CIO

A Better Way to Buy

Kennametal's global purchasing and supply management director Jim Cebula was used to making big orders, but in May 2000 he was facing a tall order: "Tell us where every dollar we spend goes, even in departments that don't cut purchase orders."

The $US1.6 billion Pennsylvania-based company was going through hard times as the global economy faltered. Kennametal makes its living selling metal cutting, coal mining and highway building tools and providing engineering services, but both building and road construction projects were on the wane, and car makers were slowing production. Sales were already on the decline that ultimately saw them drop 17 per cent between 1999 and 2002.

Part of Kennametal's solution had been to appoint Mark Steele as vice president and director of purchasing and supply management (PSM) to put in place a global strategic sourcing program that would reduce the company's purchasing costs by $US35 million. Yet Kennametal could only estimate its current spending, and while individual business units had data on where they were spending the most money, no such assessment was available companywide.

"It quickly became clear that we didn't have a purchasing data warehouse, a central repository for the data we needed to do the analysis to identify the best [sourcing] opportunity," Steele told InfoWorld in August 2002. His vision was to get Kennametal to a position where it could aggregate all data companywide, so that the separate business units would be able to act as one company when purchasing in various markets. He also wanted a mechanism to help enforce purchasing agreements and ensure business units only bought from Kennametal's primary contracted sources.

And so Cebula, who works under Steele, was charged with implementing systems to help Kennametal determine exactly how much each business unit spends on all supplies, and with which suppliers.

"The impetus was a challenge by our chief administrative officer to first understand where every dollar went that was spent in Kennametal - not just purchase order spend, which typically can be easily retrieved from, in our case, our ERP system SAP, but all the spend, including spending that was made by departments that typically don't cut purchase orders," Cebula says.

"So for example human resources have quite a bit of spending on employee benefits and health-care, and typically when you go to an ERP system you get spending in the manufacturing plants, but not spending at the corporate headquarters."

Cebula's job would not be easy. Kennametal has many business units and factories around the globe. It also runs five different ERP systems - including two versions of Computer Associates' Ask Manman, which derive from the late-1980s, and two even older packages specific to industrial manufacturing - and also draws on American Express purchasing card data. It runs six different databases.

"We really wanted to identify every dollar that leaves the company, so being able to get data from all those systems was critical," Cebula says.

But when Cebula started casting around for solutions, he found very few models to draw from. Neither Dunn and Bradstreet nor SAS had a workable solution to offer. So in August 2001 he turned to a New York-based supply chain consulting company named Tigris Consulting and solicited its support to build a solution. Tigris quickly put its staff of somewhere between 50 and 75 database analysts to work identifying, consolidating and normalising Kennametal's data. It was difficult and demanding work.

Cebula charged Tigris with delivering a fully functional purchasing database for three of its enterprise systems within eight weeks. Drawing on some of Kennametal's existing technology, custom-designed applications and inexpensive tools, Tigris did just that. Now Kennametal has a purchasing warehouse with strong analytical and categorisation tools, and an OLAP tool purchasing professionals can use to quickly deploy the "spend cube" spend-analysis tool regardless of the enterprise system being used.

The system - which has proved incredibly inexpensive - revolves around a Microsoft SQL Server database, Microsoft Access, and DataBeacon's eponymous "spend cube", a Web-based analysis tool. Cebula says part of the tool's effectiveness is that it is multilingual and very intuitive. The spend cube lets Steele, Cebula and local purchasing officers view the data from a range of dimensions, including by item category, supplier, office location, amount spent, time period and so on. ROI was achieved in less than three months. Kennametal refreshes the spend data every three months, since it contains historical information, and since the organisation has learned that strategic negotiations with suppliers are most effective when it can draw on current information.

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Cebula says the spend cube has helped all of Kennametal's purchasing and supply management organisations work to the same standards and use the same language. Better still, he says, the entire system imposes a minimal burden on the organisation's IT infrastructure, since Tigris hosts the system under an ASP model. "It means that Tigris runs this system on its computer, and all Kennametal has to provide is a desktop computer that has access to the Internet. That's not a big ask, so our IT department really has little or nothing to do with this application," Cebula says.

Now purchasing officers can easily extract information on the company spend, because the Tigris tool consolidates the spend data from the different systems into a single Excel program to give what Cebula calls "spending visibility". They are also using the Tigris data to conduct online reverse auctions on tool steels and forgings and castings, and plan to extend this to additional auctions for other commodities. The buying team has already used the data to win $US800,000 in savings on a renegotiated telecommunications contract, and a further $US600,000 through weeding out off-contract purchases.

In addition, the system is allowing buyers to develop supplier management and supplier rating systems.

Spend Cube Impacts

Cebula says the spend cube impacts the financial organisation, the informational organisation (which has had its burden considerably reduced by the ASP arrangement), and Kennametal's interpersonal relationships. Although the spend cube is just one of many activities the organisation undertakes to generate global cost reductions, it has led to significant identification of opportunities for savings and helped the company to prioritise resources. It has made a significant contribution to the $US40 million the organisation slashed from its costs over the past three years.

"For example, we did not realise across our executive team how much we spent on pharmaceutical benefits and health- care," Cebula says. "And this is something that typically was not negotiated. So just recently we did an Internet auction on our pharmaceutical benefits program and generated bid day savings of over a million dollars. That's not bad on $US9.5 million of annual spend.

"And even though our human resources department felt they were doing a very good job at $US9.5 million (although in their words it could have been $US12 or $US15 million), the reality is that when we competed the business in an Internet auction, the lowest benchmark price was a million below what we were paying."

Kennametal's primary technology purchasing tool has now become Internet-based auctions, and it prioritises those efforts based on the information from the spend cube. "Last year, in fiscal year 2003, we had cumulative savings of $US1.6 million, on a spend of $US10.4 million, and then in fiscal year 2004, which started July 1, 2003, we've already exceeded that in terms of savings and volume," he says.

Perils and Pitfalls

Cebula says he learned some important lessons along the way to spend management nirvana. He says the organisation initially underestimated the value of such spend information, and so was not prepared to share and train large numbers of people in order to gain more value. "For example, we were able to train our financial controllers who now use the tool to help them forecast their budgets for the following year. We've only learned to do that recently from a tool, a system, that has global information."

Now Cebula spends a lot of his time sharing his experiences with other companies. "For example, just last Friday I was in New York city for a strategic spend management conference that was put on by The Conference Board, and maybe 75 companies were represented," he says. "They are very interested in our work.

"There are other software packages on the market that offer spend management solutions; however, I don't think they are as effective as the one we have developed."