Executive Briefings

Con-way Centralized Procurement, Leverages Its Enterprise Spend

A conversation with Mitch Platt, chief procurement officer at Con-way, a $4.2bn transportation and logistics services company based in Ann Arbor, Mich.

Con-way's three primary businesses are in the less-than-truckload, full truckload and brokerage and third-party logistics sectors. Some 35,000 suppliers provide products to these operating divisions -everything from office supplies to freight handling equipment, over-the-road vehicles, fuel, tires, spare parts, computers and software, uniforms for employees, an array of business services and even construction. Con-way's annual spend is in the range of $500m. To better manage expenditures, the company recently centralized its sourcing and procurement operations and implemented a number of spend analysis and management tools from Emptoris.

 

Q: How were you handling procurement before this initiative?

Platt: We had procurement broken up into three different silos within the organization and we didn't leverage it across the enterprise. We had an IT procurement group that was responsible for all the hardware, software and IT procurement. We had an indirect spend procurement group that was responsible for office supplies and forms and service awards and that type of thing. And then we had a fleet procurement group. As a transportation and logistics company, the fleet group was the focus. Our purchasing vice president's sole responsibility was that fleet part and when people thought of purchasing within our organization, they related just to the fleet purchasing-the trucks and tires and fuel, etc. When our new executive management came into place a couple of years ago, they took a much different approach to managing. Our prior parent company had been more of a holding company and the individual business units really kind of ran themselves. The new management wanted to see what kind of synergies they could leverage across the enterprise and one of the things they looked at was procurement. They thought there was a lot of opportunity there, so they combined all three procurement groups into one, under central leadership, and at the same time they rolled accounts payable into the procurement organization. I took over responsibility a year ago for the entire procurement group, which now includes IT, fleet and indirect spend as well as accounts payable. With that change, we now have control over the entire order-to-pay process.

 

Q: Did your selection of spend software go hand-in-hand with the organizational change?

Platt: After putting what we felt was the correct organizational structure in place, we then started looking at the processes and tools we had in place. Obviously, we had multiple processes and multiple tools, so the question was, how do we develop synergies among three disparate groups? We decided that it made sense to start with spend analytics to really understand where we were spending money as a company and that was the first piece we invested in. And we identified a lot of opportunities in different commodity or category groups. For example, there were areas where we had never had contracts in place, like temporary labor or waste disposal and janitorial services. And in areas where we did have contracts, there was maverick spend. So the next solution we turned to was e-sourcing software that gave us the ability to take some of these commodity and category areas and begin soliciting bids or even using reverse auctions to maximize the savings benefit. These are all solutions from Emptoris.

 

Q: As you saw the results of the spend analysis, were there any real surprises?

Platt: I think probably the biggest 'aha' was just seeing the number of suppliers we do business with. On an annual basis, we do business with about 35,000 different suppliers. We were doing business with a lot of small suppliers rather than trying to leverage and focus our spend, so that was probably the biggest 'aha.' There were other ones but that was the largest.

 

Q: How does centralization of procurement impact the way your business units operate?

Platt: That really depends on the commodity and category group. If it is something that we can bring leverage to across the enterprise, then we may have a contract in place that they can access on a day-to-day basis. We may change a particular supplier, but they would still interact with that supplier on a local level. In instances where we don't have significant enough leverage or we don't have the time or resources to go after it, we just leave them alone and let them manage their business on a local level. There is a fine line between centralizing things and really trying to control too much and bringing a lot of bureaucracy to it. You have to let the businesses be effective and efficient and nimble.

 

Q: What have been the advantages of combining procurement with accounts payable?

Platt: When we set up a supplier and maybe a new commodity or category, we are able to say, 'OK, we are going to negotiate a contract and terms, but let's also talk about how we are going to pay you. Maybe we will set you up on our e-procurement platform and pay you electronically with a P-card.' Those are the types of conversations we now have when we start discussing contract terms with new suppliers. Not only what is the pricing going to be, but how are we going to pay you and how can we automate that, whether it is through a purchasing card or through electronic file transfer or some other means of automating that process. And, of course, that may influence what the ultimate price turns out to be because we can leverage that ability to get discounts or rebates.

 

Q: How are you attacking maverick spending?

Platt: This is really a matter of visibility and working with the individual controllers at our different business units. If we have established contracts in place, we can use spend analysis to see where the rogue spending is occurring. We send out this documentation to the controllers and let them manage their individual locations. These things generally carry more weight when they come from the controllers of the business units. They go to the locations and show them where they are not taking advantage of the contracts we have in place and explain to them that there are process costs associated with maverick buying. We have to create a separate purchase order, we have to process a separate invoice, we have to cut a separate check, whereas in cases where we have contracts with suppliers most of these processes have been automated, which significantly reduces administrative costs.

 

Q: Do you have a lot more purchasing under contract now?

Platt: Yes. I would say that prior to the centralized approach we probably had 20 percent of our spend under management and now it is close to 50 percent. There still is a long way to go and we have a lot of things in the pipeline that we are targeting for 2007 and 2008. There always will be a certain amount of spend that we won't have under management, but we are going to have a much greater percentage than we have today.

