IndustryWeek

Supply managers move to mission critical

For years, procurement experts wielded little influence beyond the warehouses where they toiled.

By Carlos Niezen, Wulf Weller and Heidi Deringer

Published on November 08, 2006
min read


When the first passengers board Boeing's 787 Dreamliner in 2008, they'll be part of aviation history, flying aboard a super fuel-efficient aircraft that allows midsize jets to achieve the range of much larger jetliners. What they won't realize is that the business model used to build the Dreamliner was equally revolutionary. Instead of tapping subcontractors' expertise late in the design and development process, Boeing decided to include them from the very start. Japan's Mitsubishi Heavy Industries is collaborating on making the 787's wing boxes; Messier-Dowty of France, a world leader in landing gear, is helping develop the 787's landing gear; and Latecoere, the aircraft manufacturer, is creating the doors. "Subcontractors are responsible for end-to-end design, and what we provide is integration," says James Renaud, Boeing's director of development operations. The key to Boeing's new way of doing business is its increasing and innovative reliance on procurement, now often called supply management. Boeing has expanded the role of supply management from that of outsourcing parts to assembling an entire global team of subcontractors. That way, the company taps into the best ideas and abilities throughout the industry to create a state-of-the-art jetliner, faster and more efficiently. Evolving Role Of Supply Chain Managers Back in the days before intensified global competition, increased risks of supply chain disruptions, and faster product cycles, procurement was an undersung corporate function. Its primary purpose was to purchase what the company needed at the lowest cost. But in today's fast paced, highly competitive world, manufacturing industry leaders are elevating supply management to new level of importance, using it to help drive a company's strategy and ultimately, its success. As a result, supply managers who help companies innovate products, save costs and become more agile competitors get more than just respect. Often, they find themselves on a fast track to the executive suite. A Bain & Company survey of procurement practices at 156 companies found 34 of them (22%) had superior supply management capabilities. Their growth was over 20% a year, with supply managers generating significantly more incremental revenue, as well as reducing cycle times and encouraging innovation, either on their own or by working with suppliers. For Boeing, supply management's expanded role has enabled sharing both ideas and costs: Nearly all of the jet's design and fabrication, along with some 40% of the estimated $8 billion in development expenses, is being outsourced to subcontractors and suppliers. Procurement As A Competitive Advantage Leading supply management organizations like Boeing's know that the rules of the game have changed, and that winning means developing a clear picture of the potential obstacles and figuring out how to overcome them. By studying how these industry leaders have unleashed supply management's full potential, we've identified three critical ways that they've built up procurement's game to prepare for the next wave of competition. First, they practice strategic supply management to achieve cost reductions in innovative ways. Practitioners of this approach gain an edge in negotiations with suppliers by establishing price targets in advance. How do they accomplish this? By figuring out how they can use supply management to accelerate corporate strategies, then taking the necessary steps. Those steps include: selecting suppliers who can survive economic downturns, creating competition among suppliers to obtain the best "total cost" by continually searching for new suppliers, and developing alternatives—including outsourcing. By performing their own analysis of the market and suppliers' costs and returns, they determine a target price for purchases. Also, they invest differently by dividing suppliers into groups based on the strategic importance of what they provide. Finally, they re-gauge their bets, using their experience curve to project—and demand—cost reductions. Analysis shows that the cost per unit in most industries decline between 20% and 25% for every doubling of industry-accumulated experience, which charts as a downward sloping curve. Creating competition among suppliers has paid off for MAN AG, a leading manufacturer of engineering equipment and heavy trucks. Recently, MAN introduced "concept competition," which asks suppliers for alternative technical solutions. By including suppliers in product development, supply management has helped MAN achieve cost savings of up to 35 percent on some of its subsystems. Collaboration & Cross-Functionality Collaboration among manufacturers and supplies also has delivered dramatic cost savings. For example, when two refrigerator manufacturers wanted to find ways to reduce costs, they took the unusual step of asking Henkel Technologies, a German supplier of adhesives, sealants, and surface treatments materials, to tackle the problem. In one 12-hour tear-down session, engineers at Henkel's Innovation Center disassembled a refrigerator and found 14 ways to save time and money in the manufacturing process, including using adhesives to replace more time-intensive screwed-on gaskets and taped-on shipping foam. Using supply management strategically is not enough. Industry leaders also think cross-functionally—and beyond procurement's traditional walls. By setting up cross-functional teams with representatives from such crucial areas as marketing, R&D, and finance, supply managers start viewing procurement from the perspective of the entire business. For DaimlerChrysler, cross-functional teaming for purchases is integral for advancing the vehicle manufacturer's strategic goals. The company's new Material Strategy and Innovation Council (MSIC) coordinates activity in engineering, procurement, cost analysis and research and technology—and has already identified and implemented strategies to combine volumes and reduce costs, while improving quality and innovation. And by making results available by scorecards to both internal supply managers and external suppliers, everyone can see what works, and what doesn't, allowing optimized spending, as well as the development of metrics and incentives. Supply Chain Managers Part Of Innovation Process Finally, leading companies use supply management to spur innovation. With increased global competition from low-cost manufacturers like China, innovation is the do-or-die differentiator for Western multinationals. To level the playing field, savvy supply managers reach out for R&D insights from customers, suppliers, and even competitors who can give their companies a winning advantage. Few industries change as quickly as technology. Hewlett-Packard has gained a powerful new weapon by partnering with its suppliers to co-design items ranging from servers to printers. The end result: HP has shaved 60% off the time it takes to speed new products to market, making it a much more nimble competitor. With supply management's proven ability to accelerate and execute corporate strategy, supply managers are finding themselves in demand. And their metric for success no longer is cost savings, but increased shareholder value. Carlos Niezen is a partner in Bain's Dallas office. Wulf Weller is a partner in Bain's Munich office. Heidi Deringer is a partner in Bain's Atlanta office. All three are leaders in Bain's Global Performance Improvement Practice. Note: This article contains a mix of Bain client and non-client examples.

