COVER STORY

Soaring To New Collaborative Heights

Author(s):

Lisa Arnseth
Lisa Arnseth is a senior writer for Inside Supply Management^®.

January 2010, Inside Supply Management^® Vol. 21, No. 1, page 18

United Airlines: Supply Management Professional Profile.

Two years ago, Grace Puma arrived at United Airlines with a major objective: She was responsible for transforming the sourcing organization into a strategic function. Puma, who is the senior vice president of strategic sourcing and chief procurement officer at United, came to the position with more than 20 years of experience leading global strategic sourcing organizations for companies such as Kraft Foods, Motorola and Gillette. Because a major airline requires a variety of sourced products and services, she saw an opportunity to implement a standard sourcing process companywide through category management teams focused on driving the lowest total cost of ownership (TCO).

How did Puma organize this transformation and continue to see savings results, even during the ongoing economic pinch of the past few years? The answer: alignment with strategic suppliers through collaborative development of the relationship.

Strategic supplier development has been fundamental to the success of United's procurement organization, and it's an area of supply management that Puma is passionate about. However, getting a team that had been accustomed to performing a more traditional transactional role in the company to fully understand how they would be adding true strategic value to the entire organization required a cultural change. Not only did the supply management professionals learn to interface with the business partners and work cross-functionally within United, they also needed to communicate to the suppliers themselves that a more involved and collaborative approach was required to meet United's TCO goals and still provide the best quality in services and products.

"We set the expectation that our suppliers operate in a transparent and fact-based manner," explains Puma. "Specifically, we discuss opportunities to enhance service performance and drive out cost via supply chain inefficiencies, and engage with key partners on driving innovative solutions to increase revenue and customer satisfaction."

A Strong Internal Team

The first step in the transformation toward strategic sourcing was developing a capable team of supply management professionals to begin the process of identifying key suppliers. The team also needed to build tools to foster supplier development, and then learn how to fully use those tools to determine supplier performance, break down component costs and pinpoint cost drivers. Kate Gebo, vice president of corporate real estate, was the key leader in retraining the team about the different elements that go into a sourcing event, and how the buying teams in different spend categories could apply what came to be known as the United Total Cost of Ownership Sourcing Process to achieve significant savings.

A direct report to Puma, Gebo led discussions between division leadership and her team. Puma says it was crucial to communicate to the rest of the organization what roles the sourcing department would have, going forward. Prior to the transformation, many of the user groups would handle their own procurement, so alignment with the division leaders was critical to cement this "cultural change" successfully throughout the company.

"The cornerstone of this process was that it was very collaborative in nature, so throughout our discussions and the process no one felt that anyone else had a greater role, and that was a big change for United," says Gebo. "We explained that by working together, we're providing a value-added service for bringing new suppliers in, introducing new analytics and looking at things from a total cost of ownership perspective. It's been an evolving process, but today it's simply the way we do business."

Today, each step in the sourcing process has been defined regarding which party will handle each responsibility involved in choosing a supplier. The guiding principle for selecting suppliers is that the process always be cooperative. For example, the sourcing team stepped in to work with the human resources user group within United to assist in the selection of a provider for employee medical benefits. "We provided the user group with the different options, such as PPO and HMO programs, and presented the value levers for each type of benefit. Then, the group could make its decision based on the information that was brought to them by sourcing," says Gebo. As a result of this total-cost approach, United has recently introduced a health and wellness program, as preventive measures are considered a way to offset costs.

Cost Drivers Revealed Through "Clean Sheets" and Workshops

When it comes to offsetting costs with outside suppliers, one of the department's most valuable tools is its Clean Sheet model, which is a financial model to determine what a particular item "should cost." The team identifies the cost drivers in detail and uses industry research on those cost drivers to develop an estimate of what the item should cost, building in overhead and profit levels, as well. This information is solely for internal use at United and is not shared with suppliers — instead, it is used to create a common language template using the cost drivers derived from the Clean Sheet. Once supplier bids are received, the strategic sourcing team has detailed negotiations on each component of the pricing and focuses on areas where large variances exist between the Clean Sheet and the supplier bid.

"The Clean Sheet allows us to have a very different kind of conversation with our suppliers about what United is willing to pay," notes Puma. "It gives us better knowledge around the subcomponents of the cost, since we can discuss precisely why this supplier is much more expensive in a specific subcategory of the cost than what we have found in another bid. It could be that their accounting department has certain procedures, or we might be driving specific specifications that are more costly to them. These are fact-based discussions — much more intellectual than just the end-bid price."

United's methodology for sourcing requires that suppliers become "more savvy about understanding their own costs," and the strategic sourcing team has to be sure that the suppliers understand the logic as to why United is asking for such detail. "It's actually in everyone's best interest to look closely at cost, and we worked with the suppliers so that they didn't simply see this as something we were going to use as leverage," says Puma. "After all, we were — and are — asking for a level of information that traditionally has never been sought in this industry."

Collaborative workshops with suppliers have opened up communication and trust between suppliers and United, and, in fact, the information gleaned from these sessions help the strategic sourcing team as it develops the Clean Sheets. These individual workshops occur prior to commencement of a competitive bid. The strategic sourcing team invites two or three other known suppliers of the particular commodity or service being bid, as well as the incumbent. Each supplier is asked to provide specific "homework" two days prior to the meeting so that both teams are prepared for the discussion, which ranges from current market dynamics and trends to supplier cost structures. Typically, supplier participants are limited to technical, operational and financial/contracting representatives, so the workshops are clearly not sales pitches. Members of the user group are also in attendance, to learn of the cost drivers firsthand. "We've found that our suppliers will openly discuss their cost structures and those drivers with us, because they want to educate us on the business," says Puma. The United user group can identify potential opportunities as a result of these workshops, which may lead to future innovation and collaboration.

Continuous Improvement and Development

United's business imperative is to not only see TCO savings, but also to improve the quality of its services to its customers. Taking care of all the details of running an airline on a day-to-day basis requires a highly integrated supply chain made up of suppliers that support the operational service involved in getting a plane out safely and on time. "Our approach to sourcing is really around supplier development, helping them to understand that our success is their success, and that they have an active accountability to ensure that our customers have a good experience on board our planes," states Puma.

To do this, the strategic sourcing team works with key suppliers on a continuing basis in a number of ways. Supplier Summits are held to ensure alignment and transparency, and to highlight the integrated role the suppliers play in mutual business success. On occasion, black-belt professionals from United will work closely with a supplier to help optimize its operations. The team also explains how to understand the supply chain view of what United purchases, so that suppliers know how to think about a TCO value solution — not just a pricing solution — when working with the team's cost-modeling tool and process.

Over the past two years, Puma says she has seen suppliers grow and become ever more sophisticated in their strategic roles as suppliers to United. "We're having candid conversations about where the relationship is at the moment, and where it could be, which is not a natural thing in a buyer-and-supplier relationship." Puma feels that strategic supplier development will lead to future innovations, mostly because the organization as a whole is on board with the transformation Puma and her team has led.

"If you want to work with business partners that are transformed, it's necessary to be coming from a position of transformation in your own company," Puma says. "Our success has been dependant on our business partners transforming along with us, and buying into strategic approaches to business. We are always looking for opportunities to drive synergies with our partners and share best practices in sourcing with others."

For more information, send an e-mail to author@ism.ws.

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