At the Supply Management 2.0 Forum in London earlier this month, Jessica Dunlop, e-Sourcing and Strategic Purchasing Manager for ITT Indutries, gave an encore performance of how new strategic sourcing and supplier and category management approaches helped her company overcome the mounting pressures of rising global competition and turmoil in the telecommunications industry, one of ITT’s core businesses.

Jessica told a sold out audience of U.K. supply managers how, the telecom crash forced ITT to cut its workforce in half between 2001 and 2002. At the same time 70% of the telecom supply base moved to the Far East, particularly China.

“Before this time procurement was viewed as a tactical function that was typically brought in late, after design and manufacturing decisions were made,” said Jessica. “But these factors dramatically increased pressures to reduce supply costs and to find new ways to obtain best-value as our supply base shifted from local to global [approach].”

ITT’s supply management team used this company “crisis” to secure resources and support to facilitate a new organizational structures, policies, and technologies. ITT has structured its global strategic sourcing approach into the following areas:

• Global strategic sourcing team — consisting of category managers in Asia, Europe, and North America, these groups manage large spend volume sourcing projects and are responsible for developing category and sourcing strategies and procedures for use across the regions.
• Value-centric sourcing — consisting of regional and site buyers across ITT’s manufacturing sites, these buyers manage sourcing for low-value, less-strategic spend and coordinate with the global team on larger projects.
• Premier sourcing process — the global and regional teams follow a common set of strategic sourcing principles and procedures to ensure integrity and consistency across all sourcing projects and to present a common and reliable face to suppliers aroudn the globe.

ITT has used a commercial e-sourcing solution to enable the above procedures, simplifying evaluation and negotiation with new Asian suppliers, engaging internal stakeholders from design and manufacturing in the sourcing process, and reinforcing common sourcing process around the globe.

Dunlop provided a case study on how ITT used these e-sourcing enabled processes — including the use of total-cost-based reverse auctions — to drive repeatable double-digit cost improvements for machined components over several years. (View previous post for more details.) “We were surprised at our ability to drive such large savings with each subsequent auction,” said Dunlop, attributing part of ITT’s repeatable success to a shift lotting and supplier approaches with each auction.

For example, ITT involved the machine setter from its manufacturing group on its machined components sourcing project to help assess which parts should be outsourced and which ITT would be better off to make itself. This process not only helped establish the proper lotting strategy, but it also helped ITT maximize its manufacturing utilization. ”We realized we were not competitive making these parts in house, but we had a shortage in another area and were able to sell off our [manufacturing equipment] assets 18 months sooner than planned,” improving both cash flow and performance, said Dunlop.

ITT also allowed suppliers to offer alternative bundles and flexible payment options. These were rolled into a score that was used to apply cost credits and debits, depending upon the supplier approach. “If a supplier wanted shorter payment cycle, we added an adverse factor too their bid [during the reverse auction],” said Dunlop. “This gave us a holistic and balanced way to measure the total cost of all supplier offers and to determine the best value award strategy [for ITT].”

Finally, ITT shifted its lotting strategy and auctioning approach with each subsequent sourcing project, beginning with a simple reverse auction with a limited number of vendors, moving to a more complex, total-cost-based negotiation with multiple lots and auction events, and, finally, a more flexible bidding environment, allowing suppliers to bid on partial bundles and provide alternative offers.

This continous improvement approach to sourcing delivered repeated, double-digit cost savings at a time when key commodities were experiencing inflation and supply scarcity. Such savings helped ITT to move from a loss to breakeven within the first year and have contributed to profitability since. It also secured the supply management team a new-found respect within ITT. Having seen what ITT’s supply management team has accomplished — and with tightening market conditions – ”other groups are now asking us to get involved in the sourcing process,” said Dunlop.

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