When the first passengers board Boeing's 787 Dreamliner in 2008, they'll be part of aviation history, flying aboard a super fuel-efficient aircraft that allows midsize jets to achieve the range of much larger jetliners. What they won't realize is that the business model used to build the Dreamliner was equally revolutionary.

Instead of tapping subcontractors' expertise late in the design and development process, Boeing decided to include them from the very start. Japan's Mitsubishi Heavy Industries is collaborating on making the 787's wing boxes; Messier-Dowty of France, a world leader in landing gear, is helping develop the 787's landing gear; and Latecoere, the aircraft manufacturer, is creating the doors. "Subcontractors are responsible for end-to-end design, and what we provide is integration," says James Renaud, Boeing's director of development operations.

The key to Boeing's new way of doing business is its increasing and innovative reliance on procurement, now often called supply management. Boeing has expanded the role of supply management from that of outsourcing parts to assembling an entire global team of subcontractors. That way, the company taps into the best ideas and abilities throughout the industry to create a state-of-the-art jetliner, faster and more efficiently.

Evolving Role Of Supply Chain Managers

Back in the days before intensified global competition, increased risks of supply chain disruptions, and faster product cycles, procurement was an undersung corporate function. Its primary purpose was to purchase what the company needed at the lowest cost. But in today's fast paced, highly competitive world, manufacturing industry leaders are elevating supply management to new level of importance, using it to help drive a company's strategy and ultimately, its success. As a result, supply managers who help companies innovate products, save costs and become more agile competitors get more than just respect. Often, they find themselves on a fast track to the executive suite.

A Bain & Company survey of procurement practices at 156 companies found 34 of them (22%) had superior supply management capabilities. Their growth was over 20% a year, with supply managers generating significantly more incremental revenue, as well as reducing cycle times and encouraging innovation, either on their own or by working with suppliers.

