MRO/DISTRIBUTION

Integrated supply: Value engineering reduces costs

News about Atlantic Fasteners is in red.

by Susan Avery

Like many MRO buyers who have implemented integrated supply agreements at their companies, Suzanne McAuley of the Foxboro Company finds that it's relatively easy to reduce purchasing costs during the first year. After that, she says it becomes more challenging to keep up the momentum.

In 1996, McAuley, who is commodity manager, corporate purchasing, entered into the agreement which pooled Foxboro's MRO buy across three divisions with a single electrical distributor, WESCO Distribution, Pittsburgh. During the agreement's first year, the Foxboro, Mass.-based maker of automated industrial control equipment reduced its purchasing costs by 15% [PUR: May 22, '97; p. 69]. In the second year, the company realized savings of nearly 11%.

As McAuley sees it, under an integrated supply agreement, all of a company's buying processes for a variety of MRO (maintenance, repair, and operating) goods and services are brought together under a single process. Foxboro's annual MRO tab--electrical equipment, PVF/HVAC, industrial supplies, data communications equipment, cutting tools, bearings, and power transmission--amounts to some $3 million annually.

Cost savings resulting from the agreement in the first year are due mainly to price improvements, administrative improvements, standardization efforts, elimination of freight charges, and productivity improvements.

"Our challenge now is to keep cost-reduction figures in double digits as long as possible," says McAuley. "We believe we'll still see savings exceeding 10% in the third year."

How McAuley is doing this is by encouraging user departments to analyze their purchases for cost-saving opportunities. McAuley and Henry Dzialo, Foxboro account rep, WESCO, are systematically applying proven principles of value engineering to the fastener and cutting tool purchases.

The first commodity the two have tackled is fasteners. At $1.5 million annually, fasteners is the single largest commodity the company purchases, and a challenging one at that: 75% are "specials."

WESCO provides 2,000 part numbers to Foxboro through an alliance the distributor has with Atlantic Fasteners. Looking to substitute some of these "special" fasteners with like parts, McAuley and Dzialo put together a team of representatives of the engineering staffs of both Foxboro and Atlantic Fasteners. Meeting weekly, the team first ensured that each of the fasteners used in Foxboro's production process is properly classified in the company's database.

The team identified 33 that they believed could clearly be re-classified as "standards." In doing so, the team realized cost savings of $285,000. Looking at additional fasteners, the team has determined that savings could eventually amount to $430,000, a 30% cost reduction.

"We needed support from throughout Foxboro to make the changes to the engineering drawings," says Dzialo. "Atlantic Fasteners did a tremendous job in working with engineers to provide information on why the substitutions would work."

Still, McAuley says, "In some instances, such as those in which special fasteners are used to produce instruments sensitive to temperature extremes, we couldn't use substitute parts." In all, this process took 12-15 weeks.

Now, fasteners that engineers may specify for use in Foxboro production processes are listed by the company's part numbers in its database. The engineers may access information on parts by entering such data on the fasteners as part size or material specs. The system, in turn, generates a list of fasteners suitable for the engineers' applications. By using parts already listed in the database, the engineers are helping to generate additional savings for the company by not creating new demand for fasteners.

Carbide inserts

Another purchase to which McAuley and Dzialo have applied value engineering techniques is carbide inserts, a $500,000 annual spend for Foxboro. The company's machine shop had been using inserts that were purchased from three suppliers. This time the value engineering team, made up of machine shop personnel, the supplier, and Dzialo, narrowed the supply base to one manufacturer.

At the same time, the team has reduced the number of carbide inserts Foxboro purchased from 68 to 37. The result: a 15% cost savings from reductions in unit price. In addition, Dzialo has set up a rebate program with the manufacturer they've selected, Valenite, which may result in an additional 57% savings. Also, the manufacturer provides technical training for Foxboro engineers.

For items used in a company's production process, such as carbide inserts, it sometimes can be difficult to convince machine operators to stop using a brand that they have been using for 30 years, McAuley says. At Foxboro, however, the operators have been willing to try alternatives. "While at many companies, machine operators would not go for this, improving the efficiency of our operation is important to everyone here."