Also, prior to our having these tools, we didn't do any reverse auctions. Now, we go in with the mindset that we are going to put things out to reverse auction unless there is a reason not to do so. So a decision not to go to a reverse auction has to be justified. That may happen in cases where there may not be enough competition or there may be too big a gap in pricing or maybe only one company that really meets all the objectives of the bid. To this point, I would say we have conducted auctions about a third of the time.

 

Q: Was the fact that Emptoris is an on-demand solution an important factor in your decision to partner with them?

Platt: Yes, that was one of the key things we wanted. I think one accomplishment that stands above the rest is the speed with which we have been able to reach some our results and that has a lot to do with the demand model. We made the decision and signed a contract with Emptoris in April 2006 and we started spend analytics immediately. We had those results back in about 10 weeks. We also started immediately using the e-sourcing tools, even prior to getting the spend analysis results, because we already had things in the pipeline where we knew we could use them effectively. The on-demand model gave us the ability to get up to speed faster and to implement quicker. We don't have to install software behind our firewall; we don't have to pay for upgrades down the line; we don't have to maintain the system ourselves. We pay a subscription fee so the costs are spread out over time as opposed to big, upfront software costs. So from our perspective there are a lot of benefits.

 

Q: Who are the users of the software in your organization?

Platt: Historically, as a company we didn't differentiate between people in the procurement group. We had people who would create manual RFPs and they would negotiate the contract and then they would be the one administering it after the fact, resolving issues and measuring the supplier. When we set up new organization, we differentiated the functions. We created a strategic sourcing group and a separate procurement group. The strategic sourcing group is responsible for using the spend analytics data, identifying opportunities, creating requests for proposals and quotes, analyzing bids, negotiating contracts and finalizing contracts. At that point, the supplier relationship management is handed over to the procurement group and they are responsible for vendor management, supplier performance measurements, resolving issues and so on.

 

Q: Are there "lessons learned" from this project that you would like to share?

Platt: The key for us throughout this procurement transformation process has been the executive level support that we received. Without it, I think we would have been fighting an uphill battle. We established CEO and CFO support early on, forming a procurement steering committee made up of the CEO and all of his direct reports. We meet with this committee on a quarterly basis and talk to them about procurement results, projects that are in the pipeline, and any issues we have encountered. So they are always up to speed and have committed to supporting us throughout their organizations. As a result, we don't run into the types of political hurdles that I think a lot of organizations run into. Procurement has really been elevated within the organization as far as how it is viewed and its strategic value, and a lot of that has to do with the potential bottom line impact we can bring to the corporation. That is the key in all of this.

Con-way's three primary businesses are in the less-than-truckload, full truckload and brokerage and third-party logistics sectors. Some 35,000 suppliers provide products to these operating divisions -everything from office supplies to freight handling equipment, over-the-road vehicles, fuel, tires, spare parts, computers and software, uniforms for employees, an array of business services and even construction. Con-way's annual spend is in the range of $500m. To better manage expenditures, the company recently centralized its sourcing and procurement operations and implemented a number of spend analysis and management tools from Emptoris.

 

Q: How were you handling procurement before this initiative?

Platt: We had procurement broken up into three different silos within the organization and we didn't leverage it across the enterprise. We had an IT procurement group that was responsible for all the hardware, software and IT procurement. We had an indirect spend procurement group that was responsible for office supplies and forms and service awards and that type of thing. And then we had a fleet procurement group. As a transportation and logistics company, the fleet group was the focus. Our purchasing vice president's sole responsibility was that fleet part and when people thought of purchasing within our organization, they related just to the fleet purchasing-the trucks and tires and fuel, etc. When our new executive management came into place a couple of years ago, they took a much different approach to managing. Our prior parent company had been more of a holding company and the individual business units really kind of ran themselves. The new management wanted to see what kind of synergies they could leverage across the enterprise and one of the things they looked at was procurement. They thought there was a lot of opportunity there, so they combined all three procurement groups into one, under central leadership, and at the same time they rolled accounts payable into the procurement organization. I took over responsibility a year ago for the entire procurement group, which now includes IT, fleet and indirect spend as well as accounts payable. With that change, we now have control over the entire order-to-pay process.

 

Q: Did your selection of spend software go hand-in-hand with the organizational change?

Platt: After putting what we felt was the correct organizational structure in place, we then started looking at the processes and tools we had in place. Obviously, we had multiple processes and multiple tools, so the question was, how do we develop synergies among three disparate groups? We decided that it made sense to start with spend analytics to really understand where we were spending money as a company and that was the first piece we invested in. And we identified a lot of opportunities in different commodity or category groups. For example, there were areas where we had never had contracts in place, like temporary labor or waste disposal and janitorial services. And in areas where we did have contracts, there was maverick spend. So the next solution we turned to was e-sourcing software that gave us the ability to take some of these commodity and category areas and begin soliciting bids or even using reverse auctions to maximize the savings benefit. These are all solutions from Emptoris.

 

Q: As you saw the results of the spend analysis, were there any real surprises?