For Boeing, supply management's expanded role has enabled sharing both ideas and costs: Nearly all of the jet's design and fabrication, along with some 40% of the estimated $8 billion in development expenses, is being outsourced to subcontractors and suppliers.

Procurement As A Competitive Advantage

Leading supply management organizations like Boeing's know that the rules of the game have changed, and that winning means developing a clear picture of the potential obstacles and figuring out how to overcome them. By studying how these industry leaders have unleashed supply management's full potential, we've identified three critical ways that they've built up procurement's game to prepare for the next wave of competition.

First, they practice strategic supply management to achieve cost reductions in innovative ways. Practitioners of this approach gain an edge in negotiations with suppliers by establishing price targets in advance.

How do they accomplish this? By figuring out how they can use supply management to accelerate corporate strategies, then taking the necessary steps. Those steps include: selecting suppliers who can survive economic downturns, creating competition among suppliers to obtain the best "total cost" by continually searching for new suppliers, and developing alternatives—including outsourcing. By performing their own analysis of the market and suppliers' costs and returns, they determine a target price for purchases. Also, they invest differently by dividing suppliers into groups based on the strategic importance of what they provide. Finally, they re-gauge their bets, using their experience curve to project—and demand—cost reductions. Analysis shows that the cost per unit in most industries decline between 20% and 25% for every doubling of industry-accumulated experience, which charts as a downward sloping curve.

Creating competition among suppliers has paid off for MAN AG, a leading manufacturer of engineering equipment and heavy trucks. Recently, MAN introduced "concept competition," which asks suppliers for alternative technical solutions. By including suppliers in product development, supply management has helped MAN achieve cost savings of up to 35 percent on some of its subsystems.

Collaboration & Cross-Functionality

Collaboration among manufacturers and supplies also has delivered dramatic cost savings. For example, when two refrigerator manufacturers wanted to find ways to reduce costs, they took the unusual step of asking Henkel Technologies, a German supplier of adhesives, sealants, and surface treatments materials, to tackle the problem. In one 12-hour tear-down session, engineers at Henkel's Innovation Center disassembled a refrigerator and found 14 ways to save time and money in the manufacturing process, including using adhesives to replace more time-intensive screwed-on gaskets and taped-on shipping foam.

Using supply management strategically is not enough. Industry leaders also think cross-functionally—and beyond procurement's traditional walls. By setting up cross-functional teams with representatives from such crucial areas as marketing, R&D, and finance, supply managers start viewing procurement from the perspective of the entire business.

For DaimlerChrysler, cross-functional teaming for purchases is integral for advancing the vehicle manufacturer's strategic goals. The company's new Material Strategy and Innovation Council (MSIC) coordinates activity in engineering, procurement, cost analysis and research and technology—and has already identified and implemented strategies to combine volumes and reduce costs, while improving quality and innovation. And by making results available by scorecards to both internal supply managers and external suppliers, everyone can see what works, and what doesn't, allowing optimized spending, as well as the development of metrics and incentives.

Supply Chain Managers Part Of Innovation Process

Finally, leading companies use supply management to spur innovation. With increased global competition from low-cost manufacturers like China, innovation is the do-or-die differentiator for Western multinationals.

To level the playing field, savvy supply managers reach out for R&D insights from customers, suppliers, and even competitors who can give their companies a winning advantage.

Few industries change as quickly as technology. Hewlett-Packard has gained a powerful new weapon by partnering with its suppliers to co-design items ranging from servers to printers. The end result: HP has shaved 60% off the time it takes to speed new products to market, making it a much more nimble competitor.

With supply management's proven ability to accelerate and execute corporate strategy, supply managers are finding themselves in demand. And their metric for success no longer is cost savings, but increased shareholder value.

Carlos Niezen is a partner in Bain's Dallas office. Wulf Weller is a partner in Bain's Munich office. Heidi Deringer is a partner in Bain's Atlanta office. All three are leaders in Bain's Global Performance Improvement Practice.

Note: This article contains a mix of Bain client and non-client examples.