purchasing\'s new muscle what used to be a corporate backwater is becoming a fast-track job as purchasers show they can add millions to the bottom line.

by:Cleanmo      2020-03-05
Fortune magazine)
-For AT&T, by 1997 it was a highway that cost down to $1 billion, a key part of the phone giant\'s long-distance stay-Ahead program.
This is the route that Larry boxidi has chosen to revive the alliance signal.
This is the highway where Columbia/HCA are racing to dominate the US hospital business.
This avenue to savings is wide and fast. -
However, even experienced managers are not sexy at times.
It is taking advantage of purchasing power.
You can spend the day cutting inventory and adjusting labor productivity, but if you think buying is the best option
Clerk with stains in the basement compartment, you\'re wasting your time.
Listen to William Marx, executive vice president of AT&T telephone products: \"procurement is AT&T\'s largest single feature so far.
It doesn\'t matter what we do.
\"The simple fact is: when the goal is to increase profits by significantly reducing costs, businesses should first consider what to buy.
From raw materials to overnight mail, manufacturers spend an average of 55 cents on goods and services per dollar of income.
In contrast, the labor force rarely exceeds 6% of sales and 3% of indirect costs.
So the leverage of buying on income is far greater than anything else.
A typical manufacturer increased net profit by nearly 5% by reducing the bill by 3%.
Taking so much out of the labor force means cutting wages by half.
The same calculation applies to the service industry: for example, in investment companies such as Merrill Lynch and Solomon, income from purchasing goods and services accounts for more than 15% of total income.
So why buy fat things like President Clinton\'s waist in many companies?
Robert Howell, professor of management and accounting at New York University\'s Stern School of Business, said: \"The tragedy is that so many companies take the huge spending they buy for granted.
\"As the Columbia/HCA records show, savvy purchasing management can produce amazing results.
By consolidating the purchasing power of its growing collection of 200 hospitals, the company cut bills for cotton swabs, IV solutions and other supplies by $0. 2 billion last year-
Net profit of 15%.
No wonder sourcing has begun to attract some of the best young executives: they know a fast lane when they see a fast lane.
General Motors, G.
Richard Wagoner served as chief financial officer and head of global procurement in 1993 and 1994.
In July, his seasoning in the purchase helped GM raise Wagner to the top position for $90 --billion-a-
North American business.
At & t, 49-year-old purchasing director Daniel Carroll is a former CEO of $6. billion-a-
Annual Department for Manufacturing switch equipment.
Carol\'s boss and executive vice president, Marx, asked him to accept procurement in 1993 ---as a promotion.
Carol is not sure.
\"My first reaction was, \'What did I do wrong? \' \" he recalls.
\"This is not a highglamour area.
There are many obstacles and problems. there are no Nobel Prize winners.
But, I \'ve delivered a lot more dollars to the bottom line than I can do when converting.
\"Reducing procurement costs has little to do with intimidating suppliers of raw materials and parts to reduce prices.
This bullying has played a role in the most severe period of the recent recession, when the capacity of suppliers has been overwhelmed.
But now the factory is full and prices are rising.
Quick response-
Stalkers like Carol turned to \"creative collaboration \".
As an exchange to help major suppliers produce more effectively and thus lower prices, buyers receive some savings.
Jack Barry, purchasing expert at EDS management consulting, said: \"As we move to the seller\'s market, companies win the competition by treating suppliers as rivals rather than partners.
\"The purchase of tivosos also uses their purchasing power in the business services and supply sector ---
From air tickets, phone calls to computer classes, laser classes
Replace the ink cartridge with the printer.
While many companies spend heavily on raw materials and components, services and supplies often represent a broad range
Open the frontier of savings.
Such costs can consume up to 20% of revenue;
The leverage to trim them is huge.
Take the category that is not gracefully called maintenance, repair and operation supplies or MRO for example-
Various items such as stapler, mop and spare parts.
According to a study by Joseph Cavinato, a professor of business logistics at Penn State University, American companies spend an astonishing $250 billion a year on these things.
For example, in a Ford car, the miscellaneous cost per vehicle is $530.
It\'s not just careless purchases that increase MRO costs: administrative fees are huge.
For each item, the secretary or mechanic usually collects three or four signatures on the purchase order and delivers them to the purchasing department.
When the valve or fax machine arrives two weeks later, the procurement has issued a large number of documents to the supplier, the receiving department and accounts payable, which write the cheque.
Most companies pay as much overhead to buy a $20 wrench as buying a truck of $4,000 in office furniture.
Today\'s companies package once-fragmented services and supply purchases into two company-wide contracts.
Looking at these bulk orders to reduce costs, it\'s a pleasure for Patrick Grace, president of Grace Logistics, a company that manages W. s. Logistics procurement and distributionR. Grace & Co.
