An Effective Procurement Process

A Note To The Reader

This text describes how purchasing operations were radically altered from the beginning of the 2000s. It describes how this change was made and how new working methods were developed. This encompasses internal work within the business area as well as throughout Saab AB.

 

One very important change was the introduction of cross-functional teams in order to gain an overall picture of purchasing and technology needs.

The change described here – and which had a very positive impact on outcomes – is close collaboration with our largest strategic suppliers.

Most important in the practicalities of developing business relations was to together with each supplier create good relations at all levels. A joint strategy for business relations was created, with shared values, to enable the business relation to develop.

Background

At the beginning of the 2000s, the purchasing organisation was order-oriented, pursuing traditional purchasing and contract work. Organisational maturity in the purchasing organisation at this time was characterised by a hierarchic approach, with purchasers forming the contact interface with suppliers.

The engineering function produced all the technical solutions for systems and components without any direct involvement from purchasing operations. Consequently, it was not possible to fully leverage new technical systems or other technical solutions that Saab's suppliers already had in their product portfolios and which were fully developed.

Recomendation

The author recommends the following texts that relate to this story: In chapter Ensuring long-term operations capabilities under the heading Management & control of capability development, under the heading Planning and Implementing Capability Development and under the heading Capability Development in an International Environment.

This text concerns the highlighted areas of A Journey of Change in the Aircraft Industry

Summary

There was a general trend in purchasing operations at the beginning of the 2000s of wanting to increase business capability by leveraging the potential of suppliers and, more specifically, their development capability.

The driving force behind this was to get the suppliers on board at early stages of the development work so as to increase their vested interests. There was also a desire to utilise the suppliers' capability and capacity in product development work and to thereby utilise synergies from the suppliers' other development projects.

The business area management team decided to implement a radical change in purchasing operations, with a focus on securing low life-cycle costs for the products in the product portfolio.

A decision was made to develop a new purchasing strategy, and this strategy was to focus on profitability and create effective partnerships and supplier collaborations. Realising these goals also required a differentiated supplier strategy.

Most important in the practicalities of developing business relations has been to together with the supplier create good relations at all levels of both organisations. Measures have also been taken to effect a joint strategy for the business relation. Here it has been important to create shared values and a good atmosphere between the management teams at Saab and its suppliers.

An essential part of streamlining was to together with the suppliers influence the cost-driving aspects of equipment and systems. This resulted in the creation of working methods wherein Saab's development organisation, together with the supplier's development organisation, could collaborate and produce new solutions by using known technology or by adapting existing solutions to Saab's needs.

Content outline

  • Purchasing operations challenged traditional working procedures.
  • Several efficiency programmes were conducted at Saab during the mid-2000s and these even encompassed purchasing operations.
  • The purchasing organisation gained the role of creating relation-oriented partnerships with strategic suppliers.
  • Capability development for all purchasing was realised and focused on collaboration between all interested parties throughout the value stream.
  • Old assumptions were challenged and radical changes were implemented.

Purchasing Operations Background – dare to Challenge Old Assumptions!

At the beginning of the 2000s, purchasing was an order-oriented organisation, pursuing traditional purchasing and contract work. Organisational maturity in purchasing at this time was characterised by a hierarchic approach, with purchasers forming the contact interface with suppliers.

The engineering function produced all the technical solutions for systems and components without any direct involvement from purchasing operations. Consequently, it was not possible to fully leverage new technical systems or other technical solutions that Saab's suppliers already had in their product portfolios and which were fully developed.

At this time, there was a general trend in sourcing of wanting to increase business capability by leveraging the potential of suppliers and, more specifically, their development capability. The driving force behind this was to get the suppliers on board at early stages of the development work so as to increase their vested interests. There was also a desire to utilise the suppliers' capability and capacity in product development work, as well as to utilise synergies from the suppliers' other development projects.

There was a great need to be able to reduce development costs and win commercial advantages through close collaboration with suppliers.

This meant new approaches, which required radical changes to the organisation.

Efficiency Programme – Breaking the Cost Curve

The mid-2000s saw a major efficiency programme at Saab AB, called the Billion Programme. The part of the programme that was implemented in the Aeronautics business area was called Gunder.

The Gunder change project included the evaluation of the different activities conducted by the business unit. This evaluation was conducted by the external consulting Company which looked at opportunities for streamlining and rationalisation. When evaluating the performance of purchasing operations, great potential was found for improvement, with a strong focus on reducing capital tied up. Purchased materiel comprised about 50% of the total cost, which meant there was great potential to reduce costs.

