While today's ever-shifting procurement skyscape is certainly all about cost, it's not necessarily predicated on price. That's the strong consensus of several respected procurement professionals. "Supply chain management has evolved. In the past, it's been more transactional based and reactive," says Jim Renaud, a Certified Purchasing Manager.
While Renaud is director of development operations for Boeing's C3 Network, his comments are in the capacity of a spokesperson for the Institute of Supply Management. Once upon a time in another era (although not necessarily all that long ago), "the lowest cost would get the award. Today . . . you have to consider other factors. And these factors are more than [just] price. You have to take into account the logistics cost, the quality."
His experiential take on what the purchasing industry now calls Total Cost of Ownership is backed up by a seminal study. In an August 2002 article in The Journal of Supply Chain Management, Bruce G. Ferrin and Richard E. Plank of Western Michigan University in Kalamazoo underscore Renaud's assessment. Their findings suggest that "supply managers [should] adopt a long-term perspective, not a short-term initial-price perspective, for the accurate valuation of buying situations."
Ferrin and Plank contend that "cost . . . should include elements other than initial purchase price." Specifically, the professors of logistics (Ferrin) and marketing (Plank) say, "Supply managers must consider the impact of other business functions on the valuation of a specific purchase." They need to "understand and measure the cost impact of all the activities associated with the purchase."
Performance, efficiency and quality are the three things on the top of purchasers' lists these days. Get a handle on them and Total Cost of Ownership becomes less onerous. To Phil Krotz's way of thinking, getting a firm grip on those elements means just one hand on the handle at any one time. Otherwise, you tend to drop the thing to which it's attached. "We have an enterprisewide [procurement] department," says Rockwell Collins' director-supply chain service. He calls the approach "kind of unique for the aerospace and defense business." In lots of instances, aerospace firms have purchasing and sourcing sections for each division. "It's all siloed," he says. Aggregating elements of the avionics' firm's supply chain under one administrative roof "helps us deliver savings," he contends.
Bolstering his department's efforts are centralized Material Resource Planning and Enterprise Resource Planning software, both of which "help us get access to information [so] we can very efficiently source and procure products from our suppliers." With those sorts of sourcing tools in place, it's fairly simple to measure things like the impact of Lean supply chain practices. That in turn renders it easier to tally TCO.
Rockwell Collins started to develop its Lean philosophy in the late 1990s. At the beginning of the new century, "we started to push it out to our suppliers," says Krotz. So far, the firm has worked with some 1,000 vendors. The result--and here's where TCO comes into potent play--is a "30% to 50% reduction in lead time with our suppliers" even as the vendors "went through and adopted [Lean] methodologies."
This sort of TCO value tends to cascade through the highly interdependent aerospace industry, from subcontractors through primes and all the way to airlines. "It helps us react to our customers' needs more quickly," explains Krotz. "It makes us more agile." Lead time is terrific, but can the infusion of Lean lessons into the supply base save money? "We've seen individual suppliers save anything from $30,000 to $100,000 just by implementing specific Lean methodology," he asserts.
BETTER LEAD TIME, BETTER SAVINGS
But how do you know who needs help, where to deploy scarce procurement personnel? "We have a selection process that we go through," says Krotz. Part of that process entails using a special algorithm to highlight suppliers that might need help so that they "bubble to the top," he says. That's where Rockwell Collins' assistance goes. To cement the relationship, "We typically put out a memorandum of understanding with these suppliers [when] we go work with them on a Lean activity."
Surprisingly, first results tend to be kind of disappointing. "What typically happens as you implement Lean," he says, "is an initial degradation [in performance]." But that changes once people on the supplier's side get with the program.
Renaud recognizes that it's sometimes a matter of "sending our folks out to suppliers to help them [avoid] costs." Mike Madsen couldn't agree more. "We're focused on reducing spend [and] reducing costs within our supply base," says Honeywell Aerospace's VP-Global Airlines Business. That means "partnering with our supply base to share some of the techniques we've developed, such as the Honeywell Operating System, so that they can become more efficient."
How much more efficient? The Honeywell Operating System is deployed globally at some 37 sites within the US, Mexico, Canada, Europe and Asia. By the end of 2009 it will be integrated into 45 sites--85% of the manufacturing cost base. A full 50% of this base will be in the advanced stages of HOS deployment by year end. Honeywell says advanced HOS sites have racked up quality improvements at a rate three times that of non-HOS sites. As for productivity, the aerospace giant says HOS locations tallied twice the productivity of non-HOS sites.
"It's more than ROI," emphasizes Madsen. "It's about cost, efficiency and performance. Right now in particular we're in almost unprecedented times. It's very challenging for the commercial air transport business." Improve process and you boost TCO is the theory. Improve TCO and other things like quality and ontime delivery have a way of taking care of themselves.
"From a defects perspective, we've seen pretty significant improvements in quality," says Krotz, "usually about a 20% to 30% improvement." In terms of ontime delivery, he says the average gain has been on the order of 4%-5%. "You can imagine if someone's [already] at 89% [they're doing] pretty good."
Purchasing pros such as Krotz, Renaud and Madsen don't fixate on price and don't get hung up on purely transactional costs. Instead they understand the concept of Total Value Stream Costs. Quality, ontime performance and operational efficiencies are the intertwined flows that make up that total stream and reflect TCO.
Early intervention is the latest way procurement professionals are tweaking TCO. "One of the things we're working on right now is moving further up in the design phase with our lifecycle value stream managers," says Krotz. In essential programs, Rockwell Collins embeds procurement people early in the design of a new platform in an effort to help "drive out costs early in the design and development phases of the lifecycle."
So why is this important? He asserts that "75% of the cost is designed in up front." Traditionally, procurement people are handed a design, given specs and the boss tells them to " 'go negotiate this,' " he says. In the TCO scheme of things, he contends, "it's prudent for us to get involved early on so we can select the right suppliers and choose the right components." This gives Procurement the power it needs so it can "leverage our spend across the enterprise, get higher volumes and better negotiate with our suppliers."
While insightful, the perspectives of people like Krotz, Madsen and Renaud may not be entirely representative of the way logistics folks collectively embrace TCO. Ferrin and Plank found that although design and engineering played an important role in TCO, 63% of those responding to their survey said the contribution logistics managers make was "moderate" or "minor" or "slight" or "none." It was worse when it came to IT managers, who by virtue of the data they supply play a critical role in supply chain decisions these days. The researchers found "nearly 72% of respondents indicated ITmanagers play only a minor role in TCO valuation."
Maybe that's because Total Cost of Ownership isn't a cut-and-dried concept like price. Ferrin and Plank concede that TCO valuation "is a difficult process," but they also say "it's likely to be worthwhile for firms that apply it well." None of the folks Airline Procurement interviewed for this article would disagree.