Wednesday, May 9, 2007

Transformation to a Centralized Procurement Model - Case Studies

The following selected vignettes offer a small glimpse into the power of leveraged spending that leading corporations around the world have experienced recently.

The Limited Brands
The company operates 3,700 domestic retail store locations under four separate brands (The Limited, Bath & Body Works, Victoria's Secret, and Express) and has a sizeable $3 billion annual spend. Until recently, it had its 40 procurement professionals located in Ohio, New York, and Hong Kong working for the brands separately. But over the last five years, the company began consolidating several functions—including procurement—into one centralized shared services organization. "Now, these four brands continue to develop, design and market individually, but all of their support functions are within a central, shared services organization," explains Chuck Dahlman, director of strategic procurement at the company.

In mid-2002, as part of this effort, the company consolidated all of the purchasing people into one organization, called the Strategic Procurement Organization. The goal was to transform the purchasing organization from being engaged in strictly tactical functions (eg. processing purchase orders) to more expanded strategic functions, including strategic sourcing. "While they would still be involved in some transactional activities, we installed some technology to handle a lot of this," Dahlman says.

To achieve this transformation, it was necessary to create a process and subsequent training program that would involve helping the procurement professionals understand best practices for a world-class strategic procurement organization. "We wanted them to be able to gather all of the relevant data for a project, understand what they were looking for, and realize what was happening in the specific markets where they were sourcing, so they could develop the appropriate procurement strategies," continues Dahlman. "In this way, we hoped they would be able to do better than the market as a whole."

To achieve this, the company created a proprietary in-house talent assessment called an Organization & Leadership Review Process (OLRP). The first goal of the OLRP was to redefine roles, job descriptions, professional competencies, and leadership behaviors. Next, it assessed work history, education, performance, and career interest. Finally, it mapped talent gaps, strengths, and developmental needs. "As part of the training initiative, we began to strongly encourage everyone to get their C.P.M. certification," Dahlman says. "We began offering some courses here to help them prepare."

Once buyers were certified, they began to participate in continuing education courses, such as off-site seminars. The benefits of the efforts are coming through today. For example, when the procurement functions first consolidated, procurement management realized that the new department would need to market itself to its internal customers. Company policy did not mandate that people go through procurement when they were engaged in non-merchandise sourcing initiatives.

"For example, in a large project, businesses can go about sourcing any way they want," states Dahlman. To begin marketing themselves, the procurement professionals first became involved in some small projects, or got involved in large projects in small ways, such as taking care of the requisitions and purchase orders. "Gradually, they began making suggestions," he notes. "As a result, more people are coming to us when they have projects and are asking us for help in terms of qualifying suppliers, negotiating, creating better terms and conditions, and so on." For example, procurement professionals have become successful at creating price caps so that, when prices increase, the company doesn't see increases as significant as it might have otherwise seen.

The teamwork between procurement and internal customers has been paying off: The original goal was for purchasing to help reduce cost for the enterprise by $200 million over five years. "We are only in our fourth year, and we have already helped save between $320 and $350 million," he states.

While things are moving along smoothly, the department is not done fine tuning its efforts. "Before we made the transition, procurement people were aligned with a specific brand," states Dahlman. "When we made the transition, we trained them to become specialized subject matter experts who could support several different brands as needed." Now, there is an initiative to blend the best of both; where the department will continue to have subject matter experts but will also have some people dedicated to the specific brands in order to maintain internal customer relationships. "We are already getting pretty close to this ideal balance," he concludes.

(Ref: “Centralized procurement: Success breeds success”, William Atkinson, Purchasing, June 15, 2006)

Sanmina--SCI Corporation
As an electronics contract manufacturer within a $125B market, Sanmina embraced the core concepts of supply chain management and increased its focus on the global supply base. In 2001, by emphasizing supplier selection, supplier management, supplier development, and technology convergence through a dedicated core of procurement and commodity experts, Sanmina reduced the corporation's inventory by almost 90 percent and nearly tripled its inventory turns. By continuing to attack the islands of centralization at its factory level, Sanmina projected continued improvements of approximately the same magnitude over the next year. The benefits of centralized procurement and integrated supply chain management are readily apparent, as its supply chain vice president testified, "We don't do a lot of part shortage meetings anymore."

(Ref: Jim Sutherlin, vice president, supply chain, Sanmina--SCI Corp, "Global Inventory Management," 7 Feb 02)

ChevronTexaco Corporation
In 2001, ChevronTexaco (CT) created a center led strategic procurement organization with decentralized operational procurement organizations reporting directly to it and expanded the center-led focus from materials-only procurement to materials, services, and logistics procurement. Utilizing strong top management support from the CEO downward, the resulting corporate leverage enabled CT's procurement organization to save 34.3 percent in oilfield trucking costs, 39.3 percent in office supply costs, 22.4 percent in office furniture costs, 31.1 percent in telecommunications expenses, and more than $10.3M in information technology hardware. By consolidating suppliers, creating competitive threat with their incumbent suppliers, negotiating heavily, and obtaining tremendous consensus with its supply chain partners, CT also was able to save 18.5 percent in its refinery maintenance costs for its six US refineries. Notably, CT executed its consolidation and improvement efforts while also achieving outstanding goals in supplier diversity and small business utilization.

(Ref: Renee Lagorio-French, business manager, ChevronTexaco Corp, "ChevronTexaco Procurement," 8 Feb 02)

Beyond the obvious advantages of leveraged buying power, strategic procurement is a key enabler of effective supply chain management (SCM). Motorola's Personal Communications Sector, the world's second largest cell phone manufacturer, acknowledged this often-overlooked fact as it placed Theresa Metty, one of the nation's top-ranked purchasing professionals, in charge of its SCM function in 2000. Through Metty's campaign to reduce supply chain complexity and leverage centralized purchasing power, Motorola PCS successfully increased its market share, "squeezed $2.6B in costs out of its supply chain, reduced inventory by $1.4B, and improved its customer response time 40 percent" in the following 2 years.

Metty, who was promoted in 2003 as Motorola's senior vice president and chief procurement officer, introduced the centralized commodity council concept at Motorola PCS, better equipping the organization to stay ahead of economic developments, technology shifts, changing demand, supply restrictions, and bottlenecks.

(Ref: Bolaji Ojo, "Motorola's Master Plumber," EBNonline, 31 Mar 03; James Carbone, "Motorola Simplifies to Lower Cost," Purchasing, 18 Oct 01)

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