Strategic decisions – a commercially strategic working procedure with a new focus for supplier collaboration

The business area management team decided to implement a radical change in purchasing operations, with a focus on securing low life-cycle costs for the products in the product portfolio.

The change in purchasing work was anchored through the business area's management group, with the implementation of a new purchasing process, a new working procedure and a new purchasing organisation. This work was also anchored with the Deputy CEO of Saab AB to formulate a new purchasing strategy that would apply throughout the Saab Group.

The efficiency projects in the purchasing function aimed to both streamline operations and reduce costs for the acquisition of equipment and systems. The goal was to develop new, more effective working procedures while also refining the purchasing organisation's business capability.

Several efficiency projects were initiated within the purchasing function. This was particularly pressing considering the ongoing work on the Gripen Demo technology demonstrator, which required the procurement of new equipment and systems.

Saab management was deeply involved in the change work. A Consulting Company was engaged to assist with the streamlining, helping out with both the new working procedures and the enhancement of the department's business capability. The Consulting Company was even involved in the practical implementation of streamlining in purchasing operations, which took place at the start of the Gripen NG product development project.

A decision was also made to reorganise the purchasing function. One very important change that was introduced was working in cross-functional teams to gain an overall picture of purchasing and technology needs. The cross-functional teams are comprised of all stakeholders with an interest in a specific procurement process. These teams work very closely together throughout the entire value stream, from needs analysis to the acquisition of a particular type of equipment or system.

New purchasing strategy – focus for supplier collaboration

A new purchasing strategy with a focus on profitability was to be developed, along with effective forms of partnership and supplier collaboration. Realising these goals also required a differentiated supplier strategy.

The main aim was to reduce both supplier costs and risks while creating a new focus for supplier collaboration. Moreover, new, more flow-oriented working procedures were to be developed, with greater integration of early-stage development operations at both Saab Aeronautics and suppliers.

Another focus was to streamline the supply chain flow and manage obsolescence at suppliers.

Problems concerning obsolescence involved the opportunity and willingness on the part of suppliers to continue to develop and produce systems and equipment. Obsolescence also related to aging technology, where it was no longer possible to purchase components for certain systems and equipment. Supplier requirements were also to be tightened up to ensure the suppliers' willingness and capability to deliver the right quality with the agreed delivery precision. The commercially strategic working procedure was focused on the largest suppliers – in monetary terms – of major strategic importance to Saab.

A new purchasing strategy also required the formulation of a number of other strategies, namely the following:

  • Supply Management Strategy
  • Organisational Alignment
  • Category Management
  • Relationship/Contract Management
  • Supply Chain Management
  • People Management

The results of this work later came to be included in the group-wide working procedure that is followed within Procurement HUB.

When the Business Board makes a decision on a new business deal, purchasing participates in the commercially strategic aspects of the decision-making process.

New organisation – expertise and flexibility

Radical changes were made to realise the new purchasing strategy. A number of people in the former purchasing organisation, primarily team leaders and other senior department members, were assigned other work tasks or offered early retirement.

Two areas were created, one for procurement, Strategic Sourcing, and one for operational procurement that secures the supply chain, Supply Chain. Purchasing was then divided into Strategic Procurement, with a focus on working with strategic suppliers, and Category Procurement, with a focus on category management. A Kraljic matrix was used when dividing up suppliers between the two purchasing departments. This matrix was used as an aid and a model when categorising the different suppliers.

The entire purchasing operation's primary mandate was to manage procurement, maintain agreements and develop business relations.

Strategic procurement

The strategic procurement group works primarily with strategic suppliers and project purchasing. There is also a Cost & Change Management function that secures the upkeep and development of purchasing capability.

In the mid-2000s purchasing operations even included the Export Control function, which was later reassigned to the Quality and Operational Excellence department.

The Cost & Change Management function promotes capability development within Sourcing and manages financial procurement data. This function develops and manages the tools, methodologies and support systems used by all purchasers.

The part of the purchasing organisation that works strategically develops business relations with strategic suppliers. They draw up supplier strategies, perform analyses, challenge price and costs trends and assess whether contracts need to be renegotiated or updated. Analyses of the supplier market are also a recurring aspect of their work, with each purchaser focused on 1–3 suppliers.

Project purchasing is a work method for managing procurement work in product development projects. The initial stage of every product development project includes the formulation of general strategies that provide a basis for future procurement work. Each product development project has a core team that makes general decisions about different types of procurement. The purchasing organisation also has a specific core team comprising a decision-making forum that establishes goals and assigns mandates for procurement work.

