Robert A. Gallant
Robert A. Gallant, Chief of Supply Management, CN, Montreal, Canada H3B 2M9 514/399-7709
Two years ago, Canadian National Railways made a fundamental change in its approach to procurement services, when it replaced its traditional unit cost focus with the "cradle to grave" concept of total supply chain management.
This shift to supply management required a change in the mind and skill set of both the department's employees, and of its suppliers and customers. To accomplish this change, CN developed a three-step program: in-depth explanation of and training in the supply chain management; identification and subsequent development of key skills; and fostering of business and commodity knowledge. This approach is changing attitudes and behaviours among all stakeholders in the supply chain.
The previous environment.
Canadian National is Canada's largest rail-based transportation company, employing about 23,000 people, operating close to 18,000 route miles of track, and each year purchasing around $1 billion of goods and services.
In recent years CN, like every other North American business, finds itself providing services in an increasingly competitive marketplace. CN has responded with a corporate strategy focused on delivering quality customer service driven by an internal cost reduction strategy based on downsizing, improved asset utilization, and network rationalization. Each of these initiatives has had a substantial impact on the role and future of procurement services.
Previously, the purchasing function fulfilled its mandate by acting as liaison between end-user and supplier, a highly reactive role that had evolved to suit the culture and market environment of another time. Department employees were primarily transaction processors, requesting and selecting among bids, and formalizing contracts. Their performance and promotion potential was evaluated on their ability to obtain the lowest unit cost. As well, promotions were routinely awarded from within.
Consistent with this philosophy, which rewarded experience over innovation, the incidence of advanced education in the department was minimal. Likewise formal and broader business knowledge was at a premium. There was, however, a great depth of experience with CN's procurement procedures, and of purchasing's legal dimensions.
Although this purchasing mindset had served the company well in the past, it no longer reflected the way CN needed to conduct its business in the '90's. Cost reduction is now front and centre on senior management's agenda. Service delivery and improvement is everyone's concern. All departments, Supply Management included, must find ways to provide and improve service with far fewer resources.
Changing expectations. In addition, expectations of the purchasing function have radically changed. Given that the department oversees more than $1 billion/year in corporate expenditures, its activities have a clear and direct ability to deliver cost reductions to CN's bottom line. As well, with the increasing move to out-sourcing, the department is looked to for expertise in selecting suitable suppliers, and developing win-win supplier relationships.
In taking on this larger responsibility and role in support of corporate strategic objectives, CN's Supply Management department is echoing a trend also evident in the non-service industry. The trend was first identified in the 1985 Annual Survey of Manufacturers. According to this survey, the purchase of goods and services as a percentage of corporate expenditures nearly tripled from 20% in 1935, to 55% by 1985.
This is supported by a 1993 McKinsey and Company survey of automotive and electrical companies, where purchased goods and services represent 70% of total costs with the balance allocated to manufacturing. CN has also experienced growth in the percentage of corporate cash outflow assigned to the purchase of goods and services. In 1993, external expenditures were 25% of all expenses. In 1995, this had increased to 35%, and growing.
Another dimension was added with the company's need for not only goods, but also for services which had once been available in-house, but were now being outsourced. In this capacity, Supply Management must be able to add value to the corporation. The department must ensure that strategic partnership opportunities are identified, developed, and then managed for maximum advantage to all partners.
Based on these realities, CN's Purchasing and Materials department made a conscious decision to change. The first step was a new name for the department - Supply Management. And based on research that clearly showed the cost reduction advantages of supply chain management over traditional purchasing, the department made a radical shift in its approach to procurement. In a traditional purchasing function, where negotiation is the major lever, potential for cost reduction topped out at 5%. Supply chain management, with its emphasis on involvement in the complete supply chain from conception to end use, could achieve savings between 15% and 40%.
A new mindset. To be successful, such a fundamental change in approach had to be matched by a change in mind and skill set, not only for the department's employees, but also for the department's suppliers and customers.
Essential among these skills is an understanding of fundamental business economics. Equally important is empathy with the working environment and workplace issues of the department's customers and suppliers. Partnerships must be fostered between customers and suppliers. Supply Management's role is to facilitate, not dominate, the interface between the provider of the product or service purchased, and those who use it in their daily work. Strong interpersonal skills are important, as are imagination, a capacity for innovation, a childlike curiosity, no small degree of eclecticism, and the willingness to question and challenge the status quo. And those attributes must be complemented by extensive general business knowledge, interfunctional experience within the company or the industry, formal post secondary education, and a diversity of theoretical perspectives.
It's a tall order to fill, and certainly CN, at the time these changes took place, could not have bridged the gap with the existing staff. It is interesting to note, however, that the situation was not at all unique. Research conducted by McKinsey and Company has found that it's almost a waste of time for companies to try and close the gap between an existing and ideal skill profile. Their research found that "companies that have made the shift have found that between 50% and 100% of their senior purchasing managers needed to be replaced."
