Having succeeded in transforming its procurement processes for indirect materials, will Ametek now consider doing the same for direct electronic component materials?

By Diane Trommer EBN (11/10/2003 10:00 AM EST)

For more than a decade, Ametek Inc.'s business has been driven by a Corporate Growth Plan instituted by the company's then-chairman, Walter Blankley. Blankley's four-part plan, consisting of new-product development, operational excellence, global and market expansion, and strategic acquisitions and alliances, was developed in an effort to ignite Ametek's flat earnings and weakening stockholder value.

The initiative worked, and today, the Paoli, Pa., manufacturer of electronic instruments and electric motors is a $1 billion company with more than 8,000 employees staffing 15 operating divisions and 57 facilities worldwide.

But for all it accomplished, Ametek recognized that it still had some significant weaknesses, particularly within its supply chain.

While the company had long prided itself on the autonomous nature of its various businesses, in early 2000 it acknowledged that it was missing substantial savings opportunities by not better leveraging its spend with suppliers. Chief among its problems was the fact that, despite its size, Ametek had never developed a centralized strategy to direct its $500 million annual materials expenditure, according to vice president and chief information officer William Lawson.

But with competitive pressures driving Ametek to find new ways to reduce costs, executives could no longer ignore the savings made possible by consolidating purchasing functions. So the company has begun to transform the way it structures and executes its procurement processes, extending to virtually every commodity area and leaving Ametek at the threshold of determining whether also to transform its expenditures on direct electronic component materials.

Before that weighty decision can be addressed, however, Ametek, like most companies engaging in e-procurement for the first time, has tackled more obvious targets--noninventory materials like office and janitorial supplies that are easily commoditized and are more common across its entire scope of operations.

Ametek was also sensitive to the fact that such items are not a crucial component of the products the company delivers to its customers, meaning there would be less risk if problems arose.

The first challenge lay in finding a solution that would enable Ametek's operating divisions to maintain as much autonomy as possible, while at the same time providing the company with the opportunity to obtain better prices and service from fewer suppliers.

Ametek turned to one of its preferred technology vendors, Oracle Corp., which conducted a system value assessment. Ametek's business partner, IBM Corp., acted as a consultant to help the company pinpoint its requirements and select the optimal software package. Based on the assessment, Ametek opted for Oracle's Advanced Procurement platform, which includes Oracle Internet Procurement and Oracle Purchasing Intelligence.

With Oracle's iProcurement desktop requisitioning tool, Ametek would be able to create self-service access for users to pre-negotiated catalogs of MRO materials.

In addition to committing to implement Oracle's e-procurement applications, Ametek adopted the software vendor's "shared services" model, which enabled Ametek to consolidate non-revenue-generating activities, such as payroll, accounts payable, purchasing, and inventory management, into Shared Services Centers.

Earlier this year, Ametek named Elaine Gorman, the company's former director of financial information, to the newly created post of vice president, Shared Services.

Supplier issue

With its technology choices made, Ametek next set about organizing the mounds of supplier and product data from its divisions worldwide.

The task was daunting given that Ametek had no corporatewide ERP system, no standard financial program, and no common approved-vendor list. Ametek enlisted the help of Dun & Bradstreet (D&B), which compiled vendor lists and spend data from all of Ametek's operating divisions and found that the company would actually be able to consolidate its base for direct and indirect material purchases from 40,000 suppliers to just 14,000.

Shortly after receiving the D&B analysis, Ametek was alerted by one of its overnight freight carriers of a pending rate increase. With the new data in hand, Ametek was able to show the carrier just how much business each of Ametek's divisions did with the freight carrier. In the end, not only did Ametek avoid a rate increase, it was able to negotiate a reduction.

Lawson noted that the savings from that one contract alone covered nearly half the cost of Ametek's e-procurement implementation.

With its supplier data cleansed and organized, the next choice Ametek had to make was how to manage its catalog.

Initially, Ametek's plan was to have a local "dot.com" catalog content management firm help create the initial catalogs, which Ametek would then host and manage using its own system.

This plan didn't work.

"The sourcing problems were huge," Lawson said. "We had problems getting our vendors to convert to this catalog content system because the third-party catalog provider wanted the suppliers to pay them to cleanse their content."

In addition, the company's users found the catalogs incomplete and difficult to navigate.

Ametek realized that a shift in strategy was necessary and began looking for a larger service provider that could scrub and host the commodities catalog.

ICG Commerce, a procurement services provider that offers strategic sourcing, implementation, and transaction and category management, was chosen. ICGC aggregates the buying power of a company's large customer base to improve pricing and service levels for suppliers in more than 40 indirect buying categories, according to Bob Kothari, vice president and general manager of ICGC, Jenkintown, Pa.