Technical leaders were appointed within strategic procurement, tasked with managing capability development in the areas Strategic Suppliers, Project Purchasing and Cost & Change Management.

The technical leaders play a key role in developing their own department, but also in supporting the different purchasers in their work and with current goals and challenges.

By coaching and managing their colleagues, they have been able to maintain a business focus and implement activities in accordance with defined strategies and goals. By continually developing and adapting working procedures, processes and methodologies have become effective tools for routine work tasks.

Strategic procurement also has a Competence & Resources function, under which all purchasers are organised.

Training and development

Essential to this work is maintaining and developing the expertise found within the purchasing organisation and the expertise and working procedures jointly developed by the purchasing organisation and the development organisation. Consequently, different types of activities and programmes are used to attract, develop and retain the right people. This entails continually investing in employees' personal development and business skills, with each employee having an individual development plan. Goals and activities were also established for employees to ensure effective procurement work. To this end, a support programme was developed encompassing coaching, mentoring and skills development for all employees.

This programme included both personal and professional development. Part of the programme was focused on handling long-term business relations and working in different types of networks, as well as collaborating with different types of international companies.

Mentors are very senior employees from the different function areas who support colleagues in the purchasing organisation by offering advice and sharing experience. Coaching is also provided on a systematic basis to bolster the cross-functional and relationship-building working procedure.

Moreover, well-established methodological support is central to ensuring continual improvement in operations and capabilities.

The entire organisation within strategic procurement developed the new, creative working procedure, with the aim of substantially improving business capability. All purchasers had direct access to experts within the strategic procurement organisation.

Operational procurement

Operational procurement, or Supply Chain, is divided into Supplier Management and Purchasing/Category Procurement. Supply Chain's primary task was to secure deliveries and measure and evaluate suppliers. Based on these supplier measurements and evaluations, various development programmes were implemented for each supplier. These were based on the KPIs (Key Performance Indicators) recorded for each supplier.

Supplier Management secures the materiel supply chain and supplier performance, monitors the total supply chain cost and ensures compliance with and the development of purchase agreements.

The Purchasing/Category Procurement function manages commercial issues in the shape of negotiations and the drafting of agreements with suppliers. Their procurement work is organised into product groups. The commercial managers are responsible for a number of component suppliers and different product ranges.

Relation-Oriented Partnerships

The purchasing organisation now had the role of creating relation-oriented partnerships with strategic suppliers.

An account manager was assigned to each strategic supplier. Each account manager had overall responsibility for supplier development and life-cycle responsibility for a supplier's capability and deliveries. This includes, for example, all relations, finances, agreements, the supply situation and activities to coordinate the production of technical solutions.

Account managers are also responsible for ongoing relations with partners/suppliers, and to this end recurring management review meetings are held. These meetings are a forum for top management from Saab and its partners/suppliers to review supplier issues and to discuss current and future business opportunities.

Each account manager drafts an overall strategy for each supplier, defining goals and plans for developing existing delivery commitments. This strategy includes plans and activities for closer collaboration to manage cost developments and develop new business.

In practice, this can entail developing new ideas for new collaborations and handling responsibility issues, communication issues and changes concerning the supplier's capability, as well as facilitating collaboration.

Ensuring the positive development of a supplier partnership requires close cooperation in developing Saab's business opportunities. Factors for successfully accomplishing this include providing suppliers with insight into various business models and future business opportunities. Suppliers must develop confidence in and an understanding of Saab's planned business direction and want to help develop these business opportunities.

Each account manager also handles group-wide issues involving a supplier, the aim being to achieve the favourable commercial returns that the synergies gained from group-wide coordination offer. A group-wide purchasing strategy provides a foundation for this work.

Supplier collaboration a win-win concept

Supplier collaboration is based on a win-win relation between Saab and the supplier. The practical working procedures developed within Saab have made a substantial contribution to the business development achieved between Saab and its suppliers.

One reason is the focus on integrating the supplier with both product development work and business activities by establishing a close, long-term relationship between management at Saab and management at the supplier. This is a necessity as collaboration often entails a business relation that lasts some 30 years.

Essential to this new direction in purchasing and the very favourable results that have been achieved has been to create confidence and respect, openness in the business relation and the development of excellent working procedures.

Working methods – cross-functional teamwork

Most important in the practicalities of developing business relations has been to together with the supplier create good relations at all levels of both organisations. Additionally, a joint strategy for the business relation has been drawn up, including shared values for how the relation is to develop.

