How to Save a Billion Dollars in Your Supply Chain
Or “the Billion-Dollar Boys” and Mega-Negotiations Story
By Dr. Tom DePaoli
For more Supply Chain stories see my books on Amazon;
Common Sense Supply Management or Common Sense Purchasing.
I and a supply management colleague had been working diligently for a year to try and standardize MRO (Maintenance Repair and Operating) parts to include pumps, pipes and valves, electrical and operating supplies. We divided the storeroom parts into these four bucket areas. These were storeroom related parts for a major process chemical company. We used a market basket sourcing approach. We had conducted numerous strategic sourcing cross-functional teams and had worked hard to get our engineers to select standardized parts for our plants. These sessions were long and arduous. We had reduced the number of suppliers or OEMs (Original Equipment Manufacturers) in many categories to one or two. Our goal was to gradually replace the existing parts as they wore out with the new OEMs and strive for standardization in the MRO arena. We had a systematic well thought out plan for doing this and had negotiated contracts with the OEMs and distributers. We were approximately 80% complete which was quite an accomplishment for the fifty North American plants.
Then the company suddenly announced that they were in the initial stages of planning a five-billion-dollar expansion in the United States. The winning five plants had already been selected. Some of the expansion was to be entirely new plants and the others were major rebuilds. The capital expansion was to start in six months. We were faced with managing a major capital expansion and a significant spend in the MRO area. We met with the Vice-President of engineering and decided to have a strategy session with him and the five selected plant engineers. We decided to have a one-shot bidding meeting with our preferred suppliers in Louisiana. We had a very good idea about the dollar amount of spend in the various buckets for the expansion. The capital job estimates had already been done and approved. We had four bucket areas in MRO: mechanical, electrical, piping and valves and operating supplies. We already had cost plus pricing contracts for 80% of our MRO. We did however still have at least two preferred suppliers in almost every major component MRO area like pumps.
I suggested that we leverage the hard work that we had already accomplished. We would announce the capital expansion at a preferred supplier meeting and give an approximate future dollar spend in each of the four buckets (areas). We obviously had a lot of leverage and many of the bucket dollar numbers were huge. We had fairly accurate data from recent expansions and the capital job estimates. We then established these ground rules for the bidding process:
1. There would be only one round of bids. We urged the suppliers to give the bid their best shot. There would be no second bid rounds. We did not have the time to manage multiple bids.
2. We announced that we would in many cases narrow down the areas where we had two preferred suppliers to one, unless we had a good business reason for keeping two.
3. Although we had negotiated some significant total cost of ownership savings in the current contracts, we were open to enhancements from the suppliers and distributers.
4. We told the suppliers that we would not accept their standard spare parts packages like we had in the past. We would challenge their typical spares packages but would be especially open to creative ways of them controlling and managing the spares at minimal or no cost to us.
5. OEMs could work with distributers to propose any additional creative services to provide us.
Quite frankly we had no idea how this mega-negotiation process would work. Fortunately, we had done a lot of supplier consolidation before this process. We had not had the time to even predict cost savings or eventual outcomes. We just did it. As the bids rolled back in, it was obvious that our suppliers had done their homework. All told the cost and other savings amounted to 20% of the 5 billion dollars or 1 billion dollars! We were stunned. For the next year, I and my supply management colleague, had to endure the “handle” or nickname of “the billion-dollar boys”, whenever we entered a meeting.
Yes, we were good and worked hard, but we were also very lucky. The fact that the company was spending that much capital at one time when we were transforming to supply management really helped our leverage and savings potential.
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