a Purchasing function in its most ideal state; the function they would design if they had total control. After some refinement, that definition became the vision towards which we would work over the 5 year period. We called it the "Idealized End State". Differences between that end state and the then current Purchasing environment, as defined in the internal and external profiles, were recognized as "barriers" to the end state and objectives were designed to eliminate or minimize the effect of those barriers.
Note that the improvement plan was not aimed at improving the status quo. Instead, the plan was to start at the idealized end state and work backwards to the present, establishing whatever objectives were necessary to bridge the gap between the current environment and the idealized end state. Those broad 5-year objectives formed the basis for annual objectives which, year by year, moved us closer to the end state. Each site Purchasing Department supported accomplishment by ensuring that their part of the objectives found their way into individual employee objective sets.
Note that the development model was designed so that each part could be pursued as a "stand alone" project and completed in relatively short time. These easily identifiable starting and ending points provided comfort to players who are less comfortable with long-term planning time frames. Yet, each part led into the next so that, over time, the whole model was completed. As a reference, the Purchasing Council met once a month for a few hours to summarize work done at the sites and each part was completed in 1 to 2 months, depending on the requirement. Over about 7 months, the team worked through the whole model to establish the idealized end state, 5-year objectives, and first year annual objectives. At the end of this period, each player knew a lot about Purchasing's strengths, weaknesses, and the long-term vision for the function. While this may seem long to some, keep in mind that the team was newly formed and consisted of players from recently merged companies who employed different methodologies and cultures. In that environment, trust among players had to be built from scratch.
A MODEL FOR STRATEGIC DEVELOPMENT IN PURCHASING (not available in text-only version of this paper).
Shared Ownership Of The Process. To ensure buy-in and support by those who would ultimately be responsible for accomplishing the objectives, each part of the development model was discussed in detail and brainstormed by, first, the Purchasing Council and, second, all Purchasing Department employees in joint meetings. For each part of the model, including the mission statement, internal and external profiles, the idealized end state, objectives, etc., the end product represented the combined input of the whole Purchasing function. Our objective was to ensure that each Purchasing player could see his or her input in each of the final products. In that way, the idealized end state and final objectives were not the product of the managers, but the product of the individuals who would have key responsibility for accomplishing them on a day-to-day basis. The Idealized End State leading to the 5-year objectives was characterized as follows.
- The Purchasing Staff
- Confident, well trained, highly professional.
- High levels of interpersonal skills.
- Will challenge the status quo.
- Focused on total cost and long-term value rather than price per unit and short-term gain.
- Dedicated to continuous improvement and comfortable with challenging objectives.
- Supplier Relations And The Supplier Base
- Core commodities sourced from a minimum number of suppliers.
- Common suppliers among sites.
- Broad national contracts and preferred agreements with all core suppliers.
- Continuous supplier performance improvement through statistical methods.
- Internal Customer Relations
- A customer service attitude at all levels.
- High levels of internal customer satisfaction.
- The Purchasing Process
- An effective, administratively simple, value adding transaction process.
- A focus on continuous process simplification and improvement.
- All sites linked into a single purchasing system.
- Optimal use of electronic interfaces, EDI, etc.
These characteristics define the idealized end state. They were purposely broad in scope so that (1) they would represent an unchanging target over the 5-year development period and (2) players would retain a great deal of freedom when crafting strategies that would lead to realization of the end state. The level of specificity increased progressively with 5-year objectives, annual objectives, and, then, site specific objectives which supported the whole. While this may appear simple on the surface, making the characteristics listed above a reality entailed a large number of long and tremendously complex lists of things to accomplish. As examples:
- The first point under The Purchasing Staff which calls for "confident, well trained, and highly professional" Purchasing players led to adoption of core competency training requirements containing 15 different training events including statistical methods, negotiation skills, basic and advanced contract law, basic and advanced problem solving, NAPM certification, etc. The objective was for all Purchasing professionals to complete core competency training during the 5-year period ending in 1998. About 96% was completed. A key and ongoing part of this training involved improving skills to communicate, motivate, and persuade when presenting and selling ideas.
- The bullets under Supplier Relations and The Supplier base required Purchasing consensus on key suppliers, qualification of and agreement on the "best" supplier from lists of site preferences, and strategies to sell Operations players at all sites on the value of single-source relationships with suppliers other than their "favorites". Then came negotiating contracts, implementing at each site, and dealing with inevitable resistance that arises when implementing such a strategy.
While space does not permit the level of detail that would more thoroughly define specific objectives, suffice it to say that all other characteristics were tacked in similar fashion. All in all, it made for a busy, challenging 5 years.
