Driving Change at Selex through Integrated Global Souricng

| April 14, 2018

Driving Change at Selex through Integrated Global SouricngSelex, a U.S.-based electronic devices company, is an organization undergoing majorchange. It is in the process of transforming itself from a slow-moving, research-driven companyto a flexible, market-focused company. The 1990s, which include the longest period ofeconomic expansion in U.S. history, were not rewarding for Selex. The company experiencederoding profit margins due to intense global competition and mature product lines, sufferedthrough several costly new product failures, and lost market share as new technologies andcompetitors encroached on core markets. And, with some difficulty, the company was forced tochange its culture to respond to the demands of a new marketplace and CEO.For most of its history Selex viewed itself as a high technology company that couldprovide internally the inputs required for production. The company rewarded its researchers forcomplex and exotic materials and designs that were often difficult or costly to manufacture. Thecompany stressed basic rather than applied research, leading to many patents “sitting on theshelf” without ever being commercialized. Furthermore, Selex’s culture endorsed the “notinvented here” syndrome, a belief that rejected new ideas and help from outsiders. Internally,there was no incentive or willingness to pursue new ideas with suppliers or for supply chainmembers to collaborate with Selex. Change was resisted since it would likely alter somethingthat historically worked well.Selex’s traditional business model, which featured the development of a fewbreakthrough products that required four to five years to develop, began to break down in theearly 1990s. This was due to several costly new product failures and the introduction of newtechnologies by competitors that encroached on core product lines. As a result, Selex’sfinancial condition reached a crisis point during the mid-1990s.During this period Selex’s CEO retired and an outside management team arrived torevitalize the company. This new team decided that as part of its strategy the company mustreduce material costs while growing revenue through the rapid introduction of innovative new1products and technology. As Selex struggles to again become a market-leader throughinnovative new products and control of purchasing costs, the need to rethink how to approachworldwide sourcing has become evident.This case focuses on the global sourcing approaches taken by Selex’s three primaryprocurement groups to support the company’s revitalization efforts. These groups includeindirect purchasing (non-production goods and services), raw materials purchasing (anymaterial that is required directly for production), and contract or finished goods purchasing(outsourced finished goods).Indirect PurchasingOf Selex’s total revenue, over a third is committed to worldwide indirect purchases.Previous efforts at managing indirect purchases were strictly U.S. focused, even though Selexhas a manufacturing presence in Europe, Mexico, the U.S., and Asia. The question facingprocurement executives was how to globalize indirect purchasing, which involves the purchaseof goods and services that do not directly become part of finished products.The answer to this question suggested a need to change the organizational structuresupporting indirect purchasing, which was previously organized regionally with movementtoward total control at the local or site level. Given that a regional perspective would not supporta globally coordinated procurement effort, Selex has reorganized so that a single director hasindirect purchasing responsibility across the entire company.Creating a New Process A major strategy initiative underway at Selex has involved thedevelopment of a global process called Sourcing Value 2000. This process, which wasintroduced throughout the company in the early part of 2000, evolved partly from Selex’sinvolvement in a global benchmarking consortium. Involvement with leading companiesconvinced management of the need to create a formal process and structure to improve indirect2procurement. External consultants supported the development of the Sourcing Value 2000process.The goal of Sourcing Value 2000 is to systematically review, using a structured approachand process, Selex’s entire global indirect spending and activities. The indirect purchasingdirector has committed to annual cost savings of 7-15%, depending on the purchase categoryunder review. The pressure to produce these savings is strong—managers now includeexpected savings from global projects in their financial projections.Selex’s Sourcing Value 2000 process has three primary phases. The first phase, calleddiscovery and kick-off, involved eight weeks of analysis, review of existing contract agreements,and a review of Selex’s total procurement expenditures. The primary output from this phasewas the identification of high potential global sourcing opportunities. This first phase alsofeatured the establishment of improvement goals for the various categories of indirect items.The second phase involved identifying high impact areas and initiating the first wave ofglobal sourcing projects. These first projects involved capital purchases (machinery, capitalizedsoftware, and other items that are depreciated rather than expensed); marketing and salesrelated expense categories; maintenance, repair, and operating supplies; vendor services (suchas landscaping suppliers), and travel. Each project lasts 4-6 months and has a corporateofficer, who is a steering committee member (discussed shortly), assigned as a sponsor. Crossfunctional teams, working with their steering committee sponsor, develop project milestones andtimelines for developing a global indirect strategy.The final phase of Sourcing Value 2000 is one of continuous review and the pursuit ofnew project opportunities. The consulting group that is supporting the process expects to returnfour times over the next several years to validate that expected savings are being realized.Executive Support Selex has created an executive steering committee to overseeSourcing Value 2000. This committee consists of the vice presidents of