There's Leverage In Them Thar Hills! Developing Successful Commodity Leveraging Programs
Patrick S. Woods, C.P.M., A.P.P., CPIM
Patrick S. Woods, C.P.M., A.P.P., CPIM, Commodity Manager, Emerson Electric/Fisher Controls, Sherman, TX 75091, 972-491-1394
84th Annual International Conference Proceedings - 1999
Overview. You are probably familiar with the saying, "There Is Strength In Numbers." Although this statement was originally applied to armies and nations, it can also be applied to leveraging your purchase of goods across companies, divisions, facilities and/or departments. It is not uncommon in some organizations for two or three different purchasers to deal with the same supplier for similar products resulting in duplication of efforts and dilution of importance. In some cases, the situation above happens in the same building!
This presentation will explain how to choose commodities for leverage, how to develop a multi-site purchasing team as well as a cross-functional team, and how to motivate team members to not only participate, but exceed expectations. Further areas discussed will be developing the team mission statement, developing goals, a strategy and a timeline, gathering information, benchmarking current and potential suppliers, quantifying savings and other benefits, selling this program to management and most importantly, implementation and program maintenance. Yes, there is leverage in them thar hills, do you know how to dig for it?
Note: This paper primarily addresses the leverage of goods because this area has been the experience of the author. With a little imagination, these leveraging techniques could also be applied to services procurement.
Which Commodities To Choose. It is very unusual to work in a company where the purchasing department is responsible for only a few items. Most of us have more commodities than we know what to do with. Or as one wise person once said, (I can't remember his name, I just know that he was wise), If a purchasing professional is all caught up, then he probably does not have enough to do and maybe will be rightsized or is it, downsized or is it, cut back or just plain laid off! Of the 99.999% of us that have the problem of so many commodities and suppliers to choose from; where do we start? If Rome was not built in a day, were they at least able to throw up all those fast food places in less than 6 months? As you embark on this program, in order to get some quick success; you may not be able to build Rome, but maybe a fast food place or two.
Back to which commodities to choose. You may have heard someone express it as the Pareto Optimum, or the ABC Approach or more commonly, the 80/20 Rule. All descriptions are basically saying the same thing; approximately 20% of our total commodities or suppliers comprise 80% of our purchase dollars. Although the exact percentage may vary from company to company, the premise still remains the same, only a few commodities/suppliers make up the bulk of the purchase dollars of a given company. In choosing commodities for leverage, the task is twofold.
- Focus on those few commodities that make up the bulk of your purchases,
- Determine which of these commodities are from suppliers that service multiple divisions, sites and/or locations.
The complexity or simplicity of these tasks will lie in what type of record keeping your company has done in reference to number of suppliers, part numbers supplied as well as locations. If the records are slim to none, then your first task will to be to go back and accumulate this data, either from each location or possibly from the suppliers themselves.
Developing The Team. Another wise man said, (I don't know this one either, but he was probably related to the one above), the word "team" stands for: Together Everyone Accomplishes More. My experience has been that this is a true statement if you can get capable people to join the team. Most capable people (those not watching the clock) are not caught up with their work (that 99.999% mentioned above), want to go home prior to 11:00 P.M. every night, so an invitation to join another team is about as welcome as gum surgery. The most difficult task is to convince these potential team members and/or their superiors that your team is very important and will return maximum benefit back to the company, (please see Quantifying The Benefits listed below).
In reality, I have found that the most successful approach in getting key people to join this team is to approach their superiors first and have them select the appropriate team member(s). The superior is in the best position to assess their subordinates' workload and possibly reassign some of their other responsibilities to non-team members.
Who should you select as team members? The core team should be made up of purchasing representatives from each division, site or location that has a stake in the commodities and suppliers. For example, if you are planning to leverage the purchase of widgets that comprise $5,000,000 per year and if there are 5 locations that spend $1,000,000 each in this commodity, then your core team should have 5 representatives.
Obviously, there could be some locations that have a much smaller stake, such as one that only purchases $50,000. You would then have to make the determination whether the spend would justify team membership. If not, then you may decide to leverage their requirements, but without their full participation, but of course, with their agreement. This team of 5 would be responsible for developing the leveraging strategy, all commercial issues and presenting the plan to management.
Note: The assumption is made that the "you" addressed in this paper would be the team leader and this individual would coordinate the start up and management of the team. To move forward with a commodity leveraging team without a leader would be as disastrous as sailing a ship without a captain.
The other sub-team would be cross functional in that you would recruit members from quality assurance, engineering, finance, end user or whoever would ultimately have a stake in the suppliers that you expand or eliminate through the leverage. Although these people would not participate in every team meeting, they would serve in an advisory role as supplier development issues concern their area. For example, a discussion on a supplier's financial viability would involve the financial team member.
Motivating The Team. As alluded to above, how do you motivate an individual who is overworked and who is constantly shuffling priorities, that it makes good sense to be a member of this leveraging team? This could be an area where you may have to test your Reverse Marketing skills. Reverse Marketing is the process whereby the purchaser reverses roles with the supplier and sells him or her on an idea, program, or concept that at first may be perceived as unpopular or painfully expensive. A slight modification to that definition is to substitute the word "supplier" with "potential team member" and/or their "superior." As mentioned above, initially quantifying the benefits is the key. Also, keep in mind that per the "80/20 Rule," the focus will be on the commodities/suppliers that have the most impact to the company as well as the greatest opportunity for savings.
