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Supply Management At CN: Strengthening The Links In The Chain


Robert A. Gallant
Robert A. Gallant, Chief of Supply Management, CN, Montreal, Canada H3B 2M9, 514/399-7709.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

At an inaugural seminar in late 1993, rail carrier CN's Purchases and Materials department embraced Supply Management as both a new name and management philosophy. Employees have since partnered with internal customers and suppliers for greater supply-chain understanding and total cost-reduction. To date, this has been a "win-win-win" initiative for all supply-chain links: CN's suppliers, its Supply Management department, and its internal customers.

According to one source, the railway industry literally "wrote the book" on procurement. "The Handling of Railway Supplies - Their Purchase and Disposition" was published in 1897. Today, the Supply Management department at Canada's largest rail carrier is looking to its employees and supply-chain partners to "write a new chapter" in that book. The Supply Management concept is being used to strengthen the links in the chain.

Historically, purchases of goods and services have been second only to labour expenses at CN. These expenditures on everything from cotton gloves to locomotives run in the C$800-900 million range each year. That presents significant challenges, and at the same time, great opportunities to positively influence the corporate profit picture.

The opportunities are part of a growing trend in which companies outsource to companies which are the best in the world at what they do. For purchasing units, the focus is no longer on price negotiation alone. Multiple sourcing is being challenged by single sourcing, negotiation is replacing competitive bidding, and longer-term contracts are supplanting short-term relationships. Throughout industry, the procurement function is growing in importance.

CN's Supply Management department is no exception. It, along with its Supply Management operating philosophy, is figuring prominently in corporate turnaround efforts.

While procurement becomes more important in the broader scheme of things at CN, that role is itself changing. CN's Purchases and Materials department used to be viewed as a transaction processor. Now, under the Supply Management banner, the unit develops processes, puts them in place, and then ideally, steps out of the way of the supplier-internal customer transaction.

In late 1993 and early 1994, a series of seminars introduced CN Purchases and Materials employees to the new departmental name and business philosophy: Supply Management.

The Supply Management concept is relatively new in the procurement field. For all links in the chain, it represents an opportunity to reduce costs -- to everyone's advantage. The viability of CN and its suppliers is closely related, since in any chain, overall effectiveness is tied to the strength of the weakest link.

The Supply Management focus transcends purchase price in procurement decisions to include company-wide cost reductions. There is much to consider beyond initial cash outlay. Environmental and disposal aspects, safety, product effectiveness, and storage and distribution costs all weigh significantly.

With so many different cost aspects, the Supply Management department must heed suppliers' suggestions, especially those which point to certain product specifications which can elevate costs unnecessarily. Suppliers are counted upon for their suggestions for better, mutually-advantageous business arrangements. Supply Management must also listen to its own employees.

At the first Supply Management employee seminars, CN Supply Management employees, with the assistance of internal customers, as well as outside suppliers, quickly learned to develop a better understanding of the total supply chain, from the raw-material to the end-user phase.

During these sessions, some CN suppliers provided valuable input. In a particularly noteworthy example, one vendor produced a video about its track component manufacturing operations, specifically for the seminar.

Using information such as this, coupled with techniques developed at the sessions, Supply Management employees and supply-chain colleagues now collaborate on cross-functional and cross-company commodity-review teams. These typically include three to six people, drawn from Supply Management employees, suppliers and internal customers.

While one of the Supply Management seminar goals was to promote continuous improvement, the sessions themselves have been changed for the better, at the request of employee participants.

The seminars were revamped, with less theory and a greater emphasis on walk-through supply chain link identification and cost-estimate exercises for different products. Employees learned about cost-structure determination processes throughout the entire supply chain.

To complement these efforts, a study has been conducted to assess Supply Management employees' skills, knowledge and interests, in conjunction with departmental goals. This helps with training and development recommendations for each Supply Manager. Ideally, Supply Managers should be able to look at problems from different angles, work in teams to find innovative solutions, use research resources, and understand financial information. Any gaps in these areas will be filled with courses and practical experience.

In addition to Supply Management employee "buy-in," internal customer support is also required. With this in mind, Supply Management senior executives have made presentations to their counterparts in Engineering, Motive Power and Car Equipment, and other departments. Integration of these different departments' goals is facilitated by the fact that Supply Management and its in-house customers report to the same Senior Vice-President. The benefits of applying the Supply Management strategy accrue to these internal customers by reducing their total costs.

Additionally, internal customer departments are well-represented at Supply Management's employee seminars, and most recently, at sessions of CN's newly-formed Supplier Council.

Following the success of other industry leaders, CN has recently developed its own Supplier Council. This helps the company to capitalize on one of its most valuable assets -- its supplier network. Under the Supply Management concept, the department recognizes that suppliers are sources of goods, services -- and innovative ideas.

The CN Supplier Council purpose is: to work together; to improve effectiveness, productivity and responsiveness; and to develop long-term, mutually-beneficial relationships resulting in enhanced profitability for CN, its suppliers and customers.

The Council includes a General Membership of about 100 companies, a rotating Active Membership of about 25 which discuss issues at Working Sessions, and a six-company Advisory Committee.