research, supply chainmanagement, marketing and sales, information technology, and the corporate controller. Each3member resides at the executive vice president level, and each champions a specific project.The steering committee also works to overcome any barriers faced by the project teams.Selex also has an executive management committee comprised of the company’s top 12executives. Indirect purchasing project leaders, the indirect purchasing director, and the vicepresident of purchasing each report to this committee monthly. Again, this further illustrates thevisibility that Sourcing Value 2000 is receiving across the company.Use of Cross-Functional Teams Cross-functional teams are an integral part of theSourcing Value 2000 process. Team members, who are from engineering, finance, purchasing,and one or two members from site locations or operating groups, commit 25% of theirprofessional effort to supporting global sourcing projects. Teams report directly to the executivesteering committee and have the authority to make strategy decisions rather than simplyrecommendations. Each team disbands after it makes its supplier selection decision andawards a global contract. Stakeholders, rather than the project teams, manage the transition tonew contracts and suppliers.Selex’s CEO has stated that Sourcing Value 2000 is one the company’s primarycorporate initiatives. As a result, support for Sourcing Value 2000 is working its way in to thebusiness objectives of non-procurement groups. While the CEO’s support for this processreflects the importance of managing global indirect purchases, it also creates an expectation todeliver the savings that sourcing managers project. To put these expectations into perspective,Sourcing Value 2000 teams expect to achieve annual indirect purchasing savings of $50 million.Considering that Selex has recently reported major losses, the success of this process willbegin to dramatically affect the company’s financial position. While the indirect purchasinggroup is the least experienced of Selex’s three procurement areas, early results from SourcingVision 2000 are promising.Raw Materials Purchasing4A second major procurement area at Selex, and the one that is most experienced withworldwide sourcing, is raw materials purchasing. Raw materials refer to any component or itemthat is used directly in the production of a physical product. The director of raw materialspurchasing has broad responsibilities—his staff is responsible for sourcing all direct materialsand components. This group also has responsibility for finished goods planning, includingaggregate product planning. The raw materials director heads a staff that resembles amaterials management organization.Managing finished goods requires a high level of integration between the raw materialsdirector and marketing, which has responsibility for sales forecasting. A primary responsibility ofthe raw materials director is to participate in a higher-level monthly sales and operationsplanning meeting. At these meetings sales forecasts and inventory levels are reviewed todetermine each plant’s ability to support the forecast while managing material costs. Almost allproduction is driven by forecasts due to the seasonal nature of Selex’s core products.As part of its global procurement strategy, the raw materials group has traditionallyfocused on identifying qualified sources worldwide and aggregating volumes with leveragedagreements. This group has achieved at least 6% annual material cost savings throughout the1990s. Most of these savings have come from changing the product, process, or material ratherthan price reductions granted by the supplier. The vice president of purchasing and the CEOverify price change figures annually during the budget process.Centrally Coordinating Raw Material Requirements A major change recently put inplace involves worldwide technical personnel, operations, and procurement working together torefine the materials that are critical to component performance. This cross-functional approach,which is coordinated at the corporate level, examines systems tradeoffs to arrive at an expectedlowest total cost for key materials.A second major change emphasizes a centrally coordinated commodity team approachto global strategy development. This approach, which differs dramatically from Selex’s5previously decentralized approach to raw material sourcing, requires the involvement ofpurchasing and technical personnel from different locations or sites. Commodity teams havedeveloped a short term, medium term, and longer-term sourcing opportunity list. Eachopportunity has a targeted completion date, an estimated probability of success, and estimatedproject savings. The raw materials purchasing director, working with manufacturing, reviewsand prioritizes the project opportunities.Operations managers, who have been accustomed to directing activities at their ownsites, have had some difficulty adjusting to this change. The raw materials purchasing directoris de-emphasizing individual sites and stressing a company-wide commodity focus using crosslocational teams. Managers at the corporate level are responsible for supporting the commoditymanagement groups. Selex has also established lead buyers at individual sites for items thatare not part of the coordinated commodity approach. An individual at each plant is Selex’sexpert for a particular purchase category.The raw materials purchasing director, while taking a different approach than the indirectpurchasing group, recognizes that capturing the benefits from a globally integrated approach tosourcing required a radical change to organizational structures and reporting relationships. Healso recognizes that effective global sourcing demands an integrative approach to demandplanning and inventory management.Contract PurchasingThe arrival of a new executive management team led to a philosophy that stressed theneed to nurture and innovate within Selex’s primary core competency, which is the ability toacquire and process highly complex data within its electronic devices. Only one other companyin the world has the same technical capabilities as Selex. This philosophy has caused Selex tooutsource products and services that were previously