Driving Change at Selex through Integrated Global Souricng
Selex, a U.S.-based electronic devices company, is an organization undergoing major change. It is in the process of transforming itself from a slow-moving, research-driven company to a flexible, market-focused company. The 1990s, which include the longest period of economic expansion in U.S. history, were not rewarding for Selex. The company experienced eroding profit margins due to intense global competition and mature product lines, suffered through several costly new product failures, and lost market share as new technologies and competitors encroached on core markets. And, with some difficulty, the company was forced to change its culture to respond to the demands of a new marketplace and CEO. For most of its history Selex viewed itself as a high technology company that could provide internally the inputs required for production. The company rewarded its researchers for complex and exotic materials and designs that were often difficult or costly to manufacture. The company stressed basic rather than applied research, leading to many patents “sitting on the shelf” without ever being commercialized. Furthermore, Selex’s culture endorsed the “not invented here” syndrome, a belief that rejected new ideas and help from outsiders. Internally, there was no incentive or willingness to pursue new ideas with suppliers or for supply chain members to collaborate with Selex. Change was resisted since it would likely alter something that historically worked well. Selex’s traditional business model, which featured the development of a few breakthrough products that required four to five years to develop, began to break down in the early 1990s. This was due to several costly new product failures and the introduction of new technologies by competitors that encroached on core product lines. As a result, Selex’s financial condition reached a crisis point during the mid-1990s. During this period Selex’s CEO retired and an outside management team arrived to revitalize the company. This new team decided that as part of its strategy the company must reduce material costs while growing revenue through the rapid introduction of innovative new 2 products and technology. As Selex struggles to again become a market-leader through innovative new products and control of purchasing costs, the need to rethink how to approach worldwide sourcing has become evident. This case focuses on the global sourcing approaches taken by Selex’s three primary procurement groups to support the company’s revitalization efforts. These groups include indirect purchasing (non-production goods and services), raw materials purchasing (any material that is required directly for production), and contract or finished goods purchasing (outsourced finished goods).
Indirect Purchasing
Of Selex’s total revenue, over a third is committed to worldwide indirect purchases. Previous efforts at managing indirect purchases were strictly U.S. focused, even though Selex has a manufacturing presence in Europe, Mexico, the U.S., and Asia. The question facing procurement executives was how to globalize indirect purchasing, which involves the purchase of goods and services that do not directly become part of finished products. The answer to this question suggested a need to change the organizational structure supporting indirect purchasing, which was previously organized regionally with movement toward total control at the local or site level. Given that a regional perspective would not support a globally coordinated procurement effort, Selex has reorganized so that a single director has indirect purchasing responsibility across the entire company. Creating a New Process A major strategy initiative underway at Selex has involved the development of a global process called Sourcing Value 2000. This process, which was introduced throughout the company in the early part of 2000, evolved partly from Selex’s involvement in a global benchmarking consortium. Involvement with leading companies convinced management of the need to create a formal process and structure to improve indirect 3 procurement. External consultants supported the development of the Sourcing Value 2000 process. The goal of Sourcing Value 2000 is to systematically review, using a structured approach and process, Selex’s entire global indirect spending and activities. The indirect purchasing director has committed to annual cost savings of 7-15%, depending on the purchase category under review. The pressure to produce these savings is strong—managers now include expected savings from global projects in their financial projections. Selex’s Sourcing Value 2000 process has three primary phases. The first phase, called discovery and kick-off, involved eight weeks of analysis, review of existing contract agreements, and a review of Selex’s total procurement expenditures. The primary output from this phase was the identification of high potential global sourcing opportunities. This first phase also featured the establishment of improvement goals for the various categories of indirect items. The second phase involved identifying high impact areas and initiating the first wave of global sourcing projects. These first projects involved capital purchases (machinery, capitalized software, and other items that are depreciated rather than expensed); marketing and salesrelated expense categories; maintenance, repair, and operating supplies; vendor services (such as landscaping suppliers), and travel. Each project lasts 4-6 months and has a corporate officer, who is a steering committee member (discussed shortly), assigned as a sponsor. Cross-functional teams, working with their steering committee sponsor, develop project milestones and timelines for developing a global indirect strategy. The final phase of Sourcing Value 2000 is one of continuous review and the pursuit of new project opportunities. The consulting group that is supporting the process expects to return four times over the next several years to validate that expected savings are being realized.
