Moving Beyond Purchasing: A More Comprehensive Approach To Business
John Hanrahan, C.P.M.
John Hanrahan, C.P.M., Asst. Director-Procurement, Long Island Rail Road, Jamaica, N.Y. 11435, 718/558-7730.
80th Annual International Conference Proceedings - 1995 - Anaheim, California
Over the past few years much has been written concerning the value of cross functional teams to the procurement process. This paper attempts to move past the conceptual discussion of the team approach and through the review of a procurement case study provide quantifiable benefits to support this approach to business. For procurement professionals to survive and prosper they are going to have to broaden their focus. The title "Purchasing" is a relic, or will soon be one in most organizations. As organizations continue to review and reduce costs, positions narrowly focused on buying materials or processing requisitions will continue to be eliminated. Procurement professionals who develop more creative information system solutions, lead cross functional teams and contribute value on technical and business issues will become vital to the success of the organization.
THE CASE STUDY.
On January 28,1994 the Board of Directors authorized the Long Island Rail Road (LIRR) to proceed with the competitive request for proposal (RFP) process for 23 locomotives and 114 passenger cars. The budget estimate for the acquisition was $300 million, the total project budget including internal and consultant costs, plus downstream equipment maintenance costs is over $400 million.
The LIRR established an independent cross functional Evaluation Team comprised as follows:
- Procurement & Materials Management - Asst. Director
- Maintenance of Equipment - Engineer
- Market Research - Director
- Capital Projects - Director
- Transportation - Director
The LIRR is the busiest commuter passenger railroad in the United States providing transportation services to over 200,000 customers each weekday between Long Island and New York City. Beyond its core market, the LIRR provides 24 hour year round transportation service to customers in the region who travel to work and pleasure over 595 miles of track with 134 stations across 9 branch lines. The passenger fleet is made up of over 1250 cars and locomotives and the centerpiece of the infrastructure is the newly renovated Penn Station situated in midtown Manhattan.
This procurement of new locomotives and passenger cars will replace existing passenger equipment which has exceeded its useful life. Some of the existing passenger coaches are over forty years old and do not deliver the level of customer service needed to retain and attract customers. Competitive bidding was judged to be inappropriate for these procurements since selection was to be based on formal evaluation of characteristics that are relevant to the LIRR's provision of customer service, and not on the basis of purchase price alone.
The first step for the LIRR was to establish the organizational approach to managing the procurement process. The aforementioned Evaluation Team was established and assigned the following responsibilities:
- Development of the Selection Criteria & Contract Documents
- Review and Evaluation of Proposals
- Discussions and Meetings with Proposers
- Contract Modifications (Addenda)
- Recommendation for Contract Awards
A Policy Committee comprised of senior staff of the LIRR was established to provide policy guidance to the Evaluation Team and to receive and act on recommendations of the Evaluation Team. The Evaluation Team during this phase of the project concentrated on the development of the Selection Criteria and the Technical Specification. The following criteria was established:
- Locomotives and cars which improve the quality, in quantifiable terms, of the transportation service we provide to our customers
- The life cycle costs to acquire, operate and maintain the equipment
- The degree to which the builder and the sub-suppliers provide long term maintenance agreements
- The manufacturing and design capabilities of the builder
- The extent to which the builder can improve upon the LIRR's minimum delivery schedule
- The level of work conducted within the State of New York
The next step involved intense scanning of the marketplace to determine the baseline conditions within the technical specification. This was achieved by having team members meet with other transportation companies, builders and inspecting equipment in service. Generally, team members attempted to gauge, from a technical perspective, where the industry would be in 15 years. In the case of the locomotives, for example, we determined that a new generation of equipment was being developed with the U.S. freight railroads taking the lead in the research and development work. Historically, diesel locomotives in the U.S. have been powered by direct current (D.C.) motors. The freight railroads working with the locomotive builders discovered that alternating current (A.C.) motors had numerous benefits such as increased fuel economy and tractive effort along with reduced maintenance costs. In short, the freight railroads came to realize that they could haul the same tonnage with less locomotives by acquiring A.C. locomotives. For a passenger railroad such as the Long Island we concluded that the A.C. locomotive provided increased reliability and operating performance, and that the locomotive builders would be focusing on this technology for the future.
In the case of the passenger cars we utilized market research to conclude that our customers had a strong desire for more interior space, particularly for the longer trips in diesel territory, where this new equipment would operate. This was considered an important factor in the pursuit of a competitive advantage over our primary competition for market share, the automobile. This in part lead to the decision to specify a bi-level design which basically provides for a upper and lower deck as opposed to a single level coach. This set the stage to offer 2x2 across interior seating with more room per seat than the traditional 3x2 seating offered in a single level coach. Part of the team's thinking was to evaluate cost on a per seat cost basis as opposed to a per car basis, which further supported the decision to specify a bi-level design.