The second area of motivation is ongoing. I've seen many teams that start off with the best of intentions, maybe continue in existence for several months and then die on the vine. Their demise was due to a lack of focus as well as burn out. It takes a good team leader to keep the team focused, challenged, as well as to facilitate fresh perspectives and direction, so that the team does not die. There are excellent resources to help your team be successful. One publication that I highly recommend and have used in my team leadership is: The Team Memory Jogger; A Pocket Guide For Team Members published by Goal/QPC. This handy publication covers such areas as preparing to be an effective team member, getting work done in teams and handling problems within the teams. Although this material applies to teams in general, it can be adapted for your commodity leveraging program (see References below).
The Team Mission Statement. Major corporations have mission statements. Some purchasing departments have mission statements. Your team should have a mission statement. The mission statement answers the important question, Why Are We Here? According to The Team Memory Jogger, a mission or purpose statement, "describes a specific focus for your team, describes realistic goals, is clear, understandable, and brief and is energizing and inspirational." Listed below is a mission statement that was developed for a commodity leveraging team:
To leverage best in class (commodity) manufacturers to achieve the highest value and best cost through strategic alliances to support (company) business objectives.
This mission statement was described in only 23 words. Mission statements do not have to be wordy and verbose to drive home your team's direction.
Developing Goals, A Strategy And A Timeline. As described in the mission statement above, the primary goal of the team is to leverage suppliers to achieve value and cost. But what does that specifically mean? At this point, the team will want to develop clear objectives that support the main goal of commodity/supplier leverage. According to Managing Purchasing, Making The Supply Team Work, "Objectives are general statements about expected outcomes" which in this case would be the outcome of the leverage. The book further goes on to distinguish between "primary" and "secondary" objectives.
In this team scenario, primary objectives might include the number of suppliers eliminated, the percentage of total spend reduced through cost reduction and the percentage of dollars placed under contract with the remaining or new supplier(s). Secondary objectives might include in-house stocking programs provided by the supplier(s), additional sales and customer service support, training and product development as well as joint participation in cost reduction teams. These are just a few examples; your team might develop different or additional factors and what could be considered secondary to one team might be considered primary to another.
Strategy development entails following or progressing through specific steps that would take your leveraging program from start to finish. Such strategy steps could include a review of current strategies, if any, to see if the team is justified and can make improvement, research of the current supply base and the marketplace (sole source versus competitive suppliers) and an in-depth discussion with your internal customers to determine what is important to them in the commodity and supplier(s). Here is where your cross-functional team may be able to offer support. The final steps would include establishing both quantifiable and non-quantifiable returns that the team will deliver (primary and secondary objectives), development of your time line to implement the strategy and ongoing feedback to monitor the program.
The other problem that I have seen with teams that do not die on the vine is taking forever to make anything happen. Here's where a timeline is extremely important. In your first or second meeting with the team, after establishing your goals/objectives and strategy, then develop your timeline for making these elements happen. A common tool for timeline development which can either be done manually or via computer (software programs exist) is the old-fashioned "Gantt Chart." The Gantt Chart is a series of columns that list "What Is To Be Done," "Who Is To Do It," and "By When" and arrows that list the start date and finish date of each task. Samples are provided in The Team Memory Jogger.
Gathering Information. You can spend hours upon hours in team formation, strategy development and timeline preparation, but if you do not have a good database to work from, to borrow from the Bible Proverb, it's as if you have built your house on sand. A good database that allows you to gather information is the strong foundation for your leverage program. If you should be so lucky to have a team member or a support person who is well versed in such programs as "Excel" or "Access," then they should be the keeper of the database. What types of data would be helpful to your leverage program? Within the spreadsheet there could be column headings for part number, part description, annual usage, supplier name, unit price, user location and contact person. Columns describing special characteristics of the parts purchased as well as supplier capabilities and equipment could also be added. The recommendation is that one entire team meeting be devoted to designing the database and the information that the team deems important as well as the appointment of keeper of the database. Keep in mind that this database should be dynamic (such as changing forecasts) as opposed to static.
Supplier Benchmarking. Much has been reported on benchmarking the purchasing department but equally or more important to this team is benchmarking the supply base. In this leverage program, how do you know whether to reduce the supply base such that you remain with a few current suppliers or to replace or supplement the supply base with suppliers that are new to the team? A good benchmarking program will allow the team to evaluate a supplier's capabilities in comparison with best-in-class, benchmark standards and determine whether the supplier(s) meet your requirements. Such areas to be covered in the benchmark can include quality assurance, management, technology, engineering and design, pricing, delivery and environmental. It is recommended that you develop a series of specific questions for each area rated on a scale of 0-5 where 5 is the benchmark standard and 0 is no recognition of the question. The suppliers can rate themselves ahead of time and then the team can go in and audit the supplier to compare and determine their own findings. The scores can then be summarized and the difference between the supplier's score and the best-in-class, benchmark standard would be the "gap." The question to then be answered is can we live with the gap, can the gap be closed (score improved) or should we eliminate this supplier from consideration. For specific examples of a benchmark program, please refer to: Developing The Supplier Benchmark Audit: The Precursor To Supplier Approval, 83rd NAPM Conference Proceedings.