He thinks high
Bulk purchases can cut service and MRO bills by 10% to 25%.
He said that by contrast, the establishment of contracts for raw materials or parts nationwide now saves only 2% to 5%.
With the compass shrinking in material, the company found a lost, lush mainland on service and MRO to reduce costs.
When dealing with suppliers, the best buyers take a middle road between pressure and cooperation.
This is not the practice of Josa ignlopez de Arriortua, a brightly colored and combative Spaniard who worked as purchasing director at GM in 1992 and 1993 and is now
At GM, Lopez squeezed suppliers until they growled and asked for double
Digital price reduction.
He broke the tradition of updating one.
Signing annual contract with long
Transfer the business to the lowest bidder.
After the supplier helped GM develop new parts-
And absorb part of the cost--
Lopez often sells these plans to competitors to find the best production price.
This aggression was rewarded.
During his short term in Detroit, Lopez cut GM\'s annual material costs by $4 billion.
But GM has learned that in the long run, making suppliers compete with each other is not necessarily the best result.
Due to tight capacity, auto industry suppliers sometimes keep their best ideas for loyal customers like Chrysler or Honda.
David Cole, director of the University of Michigan Automotive Transport Research Office, said: \"The trust relationship between GM and its suppliers is not what it used to be.
\"Buyers of companies like AT&T and Chrysler do not focus only on prices, but have a broader goal: to reduce the total cost of each part or service they buy.
They see prices as just one aspect of the total cost and build lasting partnerships with suppliers that allow them to cut other key costs year after year.
Their goal is to help suppliers reduce inventory, eliminate waste, and standardize components that can generate as much savings as they do with lower prices.
Here are the power procurement steps practiced by these experts: take advantage of your purchasing power.
Find parts and services used across factories or across companies--
Anything from telephone service to paper to valve.
Thomas steincommscope, head of Chrysler procurement, said: \"The advantages of devolution are not reflected in procurement.
We purchase centrally and get the best price from the supplier.
\"Plant managers and department heads should understand that companies can increase profits by buying each item in large quantities from two large suppliers, rather than distributing orders among patchwork suppliers.
Promise to the few suppliers you can rely on.
For each material and service, invite leading suppliers to compete for your business.
Set requirements that must be met for each: Status-of-the-
Art products, good financial position, wide enough geography, make sense for your business.
Offer a simple deal: \"Our company is willing to significantly increase your quantity at low prices and long term prices
Long term commitment that you will reduce costs.
If your price and cost continue to fall, we will reward you with a larger order.
\"From the field of bidders, choose the best combination of up to two or three productivity increases that offer low prices and commitments, such as the introductionin-
Deliver on time and eliminate defective parts.
The contract may extend the year of fluctuating goods such as aluminum to five years or more for services such as overnight mail-
Long enough to prove that you want a real partnership.
\"We want our suppliers to invest in and streamline the process for us,\" said steincommscope.
They won\'t if they worry about being thrown out.
\"Work together to reduce the total cost.
Send production personnel to help suppliers reduce inventory and waste.
To ensure that their competitors do not improve faster, compare the price, cost and technology of your suppliers with their competitors at least once a year.
Help your suppliers regain their advantage if they fall-
Make sure they understand that your business is theirs, whether they make something or lose.
If the supplier can no longer operate with the leader, it is time to seek new long-term cooperationterm partner.
The joint signal has become a master who can leverage and cooperate with carrots. An $11. 8-billion-a-
AlliedSignal, an annual manufacturer of automotive parts and aerospace electronics products in Morris Town, New Jersey, works side by side with suppliers in an effort to reduce production costs.
It also gets huge savings from MRO.
Despite a 6% increase in revenue in 1994, the procurement costs of AlliedSignal actually fell.
Return: profits are expected to surge by 21%.
The company uses two classic methods to attack component costs
Double penetration.
When it signs on a supplier, it charges a start-up fee: a steep
Time to cut prices.
At the same time, it requires the supplier to commit to reducing the total cost of the component by 6% per year and to adjust to inflation.
Typically, the supplier achieves the 6% target by reducing the price and improving the service (such as increasing the frequency of delivery), which helps to reduce the manufacturing cost of the joint signal. The 6% goal--
Coupled with the promise of almost eliminating defects ---
This is a standard \"cooperation agreement\" that connects suppliers with alliance signals.
Not a treaty-sided.
As far as AlliedSignal is concerned, it agrees to increase the number of suppliers and help them improve their productivity.
This system works well.
1993. The order for the joint signal to be provided to the dual-machine armor-
Trooper of Melrose Park, Illinois, an aluminum chassis manufacturer of aircraft and rocket avionics systems, has annual sales of $1 million.
Exchange conditions: 10% reduction.
The original clause eliminated the armor.
Trooper \'edge.