You will note that the development model includes "operationalizing" and "institutionalizing" the strategy. A strategy is "operationalized" when the actions and activities through which it will be accomplished are a part of each individual's personal annual objectives. It is "institutionalized" when the process of strategic development becomes so much a part of day-to-day work that it is pursued routinely rather than as a special event from time to time.
Maintaining Awareness, Enthusiasm, and Motivation. It is critically important to routinely reiterate the strategy, note accomplishments to date, and review remaining challenges. Wellman Purchasing rarely opened a meeting without covering those points in an effort to ensure continuing awareness. Enthusiasm and motivation are typically a function of involvement and the level of success. Accordingly, every Purchasing Manager assumed a responsibility to keep each of his or her staff members actively involved in the transformation process by ensuring that each individual's personal objectives were challenging and that they supported functional objectives aimed at realizing the idealized end state. Then, through coaching and assistance, the managers ensured successful accomplishment by each individual and recognized it when it occurred. It is important to note that, when a player begins making routine decisions in ways that solve the here-and-now problem and, at the same time, move the function closer to the targeted end state, he or she will have turned the corner from "reactive" to "proactive".
A Continuous Process Improvement Program. As many of the objectives under pursuit involved improving processes, it was obvious at the outset that our players would need problem solving and process improvement skills... and techniques that would really facilitate improvement rather than just report data. The term "continuous improvement" implies a continual closing of the gap between current results and desired results and, the fact is, true ongoing improvement of processes is not very likely unless measuring variation in results and trends, and comparing them to desired results. This kind of measurement requires the use of statistical techniques, so we adopted the Edwards Deming Statistical measurement and improvement techniques as primary tools for process improvement and made their use a part of core competency requirements.
Dealing With Skepticism. Our plan for dealing with skepticism was to sell the value of our strategy to the Operations players who would reap the benefits. We made little attempt to sell the strategy itself as that could be viewed as the ideas of only one function among many. However, measurable value was much more salable and we gradually won over most of the skeptics. Use of the Deming statistical tools enabled us to more rapidly improve some processes to a point where that improvement was both obvious and measurable in terms of real value. In dealing with those who resisted change and perceived a loss of autonomy, we found that keeping them in the loop and, where practical, involving them in the decision process tended to raise their comfort levels.
Value Delivered. As raw materials are under long-term contracts, the strategy defined in this article was aimed initially at purchases other than raw materials. Of those purchases, about 35% are proprietary in nature, are specific to a site or business unit, and do not provide the economies of scale required for leveraging. Of the remaining 65%, about half have been leveraged according to the strategy. For the 5-year period, average hard-dollar reduction on total purchases, from all sources, was 3.1%, though only about 32.5% of these purchases are currently leveraged.
Though obviously important, the Wellman Purchasing strategy considers hard-dollar reductions in the price of goods as a secondary target. The primary target is soft-dollar savings, as they represent larger value. Soft-dollar savings include improved supplier engineering and technical service, warranty extensions, free technical training that would otherwise cost Wellman, improved terms, consigned inventories, supplier solutions to on-the-plant-floor problems, less Engineering and Maintenance effort due to the effect of standardized goods, etc. These soft-dollar impacts positively influence the manufacturing environment which, in turn, can lead to improved productivity, higher quality of manufactured product, lower waste levels, etc. Further, through the aggregate effect of process improvements and elimination of much of the effort associated with supplier selection, qualification, and the bid process, the Inventory Control and Purchasing staffs are operating successfully with 25% fewer employees.
By now you will have determined that the transformation in Wellman Purchasing was more internal than external. Individual site Purchasing Departments were doing an excellent job for their respective sites. However, no individual site represented sufficient volume to significantly leverage service up and prices down. So, from a whole company perspective, Purchasing was fragmented and, even though, as it was structured, could not maximize contribution to company profitability, the need to change it was not obvious to those outside of Purchasing. Wellman Purchasing is now a well organized, forward thinking, team of professionals who work together towards a common, always evolving, vision. Individual players have a high level of reciprocal trust, function well together, and create synergy among sites that otherwise would not exist. Though I am writing this article, credit for this transformation belongs to the team. Due to the aggressive nature with which they implemented this strategy, and the results achieved, the function is now regarded as proactive and value adding, and enjoys a higher level of respect in the company.
Where We Go From Here. With a view towards process improvement, Wellman Purchasing conducts informal brainstorming all during the year and a formal brainstorming session involving all Purchasing players each year. Every other year that session is devoted to updating the 5-year strategic development plan. Accordingly, the function is always targeting an idealized end state that is 3-5 years in the future, based on our best information on how the field is changing and where the opportunities live. In all cases we follow the development model presented here. Year 2000 objectives include, among others, further staff development, leveraging the balance of purchases that reasonably could and should be leveraged, and further definition and refinement of systems.
It is an ongoing challenge...... a shot that is still being heard.