At some companies, the purchasing professionals seem almost weary of programs designed to reduce costs. Not so at United Technologies, where the supply management operation appears energized by the relaunch of a cost-savings initiative for indirect goods and services. After exceeding targets set earlier this decade under an initiative called UT500, the purchasing pros are now hard at work on its successor, UT500 Plus!.
Initially launched in April, 2001, UT500 sets savings targets for categories of indirect spending managed by cross-functional, cross-divisional teams. The teams use process, policy and sourcing strategies to meet their goals.
One team, led by Brian Ross, MRO/chemicals commodity manager, is factory supplies, which consists of maintenance, repair and operations items, chemicals, and industrial gases-a $440 million annual spend for UTC. Working with key suppliers in these categories, the factory supplies team is well on its way towards meeting a two-year cost savings goal of $55 million.
For this effort, PURCHASING magazine named Ross to its team of MRO Buy Champions for 2005. His boss, Susan Spence, director of general procurement at UTC, was a PURCHASING MRO All-Star Buyer in 2002, when she held the same position. While Spence led the factory-supplies UT500 team, it exceeded a cost-savings target of $35 million, on a smaller annual spend. She was promoted in 2002; she's now responsible for UTC's $6 billion indirect buy. For his part, Ross recently moved from the corporate supply management function at UTC to supply management at UTC Fire and Security.
Headquartered in Hartford, Conn., UTC provides high-technology products and support services to the building systems and aerospace industries, including jet engines, electronic controls, elevators, air conditioners, fuel cells and helicopters. Its divisions include Carrier, Hamilton Sundstrand, Otis Elevator, Pratt & Whitney, Sikorsky, UTC Fire & Security, UTC Power and multiple joint ventures. UTC has $37 billion in revenues and more than 100 manufacturing sites in North America alone.
Factory supplies
"There's talk among purchasing professionals that cost-savings efforts are starting to hurt," says Spence. "But it doesn't have to hurt if you redeploy employees to activities that grow the business while letting suppliers do what they do best, managing the buying of certain commodities such as MRO items." She credits the structure of UT500 for her organization's recent success at meeting cost-savings targets. Under UT500, employees from across the company form teams that examine process, policy and sourcing for ways to reduce costs. Each year the teams present a report on their progress to an executive steering committee.
When it comes to the MRO buy, the supply management operation at UTC faces many of the same challenges as purchasing professionals at other global companies. For Spence and Ross, their biggest challenge is to develop and implement a common strategy for more than 200 sites worldwide that use many different systems and processes to buy MRO items.
"We have to tailor our program to the size and needs of the factories," says Ross. "We are almost totally engaged at the larger sites. The smaller sites present some challenges to expanding our program." UTC manufacturing facilities range in size from 25,000 sq ft to 6 million sq ft. For the factory supplies category, supply management has negotiated contracts with about 50 suppliers. Four key suppliers provide MRO items and chemicals to the larger facilities, those over 100,000 sq ft.
The key suppliers are:
Bruckner Supply, the integrated supply services unit of WESCO based in Port Washington, N.Y. Bruckner provides UTC with perishable tooling, hand and power tools, maintenance supplies, electrical supplies, and other items.
Praxair, which provides industrial gas in bulk and cylinders, other items and engineering expertise. Praxair is located in Danbury, Conn.
Haas TCM , a provider of chemicals (product and nonproduct) in West Chester, Pa., to UTC through an offsite JIT (just-in-time) delivery program of quality-approved materials.
K&S, a provider of machine repair services and offsite storage of spare motors.
Integrated supply
In an integrated supply arrangement, a supplier agrees to handle many of the processes necessary to fill MRO requirements-placing orders, purchasing supplies, managing inventories, making deliveries-promising significant reductions in purchasing costs. In effect, the customer outsources its MRO purchasing to the supplier. As a provider of integrated supply services to UTC, Bruckner uses its inventory system to manage UTC's cribs; it owns the inventory. The supplier has assigned program managers to each UTC division and has more than 70 site managers, crib managers, material handlers, and buyers in the field at UTC sites. There's also a Bruckner program director co-located with the UTC general procurement team.
Under Spence's leadership, the factory-supplies UT500 team worked with Bruckner to develop a Web-based crib-management system called e-crib. E-crib functions as a front-end ordering and inventory-management system. The system has functionality for individual consumption tracking and financial controls. It also has capability for "shop-out" to an online catalog. By implementing this system, the factory supplies team helped reduce costs by 17%.