The key, McAuley says, is to build on past success, which she did by demonstrating to the company savings resulting from applying value engineering techniques to the fastener purchase. William E. Cenk, director of integrated supply at WESCO, says that his company helped by conducting product demonstrations for machine operators, displaying the inserts for side-by-side comparisons. For Valenite's part, the manufacturer's in-depth knowledge of its products (i.e., which inserts should be used to meet Foxboro's production levels) played an important role as well.

Foxboro purchases the Valenite carbide inserts from WESCO on consignment. This way, there is no need for the company to hold--and manage--inventory, helping to further reduce purchasing costs. The distributor stocks on site all 37 inserts being used by machine operators.

For fasteners, Foxboro also has a consignment agreement with Atlantic Fasteners. WESCO manages the inventory as well, holding some of the fasteners at Foxboro's facility in East Bridgewater, Mass.; for others, it provides a bin replenishment system.

"We're seeing increased interest from buyers recently in consignment systems," says WESCO's Cenk. "This is something that many distributors seem to shy away from because of the [apparent] inability to control inventory that's kept off site. With integrated supply agreements, however, distributors now have improved access to information. We are now better able to track inventory levels."

What's next

Since implementing the integrated supply agreement with WESCO, Foxboro has reduced its supply base by 500 suppliers. WESCO's core supplier group consists of only 18 suppliers, a dramatic decrease and a good opportunity to leverage volume for reduced purchasing costs.

In tracking its performance against goals set by the two companies each spring, WESCO prepares weekly reports on purchase price variance (PPV) for Foxboro business units. Another performance measure is time to process orders. This now takes WESCO about five days. Many of these orders the distributor can process for next-day delivery (Foxboro has no stock rooms); others for, say, machine repair parts, may take as long as three weeks. All this information is tracked by WESCO in its own computer system.

"We review the metrics in Pittsburgh, then Henry posts results prominently outside his office at Foxboro so that everyone can monitor WESCO performance," says Cenk.

McAuley's accomplishments so far have been the introduction of the MRO program to the three Foxboro plants as well as co-chairing, with Ash Budhiraja, the fastener VE team for the three facilities. One of her goals is to apply these VE tech-niques to other commodities within Foxboro.

Beginning with electrical equipment, another team of Foxboro and WESCO engineers spent three weeks cleansing data in the company's computer system--how much Foxboro is spending on these items, from which suppliers it's buying them, etc.

From there, the team is mapping out strategy appropriate to each commodity. It takes into consideration capabilities of the supplier providing the commodity, as well as the items provided (a single SKU, stock-keeping unit, or an entire product line).

"If we want to assume sourcing of materials, we need to understand Foxboro's current suppliers and all the nuances of the ordering process as well as delivery performance," says Dzialo. In analyzing this information, the distributor can help determine if the buying strategy that's now in place is most cost-effective.

"Sourcing a different part from a current supplier or the same part from a different supplier may be more cost-effective for Foxboro," says Dzialo. "At the end of the day, it may be a mix. This is value engineering at its best."

Foxboro has good data on these items, says Dzialo. Connected to the company's computer system, WESCO has real-time access to Foxboro's forecast and usage figures. "Giving WESCO capability to retrieve data and run reports helps to make everyone's lives easier."

At the same time, WESCO is opening a branch within the Foxboro location. This way, "we expect to provide Foxboro with improved process efficiencies, i.e., reductions in cycle time," says Dzialo. "We will be turning orders more quickly and delivering directly to the desktop, saving Foxboro at least one day in the process."

On the MRO side, "we are expanding the program to our affiliates across the country," says McAuley. "Our marketing department is interested as well in offering the program to Foxboro customers who have installed our products." In identifying major installers at these sites, WESCO can provide purchasers not only with attractive price levels, but also product support. This also gives Foxboro an opportunity to benchmark their experiences against other companies that become involved in the program.

McAuley credits Dzialo's capability at managing the relationship for much of the agreement's success. Dzialo, for his part, says that in order for the agreement to work, the two companies needed not only commitment from top management, but support of everyone involved as well. Frequent meetings between the two companies to discuss objectives of the agreement also are vital to its success.