My first job in purchasing was as a procurement engineer (i.e., technical buyer). Responsibilities of that position included prospecting for new suppliers; making sourcing decisions; working to reduce supplier manufacturing costs; and connecting suppliers with our engineers to develop spec and design changes that would allow for lower cost processing. This was a great job for learning the ins-and-outs of supply management and also exposed me to some unbelievable life experiences, including one that will be related here.
My span of responsibility in this job included, among other things, hydraulic components. Upon becoming a procurement engineer one of the first things I did was put together a Pareto analysis of the spend I had responsibility for, to help focus my efforts on those parts that would have the most cost reduction potential. After identifying the high-spend parts I then reviewed their annual pricing history to see which ones, if any, were negative material variance outliers. And indeed I did find one hydraulic component in particular that stood out.
The part in question was a type of hydraulic valve used in the operation of our equipment. I found that over the previous five years it had increased in price by over 40%! This was in the 1980s, so inflation was a factor, but the price increases on this part were way above anything else in my “buy.” I called the supplier in to have them explain the basis for their price increases and really didn’t get much of an answer. At that meeting, however, they did let me know that the increase for the upcoming year looked to be in the 7% to 8% range!
After the meeting I investigated the availability of alternate sources and found that none currently existed. This helped me understand that the supplier of this component felt it had all of the leverage and wasn’t shy about exerting it. The source issue wasn’t whether there were other suppliers of similar hydraulic components; there were. Our use of this type of component was a bit unique, however, in that it operated at a lower hydraulic pressure relative to the applications of most other customers. In other words the supplier’s product design and processing was targeted for applications requiring the much tighter tolerances needed to support higher pressure systems.
The current supplier had gotten our business by coming up with an alternative approach to housing design and fabrication that, I’ll admit, was innovative and out-of-the-box. Rather than fabricating housings out of a machined casting they would construct theirs by layering stamped plates one-on-top-of-the-other to define the needed flow patterns and then bolt them together. Of course, even though their specialized stamping process was capable of holding tighter than normal tolerances, it could never match the internal precision of the competitive machined housings. But because of the lower pressures our product operated at they didn’t need to.
Our current supplier had taken advantage of this reduced-cost processing involved to get their business by significantly undercutting the price of traditional valve manufacturers but—and this is an important “but”—over time they had raised their prices to a level just under the prices of their competitors. So while my employer was still getting a better deal than if we went with a traditional valve, the advantage was minimal. Based on how this supplier had been dealing with my company over the years it was apparent to me I needed an alternative source.
I researched the commodity and came up with a hydraulic component supplier that other divisions within my company had developed a collaborative working relationship with. I approached this supplier and we brainstormed about how we might significantly reduce the cost of one of their current product line offerings without re-inventing the wheel. In other words, they were open to consider tweaks to their design and processing but not willing to take a greenfield approach since our business alone wouldn’t represent enough volume to justify a new product line.
It turned out that their current housing processing included three sequential machining steps, each successive one honing further the increasingly tighter tolerances needed by the bulk of their other customers. Each different step required post-process inspection as well as set-up on a different machine in a different department. I asked if they could adjust their initial rough machining operation such that it alone could provide the tolerances needed to support our lower system pressure operations and in doing so eliminate the need for second and third machining operations. They said they’d look into it and a week or two later got back to me. My contact was pretty excited in telling me their engineers had confirmed that with minimal adjustment the first rough machining operation could be made to suffice. We then mocked-up a couple of prototypes and tested them, both in the lab and on operational equipment. The revised processing components performed just fine.
The next step was to cost-out our component based on the revised processing. I gave them a target cost around the level that our current supplier had originally gotten the business with five years ago and they came relatively close to meeting it. I then asked if they would agree to a several-year contract relative to controlling prices, i.e., we would only honor non-controllable pricing impacts such as material. They got together with their accountants and were able to find middle ground on this so, as far as I was concerned, the project was a “go” and would deliver a huge price reduction.
But it wasn’t me that would make the final decision on this option. Our next step involved putting together a proposal to my upper management—both engineering and purchasing—to get their blessing. I suspected that supplier participation in the presentation would make it easier to get the go-ahead so I asked my contact from the supplier to co-present at the decision meeting. I will also admit that the fact that our chief engineer—the one who would likely have the final say—had recently transferred in from another division within our company who had a long and positive working relationship with this supplier, was a consideration in my asking for the supplier’s participation.
It was summer and our presentation was scheduled for right after lunch. Our factory was in a small town such that we were able to walk to a restaurant that was only a couple blocks down the street from where the building where the presentation was to be made. Returning to the factory from the restaurant we had to cross the street and step across a short plot of grass next to the curve to get on the sidewalk, i.e., the parking lot. When we did, I noticed that my co-presenter—let’s call him Richard (not his real name)—stopped to slap his leg, starting at calf level and working his way up towards his thigh. I asked him what was up and he said that he thought a bug might have flown up his pant leg but that I shouldn’t consider it a big deal.
