With U.S. manufacturers increasingly challenged by global rivals, American Axle & Manufacturing's Abdallah Shanti believes that the best way to compete is to collaborate.
[From Supply & Demand Chain Executive, December2003/January 2004] In an industry renowned for its ups and downs, American Axle & Manufacturing (AAM) clearly has seen its share of ups since 1994, the year when co-founder, Chairman and CEO Richard E. Dauch joined with two investors to buy five driveline and forging assets from General Motors. Since becoming an independent company, the tier-one auto industry supplier has seen its top-line revenues rise almost twofold to $3.5 billion, expanded from five facilities to 23, and gone from two customers in as many countries to more than 75 customers in 12 countries. Today AAM is a global manufacturer of automotive driveline and chassis systems and components, including axles and driveshafts for light trucks and sport utility vehicles (SUVs).
Abdallah F. Shanti, AAM's vice president for global procurement and information technology (IT), as well as its chief information officer, shares his company's GM heritage: Shanti began his career at General Motors/EDS in 1984 before going on to serve in various information technology leadership roles for automotive and manufacturing corporations, including, most recently, CIO and vice president of information technology with LucasVarity and general director responsible for systems engineering at GM. Shanti joined AAM as executive director of information technology and CIO in 1999, and he assumed his current position in September 2002.
Supply & Demand Chain Executive recently asked Shanti about the role the company's supply chain has played in American Axle's growth and how the supply chain is helping to improve his company's competitiveness today.
S&DCE: How has the procurement organization contributed to the bottom line at AAM over the past nine years?
Shanti: First of all, AAM was part of General Motors [until 1994], but the procurement function continued to be part of GM until 2000. GM procured all our direct materials not the indirect materials. In 2000, when AAM took over that responsibility, we faced some challenges, one of which was building a procurement organization to support AAM. When we took over our own purchasing, we still had the contracts that General Motors had in place for us with existing suppliers, so we have had to transition those contracts to AAM.
S&DCE: What is your direct materials spend?
Shanti: Our direct materials spend is roughly $1.6 billion. But we buy a big chunk of that internally I would say almost $400 million because AAM is "vertically integrated." We have our own forging division, where we procure such components as gears, axle and drive shaft components, pinions and the like. But we still procure the raw materials, like steel, for our forging operations. We buy approximately 250,000 tons of steel a year, and we're the largest special bar quality steel buyer in the automotive industry.
As far as the procurement organization, I look at my team like any other operational department within AAM. We have our driveline division, our forging division, and I look at the purchasing department as another division. In this case the plants happen to be our suppliers, and we treat them like they are AAM plants or an extension of our plants. That means we try to apply the same methods we use, which helps us internally to gain productivity and to achieve a competitive advantage. We work very closely with our suppliers to improve productivity, and they collaborate with us on product design, manufacturing and tooling development. We try to have a good, solid, collaborative relationship with key, strategic suppliers/partners.
That has helped us quite a bit in gaining benefits as opposed to the old, traditional approach of going out and saying [to suppliers], "Give me a 5 percent or 10 percent cost reduction." I'd rather work with them up front to design the cost out of the product. Because, if you're a casting supplier to American Axle, I look at you as the expert in that domain, and if you can tell me how to design my product better to leverage your manufacturing capability and so on, I've taken cost out without even asking for it. So that's one area on which we work quite heavily.
Also, our whole procurement department and I work with our suppliers to make sure that they understand that AAM is not just competing against other axle manufacturers in North America we're competing globally against axle manufacturers from around the world. We need to be very productive to stay competitive, and we want our suppliers to be able to compete on a global footprint as well. It doesn't matter if you're an AAM supplier in Korea, China, Mexico or Detroit, Mich.; we all have to work together to be globally competitive. That philosophy comes from our CEO, our chief operating officer and myself, and it is delivered throughout our whole supply chain. It is a constant theme any time we communicate with our supply chain.
S&DCE: What are the processes and technologies that you have invested in to enable the kind of supplier collaboration that you're talking about?
Shanti: I'll talk as much as I can without getting into the technical details, because I don't want our competition to know what tools we use.
If you remember three years ago or so, when the whole e-business and dot-com buzz was going on, everybody was talking about auctioning and selling over the Web. AAM chose a path that, at the time, was not the most popular to follow; we didn't think auctioning was a key competitive advantage for American Axle. Instead, we decided that our greatest productivity could come through leveraging IT on the collaboration side between our strategic suppliers and us.
Our approach at AAM was to focus more on the up-front work. We brought in our key strategic suppliers and had an open discussion to determine ways in which we could help each other be globally competitive by leveraging IT tools. We concluded that collaborative engineering and collaborative manufacturing are two strategic initiatives that would help us achieve our objectives.
Some [suppliers] were co-located, either physically or virtually, and that's where the IT kicks in. What I mean by "virtually" is actually working together through the use of computers on product design and manufacturing processes. We investigated a number of tools, a number of technologies. We looked at technologies that we already had in place, the technologies our suppliers had in place, and we figured out a way to create an open architectural platform that brought our suppliers into our infrastructure without burdening them with technology investments and extra costs.
