Building a Supply Chain Organization from the Ground Up

Commercial Metals Company started with a clean slate in creating a shared supply chain group, but in less than a year it already saw tens of millions of dollars of cost savings

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If you had the chance to build your company's supply chain function from the ground up, what would that organization look like? And more importantly, how would you go about designing the function, where would you find your staff, and how would you roll the organization out to the rest of the company?

All these questions faced Commercial Metals Company in 2008 when the Irving, Texas-based global metals firm opted to begin moving to a centralized supply chain organization model. The ambitious goal: create a shared supply chain group that could drive savings per year per supply chain employee at a rate double or triple the industry average – in just the first year of the initiative.

"Starting from Scratch"

CMC manufactures, recycles and markets steel, other metals and related products. The company, which reported 2009 fiscal year revenues of about $6.8 billion, has operations in Poland, Croatia, Australia, Germany and Mexico in addition to its U.S. operations. It also has several trading offices, including in China and Singapore. A vertically integrated steel company, CMC has grown through acquisitions, bringing scrap yards, mills, fabrication shops and other facilities together under its various divisions.

With diverse operations spread across recycling, mills, and fabrication and distribution groups, it made sense to set up a shared services organizations to handle functions like accounts payable (A/P), human resources, payroll, safety and environmental engineering, and supply chain. The move to create shared services coincided with a rollout of an enterprise resource planning (ERP) system from SAP, with IBM acting as system integrator on the deployment.

The plan for implementing the ERP system envisioned significant supply chain benefits, says Andrew J. Houser, vice president of supply chain management at CMC. As a result, as CMC was putting together the business case for the SAP solution, it also put out an RFP for consulting services to help the company ensure that it realized the best return on investment on the SAP implementation by looking at how the company should structure its supply chain organization. "We were starting from scratch in figuring out how to run our supply chain, looking at what tools to use, what processes to use, what people were going to be in the organization," says Houser. "We had a completely blank sheet of paper to start with as we designed the supply chain."

Based on the RFP, CMC brought in consulting firm Greybeard Advisors, founded by Robert A. Rudzki, a former Fortune 500 chief procurement officer. Houser says that CMC went with Greybeard from among a total of eight consulting firms that the company looked at because the firm did not offer an "off-the-shelf" approach. "They genuinely got to know the business and the operation, including the culture and the people, before they put together their proposed solution," he says, adding, "At CMC, we have a very rich, defined company culture, and new initiatives are only going to be successful if you get people to participate." The consulting firm's approach also focused on communicating with senior management as well as with supply chain staff, and on transferring knowledge and skills to the client's organization to build in-house capabilities quickly.

Ambitious Goals

Greybeard's charge was to help CMC craft a roadmap for how the company should put in place its supply chain organization and business processes, and then assist in the rollout by providing training and experienced team coaches during the first few waves of sourcing projects. Rudzki, who led strategic transformation initiatives as a supply chain executive before moving to the consulting side, says that Greybeard's approach to creating a "transformation roadmap" begins with an objective assessment of the "as is" state of the company's supply management and procurement performance against "best-in-class" organizations not only within the company's own industry, but across all sectors. That evaluation serves as the basis for a gap analysis to identify and quantify opportunities, and to assess which specific initiatives to pursue first, second and so on, in a way that builds results over time. "This is part art and part science," Rudzki says. "Done poorly, it can be the reason for 'evaporating results.' Done well, the roadmap will create sustainable results and momentum, and build organizational capabilities that drive superior performance."

The supply chain organization that CMC established includes a group focused on procurement of direct and indirect materials; the logistics group, which manages the company's substantial fleet of its own trailers, trucks, railcars and barges and leased ocean vessels, moving all CMC's products between different facilities and ultimately out to customers; the supply chain optimization group, which focuses on the sales, inventory and operations planning (SIOP) process; and a supply chain capabilities group, which manages all the tools that supply chain uses, including SAP, business intelligence reporting, spend management, supplier scorecards, supplier diversity, supply risk analysis, eRFX, e-auction, e-commerce, EDI and global master data, including all the vendor information that is loaded into SAP.

The supply chain organization launched in September 2008, just as Houser came on board with CMC. Previously, Houser worked at EDS (before the HP acquisition), where he was focused solely on the supply chain side at a time when EDS was going through a similar transformation to centralize supply chain operations. Before that Houser was with SBC Communications (prior to the AT&T acquisition), where he did sales, operations, network management and some procurement.

At CMC, Houser says that the roadmap for the supply chain organization provided for building a very lean group. "Our intent, when we started this, was that we didn't want to build a massive overhead or a bureaucratic organization," he says. In addition, the company elected to build the team primarily using current CMC employees drawn from the businesses. "Our logic was that while a lot of the people we were bringing in might not have a formal education in procurement or supply chain, they knew the business," Houser explains. "We felt that by teaching them the process, they would be able to use their business knowledge to drive good results."

And the results that the company was looking to drive were not trivial. Based in part on benchmark data that Greybeard had put together, CMC figured that average to high-performing supply chain organizations were achieving an average of about $360,000 in savings per year per supply chain employee. CMC's goal for the first year of its supply chain transformation was to drive double or triple that performance.