insourced and to focus on what trulydifferentiates its final products.6There are several reasons why Selex insources components and outsources finishedproducts (which the company refers to as hardware). Most of the innovation that customersvalue occurs within the internal components rather than the hardware, making components aprimary area to commit research and development efforts. Furthermore, the margins for internalcomponents (which Selex also sells to other companies) are higher than the margins forfinished hardware products. Asian suppliers currently provide all outsourced hardwarerequirements. Outsourcing to Asia offers two major benefits—access to technology and lowcost. As with many electronic applications, U.S. and European producers are no longercompetitive.Beginning in 1996, Selex began to actively search for outsourcing partners for hardwarerequirements. Unfortunately, there was no organization in place to formally support that effort.While a small OEM group worked to identify contract manufacturers from the 1970s to 1995,Selex did not focus on outsourcing as part of its corporate strategy. As a result, creating anoutsourcing organization was not a concern.Creating a New Organizational Group The current director of contract purchasingapproached several key Selex executives in the mid-1990s to discuss the need for greateroutsourcing, arguing for the creation of a group that would be responsible for managinghardware outsourcing. In 1997, Selex created a group to manage contract manufacturing(outsourcing). The contract-purchasing director, who is the head of this group, is responsible forpursuing higher-level relationships in finished goods outsourcing agreements, which he termspartnerships. His group has responsibility for identifying and qualifying outsource partners,ensuring product quality, and working with contract manufacturers during new productdevelopment. This group works with suppliers up to a specific point in the new productdevelopment process before handing over day-to-day activities to another group.The contract-purchasing director has responsibility for two procurement groups locatedin Tokyo and Hong Kong. The primary mission of these groups, which are international7purchasing offices (IPOs), is to identify and work with potential and existing partners. The AsianIPOs report to the contract-purchasing director in the U.S. as well as to a regional manager.The IPOs help identify potential contract manufacturing suppliers and identify available suppliersfor a specific application (including indirect and raw materials discussed earlier in this case).Linking Outsourcing with New Product Development and Marketing Directinvolvement and linkage with marketing and technical groups is critical throughout theoutsourcing process. The U.S. based corporate marketing group is divided into four productsegments or categories. Consistent with Selex’s new market-based focus, increasing numbersof new product ideas are originating from marketing. Marketing is even responsible for markettesting new product ideas generated by R&D.An operations and technical representative, who report to the vice-president of newproduct delivery, are assigned to each product marketing category. These individuals act as aliaison with marketing to ensure the operations and technical voices are considered during thegeneration of new product ideas. Participation with marketing also ensures that operations andtechnology groups have early insight into new product requirements. The contract-purchasingdirector interacts regularly with the operations and technical people who are co-located with themarketing groups. These discussions provide insight into Selex’s new product ideas that mightrequire outsourcing support.Each new product initiative has an assigned formal program manager, who the contractpurchasing director considers his primary internal customer. The program manager isresponsible for managing the new product development effort from start to finish, includingassigning to the contract purchasing group the parts of the project that involve outsourcing. Atany given time the contract purchasing group is managing 9-12 outsourcing projects.Looking to the Future Selex also has an active advanced technology group that meetsweekly to address future material and product requirements. The group, formed and created bythe CEO, is responsible for developing medium to longer-range product strategies. The Futures8Group, driven by research and development and headed by a vice president, includesrepresentatives from marketing, finished products outsourcing, and operations. One indicationof the Future group’s importance is that it reports directly to Selex’s CEO. Participation with thisgroup allows the contract-purchasing director to pursue early supplier involvement opportunitiesvery early during new product and technology development.The changes at Selex illustrate how a major corporation, faced with the realities of newcompetitive threats and mature product lines and technology, is being forced to transform from aslow, functionally driven organization into a market-driven, cross-functional enterprise. Thiscase illustrated how three separate procurement groups, each taking very different paths, areworking to support the attainment of corporate objectives through progressive global sourcingstrategies and approaches.Assignment Questions1.Describe the competitive environment that forced Selex to undergo dramatic changes tosurvive. Why is procurement an integral part of Selex’s success?2.Describe the worldwide sourcing approaches taken by the three primary procurementgroups at Selex. Why did each group take a different approach to worldwide sourcing?3.Why did Selex decide to outsource finished goods hardware requirements?4.Discuss some of the changes Selex went through over the last ten years.5.Identify the various organizational design features and changes that Selex put in place tosupport its worldwide sourcing efforts.6.Develop a set of performance measures for each procurement group that would identifyhow well each group is meeting its sourcing objectives.7.Identify when and where cross-functional integration occurs at Selex.9

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