At this relatively early stage, some Supplier Council suggestions have already been implemented, including acceleration of the pace of the introductory and working sessions, as well as the participation of suppliers in CN training efforts. During the first Working Session, held about eight months ahead of schedule at suppliers' suggestion, Quality, Logistics and Supply Chain issues are being addressed.

Realizing the value of communications, the Supply Management department is making extensive use of internal media (departmental, company and customer publications; plus a Supplier Council newsletter), as well as the procurement trade press.

While everything from castings to cotton gloves is under examination, Supply Management emphasizes "home runs" -- concentrating on those products or services with the potential for greatest total cost savings. The beauty of the Supply Management concept is that simple solutions often produce the best results. These advances are not at suppliers' expense. Many benefit from innovative agreements, electronic data interchange, and better credit terms. CN Supply Management knows the value of a strong supplier network as a key competitive asset.

To cite one example, CN looked at discharge gates on some of its cars. While some gates had been purchased at a lower price, they required more frequent repairs. This led to downtime on rail cars, the cost of which far outweighed any component purchase-price savings. Under the Supply Management focus, consideration of total corporate costs leads to the purchase of seemingly more expensive gates. However, the long-run savings to CN become that much clearer under detailed supply-chain cost and opportunity analysis.

In another case, for one of CN's roller bearing suppliers, a consignment arrangement at a CN location has simplified transportation and handling. For CN, the agreement translates to lower carrying costs and easier access to materials for its employees.

In a track welding kit study, a supply-chain team found that materials account for only 25 per cent of weld costs. Beyond initial purchase price, the group explored product safety and effectiveness, environmental and disposal aspects, labour and equipment, storage and distribution issues, and quality. Quality is critical, since the cost of a train delay far outweighs the cost of a weld.

An innovative, mutually-beneficial arrangement with a hardware vendor allows it to bypass CN distribution centres through direct delivery to Supply Management's field customers. This customer-service challenge is met with fewer resources by shifting greater responsibility to the supplier. The vendor enjoys assured demand for its products. CN benefits from the convenience of one monthly electronic invoice, cost-plus pricing, and inventory expense reductions.

In a direct offshoot of an employee seminar study, freight-car axles were singled out for their significant bottom-line impact. Everything was considered: raw materials to manufacturing, through to shipping, crating and customs formalities. The final result: the axle manufacturer supplies product at the high end of the rail industry's specified diameter tolerance range. At no extra cost to the supplier, CN enjoys extended axle mileage. While definite cost improvements will result, performance and cost tracking over the next several years will reveal the extent of savings.

Another commodity-review team's look at the traction motor supply chain has yielded benefits. While the motor repair process was deemed cost-efficient, the analysis pointed to a simple, albeit hidden, opportunity. Throwaway cardboard containers for motor components have been replaced by reusable metal boxes. That cuts packaging waste, reduces handling and damage, and increases workplace safety.

A single-source consignment arrangement has presented financial advantages to a brake-shoe supplier. The vendor enjoys a high-volume, sole-source agreement and better payment terms. For CN, a recycling provision reduces the purchase price and disposal concerns. The agreement also improves product availability, turnaround, and reordering.

CN Supply Management has entered into a credit card order management arrangement with a major chartered bank, one of its key suppliers on the service side. For CN, 12 invoices now account for thousands of smaller-scale local purchases. At the same time, the suppliers whose goods are purchased by CN cardholders receive a preferred transaction fee as well as accelerated payment.

These examples are a few of potentially thousands of mutually-advantageous cost-optimization opportunities under the Supply Management umbrella. There are more than 100 CN Supplier Council member companies, each with many good ideas about packaging, inventory, maintenance and production runs.

While the Supply Management concept is relatively new at CN, payoffs are already showing up on the corporate income statement. The efforts of Supply Management employees, suppliers and internal customers have contributed to what is shaping up to be a relatively successful year for CN. Corporate net income for the first nine months of 1994 stood at C$186 million, compared to a loss of C$41 million for the same period the year before.

Supply Management target cost reductions set out for year-end 1994 were reached by the end of the first nine months. One of those goals was a reduction in costs amounting to C$10 million. By the end of the first nine months, savings of C$10.4 million had already been realized.

To enable CN to reach corporate net income levels required to reduce debt and finance plant reinvestment, that same target has been raised to C$30 million for 1995. Continuous improvement is expected of Supply Management, and it filters through the supply chain as well.

Under the Supply Management concept, the challenges never stop. They also come from all directions: from within CN itself in the form of revised cost-reduction objectives or employee suggestions; and from our suppliers who have a unique vantage point since they bring ideas from their own companies as well as their other customers.

CN Supply Management is open to any supplier's suggestions to improve business relations, or proposals for specification revisions -- if they strengthen the supply-chain links. The emphasis is on good two-way communication and mutually-beneficial continuous improvement for CN and its suppliers. A strong supplier network benefits CN, and a financially-viable CN is in suppliers' best interests.

Taken as a whole, adoption of the Supply Management strategy at CN is resulting in a change in culture. Supply Management employees are developing a more professional and broader perspective while generating results which have significant impact on processes, and add dollars to the bottom line.

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