We focused on this strategy and built a supplier portal. This allows our suppliers to come into [our systems] and do whatever they're authorized to do with us. (Not every supplier has the same level of access.) Our suppliers can come in, design with us, review, collaborate, do all kinds of things online. We are able to track shipments throughout the whole chain all the way from shipping parts to knowing that the parts have been delivered. If there is a discrepancy with a part or a component, [the supplier] instantly knows about it. I'm not talking about an hour or two-hour timeframe, but in real time instantaneously. Our suppliers know that the part we received from them had an issue, and they can immediately react and solve that problem. If they don't react fast enough, the problem will escalate electronically through the management chain of command.
Those systems have been very successful, very productive and they have helped us achieve some key things, such as improved quality and delivery, higher visibility and reduced inventory throughout the supply chain.
S&DCE: Are you building your own technology in house, or are you using off-the-shelf applications?
Shanti: Eighty percent of the IT applications that we use are purchased; 20 percent are customized. We are not developing applications, but we are partnering with technology companies, and they are building those applications and hosting them for us. So it's not all build or all buy; it's a hybrid of both. If the software doesn't exist and we think it's very important to have, then we go ahead and try to figure out a smart way of building it. But we're not in the software business as a company.
S&DCE: What are some of the things that you've bought and some of the things that you've built?
Shanti: For example, for our engineering system we partnered with EDS and purchased its product lifecycle management solutions (PLM) and TeamCenter software. But the way we are applying that technology is a differentiator; a lot of companies use PLM as a product data management system, but we use it more as a collaborative engine internally and externally with our suppliers.
S&DCE: How has the company measured the return on investment in its procurement-related initiatives?
Shanti: There are a few things that you always want to measure from an IT perspective. First, look at how effectively people are using the software that you've provide them with. Are they using it? Because at the beginning of any project, people are always excited: "Oh, we're going to do MRP [manufacturing resource planning]." But if you put the greatest MRP system in place and nobody uses it, it's a waste of resources.
Next we look at the application. Are people using it inside AAM? Are they using it the way it was intended to be used? Is the system serving them, or are they serving the system? At AAM we want the system to be an engine that generates information to help our associates make better, more informed decisions.
Finally, we ask if it is giving us the productivity that we were looking for. For example, if we decided to go from cradle to grave in six months using a specific technology, will we get there in six months? If we calculated the [cycle time reduction] and told the CEO that this is how long it's going to take us by adopting this new system, are we delivering the tangible time we said we were going to deliver? Are we doing it with fewer engineers and getting the productivity that we said we would?
So those are key measures. Personally, the most important measure for me is whether or not it changes the way we're doing business and makes us better. Our supplier portal is doing that today. I truly believe it's giving us a competitive edge over our competitors, whether they are in China, India or Ohio. We're not 100 percent there; we continue to push the envelope further and further. We're trying to go to the extreme edge of vendor inventory management, closer to something that I used to dream about called "real-time manufacturing." That's what we're trying to do.
S&DCE: What are the obstacles in the way of realizing that vision?
Shanti: The biggest obstacle is always that you are playing with something called change, and you're working with something called human nature. It is always challenging to get people to do something differently.
The other piece is education, because now you're teaching people something that they might not be familiar with. We talk a lot about computers like they've been around us forever, but there are a lot of people out there who are still afraid to turn on their PC. So, all the tools and technologies and processes that we're introducing require some recalibration or re-education of our workforce.
And again, in my current position as head of purchasing, we have to work with our suppliers as well. At AAM, we invest quite heavily in educating our associates. They receive 50 hours of training and skill set development per year. Fifty hours. That is not an option; that is a must. But we can't dictate that to our suppliers. We can only recommend or advise that our suppliers do the same thing.
S&DCE: Does that mean you have to invest your own time and the time of your staff in going out and helping the suppliers understand what you're trying to do?
Shanti: Yes, our purchasing organization is divided into several areas of expertise. We do have a group that's responsible for the commercial side of the business: the negotiation, the contracts and so on. But we have another group in my organization called the Supply Base Management group. Once we find a supplier, their responsibility is to develop that supplier, to make sure that the supplier is ready to launch our product when we need it, where we need it. So they work on development, launch, productivity and education. And if there are issues and I can't lie to you, there is always an issue every once in a while we dispatch a team almost like a SWAT team that goes into the supplier and helps them out of trouble so the problem does not impact AAM or our customers.
S&DCE: You are uniquely positioned as both the vice president for procurement and the CIO. Please talk about your general philosophy on the role of technology in transforming the procurement function.
Shanti: Well, I don't know if it's really unique or not. My background is engineering, but you're right, I have spent most of my career in the IT business and only recently took over the procurement department.
I always view myself as a businessman first. I believe that CIOs must always understand the business they are in. They must not only understand the domain that they manage, which is the technology domain, but they must also understand the business that they're in which in AAM's case is manufacturing. You've got to understand the business inside and out. That way you can develop strategies that help the business. If you're running the IT department, you build IT enablement strategies that support and grow the business, and you look at the technologies and the impact that they might have on the business.
I came into the procurement department with no history in procurement. I didn't know how procurement people function. But I did know one thing: I know the business that we're in. And I know that, as a company, we need to be globally competitive. So I build my strategy according to that need.
The other thing is, you've got to look at what kind of technical and technological tools you could implement in an organization to be different, to be enabled, such as integrating our suppliers. I've done that sort of thing in my past life internally, inside the company, but today I have the opportunity to go beyond our walls, into our supply chain, which I'm now responsible for.
But at the end of the day, it's Business 101. If you don't know the business, it doesn't matter what department you're running, you're not going to run it effectively, at least for the long-term.