Although supply chain management, as an integrated concept, was and is still not well understood at every level and step within the chain - by either suppliers, purchasers, or customers - CN did not feel it needed so drastic a step.
Supply Management had a lot of very good people, many with the potential required to benefit from and contribute to the new perspective. They had valuable experience with respect to customers and supplier companies. Over the years, they had established and maintained a significant network of contacts; they knew where to get answers to questions, and quickly. They were also well versed in the procedures and essential controls of procurement, including financial, ethical, and "level playing field" issues.
CN's approach. Given the intrinsic potential of its employees, Supply Management decided to create its own approach to achieving the required shift in mind and skill sets.
The approach was based on the belief that the objective would best be achieved through combining the experiences of the current staff, people who had worked in customer functions, and people completely new to CN.
There are several reasons for this. While existing staff contributes necessary expertise on who's who and what's where, people brought in from other functions and other companies contribute an intimacy with the customer's business objectives, knowledge of operational processes, and technical competencies in areas such as product specifications. They also have different perceptions as to process and, because they are in a totally new environment, exhibit a curiosity and energy sometimes lacking in long-incumbent staff.
Although the approach and philosophy were clear, implementation did not come without effort.
Initially, implementation focused on Supply Management employees. A series of workshops were held off-site to encourage creative thinking. They explained the reasons behind the change to supply management, what the benefits were, and how the concept worked. Participants were taught supply chain analysis techniques such as the Pop Up (explained in detail elsewhere in this Conference Proceeding), which helps purchasers estimate and allocate costs to each activity in the production/distribution chain, and to estimate cost. An accompanying technique of commodity reviews is then used to find ways to realize the potential savings identified.
Once Supply Management employees were familiar with these new concepts, the seminars were expanded to include customers and suppliers, ensuring all shared a common understanding of the process, and a common vocabulary. This helped prepare all parties for cross functional team work.
The next step for employees included participation in a number of additional training and development opportunities designed to hone general competencies, specific skills, and knowledge development.
To this end, Supply Management implemented a knowledge development plan. Objective is to accelerate the transfer of mutually relevant information between Supply Management employees and their suppliers and customers. The catalyst is arranging for "trades" and temporary job postings among them. Each benefit from the other's experience and knowledge. The plan is rounded out with university recruits (high potential individuals on CN's senior management development program), and co-op students, each of whom spend some time working in Supply Management. As part of their role they serve as a knowledge resource both for different business and management approaches, and as a source of research-based information.
The result has been an expansion of the department's expertise and knowledge base, and the establishment of a broader network of contacts for supply managers, both within and external to CN. There is now a far greater empathy for the needs of internal customer, the kinds of activities they are involved in, and how Supply Management can meet those needs.
At the same time, CN developed a competency model based on industry research and internal analysis to highlight the skills required at the supply manager level. Future efforts will expand the model to include other job levels as well.
The model measures employee development, then prescribes necessary training and development activities. Key competencies are identified, as well as ways to determine the degree to which the individual manager can develop the competency.
The model points to the actions needed and resources available to develop existing potential. Based on the information derived from this model, the manager then participates in the development of a personal action plan for performance improvement.
Classroom or workshop sessions are being developed to address the need for critical skills in the areas of financial analysis, research, non-confrontational negotiations, and power reading. Because they are so effective in bringing about mindset change, these sessions are also available to the general Supply Management community, including customers and suppliers.
The results. There is ample evidence that the approach to changing mindset is working, and working well. A new vocabulary, the vocabulary of Supply Management, has taken hold. With 20-25% of the department's employees new to either Supply Management, CN, or both, a good balance has been struck between veteran experience and current business practice. Routine activities are challenged, changed or discarded. A sense of urgency, a focus on results, drives every activity. Cross functional teams have moved from novelty to indispensable.
Just as impressive are the business results. Over the past 18 months, Supply Management has reduced its staff by 45%. During that same time, the department achieved cost reductions exceeding $50 million. Routine procurement activities and lower value buying has been decentralized, pushed out into the field closer to the end user. Rather than tie up valuable resources in distribution activities, CN has struck strategic alliances with five national suppliers, who now also handle local goods availability and distribution.
The results achieved to date have led CN executives to expand Supply Management's scope of activity. The department is now expected to take a leadership role, and assume responsibility for non-traditional procurement activities. This represents an increase in volume of expenditures of some 50% - in areas generally considered more complex than traditional procurement.
The challenge can only be met by people possessing a distinctly different mindset from those employed by the purchasing function of a few years ago. This mindset must be continuously complemented by skills upgrading and those developmental experiences essential to fulfilling the competencies required of supply management professionals.
Keough, M. "Buying Your Way To The Top." The McKinsey Quarterly 3 (1993) ; 41-62.