Platt: I think probably the biggest 'aha' was just seeing the number of suppliers we do business with. On an annual basis, we do business with about 35,000 different suppliers. We were doing business with a lot of small suppliers rather than trying to leverage and focus our spend, so that was probably the biggest 'aha.' There were other ones but that was the largest.

 

Q: How does centralization of procurement impact the way your business units operate?

Platt: That really depends on the commodity and category group. If it is something that we can bring leverage to across the enterprise, then we may have a contract in place that they can access on a day-to-day basis. We may change a particular supplier, but they would still interact with that supplier on a local level. In instances where we don't have significant enough leverage or we don't have the time or resources to go after it, we just leave them alone and let them manage their business on a local level. There is a fine line between centralizing things and really trying to control too much and bringing a lot of bureaucracy to it. You have to let the businesses be effective and efficient and nimble.

 

Q: What have been the advantages of combining procurement with accounts payable?

Platt: When we set up a supplier and maybe a new commodity or category, we are able to say, 'OK, we are going to negotiate a contract and terms, but let's also talk about how we are going to pay you. Maybe we will set you up on our e-procurement platform and pay you electronically with a P-card.' Those are the types of conversations we now have when we start discussing contract terms with new suppliers. Not only what is the pricing going to be, but how are we going to pay you and how can we automate that, whether it is through a purchasing card or through electronic file transfer or some other means of automating that process. And, of course, that may influence what the ultimate price turns out to be because we can leverage that ability to get discounts or rebates.

 

Q: How are you attacking maverick spending?

Platt: This is really a matter of visibility and working with the individual controllers at our different business units. If we have established contracts in place, we can use spend analysis to see where the rogue spending is occurring. We send out this documentation to the controllers and let them manage their individual locations. These things generally carry more weight when they come from the controllers of the business units. They go to the locations and show them where they are not taking advantage of the contracts we have in place and explain to them that there are process costs associated with maverick buying. We have to create a separate purchase order, we have to process a separate invoice, we have to cut a separate check, whereas in cases where we have contracts with suppliers most of these processes have been automated, which significantly reduces administrative costs.

 

Q: Do you have a lot more purchasing under contract now?

Platt: Yes. I would say that prior to the centralized approach we probably had 20 percent of our spend under management and now it is close to 50 percent. There still is a long way to go and we have a lot of things in the pipeline that we are targeting for 2007 and 2008. There always will be a certain amount of spend that we won't have under management, but we are going to have a much greater percentage than we have today.

Also, prior to our having these tools, we didn't do any reverse auctions. Now, we go in with the mindset that we are going to put things out to reverse auction unless there is a reason not to do so. So a decision not to go to a reverse auction has to be justified. That may happen in cases where there may not be enough competition or there may be too big a gap in pricing or maybe only one company that really meets all the objectives of the bid. To this point, I would say we have conducted auctions about a third of the time.

 

Q: Was the fact that Emptoris is an on-demand solution an important factor in your decision to partner with them?

Platt: Yes, that was one of the key things we wanted. I think one accomplishment that stands above the rest is the speed with which we have been able to reach some our results and that has a lot to do with the demand model. We made the decision and signed a contract with Emptoris in April 2006 and we started spend analytics immediately. We had those results back in about 10 weeks. We also started immediately using the e-sourcing tools, even prior to getting the spend analysis results, because we already had things in the pipeline where we knew we could use them effectively. The on-demand model gave us the ability to get up to speed faster and to implement quicker. We don't have to install software behind our firewall; we don't have to pay for upgrades down the line; we don't have to maintain the system ourselves. We pay a subscription fee so the costs are spread out over time as opposed to big, upfront software costs. So from our perspective there are a lot of benefits.

 

Q: Who are the users of the software in your organization?

Platt: Historically, as a company we didn't differentiate between people in the procurement group. We had people who would create manual RFPs and they would negotiate the contract and then they would be the one administering it after the fact, resolving issues and measuring the supplier. When we set up new organization, we differentiated the functions. We created a strategic sourcing group and a separate procurement group. The strategic sourcing group is responsible for using the spend analytics data, identifying opportunities, creating requests for proposals and quotes, analyzing bids, negotiating contracts and finalizing contracts. At that point, the supplier relationship management is handed over to the procurement group and they are responsible for vendor management, supplier performance measurements, resolving issues and so on.

 

Q: Are there "lessons learned" from this project that you would like to share?

Platt: The key for us throughout this procurement transformation process has been the executive level support that we received. Without it, I think we would have been fighting an uphill battle. We established CEO and CFO support early on, forming a procurement steering committee made up of the CEO and all of his direct reports. We meet with this committee on a quarterly basis and talk to them about procurement results, projects that are in the pipeline, and any issues we have encountered. So they are always up to speed and have committed to supporting us throughout their organizations. As a result, we don't run into the types of political hurdles that I think a lot of organizations run into. Procurement has really been elevated within the organization as far as how it is viewed and its strategic value, and a lot of that has to do with the potential bottom line impact we can bring to the corporation. That is the key in all of this.