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Leverage Your Suppliers' Contribution to Cost Reduction

Author(s):

Robert A. Gallant
Robert A. Gallant, Chief of Supply Management AND Danielle Dansereau, Project Officer, CN, Montreal, Canada H3B 2M9, 514/399-7709

82nd Annual International Conference Proceedings - 1997 

Introduction. Canadian National is capitalizing on the good ideas of its suppliers in two ways. CN established a Supplier Council as a technique to help identify potential cost reduction opportunities and the means to make it happen. Together CN and its suppliers tackle areas of concern such as quality and logistics to bring about mutually beneficial improvements. As well, CN conducts supply chain management workshops for its suppliers in an effort to generate further ideas, and reduce total costs along the chain. This presentation will outline these two primary initiatives and the results generated to date.

A Changing Environment. As a newly privatized company, CN must focus on better service and improved competitiveness. Both these priorities are critical to achieving financial durability and becoming a low-cost and reliable provider of transportation. Reduced costs will help CN hold down its rates. This makes CN's Supply Management department a key element in the success of the company.

Privatization has introduced a new way of doing things, a new mentality within the company and within Supply Management. Purchasing methods must be the most cost-effective. By building closer alliances with a smaller number of suppliers and eliminating unnecessary links in the supply chain, Supply Management hopes to achieve total cost savings of over $150 million over the next five years. Both in 1995 and 1996, the department has been able to extract $30 million in costs from the income statement.

Supply Management personnel are looking closely at everything from buying diesel fuel, janitorial services, and leases on freight cars to purchasing mechanical equipment and information technology. The goal of Supply Management is to manage total costs and improve competitiveness for the corporation, and to provide better service for customers both outside and within the company. Suppliers' ideas are welcome to help accomplish this goal.

A Forum For New Ideas. In June 1994, the CN Supplier Council held its inaugural meeting at Montreal headquarters. Representatives from more than 100 of CN's major suppliers attended the first session. At this kick-off event, it was explained that the Council is not an opportunity for suppliers to gain competitive advantage. Cooperation is stressed rather than competition. The Council is instead a non-threatening, non-competitive forum for the exchange of ideas that benefit both CN and the railway supply industry.

The Supplier Council helps CN better understand its vendors and its own operating procedures and specifications. Suppliers are more than sources of goods and services. They have a wealth of ideas about how to manage costs.

The Council is an important tool to enable the suppliers to help both CN and themselves attain cost-reduction targets. The idea is to take costs out of the total process, not to transfer them from one segment of the supply chain to the other.

Similarly, the emphasis is on total cost reduction as opposed to "price" reduction. Processes are reviewed in order to take out non-value added activities, but margins are preserved. Suppliers should earn a fair profit, the same as the railways should.

Finally, the Supplier Council promotes networking and enhances communications among suppliers and between suppliers and CN. Suppliers are encouraged to give feedback about how CN rates as a customer and to challenge any processes or practices within CN.

Structure of the Supplier Council. The Supplier Council consists of 120 of CN's major suppliers from various industries representing 80 percent of the business. They are regrouped under the General Council. The criteria for being part of the General Council are that the supplier has to represent at least $500,000 of business annually and is willing to participate actively in the activities of the Council. The General Council meets once a year in February and provides suggestions to the Leadership Committee.

The Leadership Committee consists of four representatives from the General Council and two CN officers. The Committee's role is to improve and enhance communication by acting as liaison between the General Council and the Project Teams; to rotate membership of the Project Teams; to provide guidance to the Project Teams; and to monitor implementation of recommendations. The Leadership Committee meets on a quarterly basis and prior to the general annual meeting to review the agenda and other pertinent matters. The Committee rotates two members each year.

Project Teams consist of sub-groups of the General Council, grouping some 20 members who are active in teams. Some topics which have been tackled by the teams are commodity reviews, supplier performance rating system, communications, EDI, suggestion program. Each of the teams are co-chaired by one supplier and one CN Supply Management officer. Project team members can delegate specialists from within their company as appropriate or subject matter experts from outside. The team members meet regularly throughout the year until they are ready to present their recommendations to the General Council.

To facilitate communications between CN Supply Management and the Supplier Council, a newsletter is sent every quarter to all 120 members. It contains a summary of the overall corporate plans for the year including such issues as capital expenditures, facilities consolidations and departmental restructuring; updates on team projects; and reports on past events and upcoming meetings.

Success To Date. Among the projects that were initiated within the Supplier Council, were the Quality Assurance, the Logistics and the Ideas Unlimited projects.

1. Quality Assurance. The Quality Assurance team's mandate was to ensure that CN obtains materials and services of the required quality on a consistent basis at the lowest total cost. In carrying out this mandate, it was recognized that the solutions would provide mutual and optimum benefit for both CN and its suppliers. The committee realized initially that CN and its suppliers shared the responsibility of ensuring that only quality products were involved in commercial transactions.

Members of the committee met on several occasions from the fall of 1994 through the spring of 1995. Since the team's report was submitted, Supply Management has undertaken the following actions:

  1. Reviewed the need for specifications pertaining to commercial matters.
  2. Defined warranty expectations and procedures.
  3. Continued to establish alliances with selected suppliers.
  4. Continued training of CN Supply Management personnel in supply chain analysis/management and material applications.