Quantifying The Benefits. In the beginning of this paper, the comment was made that we should achieve some quick success. Management may agree to this leverage program, agree to commit resources, including a team leader, team members as well as travel (offsite meetings and supplier visits), but there is going to come a time when management may borrow a line from a recent movie and declare, "Show Me The Money!"
There are two ways to report the benefits. The first way is quantifiable achievements. As mentioned above, one prime way is to show how much money the team plans to save the organization through the leveraging program. This initially can appear to be a "Catch 22." In order to get a true picture of the savings, you will have had to pull together all of the data (which could be hundreds of part numbers), select the suppliers that you want to issue RFQs to (probably the ones that are successful in the benchmark), receive back the quotations (this will take the suppliers some time), evaluate the pricing and then make cost savings projections. To do all of this, you would have had to have management agreement to proceed and the utilization of the team resources. However, management may be looking for this savings projection in the beginning so that they can determine if they will allow the team to proceed in the first place, particularly in this time of very limited resources.
All you can basically do initially is to make, for lack of better words, an "off the cuff" projection to at least determine if the benefit justifies proceeding with the team. A conservative projection that I have always found to be achievable is 5%. In the example listed above, if the total combined purchase of a widget is $5,000,000, then the savings projection would be $250,000. The question to be considered is, would the resources expended to achieve the savings be less than $250,000? At first glance, the answer should be in the affirmative. Although an initial commitment would not be made for a greater percentage, it has been my experience that the actual savings achieved through sheer leverage and consolidation is more to the tune of 15-20% or in this example, $750,000 - $1,000,000.
Other quantifiable benefits could be the leveraged supplier(s) signing a contract with the team which specifies specific cost reduction goals, volume rebates based on increasing their business, and consignment inventory programs, whereby the customer eliminates inventory carrying costs (if these costs can be quantified).
The second approach is the non-quantifiable achievements. It would be expected that through the leverage program, since you are dealing with fewer suppliers, then administrative (P.O. and other paperwork) costs should be reduced as well as an increased level of customer service, including delivery, sales and engineering support. Although your company may not be able to assign a dollar figure to these factors, it is still a tremendous benefit that you may not have gained had you not embarked on the leveraging program.
Selling Management. To borrow a line from an old toothpaste commercial, management will ask you and the team to "put your money where your mouth is" and prove to them that this leveraging program really does work and that you have truly "struck gold." Assuming that you have first convinced management to allow you to have the team in the first place, another Reverse Marketing presentation should take place after you have followed the steps of the strategy but before you actually proceed with supplier reduction, resourcing of the commodity, contract implementation, etc. These are very important steps in the program and we do want to dot the I's and cross the T's with management.
My recommendation is that this presentation immediately starts off with the thought mentioned above, "Show Me The Money." Right out of the chute, present to management the proposed savings that this leveraging program will achieve. This will peak management's interest and hopefully keep their attention throughout the balance of the presentation as you prove to them how you are going to achieve the savings. Other points to be covered include a brief review of your strategy, how you arrived at selecting the proposed supply base (either current, new or a combination of both), a proposed contract review, the timeline for implementation of the program and the dollar value of the resources required.
Implementation And Program Maintenance. The last point stated above, "dollar value of the resources required" is very important, because sometimes management will agree to pursue the leverage benefit, but ignore the fact that it will take people and perhaps travel resources to make the leverage a success. Not only may the purchasing folks be involved but what about the QA personnel if they are required to approve a new supplier or engineering if they are required to evaluate new part samples? The timeline addressed above is also very critical in that the team must make sure that they are meeting schedules and must keep management apprised if schedules slip.
To ensure program maintenance, after the leveraging program has been implemented, although the main team will disband, two or three individuals should remain to form a steering committee that continues to monitor the program. Are the suppliers meeting the agreed to contract requirements, including cost reduction suggestions, as well as quality and delivery goals? The steering committee can make sure the suppliers are on target as well as the customer. Is the customer meeting the committed forecast projections and have parts been resourced to the supplier in the timeframe committed to? Again, the steering committee can confirm this or make required adjustments.
Parting Thoughts. Why not begin today to review your company's commodities, supply base and purchases to see if you have any room for leverage? You may be surprised to find that there is indeed leveraging opportunities in them thar hills of your company!
Goal/QPC. The Team Memory Jogger, A Pocket Guide For Team Members, A Joiner Publication, 1995, 1-800-643-4316
Killen, Kenneth H., and Kamauff, John W., Managing Purchasing, Making The Supply Team Work, NAPM, 1995
Woods, Patrick S., Developing The Supplier Benchmark Audit: The Precursor To Supplier Approval, NAPM 83rd Annual Conference Proceedings