This story started one day when Mr Y… from Electron Inc. suddenly asked me ” Can you help me to transform my purchasing team in a aggressive, redoubtable weapon against internal and external cost.; our future just rely on the success of this transformation!”
And so started the story….
The situation I found was like this:
Electron Inc is a global company specialized in electronic products for various kinds of Industries. Quality and reliability of Electron inc products are in many cases perceived as order winners by customers, but cost has become for a specific range of its product an order looser , as competition puts more and more pressure on price.
Major reasons for this situation have been clearly identified:
First, the cost structure of the products. Material represents 75-80% of the total Cost of Goods Sold, but improvement efforts during the last few years were concentrated on labour productivity and lead-times reductions.
Second ,the absence of consistent Purchasing and Supply Chain strategy since years, if we except a few isolated initiatives. Number of active Suppliers , for example, remains extremely high although it has been reduced from more than 850 in the early nineties to 600 in 1997 and 300 in 98, for a purchased value of 48 millions FF in average. Among those suppliers 35 , representing 80% of the total purchased value are certified from a quality perspective, which has helped to stop incoming inspection for the items they deliver. 25 of them , have signed a “logistic contract” with Electron inc in order to implement “call-off” or Kanban Systems and reduce inventory. None of these efforts have ever lead to a real partnership agreement with any key supplier.
Third, organization of the purchasing department. Although it has recently been renamed as “Strategic Cost Reduction team”, people’s skills , ways of working are dramatically old fashioned. Among the team members, mainly one has acquired by experience a good technical knowledge on the products and the electronic parts to buy, plus significant negotiation skills. Two others mostly buy on catalogs ,with limited discussions with vendors. In addition to this weaknesses , buyers are frequently involved in multitudes of tasks that historically were abandoned by other departments (follow-up of software licenses,…) and that have now created a serious bottleneck in the group. he purchasing manager, freshly arrived from another sector of the industry, has in one year demonstrated his inability to overcome all this obstacles .
A quick situation analysis had showed that only a breakthrough approach could be used to get out of the rut.
The first decision we took was to isolate the low value added purchasing activities ( buying on catalogue) and place them in another less critical part of the organization ,awaiting for a possible external subcontracting of this tasks.
The second was to move away from a centralized- hierarchical- functional Supply Management organization that relies on the expertise and performance of individuals, to a process oriented organization that depends on a TEAM and is aligned on common vision .This idea came from the statement we made when we were considering the different skills that the remaining purchasing people should have: Negotiation- Technical- Quality- MRP2 & JIT.
Potential solutions were poor.
Solution1: to perfuse all this competencies in the existing team members, which rapidly appears as an impossible challenge and an utopia seeing the short timing we had to achieve it.
Solution 2 : to get rid of the existing team and recruit a couple of new buyers with the missing skills, which is another utopia because of the cost of such high caliber persons, regarding the total purchased value at Electron Inc.
Solution 3: to kill one hierarchical level, and create within a process and performance driven team, a bank of competencies bringing together all the indispensable skills.
That’s finally the option we choose; the former purchasing manager was offered a position of PROCUREMENT ENGINEER (2). We then incorporated a technical person with good purchasing background and gave him the role of ADVANCED PROCUREMENT ENGINEER (1). We also took a QUALITY ENGINEER (4) coming from one of the Production Processes to bring upon request his expertise in supplier Certification. The buyers “on catalogues” were re-named LOGISTIC BUYERS (3) and placed in the production processes, one of their representatives having one permanent place in the new team.
The new “Strategic Supply management team” was placed under the direct leadership of the Supply Chain Director.
Roles and Responsibilities
(1)ADVANCED PROCUREMENT ENGINEER:
- implement “Design to Cost”.
- is an active participant in the design of new products.
- has a perfect understanding of market and technology evolution.
- has a good technical background
(2) PROCUREMENT ENGINEER :
- build the detailed product specification with R&D teams.
- Select new suppliers, negotiate cost-quality-delivery and final partnership agreement.
- Define the general purchasing strategies with other team members
- has a good technical and Logistic (MRP2, JIT,…)experience.
(3)LOGISTIC BUYERS :
- implement logistic part of the Partnership agreement.
- is in charge of the day to day procurement process.
- establish forecast for suppliers
- lead the supplier certification process.
From the beginning we thought that the success of this change was relying on both people and the implementation process; That’s the reason why we first spend a couple of days outside the company ,in team building exercises starting with the “soft ” parts, like ground rules definition for team meetings, acceptable behaviors between members, etc… The “hard” stuff started when we came to talk about the vision and concrete target to reach in a very near future.
The challenge we gave them was not only to focus on cost reduction, but to view supply management as a cross organizational process that transforms the contributions of suppliers into the satisfaction of customer requirements.
In the past, the End user perspective in the purchasing process has never been considered as such . Deming’s view of every business as a whole system that transforms inputs into outputs gave us the final inspiration of our vision.
The ultimate performance goal was to give both internal and external customers, the material delivery they need, when they need it , and at the lowest possible cost. We asked them to measure themselves against 6 criteria:
- Delivery performance to Customers,
- cycle time,
- late deliveries,
- number of suppliers,
- % of material cost savings compared to annual plan.
- reject rate.
When members of the group got back together after the initial phase, they proposed by themselves specific performance goals for each objective; for example, reducing the percentage of defective components from 2% to 1% before year end, or to limit to 1% the tolerance in suppliers delivery date accuracy.
Although we invested time and money in coaching exercises with external consultant plus regular team meetings to build camaraderie trough lunches, cocktail hours …, the Strategic Supply Team was still not a real team. It had clear performance goals and began to develop common aspirations ,but there was still a gap between talk about empowerment and being really empowered. In fact, some members were still feeling each others out to discover how serious everyone was about achieving their joint goals
We finally reached the total engagement of all team members when we agreed on a peer appraisal system ( we’ll come back to this point in a next newsletter) that gave everyone the opportunity to evaluate everybody else in the group and feed it back to the person being evaluated.
After 6 months, the team spirit finally worked so well that people began to teach each others the basics of their own core competence, and the cross-fertilization process started to grow rapidly .
So far it is too early to conclude whether or not our experience with Electron Inc. is successful, but at this stage of the experience we are now negotiating 2 partnership agreements with high Quality, Cost and Logistic standards in order to meet the requirements of a new group of customers that recently came to us place an order for more than 25 millions £ in the next 2 years. This contract would never have happened without this new strategy.
…If you want to know more about this story, please ask me, but let me first l tell you ” You are not going to achieve it in one day or in 10, neither in 100, you may even never achieve it, but please let’s try it you’ll never regret it. (JFK 1960,July 4Th)
Thanks to John R. Katzenbach and Dougnas K. Smith for the book “The wisdom of Teams” they wrote in 84. and that was for me a great source of inspirations for the solution we found at Electron Inc.
Thanks to Gilbert Parent from “Technostyl” in Belgium for the clarification of the different in the new team he gave me when i met him in november 98