But after a while, sales are higher.
Along with the massive cultivation of signals from the Alliance-
The growth of productivity has been greatly promoted.
\"It would be offensive if they just said \'cut the price\',\" Mech-
Gene R, vice president of electronics. DeMuro.
\"We decided to pay the price and join the club because they agreed to work with us.
\"Cooperation helps mitigate the impact of rising raw material prices.
The alliance signed a long signal.
A long-term agreement reached in 1993 with Baja Oriente of Ensenada, Mexico.
Baha\' I aluminum alloy casting joint signal car
The component factory is in the nearby Mexicali.
As usual, the joint signal requires 6%a-
Annual cost reduction.
\"It\'s terrible, you can bet that 6% of people will get harder each year,\" said Baha CEO Michael Joyce . \".
Baja and AlliedSignal are also facing an unexpected problem.
Last year, the price of aluminum exceeded 1-
The fifth place in each investment cost jumped more than 50%.
To help Baja offset the price increase, AlliedSignal increased orders from $500,000 in 1991 to $6 million last year, enabling Baja to split fixed costs to more units.
Due to the small volume, the worker will produce a batch of qualified signal castings and then re-process Baha\' I machines to produce parts for other customers.
Now, the company uses a large portion of its plant for joint signals.
Long production runs and less conversion time help reduce costs.
Baha\' I castings provide a joint signal of the day-to-day Canyon;
This portion of the inventory of the Baja business is only $60,000, 50 times a year.
Driven by increased productivity, the cost of Baja reached 6%
Target cuts in 1994.
Recently, AlliedSignal added the compressor housing to the parts ordered by the company.
AlliedSignal applied the same principle to MRO, spending $0. 8 billion a year on MRO.
The company\'s factories and offices use a practice known as pressure to combine their purchases of important items such as air filters.
Every year, AlliedSignal negotiates contracts with one to six suppliers of each product.
The factory and office then order the required supplies at a pre-arranged low price.
For example, two years ago, 150 plants in AlliedSignal purchased valves, pipes and accessories from less than 400 suppliers.
Last year, the company packaged all its businesses into $10-million-a-
One-year contract with Dutch van leyouwan
It owns manufacturers and distributors.
The endless paperwork related to plumbing orders disappeared: the factory now orders electronically and receives most of the supply within 48 hours, and Van Leeuwan sends a monthly bill to each plant
Such an arrangement resulted in the company cutting more than $50 million in MRO spending last year.
Processing costs have fallen by millions.
National Semiconductor Company in Santa Clara, California works closely with Siltec, one of its major suppliers of silicon wafers.
Despite the substantial increase in the cost of base Silicon, these companies have found clever ways to cut spending.
For example, Professor Siltec National saves expensive packaging materials.
At the National plant in southern Portland, Maine, workers at the loading dock once discarded expensive plastic boxes that silicon wafers entered.
Now, there is a huge box on the loading dock that has been engraved with the address of the Siltec plant in Salem, Oregon.
When the workers remove the wafer, they throw the box into the box.
When the box is full, a driver on the UPS tape closes the box and then ships the box back to Siltec, which delivers the resulting savings to the country: over $300,000 per year
National has also found ways to save on the MRO budget, which last year included more than 25,000 projects amounting to $0. 18 billion.
In the last 1991, the overhead cost per purchase was $30, usually more than the goods themselves.
All offices or factories purchase their own supplies from stationery dealers or hardware stores;
Buyers bargain every time they buy a door lock or copier.
Prespresource has led National to cut the budget for miscellaneous supplies by 20% and to eliminate the annual processing cost of $7 million.
Credit card institutions have begun to trend thrift in shopping.
The fastest in the industry-
This is the growth Category-
Known as a corporate shopping card, it is intended to be purchased by office and factory by accident upon notification --
Copy of the key, sir.
Coffee machine, even Christmas tree.
Such deals are too small for national contracts, but accounting for them costs a lot of money in paperwork.
The company distributes cards to the foreman, staff and secretaries;
These cards contain code that sets the credit limit and limits the scope of use.
For example, factory workers may carry cards limited to local hardware stores.
As part of the pilot program, hundreds of factory workers with joint signals carry Visa and American Express shopping cards;
National Semiconductor is trying Visa.
Payment by American Express and Visa to suppliers, cancellation of thousands of purchase orders and cheques;
Each factory writes a check to the credit card company every month.
The joint signals and state plans to promote these cards in their factories and offices this year.
James Critzer, National\'s purchasing director, said: \"These cards reduce our processing costs from $30 to a few cents. \" Business-to-
Business services have proven to be a rich target for Shell Oil to cut costs. In the U. S.
Shell alone spent a large portion of $5. billion-a-
Annual service purchase bill.