"One reason our service is attractive to companies like Ametek is that in the world of indirect materials, there's a lot of product," Kothari said. "With most procurement groups running fairly lean, it's impossible to manage all the categories of suppliers. Having the ability to manage all those categories through essentially one supplier [ICGC] gives them the opportunity to focus on the more strategic suppliers."

ICGC is managing seven commodity categories for Ametek: electrical, industrial, janitorial, lab, office and safety supplies, power transmissions, and bearings. Ametek can requisition more than 3 million SKUs within these categories, according to Gorman.

Reduced headcount

With Oracle's self-service requisitioning tool and ICGC's pre-negotiated supplier catalogs, Ametek was able to move a significant portion of its MRO procurement down to the actual user level, enabling Ametek to reduce headcount by eliminating the need for MRO buyers.

"Part of the success of this program is that in our larger locations where there were buyers whose sole role was MRO procurement, those positions are no longer required," Gorman said. "So, for example, in some of our locations the maintenance people now have the ability to go online and order directly themselves."

While Gorman could not say exactly how many MRO buyer positions were eliminated, Ametek reports that it has met its projection of $800,000 in administrative cost savings.

When all was said and done, Ametek had invested more than $1 million in its new e-procurement initiative, including software and consulting fees.

The challenge now was to get people to actually use the system.

"Ametek took on a lot at one time. Not only did they change the system, they changed the whole process," said ICGC's Kothari.

Previously, if a worker needed something, he would fill out the paperwork and give it to a buyer, who would either pick up the phone or send a fax to the supplier. "Now you have people on the shop floor who have responsibility for placing the orders. It's a tremendous change considering many of these people often don't even have offices," Kothari said.

On-site training

Understanding that there would be resistance to such a new process, especially given the company's historically hands-off approach, Ametek instituted an aggressive change management program, including on-site training at all facilities, creation of user groups and access to print and online user manuals, and a regular newsletter communicating information about the new system.

In addition, an incentive program was established, in which small tokens such as Palm Pilots were given to reward the highest user adoption rates.

The final driving force for adoption of the new e-procurement program was a letter to all Ametek employees from company chief executive Frank Hermance requiring full compliance with the system.

Despite a few wrong turns, the plan appears to have worked. After two years in full implementation, Ametek reports that savings are "at goal level," or 10% of the company's total spend for indirect materials. In addition, Gorman said catalog adoption for indirect spend is at ap- proximately 70%.

While he is pleased with the results to date, Lawson concedes that it has taken a bit longer to reach these goals than anticipated.

"The economy has been rough. Spending is down, inventories are down, things have tightened up all over," he said. "So from a procurement standpoint, some things we may have set as targets of opportunity two or three years ago may be more difficult to achieve today."

Farther down the line

While Ametek has made significant strides in developing its e-procurement process, that does not mean the initiative is completed. In fact, now that the company has cut its teeth on the indirect side, the new frontier is direct materials, according to Lawson.

"The problem is that direct materials can affect deliveries to customers, so we are very careful about that," he said.

While the company is just beginning to investigate e-procurement for direct materials, such as electronic components, one thing Lawson said he knows for sure is that Ametek will not be able to take what works for the indirect side and assume it will work for direct materials as well.

"Now the issue is not so much the transaction side. With MRO it was about driving the person to the right thing to buy, but on the direct side it's more about facilitating the sourcing discussion and collaborating with suppliers on forecasting and delivery."

Lawson added that since the sourcing for direct electronic components is very specific to the products that the different divisions manufacture, it would be difficult to put that through an ICGC-type of system.

"I don't see that we will ever be in the position to get everyone to purchase the same capacitor because in all likelihood they don't need the same capacitor," he said.

As on the MRO side, Lawson noted that the first step in moving direct materials to an e-procurement system will be in the aggregation of the spend.

"Within some of our more common businesses, we are starting to look at ways to bring the spend together so we can give our procurement people spend analytics around the direct spend," he said.

Form a sourcing standpoint, Lawson said that Ametek is beginning to do some work with reverse auctions and establishing more collaborative contracts across the company's operations.

Effect on buyers

As companies like Ametek continue to embrace the e-procurement concept, a major transformation has begun that is likely to have long-ranging effects on procurement profes- sionals, said Dave Stephens, vice president of Oracle Procurement Application Development.

"There is this shift in value versus staff allocation that is occurring," Stephens said. "Traditionally, up to 75% of people in procurement have been in low-value activities, rather than the strategic stuff like supplier analysis, spend analysis, and contract negotiation. But when companies like Ametek put in these e-procurement systems, they move the staff allocated up the value curve so that 90% of staff is working on strategic and 10% on the low-value stuff."

With these new, more strategic responsibilities, today's buyers either need to upgrade their skills or risk being replaced by fresh--and quite possibly automated--resources, Stephens said.