Building the Team

As Houser built the supply chain team, he looked for internal candidates with strong financial acumen, good communication skills, and strong knowledge of the industry and CMC's operations. "We've got a smorgasbord," he says. "Every single division gave us people for this team. We have people on the team who used to work at the mill, who used to work in recycling. And in a variety of functions, whether they ran the melt shop, whether they were in sales, whether they ran the shredder at the scrap yard. So we have a great cross-section of people with that core skills set, and with some very unique business experience that really helps us understand what our internal consumer needs."

Coming from an operations background, Houser says the biggest pet peeve that people on the operations side have with supply chain is that they feel supply chain doesn't understand their needs, their business. "In a lot of cases, I think that's true. Where I've seen procurement organizations fail, it's where they have not involved their stakeholders enough or where they have not understood the business. So they go out and do deals with suppliers that don't meet the needs of the stakeholders or the business. If the business doesn't buy from that contract or changes the way that they do business, then the benefit never becomes real."

Bringing operations and sales people from the business into supply chain lends the organization credibility, Houser continues, because the people in the business see that it's their peers in supply chain, not outsiders. That means that when a supply chain person comes to the business and talks to them about changing to a certain supplier or doing a process in a certain way, it has credibility, because the people in the business know that the supply chain person has lived in their world. In the end, CMC wound up bringing in just a couple external candidates into the supply chain organization in cases where they needed particular subject matter expertise, primarily around IT sourcing.

Achieving Results

The company's original plan had been to have the supply chain organization formed in September, but they really didn't have everyone hired and in place until January 2009. That left even less time to meet the organization's ambitious goals for CMC's 2009 fiscal year, which ended August 31. And yet by the time the company reported its '09 fiscal year end results, CMC's senior management was crediting the supply chain organization with a total of $76 million in savings, including $36.2 million through the procurement group, $32.1 million achieved by the optimization group, and $7.7 million by the logistics group. Those results added up to $1.2 million in savings per supply chain staffer, or greater than three times the industry average that the company used as a baseline to rate its supply chain performance. Supply chain also helped reduce the company's inventory by 444,220 tons, worth more than half-a-billion dollars. All these results led CMC's chief financial officer, Bill Larson, to single out supply chain's contribution during the company's fourth quarter earnings call, noting, "Our supply chain management group aggressively attacked costs and achieved tens of millions of dollars of cost savings this year." Adds Houser, with a degree of understatement, "We've been very pleased with the rapid progress."

In all, supply chain initiated more than 275 different sourcing "plays" during the past year and had completed 134 by the end of the company's fiscal year. Houser points to "good progress" attacking IT categories such as wireless, fixed line network, printing, PCs and professional services. Other broad categories they've attacked include maintenance, repair and operations (MRO, everything from safety equipment, footwear and fasteners to ropes and slings and paint); mills (including such items as electrodes, ladle brick, alloys and lime); equipment (for example, forklifts, tractors, trailers, tires and fuel); and administrative (T&E and office supplies). The sourcing efforts not only produced hard-dollar savings but also helped CMC consolidate its supply base significantly, so that 80 percent or higher of the spend in each category now goes to five or fewer suppliers.

Supply chain also identified certain items that they were able to work with the business to manufacture themselves rather than buying from an outside supplier. Not only has this produced cost savings, but in some cases the company is getting longer lifecycle out of the products because they were able to customize the items more specifically to their needs. Says Houser: "Transforming your supply chain is not just about going out and getting a better price. It's about diving in and understanding how your business consumes the product and how you can change that consumer behavior to get uplift that's above and beyond the price change."

Success Factors

Houser credits the results, in part, to the strong backing the initiative has received from senior management. "We've had overwhelming support, starting with the board of directors on down to each of the executive VPs over the various divisions. They have realized the potential benefits to their divisions, and they're doing everything they can to help us," he says, noting that the businesses have provided staff to work on the sourcing teams. In all, more than 400 people from the divisions have participated in sourcing exercises with supply chain.

Communication also has been a significant success factor, Houser adds. He went out on the road for the first 90 days of the project, visiting most of the company's U.S. locations, meeting all the staff from top to bottom, from the vice president in charge to the individual buyers, getting to know them personally. And that was done before they started running sourcing plays, so that they knew what supply chain was doing, what its intent and goals were. The supply chain organization also hosted a number of training sessions at various locations across the U.S., including for every member of the executive team, so that they understood supply chain's plans.

As the initiative unfolded, the supply chain capabilities group, with six employees, was in charge of all supply chain communications out to the businesses. They looked at how best they could communicate progress, benefits, current projects and expectation in a way other than blasting out PowerPoint slide decks and e-mails. As a result, they did road shows at various locations, put together a supply chain "magazine" and monthly updates, created policy documents and executive presentations for the board, and also collected feedback from the businesses, too.

Houser says that he leveraged his own background in marketing to help craft an "integrated marketing campaign" to take supply chain's message out to the businesses. "I think that some of the traditional ways that supply chain has communicated have lost their effectiveness. When you throw a PowerPoint up on the screen, with most people, their brain switches off. Advertising guys are always trying to figure out how they can get their message through and get the consumer either to get educated or take action. And those are two things that we have been doing: we have been educating and we have been persuading toward action."

Finally, Houser also believes that a key success factor for any initiative of this scope is ensuring that supply chain treats its internal customers with as high a regard as external customers, if not higher. "They are the ones consuming your products," he says. "They are the ones that have to embrace the change. And if you don't look for ways to get them involved and to gain their expertise and input into the process, you're not going to be as effective."