As with all drilling and refining companies, Shell relies on external contractors to carry out dirty tasks that drive the business.
In the oil paste under sunlight, the welding part of the drill pipe is pulled thick.
Other contractors repair gas pipelines, clean oil tanks in refineries, and build gas stations.
In the past, each Shell refinery and regional exploration company used its own suppliersUsually a few.
From the barren plains of Texas to the smoking refinery in New Jersey, Shell hired a crazy quilt of 20 or more contractors to complete each task.
Recently, Shell has used its leverage skillfully.
For many services, it employs only one or two contractors nationwide;
For other companies, it appoints a company in each region.
Until last year, for example, nine independent \"workover\" companies visited the company\'s wells in West Texas and New Mexico to replace the leaking pipes.
16 trucking companies ship fresh pipes to the rig.
Shell then replaced all 25 suppliers with a company called Pool Energy Services.
\"We have moved from a total lack of coordination to a huge impact,\" said Lisa Liles Peters, Shell\'s head of procurement . \".
The contract slashed Shell\'s pipeline replacement costs.
At AT&T, cut huge bills for businessesto-
Enterprise service is the mission of the enterprise.
The biggest problem is freedom.
Faire attitude of AT&T services, from long term sales
Distance service to credit
Card Verification and telemarketing account for 60% of AT&T\'s $67 revenue.
Annual sales of 2 billion.
These businesses consume computer programming, paperwork, and office supplies;
Services and MRO projects account for $12 billion of AT&T\'s $20 --billion-a-
Annual Purchase Bill
Until recently, the service company-
Even some manufacturing departments at & t. -
Travel Services, paperwork and overnight mail delivery were purchased independently.
Units spread orders among a large number of suppliers and pay fines at high prices.
Now AT&T is urging its profit center to merge orders into large company-wide contracts.
Their target is epic: The annual savings target for MRO and services at & t reached $1 billion in 1997.
Just last year, AT&T saved $0. 125 billion.
It has achieved great success in contract computer programming.
Programming is a big cost for AT&T, totaling $0. 5 billion a year.
At any time, 3,000 programmers from outside companies are working on projects in the company, such as designing inventory systems, or for telephone products (such as 900-Number Service.
Daily work is $200 per person per day, $3,000 per day for special items.
Three years ago AT&T did business with no less than 300 companies, only paid the price of the ad and did not try to negotiate the discount.
\"It\'s completely out of control,\" said Patricia Cox, chief purchaser of administrative services . \".
AT&T has reduced the number of contractors to 75, about one per city, and has pushed hard bargaining.
Its daily rate for programming has fallen by 15%, saving about $75 million a year since 1991.
In Tenneco, buying is not just about saving money.
It itself has grown into a thriving business.
Houston Group (
Estimated 1994 sales: $13 billion)
Established a procurement subsidiary called TennEcon Services, which leverages Tenneco\'s purchasing power to get discounts on all products from telephone Services to PCs.
TennEcon, in turn, sells these products-
Low commodity prices-
For external customers, it is mainly small companies that pay more because of the small number of purchases.
There is a generous fee in TennEcon\'s pocket;
Last year, the business earned $30 million, excluding savings for the parent company.
Among TennEcon\'s most popular products-
Inside and outside Tenneco-
Telephone service and overnight mail delivery.
Up to 1994, the five divisions of parents spread their phone spending across AT&T, MCI, and Sprint.
On November, TennEcon negotiated a company-wide single contract with MCI.
The agreement requires a 10% cost savings over five years, or more than $15 million.
It also allows TennEcon to purchase services at a discounted price and resell them to external customers.
The only thing to note: TennEcon cannot steal an existing account of MCI.
TennEcon also has a similar overnight delivery contract with FedEx.
It gets a huge discount from the price tag paid by individuals and small businesses.
Normally, TennEcon will reduce its price by more than 20% to its customers, but it will still make a profit.
David Gosselin, president of TennEcon, said these savings are likely to improve: \"As we increase our external business from Tenneco more and more, we are negotiating lower prices.
\"TennEcon is becoming --
Stop small business supermarkets.
It also offers discounts on American Express Travel Services, Compaq computers and Canon fax machines.
For troubled entrepreneurs, buying from TennEcon can save money and time.
Financial Guardian, an insurance agent in Houston, uses the company for travel and overnight mailing.
\"It\'s a waste of time for me and my agent to negotiate small contracts,\" said executive vice president Michael Stroman . \".
\"When we do this, we never know if we get the best price.
\"Procurement is just beginning to show its awesome power.
As customers provide more business on fewer suppliers, successful suppliers will become more and more efficient;
Small, regional suppliers will be eliminated or swallowed up.
A new generation of super
Suppliers represent the progress of industrial development.
OK, the purchase is still dirty and secular.
But show some respect: it\'s starting to change the face of American business.
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