Executive Support Selex has created an executive steering committee to oversee Sourcing Value 2000. This committee consists of the vice presidents of research, supply chain management, marketing and sales, information technology, and the corporate controller. Each 4 member resides at the executive vice president level, and each champions a specific project. The steering committee also works to overcome any barriers faced by the project teams. Selex also has an executive management committee comprised of the company’s top 12 executives. Indirect purchasing project leaders, the indirect purchasing director, and the vicepresident of purchasing each report to this committee monthly. Again, this further illustrates the visibility that Sourcing Value 2000 is receiving across the company.
Use of Cross-Functional Teams Cross-functional teams are an integral part of the Sourcing Value 2000 process. Team members, who are from engineering, finance, purchasing, and one or two members from site locations or operating groups, commit 25% of their professional effort to supporting global sourcing projects. Teams report directly to the executive steering committee and have the authority to make strategy decisions rather than simply recommendations. Each team disbands after it makes its supplier selection decision and awards a global contract. Stakeholders, rather than the project teams, manage the transition to new contracts and suppliers. Selex’s CEO has stated that Sourcing Value 2000 is one the company’s primary corporate initiatives. As a result, support for Sourcing Value 2000 is working its way in to the business objectives of non-procurement groups. While the CEO’s support for this process reflects the importance of managing global indirect purchases, it also creates an expectation to deliver the savings that sourcing managers project. To put these expectations into perspective, Sourcing Value 2000 teams expect to achieve annual indirect purchasing savings of $50 million. Considering that Selex has recently reported major losses, the success of this process will begin to dramatically affect the company’s financial position. While the indirect purchasing group is the least experienced of Selex’s three procurement areas, early results from Sourcing Vision 2000 are promising.
Raw Materials Purchasing
A second major procurement area at Selex, and the one that is most experienced with worldwide sourcing, is raw materials purchasing. Raw materials refer to any component or item that is used directly in the production of a physical product. The director of raw materials purchasing has broad responsibilities—his staff is responsible for sourcing all direct materials and components. This group also has responsibility for finished goods planning, including aggregate product planning. The raw materials director heads a staff that resembles a materials management organization. Managing finished goods requires a high level of integration between the raw materials director and marketing, which has responsibility for sales forecasting. A primary responsibility of the raw materials director is to participate in a higher-level monthly sales and operations planning meeting. At these meetings sales forecasts and inventory levels are reviewed to determine each plant’s ability to support the forecast while managing material costs. Almost all production is driven by forecasts due to the seasonal nature of Selex’s core products. As part of its global procurement strategy, the raw materials group has traditionally focused on identifying qualified sources worldwide and aggregating volumes with leveraged agreements. This group has achieved at least 6% annual material cost savings throughout the 1990s. Most of these savings have come from changing the product, process, or material rather than price reductions granted by the supplier. The vice president of purchasing and the CEO verify price change figures annually during the budget process.
Centrally Coordinating Raw Material Requirements A major change recently put in place involves worldwide technical personnel, operations, and procurement working together to refine the materials that are critical to component performance. This cross-functional approach, which is coordinated at the corporate level, examines systems tradeoffs to arrive at an expected lowest total cost for key materials. A second major change emphasizes a centrally coordinated commodity team approach to global strategy development. This approach, which differs dramatically from Selex’s 6 previously decentralized approach to raw material sourcing, requires the involvement of purchasing and technical personnel from different locations or sites. Commodity teams have developed a short term, medium term, and longer-term sourcing opportunity list. Each opportunity has a targeted completion date, an estimated probability of success, and estimated project savings. The raw materials purchasing director, working with manufacturing, reviews and prioritizes the project opportunities. Operations managers, who have been accustomed to directing activities at their own sites, have had some difficulty adjusting to this change. The raw materials purchasing director is de-emphasizing individual sites and stressing a company-wide commodity focus using crosslocational teams. Managers at the corporate level are responsible for supporting the commodity management groups. Selex has also established lead buyers at individual sites for items that are not part of the coordinated commodity approach. An individual at each plant is Selex’s expert for a particular purchase category. The raw materials purchasing director, while taking a different approach than the indirect purchasing group, recognizes that capturing the benefits from a globally integrated approach to sourcing required a radical change to organizational structures and reporting relationships. He also recognizes that effective global sourcing demands an integrative approach to demand planning and inventory management. Contract Purchasing The arrival of a new executive management team led to a philosophy that stressed the need to nurture and innovate within Selex’s primary core competency, which is the ability to acquire and process highly complex data within its electronic devices. Only one other company in the world has the same technical capabilities as Selex. This philosophy has caused Selex to outsource products and services that were previously insourced and to focus on what truly differentiates its final products. 7 There are several reasons why Selex insources components and outsources finished products (which the company refers to as hardware). Most of the innovation that customers value occurs within the internal components rather than the hardware, making components a primary area to commit research and development efforts. Furthermore, the margins for internal components (which Selex also sells to other companies) are higher than the margins for finished hardware products. Asian suppliers currently provide all outsourced hardware requirements. Outsourcing to Asia offers two major benefits—access to technology and low cost. As with many electronic applications, U.S. and European producers are no longer competitive. Beginning in 1996, Selex began to actively search for outsourcing partners for hardware requirements. Unfortunately, there was no organization in place to formally support that effort. While a small OEM group worked to identify contract manufacturers from the 1970s to 1995, Selex did not focus on outsourcing as part of its corporate strategy. As a result, creating an outsourcing organization was not a concern.