A couple of minutes later we were in the meeting room doing a last-minute check of our presentation material and I could see Richard was sweating profusely and his face was changing color. By then the audience was coming into the room and I wondered if Richard was having a case of the nerves. I went over and told him that we were well prepared and he had nothing to worry about. He replied he wasn’t worried about the presentation. I asked, “what then?” and he answered, “You remember that bug that flew up my pants leg? It probably was a bigger deal than I let on.”
He went on to explain that what had apparently flown up his pant leg had been a bee that had stung him where no male ever wants to be stung. I asked if he was serious and he just looked at me in a way that let me know he was.
Richard was starting to look very ill so the importance of the presentation took a back-seat to his health. I immediately called the plant’s industrial nurse, Louise (her real name), whom I had a pretty good working relationship with, and explained the situation. She didn’t say anything for several seconds and then said something along the lines of, “Paul, this is not funny and I don’t appreciate you trying to pull such a prank.” I said, “Louise, I’m not kidding and the guy is starting to look grey.” Again she hesitated and then said, “Ok, if this is true you need to get him over here ASAP, but if this as a joke you’re in a heap of trouble.”
I got Richard to the nurse’s office and she handed him a tube of balm. She told him that it needed to be applied to the bite but that he would have to rub it on himself since she wasn’t going to do it. I don’t know what was in the tube but a couple of minutes after Richard went into a treatment room he came out again with a big smile on his face and said he felt fine. He looked better, too. Louise asked if there was anything else he needed and he replied, “I’ve got a four-hour plane ride to get home this evening and I wonder if you could give me another tube for the trip?” She did.
As we walked back to the meeting room I told Richard that considering what he had just gone through I felt it might be best if we rescheduled our proposal presentation. He said he felt we needed to go forward on schedule if we wanted to have the best chance of selling our proposal and that he would suck-it-up and do his part. So we decided to go ahead.
The presentation was a half-hour late in starting and when we walked into the room where we were to give it everyone there had a grin on their face. I suspect one of them had overheard me in my initial phone call to Louise but since no-one said anything I couldn’t be sure. The presentation went well and afterwards I got approval to resource the cost-reduced component which led to my first, annualized seven-figure savings. Later as Richard and I congratulated ourselves he said he was quite embarrassed by what had happened and would appreciate it if I’d keep it to myself. I assured him I would. I also told him that in going ahead with the presentation he had gone above-and-beyond what would normally be expected out of a supplier and I greatly appreciated it.
When I got back to my desk I saw the message light on my phone was blinking. In checking I found that my message box had been filled to the max. The messages were all about the incident—many of them off-color but given in a good natured tone—so apparently the guys in the meeting room had heard my phone call to Louise and started telling their friends about it. Later that day as I walked through one of our assembly line areas, production all but stopped for a few minutes as the assemblers shouted out wisecracks to me about what had happened, again in a good natured way.
I came in the next morning hoping that the worst was past. I was wrong. Early in the day I got a call from Richard’s boss who wanted to know if I could get him a copy of the medical report. I told him I didn’t know if that would be possible but would ask, which I did later that day. Louise looked at me with a bit of a frown and answered “no” to my request. She went on to say that medical records were confidential and couldn’t be released without the written approval of the patient. I telephoned Richard’s boss to tell him that I needed a written request from Richard to access the medical report. He replied that the request wouldn’t likely be coming as “all we really wanted it for was to put it in his retirement party file!” Geez, with friends like that who needs enemies?
Over the next week or so the stir this event had created in the factory gradually died down. A month or so afterwards I was visiting another supplier located in an adjacent state, i.e., in other words, not local to our factory. One of the reasons for the visit was to evaluate the field test results of one of their components that we had been working on to cost-reduce. Three supplier representatives drove me to the test site where we got out of the car. I started walking off the paved parking lot into the field of grass where the testing was going on and all of a sudden noticed I was alone. I turned around and saw my three hosts still standing in the parking lot. When they saw I was looking at them they made a big deal about taking rubber bands out of their pockets and putting them around the bottom of their pant legs, i.e., to apparently protect themselves against bees flying up them! Geez, news of the incident had apparently gone a 1980s version of Internet viral. Who says jobs in purchasing are boring?
My bottom-line here was that my employer got a significant price reduction on an expensive component. The supplier and I accomplished it by adjusting the part’s manufacturing to better align with our application’s needs, which allowed both my company and the component’s supplier to benefit—the supplier took a pretty big chunk of new business from a prime competitor of theirs.
When the incumbent supplier learned they were losing the business they immediately offered a 33% price reduction. In turning them down I replied that it wasn’t just the fact that we were getting a better price from our new source. Rather, it was that my company wanted to work with suppliers who wouldn’t leverage us at the first opportunity and to this point their company had lost our trust. Three decades later I don’t believe this company has gotten their foot back in the door with my ex-employer, at least at that factory.
My next article will be about how I got my first position in executive management.