When Ross took on responsibility of global commodity manager for factory supplies, he "kicked it up a notch" says Spence of his approach to reducing costs associated with the buy. In addition to factory supplies, he also took on chemicals and industrial gases as well as responsibility for MRO buying in Europe, Asia and North America.
Leveraging the visibility of e-crib, Ross and the factory supplies team implemented an inventory reduction program that resulted in an additional $5 million in savings. They worked with Bruckner to lower inventory levels, freeing up space at UTC warehouses while eliminating or minimizing manufacturing downtime.
Working with Bruckner, the factory supplies team identified items that are surplus or no longer needed in the factories. Key is the common platform, says Ross. "In the past we had systems that did not communicate across companies or divisions. With visibility to inventory across the company, we have data that show the sites with items to fill demand at other sites. We can transfer the items instead of buying new."
In the e-crib is a catalog of fast-moving MRO items and critical spares. Bruckner manages inventory levels for UTC using a min/max system. When inventory goes below the minimum threshold, the supplier is authorized to repurchase the item back to the maximum level. When one of supply management's internal customers needs an item, he or she logs onto a UTC mall available on the employee intranet site. For MRO, the mall has functionality that shows customers whether other UTC sites have the item in stock. If it does, the system has capability to make the transfer. If it doesn't, workflow with approvals gets the orders out to the supplier in the quickest possible time.
The team implemented the inventory reduction program in the fourth quarter, 2004, at Pratt & Whitney, a heavy user of the e-crib technology. They selected Pratt because it has a number of trucks that travel frequently between its facilities, many of which are located in New England. The facilities also have more part numbers in common. In addition to its own trucks, UTC has used a third-party provider, depending on cost.
To make the process easier, the team this year entered manufacturer part numbers into the system. Along the same lines, the team is working to standardize some MRO items across the corporation. To date, they've started purchasing common perishable tooling and some janitorial supplies.
Additional savings
There are some other ways the factory supplies team is meeting its two-year cost savings goal of $55 million. Under a formal cost reduction program, the team encourages suppliers to come up with savings ideas in the areas of price, delivery process, inventory reduction and energy savings. The team shares these ideas across the corporation.
Bruckner suggested a new, low-cost offshore source of protective gloves. K&S has set up a motor inventory search that's similar to the process Bruckner implemented for matching up MRO inventory items. Praxair recommended a $600 filtration device that prolongs the life of a $450,000 piece of equipment . Haas stores chemicals in an offsite location for UTC; delivery is within 24 hours from the time users place an order. The storage solution leaves Sikorsky with an empty building it now uses for manufacturing.
UTC stretches-again
Launched in April, 2001, UT500 is the result of line management, finance and supply management at United Technologies collaborating on ways to reduce general procurement costs. For UTC, general procurement is indirect goods and services, such as energy, facilities, transportation, chemicals, MRO, travel, IT, office equipment and supplies, and capital equipment. UT500 sets savings targets for these categories of spend which are managed by cross-functional, cross-divisional teams. The teams use process, policy and sourcing strategy to meet their goals. UTC's goal for the two-year initiative was $500 million. The teams surpassed that goal, reducing costs by $800 million. At the end of 2004, this figure was up to $1.1 billion. For 2005, the teams expect to add another $300 million to the tally.
Based on this success, management decided to relaunch the program in 2004 under the new name, UT500 Plus!. In addition to extending the life of the initiative, they decommissioned some teams-legal and marketing-and added new ones-management consulting, business services and fleet vehicles. They also combined some teams. For example, MRO, chemicals and industrial gases became factory supplies. They plan to take another look at the teams at the end of this year.
How UTC measures supplier performance
UTC general procurement implemented scorecards to measure performance of key suppliers in 2003. One of the first suppliers to get a scorecard is Bruckner Supply.
Susan Spence, director, general procurement, and her team, benchmarked other organizations' activities before launching their program. While many purchasing operations simply survey their internal customers-he users of indirect supplier services-Spence and the team wanted a tool that actually measures a supplier's performance. The team developed scorecard reporting that uses metrics pertinent to the supplier's industry. In fact, it started its program using metrics the suppliers use themselves.
UTC's scorecard tool normalizes the data so general procurement can compare performance of suppliers. Using a scale of one to seven, with seven being "delighted", the scorecard measures supplier performance in cost savings, quality, delivery and customer satisfaction in four quadrants. Some scorecards are used to measure suppliers companywide or at the divisional level; others look at performance at the site or crib level. The UT500 team discusses the scorecards' performance during quarterly operational reviews with suppliers; if there are issues, the two work together to set up an action plan.