A focus is kept on managing relations and working procedures with both existing and new suppliers, monitoring agreements to ensure compliance and their correct management, and generally securing competitiveness. Processes, methods and tools are continually developed to support the purchasing function.

Cross-functional teams with new working methods have meant more individual responsibility, with a high degree of independence for each purchaser. The role of account manager for strategic suppliers focuses on developing value-adding relations with suppliers.

Purchasing teams and supplier teams are two cornerstones of the cross-functional working procedure.

A purchasing team ensures that a procurement process is coordinated, activities are conducted, information is managed, visits are organised and so on. Purchasing teams are comprised of project purchasers, project managers, equipment engineers (technical managers) and quality engineers.

A supplier team actively maintains the relation with a supplier. The team's primary tasks are to measure and evaluate supplier performance, formulate long-term strategies for the supplier's involvement and develop the supplier's capability to fulfil commitments. Supplier teams are comprised of supplier developers, purchasers and equipment/component engineers (product managers).

Influencing cost-driving aspects – teamwork in international environments

The purchasing strategy stipulated that equipment and systems already in use in other military aircraft should be purchased, the aim being to utilise existing fully developed systems. This would enable the costs of continued development work to be shared with others in the aircraft industry instead of pursuing proprietary development. Saab offers experience and technical/technology support to the supplier. Following such further development, the supplier can then sell the new product to other customers.

Another purpose has been to be able to benefit from supplier know-how and project portfolios, enabling the use of new technologies and new products.

This work entailed closer cooperation to develop new solutions based on known technology or to adapt existing solutions to Saab's needs.

Supplier initiatives

The strategic direction for selecting future suppliers and, specifically, for all agreements concerning new variants of the Gripen are defined such that all partners/suppliers must commit to the following:

  1. Self-finance development costs (NRC)
  2. Considerably reduce unit costs (RC) for parts/systems

The second item also encompassed offering considerably enhanced functionality and performance compared to the previous generation of the Gripen.

The interpretation of this strategy was to as far as possible acquire products, systems and parts that had already been developed for other aircraft projects, referred to as commercial off-the-shelf (COTS) products. If there was a great need to adapt these COTS products, such a decision was to be based on whether this was the most suitable solution when considering business aspects and capability as compared to proprietary development.

The COTS products found in the aircraft industry are seldom like those found in the IT industry, where standard components can be used. COTS products in the aircraft industry are not simply standard components but rather have been developed for a specific purpose, although with some alteration can be used for similar purposes. The requirements for systems and components can differ somewhat.

Management – joint roadmap focused on business opportunities

Close cooperation has been established between the purchasing team, the different product projects and the various technology areas of the development organisation, the aim being to create rapid decision-making channels while firmly anchoring technical decisions. An important change was defining contract owners within product development projects.

Representatives from the purchasing organisation are thereby involved from the start in new development work and as such can influence different business cases and the direction of business strategy work.

By creating a flexible and less formal process, with a small organisation which is permitted to think outside its area of responsibility, one can find major gains for both Saab and its suppliers.

The creation of this working procedure has provided effective working methods, major financial savings and creative partnerships in the development of new technical solutions. Saab and its suppliers have thereby been able to refine the product value and develop improved technical solutions.

The focus has been on creating close and long-term business relations with management at the suppliers. This has enabled effective cooperation with the suppliers' delivery, development and production organisations.

Capability Development – Collaboration throughout the Value Stream

Purchasing operations affect the efficiency of the entire value stream of product development, procurement, manufacturing, logistics, aftermarket, support and so on. Strategy work is conducted to provide a clear direction for sourcing in accordance with the business area's strategy. These strategies are then implemented in ongoing operations by appointing an organisation of a suitable size and using resources in the areas where they provide the greatest efficiency. Moreover, continual improvement is pursued in processes and working procedures. Capacity and capabilities are directed to the areas where they provide the greatest benefit by continually measuring and monitoring the results.

The working procedures developed in conjunction with the Gripen Demo product project could be fully utilised in the development of the new product project, the Gripen NG.

With the Gripen NG, work using functional teams was begun, with purchasing teams comprised of purchasers, project managers and product managers for materiel groups.

Important success factors included defining clear supplier requirements, what was to be achieved and when, and following up different types of roadmaps for product, technical and technology development.

Monitoring and measuring – focus on life-cycle costs

One of the most important criteria for the change was the introduction of new ways of managing and measuring the effects of the goals that the operation is to achieve.

In all essentials, the model used to measure streamlining is built up as follows. One defines an economic value for the overall streamlining and the components to work with. For each component, progress and the component's economic value are measured continuously.

