Information is Purchasing Power

You can strategically source all day long, but driving savings to your company's bottom line takes more than just finely honed negotiating skills. First you need to know what to source, and then you need to ensure compliance with your hard-won contracts. One purchasing director's advice: start with the data.

Mark Steele had a dilemma.

When metal tooling company Kennametal hired Steele in May 2000, the new director of purchasing and supply management came in with a charge from CEO Markos Tambakeras to implement a sourcing program that would cut the company's costs. "I was hired to pursue a global strategic sourcing program, and I needed to generate results quickly," Steele recalls.

Problem was, $1.8 billion Kennametal, based in Latrobe, Penn., had grown to become a market leader in metal-cutting tools in North America and Europe through a series of acquisitions. That growth had left information on the company's spend spread out over four different enterprise resource planning (ERP) systems and more than 45 manufacturing and distribution facilities around the world. As a result, Steele needed a tool to analyze the spend data from the different systems as the first step in a strategic sourcing process, as well as to check compliance with contracts that might result from a sourcing process.

Steele and his team set out to find a way to regularly extract and analyze the data residing in the SAP, AskManMan, SHIMS and Enterprise ERP systems running operations at Kennametal's different units. Their initial thought was to build a data warehouse from the ground up to consolidate the spend using the United Nations Standard Products and Services Code (UNSPSC) system and D&B's business identification data, but that project proved cost- and time-prohibitive.

Kennametal also sounded out the major consulting firms and ERP suppliers, but none of the companies could move fast enough to satisfy Steele. "Many people we talked to had 90-day timeframes for scoping documents," he says, adding, "That just didn't suit my needs." Steele's team wound up looking for a "boutique" consulting firm in the purchasing sector that could provide the spend analysis service. After learning that one of the e-sourcing providers used an outside technology consultancy for these purposes, Steele was able to track down the external firm, which was a New York company called Tigris Consulting.

Kennametal first met with Tigris in late 2000, and with the clock ticking, Steele was quick to get to the point. "I threw a very aggressive challenge to them," he says. "I said, 'I'll give you the data, and then 45 days from cutting the [purchase order] and handing you the data, you have to deliver an analytical result and a tool, or you don't get paid.' And they said, 'Sure, we can do that.'"

Steele admits that he was swayed not just by Tigris' experience in doing spend analyses with other clients but by the service provider's ability to start small, at a low price point, and add services over time. "My bias is to enter into relationships through an incremental engagement," Steele explains. "I'm not the type of person who says: 'We've just met. Let's negotiate a prenuptial agreement and get married.' The way I like to do things, let's go out on a few dates, see whether or not we like each other, see whether or not we add value to each other's existence. Tigris was comfortable with this escalating engagement model."

As it turned out, the spend analysis work quickly paid off for Kennametal. For example, Steele's company had negotiated a telecommunications contract nine months prior to bringing in Tigris. But following an analysis of Kennametal's spend, the consultants highlighted potential savings to be had in this line item, and Steele's team was able to renegotiate the deal, ultimately saving the company $800,000 on an annualized basis.

The data also helped to clarify exactly how much Kennametal was spending on what and with whom. Before the spend analysis, the company had no way of knowing how much of its spend was uncategorized. In fact, out of a total spend of about $550 million, Tigris identified $82 million of uncategorized spend. "People would place orders and put it in miscellaneous," Steele says. "Now, by being able to identify it, we can fix it. We can hold people accountable to not enter purchase orders as miscellaneous."

In addition, Kennametal has used the Tigris data as the basis for running an online reverse auction on forgings and castings, with plans to look at using auctions in the future for other commodities.

But Steele says that the greatest benefit from the data has been in helping to enforce compliance with the Kennametal's existing purchasing contracts. To Steele, compliance is the key to getting the most out of any sourcing effort. "I could strategically source all day long and tell the company how much good I did by picking better-priced suppliers," he says. "But if nobody in the company buys from the preferred supplier, I haven't saved the company a dime."

With the Tigris data, Steele's team can see how much a particular facility spent, for instance, with the preferred office supplies firm and with non-compliant suppliers, and then work with a low-compliance facility to ensure a higher degree of buying off strategic agreements. To date, spend analyses have identified $20 million in off-contract buying. By moving that spend back into compliance with existing contracts, Steele conservatively estimates that Kennametal is saving on an annual basis at least $600,000, or 3 percent, and perhaps more, since the company's corporate agreements typically save the company from 5 to 10 percent. Compliance will have the additional benefit of helping the company reduce its supply base from the current level of about 8,000 to a target of below 2,000, with the resultant savings from spend consolidation.

Overall, Steele estimates that Kennametal has spent "in the low six figures" with Tigris, while the return on investment has been in the range of tenfold. These initial results sufficiently impressed Kennametal that the tooling company elected to engage the consultants on a regular basis to slice and dice the spending data. On a quarterly basis now, Tigris works with Kennametal to extract the data from the back-office systems at the company's various units, and then the consultants scrub the data, repopulate a purchasing data warehouse and run a new analysis regimen against that data set. The resultant analysis serves as the basis for Kennametal's compliance action plan for the quarter ahead.

Kennametal has expanded its cooperation with Tigris into new frontiers, as well. Specifically, Tigris is now using an income statement tool that applies a weighted average inflation/deflation index to Kennametal's aggregated spend data, based on the tooling company's spend categories and Standard & Poor's commodity indexes, to generate an estimate for Kennametal's spend for the year ahead. Tigris CEO Brent Habig notes that the use of this type of tool offers new savings possibilities for companies looking to leverage spend data. Explains Habig: "You can say, 'We're expecting increases in the key drivers in this particular spend category. Let's lock in those rates.' Or, 'We're anticipating some decreases. Let's be sure that we renegotiate that category based on market shifts.' It's a very powerful model of integrating market data into your overall spend visibility."

Steele is also exploring whether Tigris can provide a tool for reducing Kennametal's packaging spend and a tool for managing the company's contracts electronically.

In terms of best practices for this type of spend analysis process, Habig says that good communication is critical to success, particularly when the process involves going into various business units within a company to extract spend data. Consultants, in particular, must be sensitive to the political milieu in which they are operating when they are pulling out that type of data and talking about compliance. "We try to explain our objectives clearly, explain that we're not reviewing anybody's performance, we're just trying to come up with the best situation for the firm as a whole," Habig says.

With the data analysis fueling Kennametal's strategic sourcing process, Steele is also looking at other ways to streamline the company's purchasing. For example, Kennametal has put in place supplier management and supplier rating systems and is piloting an e-procurement module from SAP.

Steele is circumspect when it comes to his timeframe for putting all the pieces of an enabled supply chain into place. "Do I see some point where we'll be 80 percent done? Yes, nine months. Do I see us being at Pollyanna? No. And it's an evolving world, as you know."

Which is why the company has continued its strategic sourcing as well. Habig explains that sourcing is an ongoing process. Once a company achieves the early stage benefits by leveraging its purchasing volume and consolidating its supply base, the question becomes where to turn for additional savings. "That starts to get tricky," Habig says. "You begin to look at what we call secondary opportunities, which could be specification harmonization or more strategic issues like outsourcing or make-versus-buy assessments. It could be more on the process level: how could we drive costs out of our relationships with our suppliers? It does take additional skill to continue to get savings out of the same categories year after year after year, but it is possible."

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