These are just a couple of examples of the kinds of issues that were addressed during the pre-procurement planning phase. Other issues, such as developing a more quantifiable approach to predicting reliability of the equipment and requiring original equipment manufacturers (O.E.M.'s) to offer spare parts proposals along with the builder of the cars and locomotives up front, were new and challenging. In retrospect, the pre-procurement work proved to be critical in the business process of providing our customers with reliable, faster, more comfortable transportation service at a lower per seat cost. All too often technical specifications are left solely on the shoulders of the engineering or using departments. It is in this phase of the project were the team comes to understand the issues and works toward merging the technical specification with the commercial section of RFP. It is also the point were the group becomes a team by providing insight and expertise based on each member's individual talents and gaining a more complete understanding of issues outside their area of functional responsibility within the organization. It is precisely the area where procurement professionals should play a leadership role. The pre-procurement phase consumed roughly 5 months from January through May 1994.
THE PROCUREMENT PROCESS.
Advertisements were placed in daily newspapers as well as trade publications with world wide circulation. The availability of the RFP documents were made known to over 150 builders and suppliers by direct mailings. In July 1994 the LIRR was pleased to receive five proposals to build the passenger cars and two proposals to build the locomotives.
A few background points concerning the locomotive and passenger car markets is in order here. The locomotive market is dominated in North America by two American companies who are highly vertically integrated and are well established in terms of manufacturing and design capabilities. The two companies are just about dead locked in terms of market share and to say the competition is spirited is a major understatement. On the other hand, the passenger coach market is typified by manufactures from around the globe with only one American manufacturer. Japan, Europe and Canada all offer companies who produce passenger rail cars. Again, competition can be intense however, passenger car builders normally pick their spots to compete based on the type of car specified. Passenger car builders specialize in designing selected parts of the car, like the carbody structure, and depend more on sub-supplier support than the locomotive builders. In summary, the two proposals received for the locomotives was the number we expected while the five on the passenger cars exceeded our expectations and the industry norm.
Each Evaluation Team member performed independent reviews of each proposal and provided an initial scoring of the proposals against the selection criteria. This initial review and scoring took six weeks. After completion of the scoring, team members openly discussed the relative strengths and weaknesses of each proposal and determined that all proposals warranted further consideration. Team members with the assistance of in-house and consultant resources developed specific questions for each builder and forwarded these questions to the builders prior to sit down meetings. Each builder was provided three days of meetings to answer questions, seek clarifications and offer suggestions on improvements to the RFP.
One of the submissions by the builders was 2'x3' artist renderings of the interior layout of the passenger cars. The Evaluation Team working with a market research firm displayed these 2'x3' interior layouts to customer and employee focus groups to assess feedback to a range of interior design concepts. Evaluation Team members observed these customer and employee groups through a one-way mirror. The feedback resulted in substantive changes to the technical specification, and was extremely useful in narrowing down alternatives and keeping the team focused on the customer who uses our service and the employee who maintains the service.
At the conclusion of the meetings the LIRR revised the RFP and requested all builders to submit proposals based on these changes and a more complete understanding of the LIRR's requirements. The meetings both external and internal consumed the months of August and September of 1994 and we received the revised proposals in the first week of October. All the revised proposals were of a higher quality, more responsive and some offered significant acquisition price reductions off their original proposals. Based upon the revised proposals the Evaluation Team made a shortlist decision to reduce the field to three builders for the cars and retain both locomotive builders. After a final round of contract document review and changes the LIRR requested best and final offers from the builders and their original equipment manufacturers.
Best and final offers were received on November 11,1994 and final review of proposals took approximately one month. The Evaluation Team made a recommendation to the Policy Committee which was accepted and a final round of negotiations was authorized with the two selected builders. At the Board of Directors meeting on January 27,1995 almost a year to the day when this procurement project commenced the LIRR received the Board's approval to award contracts to the builders recommended by the Evaluation Team.
CONTRACT AWARD HIGHLIGHTS.
For the locomotive contract the following is a list of a few of the highlights:
ACQUISITION PRICE - Below the competing proposal and lower than budget estimates for a superior design and enhanced operational performance. Simulation data reveals that trip times for customers could be reduced.
LIFE CYCLE COST - Lower fuel consumption and higher reliability should result in lower maintenance costs. Agreement reached on a 15 year spare parts agreement that includes a flat fee per locomotive for all scheduled and unscheduled maintenance, except consumables. Electronic data interchange (EDI), bar coding and agreement to monitor reliability and include technology updates during the term of the agreement, should reduce the costs for both parties in the area of product support and materials management.
For the passenger cars contract we have the following:
ACQUISITION PRICE - On a per seat cost basis these cars are lower than recent passenger car procurements in the United States. In fact, lower in cost for a quantifiably higher quality passenger coach as compared to these recent procurements.
CUSTOMER SERVICE - More customer seating room than any car in the LIRR fleet and possibly any existing commuter car in service in the United States. Enhanced ride quality, lower noise levels and state of the art passenger seating are all included as well as a customer information system that provides audio and visual messages. On-board public cellular telephones along with a design which complies with the American Disabilities Act (A.D.A.) makes these cars truly practical and accessible to all our customers.
OEM SPARE PARTS AGREEMENTS - Reached agreement with 14 separate OEM's to supply parts for 15 years at firm unit pricing subject to escalation/deescalation based on published indexes. OEM's will bar code all parts and provide Bills of Materials (BOM) which will be installed on LIRR computer systems along with EDI to reduce the costs associated with maintenance of the cars.