Example measurement values:

  • Cost savings for the previous period.
  • Cost savings for the current period.
  • Planned cost savings from ongoing activities that are in phase with the current period but as yet incomplete.
  • Planned cost savings from ongoing activities that are not in phase with the current period and not yet complete.
  • Planned activities that are yet to begin.
  • Consultancy costs.
  • Cost reductions for personnel.
  • Remaining gap to overall goal – need for new actions for cost savings.

Managing streamlining – the Kraljic model and PULS reviews

The Kraljic matrix is used to categorise suppliers, after which an analysis is conducted in accordance with the Kraljic model with positioning to review the cost component of each part. Following this analysis, suitable initiatives are defined in the shape of streamlining or cost savings projects, which are organised by product group.

A profitability assessment and initiative reviews are performed based on the applicable strategies and operational goals, after which all activities are regularly monitored and measured in terms of KPIs and reported in PULS reviews.

The process used to manage product procurement includes four important decisions:

  1. The decision to initiate a procurement process.
  2. The decision on which suppliers to invite to tender.
  3. The decision on which suppliers to negotiate with.
  4. The decision to enter an agreement.

Group-wide procurement work – Procurement HUB

A common vision for the Saab Group, called the Saab Procurement Vision, was later defined to provide direction and enable the establishment of effective and profitable industrial cooperation. This provided a focus for business strategy work, rather than pursuing traditional procurement work.

Moreover, a new procurement process for all of Saab AB has been drawn up based on past experience. A group-wide advanced training course for purchasers, known as the Procurement Academy, was also developed.

In order to develop cross-functional work between the different business areas of Saab AB, Procurement HUB was created. Procurement HUB is composed of three components: a strategic component, an operational component and a third component that is an enabler with working procedures that are described in Processes, Methods & Tools and People.

Procurement HUB provides uniform concepts, shared values and working procedures, as well as a way to monitor and develop different capabilities within the Saab Group. This has enabled the development of working procedures, the exchange of experience and the utilisation of synergies between business areas. Procurement HUB includes quarterly reviews of the performance of all business areas as regards different capabilities.

Analysis and Summary

Did Saab dare to challenge old assumptions? The answer to that question will be provided at the end of this section.

What have we achieved?

A very clear primary objective was established in the shape of helping to break the cost curve for the development of new military aircraft systems. There was a need to considerably reduce capital costs as the value added of purchased systems and equipment is great.

In order to succeed, a decision was made concerning a commercially strategic working procedure that included two different capabilities. Accordingly, working with long-term supplier relations, which encompass 30-year-long business relations and comprise an important cornerstone of Saab's business capability, was an important secondary goal.

In practice, this required changing the working procedure between Saab and its suppliers. A cross-functional working procedure was introduced within Saab's line organisation and product development projects. This also provided resources and time to develop internal organisational capabilities over the longer term, and these efforts were integrated with the line organisation.

The division of purchasing operations (into strategic procurement and category procurement) enabled a focus on the suppliers of greatest strategic and economic value and increased business capability.

The cross-functional working procedure is also an important part of supplier collaboration, within engineering as well as between management teams. Since Saab provides the supplier with knowledge about new and effective working procedures, the supplier has a strong incentive to maintain good relations and good development and delivery capabilities, thereby enabling the sharing of industrial capability.

The core team decision-making forum assigned account managers a clear mandate and responsibility, resulting in the development of the long-term business relation with the supplier and the supplier's ability to deliver in accordance with business agreements. This also stimulated the development of the partnership and the supplier's capability.

Regular training and development for employees was introduced in order to build business relations, as well as to ensure employees' personal development and favourable career development. Here the recipe for success was good management that integrated coaching and mentoring with regular training and development and clear strategic objectives. Regular training and development.

Why did we succeed?

The organisation had matured such that there was a need for change. Moreover, top management was strongly focused on the results that purchasing had achieved throughout the change work. The chosen organisational structure was a very smart decision as the different purchasing activities were streamlined and could thus strengthen the business approach and working procedures. A long-term management focus was achieved.

The changes were made at a time when product renewal was under way, which enabled the results to be seen immediately in the shape of lower costs for and increased functionality in purchased products and services. The timing was right.

Competitors' development projects were shifted in time relative to Saab's product renewal, which meant increased interest among suppliers. Actions were taken in the right market situation.

Yes, old assumptions were challenged and radical changes were implemented! That it was successful was also down to enthusiasm and perseverance, among both management and employees, as the far-reaching effects and cost reductions were apparent to all.

The author´s reflections