In 1996, Supply Management developed a Quality Assurance Policy that includes lines of authority, supplier certification standards, need for third party accreditation, definition of critical and non-critical items, the mandate of CN's Quality Assurance function.

The team has also developed a Supplier Performance Rating (SPR) system and plans to use it proactively to shape its relationship with suppliers of critical items.

Plans are also to establish a Quality Assurance data base for critical items. This would contain a record of incident reporting and product verification testing. There is currently no accurate data available by product to allow measurement of suppliers through the Supplier Performance Rating System.

2. Logistics. The Logistics team was formed to set up a pilot project to manage the consolidation of Less-Than-Truckload shipments (LTL) out of the U.S. mid-west into western Canada.

Basically, individual LTL shipments are picked up on a daily basis by the U.S. consolidator and brought to its terminal in the Chicago area where they are accumulated. On a scheduled basis intermodal containers are loaded and shipped via rail to Winnipeg. In Winnipeg, the containers are brought to a contracted freight forwarder who delivers the individual shipments to their respective final destinations. This process has allowed CN to reduce its transportation costs significantly.

It is felt that the savings realized by CN would be matched or surpassed by suppliers if they were to move their LTL freight as part of this consolidation program. A fundamental benefit of the program is that, for any given shipment, suppliers would retain the control to move their freight under the consolidation program or any alternative method of transportation.

The project is now at a stage where CN suppliers are welcome to transfer freight shipments from their current arrangements to the consolidation program. This would apply to all shipments whether they be consigned to CN, destined to the supplier's warehouse, or to be delivered directly to any of their other Canadian customers.

Several companies have expressed interest in forming a shipping alliance with CN to address their LTL freight shipments in a manner such as this program. Although a formal meeting of the traffic managers from these companies has yet to be convened, individual discussions are taking place in an on-going basis. It is expected that two or three of these companies will join CN in the near future to move their freight under the consolidation program, thereby reducing everyone's costs.

Beyond the Chicago to Winnipeg pilot, this program could be expanded into eastern Canada and its origin base may be broadened to include a wider range of U.S. states. Also, if necessary, the receiving location could be moved from Winnipeg or expanded to other western Canada locations. There may also be opportunities to develop LTL consolidation programs within Canada or even to establish alliances, beyond LTL consolidation, where transportation contracts and programs are shared to the mutual benefit of all parties.

3. Ideas Unlimited Program. The CN Suppliers' Ideas Unlimited program is designed to help make effective use of the innovation and creativity of current and potential suppliers. The program provides suppliers with a formal mechanism to present ideas on products, services or process improvements which could benefit CN. Suppliers are encouraged to submit ideas that could improve work processes (e.g. different welding techniques that will reduce material consumption or labour costs, software programs that will reduce clerical effort, etc.) and reduce costs.

Initially, the program was made available to members of the Supplier Council, but it will later be accessible to all CN suppliers.

At the outset, the supplier who wants to submit an idea phones CN Supply Management where the idea is logged. The process then consists of submitting a folder containing all information related to the idea submitted. It comprises a form describing the current situation, the suggestion and estimated savings. It also describes the process for submitting an idea. The folder is forwarded to Supply Management where it is filed and a copy of it is sent to all internal customers who may be affected by the idea and can judge it.

The program also covers such considerations as acceptance criteria for a suggestion, confidentiality and proprietary rights, and an appeal process for rejected ideas.

Supply Chain Management. The Supplier Council is one element in the evolution of CN's Supply Management department. In 1993, the traditional role of the purchasing department was changed to that of supply chain management to better support CN's turnaround strategy.

Where the focus had been on obtaining goods and services at the lowest possible purchase price, the new emphasis has been on total life-cycle cost for the entire corporation. There was a need to learn about every step of the supply chain, from raw materials right through to CN customer needs, and eventual component disposal concerns. To this end, workshops have been conducted with supply management personnel, suppliers and internal CN customers. They have consisted of scoping the supply chain of various commodities, determining a "should be cost" and identifying opportunities to reduce total costs.

By looking at the elements of the supply chain, Supply Management with the cooperation of its suppliers, has been able to extract costs exceeding $60 million since the supply chain approach was adopted in 1994.

For example, by doing a commodity review of railcar axles, a team took a close look at the Association of American Railroads manufacturing specification of axle dimensions. They found that buying axles with a diameter at the upper end of AAR specification could increase axle life by as much as 250%, and accrue annual savings of $0.7 million.

By negotiating special air travel rates with a major air carrier, as well as deals with major hotels to include breakfast and obtain discounts on lunch and parking, Supply Management has trimmed $3.6 million from annual expenditures of $36 million.

In many cases, agreements reached between CN and a supplier can be extended to other suppliers.

In the future, the focus for Supply Management will be increasingly to get into partnerships that will also benefit other suppliers. As CN Supply Management is moving away from price negotiation alone and more towards single-sourcing arrangements and longer-term partnerships, strategic alliances with world-class suppliers committed to continuous improvement will gain importance with CN.

Conclusion. The synergy created between CN's Supply Management and its suppliers has led to a win-win situation for all involved. CN benefits by reducing costs across the supply chain while its suppliers benefit from reducing their costs, as well as from CN's improved profitability. In today's competitive environment, organizations and their suppliers recognize they must work together for mutual competitive advantage.


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