Creating a New Organizational Group The current director of contract purchasing approached several key Selex executives in the mid-1990s to discuss the need for greater outsourcing, arguing for the creation of a group that would be responsible for managing hardware outsourcing. In 1997, Selex created a group to manage contract manufacturing (outsourcing). The contract-purchasing director, who is the head of this group, is responsible for pursuing higher-level relationships in finished goods outsourcing agreements, which he terms partnerships. His group has responsibility for identifying and qualifying outsource partners, ensuring product quality, and working with contract manufacturers during new product development. This group works with suppliers up to a specific point in the new product development process before handing over day-to-day activities to another group. The contract-purchasing director has responsibility for two procurement groups located in Tokyo and Hong Kong. The primary mission of these groups, which are international 8 purchasing offices (IPOs), is to identify and work with potential and existing partners. The Asian IPOs report to the contract-purchasing director in the U.S. as well as to a regional manager. The IPOs help identify potential contract manufacturing suppliers and identify available suppliers for a specific application (including indirect and raw materials discussed earlier in this case).
Linking Outsourcing with New Product Development and Marketing Direct involvement and linkage with marketing and technical groups is critical throughout the outsourcing process. The U.S. based corporate marketing group is divided into four product segments or categories. Consistent with Selex’s new market-based focus, increasing numbers of new product ideas are originating from marketing. Marketing is even responsible for market testing new product ideas generated by R&D. An operations and technical representative, who report to the vice-president of new product delivery, are assigned to each product marketing category. These individuals act as a liaison with marketing to ensure the operations and technical voices are considered during the generation of new product ideas. Participation with marketing also ensures that operations and technology groups have early insight into new product requirements. The contract-purchasing director interacts regularly with the operations and technical people who are co-located with the marketing groups. These discussions provide insight into Selex’s new product ideas that might require outsourcing support. Each new product initiative has an assigned formal program manager, who the contractpurchasing director considers his primary internal customer. The program manager is responsible for managing the new product development effort from start to finish, including assigning to the contract purchasing group the parts of the project that involve outsourcing. At any given time the contract purchasing group is managing 9-12 outsourcing projects.
Looking to the Future Selex also has an active advanced technology group that meets weekly to address future material and product requirements. The group, formed and created by the CEO, is responsible for developing medium to longer-range product strategies. The Futures 9 Group, driven by research and development and headed by a vice president, includes representatives from marketing, finished products outsourcing, and operations. One indication of the Future group’s importance is that it reports directly to Selex’s CEO. Participation with this group allows the contract-purchasing director to pursue early supplier involvement opportunities very early during new product and technology development. The changes at Selex illustrate how a major corporation, faced with the realities of new competitive threats and mature product lines and technology, is being forced to transform from a slow, functionally driven organization into a market-driven, cross-functional enterprise. This case illustrated how three separate procurement groups, each taking very different paths, are working to support the attainment of corporate objectives through progressive global sourcing strategies and approaches.
Assignment Questions 1. Describe the competitive environment that forced Selex to undergo dramatic changes to survive. Why is procurement an integral part of Selex’s success? 2. Why did Selex decide to outsource finished goods hardware requirements? 3. Develop a set of performance measures for each procurement group that would identify how well each group is meeting its sourcing objectives.