“Hire athletes – not baseball stars.” That was the sage advice from a new company president to a newly minted Vice President of Global Procurement for building a team of commodity managers. “We need experienced process managers. The specific commodity is irrelevant if the manager can effectively follow the process.”
The company was ready to pull its purchasing to the center; they had reached critical mass (about a billion in revenue) and it was high time they harvested the savings such scale can produce. Their two dozen manufacturing plants were located in four geographic clusters in the U.S. and Mexico. Each plant was an independent profit center so supply chain collaboration among plants was non-existent even though many manufactured similar products.
Centralized sourcing had been debated over the years but the executive leadership (mostly family descendants of the founders) had decided to err on the side of decentralized empowerment allowing the plants to make their own purchasing decisions. Eroding profits forced a management shake-up; the manufacturing operations president was kicked upstairs, and the company’s first outside professional manager was installed in his place.
From the new president’s point-of-view, centralized commodity management was a no-brainer. After all, the company had $500 million in spend that wasn’t being leveraged or professionally managed on a national scale. Too many suppliers made it difficult to produce products with “sameness” across the enterprise, and some suppliers were judged to be less than stellar. Managing the supply chain globally was low-hanging fruit and the perfect panacea for a sagging bottom line.
To help make his case to the executive committee, the new president chose a single commodity – abrasives – to benchmark. The findings were telling. The company spent $6 million yearly on abrasives purchased from over fifty different manufacturers and distributors. The disparate abrasive products were leading to different levels of product finish quality which was a point-of-contention for customers. And consolidating the spending with a single best-in-breed supplier would save the company over $1 million dollars.
The case study had its desired effect and the executive committee approved the formation of a Global Procurement Group tasked with managing the sourcing of six major commodity groups company-wide and six commodity “athletes” were promoted out of the plants and into the general office.
Suppliers were surveyed, usage was aggregated, RFP’s were administered and annualized savings were forecast to be in the $20-30 million range. However, at the end of the second year, commodity spending was still exactly 50% of revenue and the income statement showed absolutely no evidence of savings. The newly minted VP of Global Procurement was demoted and experts were brought in to perform forensics.
My role was to assess the packaging commodity – a $25 million monster with over 20,000 sku’s and 60+ suppliers. The brand managers were plagued by $5 million in shipping damage that was believed to be the result of poorly designed packaging.
My findings were simple: The previous commodity team (the commodity manager and a cross-functional team of engineers, purchasing agents and accountants) did not have a deep understanding of the supply chain or the design issues they were tasked to manage. Their lack of expertise created a credibility gap between the commodity team, plant management, marketing and the suppliers.
Lack of credibility breeds mistrust and as a result, the plants covertly circumvented the team’s initiatives, sometimes aligning themselves with marketing to kill proposed design changes. Savings by the team were often characterized as false or misleading for reasons real and imaginary because the performance metrics being used were as porous as Swiss cheese. Suppliers formed secret alliances with the old-guard purchasing agents who saw the Global Procurement phenomenon as a fad-of-the-month failure; meetings became filibuster sessions and the program died of sabotage and apathy.
The fix: Over the course of the next year, we methodically defined the packaging value proposition from the customer’s point-of-view, adopted a testing protocol, integrated corrugated-specific metrics into the ERP system, created greatly simplified packaging design platforms and aligned the supply chain processes with the factories’ operational processes. We selected six best-in-breed supply partners and severed relationships with the others as humanely as possible.
The process was sometimes bloody and political, sometimes great fun and collegial. My role as a packaging supply chain expert was to facilitate, coach, and bring discipline to the proceedings. Most of the breakthrough ideas that we implemented weren’t mine – on the contrary – the team proved to be very resourceful, capable and creative.
My contribution was a deep understanding of the commodity, years of experience, the instincts to know which ideas were promising enough to pursue, which ideas would drive costs and which would drive savings, and the credibility that helps build trust among stakeholders.
There are no universal commodity metrics – each commodity is measured in a way that is unique to that industry – and corrugated is no exception. The team learned to think in dollars per 1,000 square feet. They learned to aggregate the dollars in a meaningful way instead of thinking in terms of ‘box price.’ They learned to convert cost per ton into cost per foot and they learned the vocabulary of the industry.
The results: The cost of packaging decreased by over $10 million. Loss and damage diminished to the delight of the brand managers, inventories were slashed and the replenishment process was aligned with the plants’ lean strategies.
The Take-away: Mid-market companies should consider centralizing the management of key commodities before revenues reach $1 billion – individual plants are reluctant to concede sourcing responsibility after decades of autonomy. Significant savings can be realized in the form of lower prices, fewer invoices to pay, and fewer suppliers to manage. Improved quality and reliability are by-products of ‘sameness’ in the global supply chain.
The ‘exploration and discovery’ process takes too long, is too expensive and creates dubious results and mistrust among stake-holders. Under-trained cross-functional teams often reach false conclusions, create savings that never seem to hit the income statement, wither from ‘analysis paralysis,’ or they push waste and non-value added upstream to the supplier.
Commodity-specific supply chain management is complicated business so commodity managers and cross-functional teams must be armed with deep technical expertise.
Corrugated packaging is rarely the highest commodity spend category for manufacturers but is commonly number two and is almost always in the top five.
If your corrugated spending is significant, consider managing it across the enterprise. Develop your approach with an expert and learn to use the industry trades to monitor pricing. Benchmark your spend and set aggressive year-over-year cost reduction goals that include all supply chain costs – not just price. Learn the industry vernacular so your team can communicate effectively with suppliers and focus on optimizing the value stream - not endless RFP’s.
A well trained team, with a top-drawer strategy will have the credibility required to lead change and drive enterprise-wide savings to the bottom line.
Ken Rohleder is President of Rohleder Group, a supply chain management consulting firm specializing in corrugated packaging.
For additional information contact Rainmakers at 847/251-3327