Case Study of Iowa Elevators
Chapter 3 Supply Organization 69
Hendrick, Thomas E., and Jeffrey Ogden. Chief Purchasing Officers Compensation Benchmarks and Demographics: A 2001 Study of Fortune 500 Firms. Tempe, AZ: Center for Advanced Purchasing Studies, 2002.
Johnson, P. Fraser. Supply Organizational Structures. Critical Issues Report, CAPS Research, August 2003.
Johnson, P. Fraser. The Pattern of Evolution in Public Sector Purchasing Consortia. International Journal of Logistics: Research and Applications 2, no. 1 (1999), pp. 5773.
Johnson, P. F., and M. R. Leenders. Supplys Organizational Roles and Responsibilities. Tempe, AZ: CAPS Research, May 2012, 118 pages.
Johnson, P. F., and M. R. Leenders, Supply Leadership Changes. Tempe, AZ: CAPS Research, 2007.
Leenders, Michiel R., and P. Fraser Johnson. Major Structural Changes in Supply Organizations. Tempe, AZ: Center for Advanced Purchasing Studies, 2000.
Leenders, Michiel R., and P. Fraser Johnson. Major Changes in Supply Chain Responsibilities. Tempe AZ: Center for Advanced Purchasing Studies, 2002.
McCue, Cliff, and Eric Prier. Using Agency Theory to Model Cooperative Public Purchasing. Journal of Public Procurement 8, no. 1, 2008, pp. 135.
Nollet, Jean, and Martin Beaulieu, Should an Organization Join a Purchasing Group? Supply Chain Management 10, no. 1 (2005), pp. 1117.
Schneider, L., and C. M. Wallenburg. 50 Years of Research on Organizing the Purchasing Function: Do We Need Any More? Journal of Purchasing and Supply Management 19, no. 3 (2013), pp. 144164.
General Motors 2013 Sustainability Report, www.gmsustainability.com/report.html#/issues/ supply, accessed February 17, 2014.
Case 31
Iowa Elevators
Scott McBride, director of purchasing at Iowa Elevators, was reviewing information collected by his analyst, Cathy Ritchie, as he prepared for a meeting with the executive management team scheduled for Wednesday, June 11. Scott had been asked by Walter Lettridge, Iowa Eleva- tors CEO, to present a five-year plan for the purchasing department at the meeting. In preparation for the meet- ing, Scott asked Cathy to prepare a report analyzing all expenditures made by the company with outside suppliers over the previous year. It was now June 3, and Scott knew there was still a lot of work that had to be completed to get ready for the meeting the following week.
IOWA ELEVATORS Iowa Elevators was one of the largest grain-handling com- panies in the United States. Headquartered in Des Moines, Iowa, the company had annual revenues of $2.3 billion
and employed more than 2,500 people. Its two business units were the grain-handling and marketing division and the farm supplies division.
The grain-handling and marketing division operated approximately 300 grain elevators in the Midwest. This division represented approximately 75 percent of total company revenues, although total revenues had declined by 20 percent from the previous year due to drought con- ditions that had affected farm crop production. Over the previous five years, the company had invested heavily in upgrading its elevator system to improve throughput and increase capacity in key regions.
The farm supplies division sold crop-protection prod- ucts, equipment and supplies, fertilizer, and seed through its network of country elevators and approximately 30 market- ing centers. Revenues for this division had doubled over the previous five years as part of a strategy to tap the companys country elevator network to diversify its revenue base.
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70 Purchasing and Supply Management
Iowa Elevators had a past reputation for steady finan- cial performance and profitability. However, the company had seen a steady decline in profitability over the previous three years. In the most recent fiscal year, it experienced a loss of $11 million after taxes and a sharp decline in working capital. Management attributed its disappointing results to lower volumes in its grain-handling and market- ing division and increased competition. Despite its rising market share, operating margins at the farm supplies divi- sion had remained flat.
Concern over the financial performance of the com- pany led to a decision by the board of directors to make changes to the executive team. In February, Walter Lettridge, a veteran of the grain-handling industry, was brought in as the new president and CEO. Shortly after- ward, Jose Sousa joined Iowa Elevators as the new chief financial officer. Both Walter and Jose had worked to- gether at a competitor of Iowa Elevators.
Immediately after joining the company, Walter went to work creating a major cost-cutting initiative, which would in- clude reductions in headcounts, capital expenditure budgets, and overhead expenses. As part of this process, Scott McBride was asked to present a five-year plan to the executive man- agement team, including annual cost reduction targets.
PURCHASING AND SUPPLY MANAGEMENT Scott supervised a group of 11 people (see Exhibit 1) who were responsible for the acquisition of requirements for head office and some regional sales and administrative offices. Its major purchases were information technology (hardware and software); printing for forms, brochures, and advertising; office supplies; and company automobile leases. The only change in the purchasing organization within the last year had been the addition of a travel coor- dinator as a result of a contract for air travel and car rent- als. The purchasing organization was part of the corporate services organization, which also included the human re- sources and information technology groups, and reported to the CFO.
Iowa Elevators had a history of decentralized man- agement, with individual divisions held accountable for their own operations and bottom-line performance. As a result, local elevator managers acted autonomously but were responsible for local market share and profitability. In addition, the elevator managers also made decisions concerning the amount and variety of crop-protection products, fertilizer, and seed stock to handle in their retail
Scott McBride Director
Manager Other Purchases & Fleet
Supervisor
Assistant Buyer
Analyst
Expediting Clerk
Invoice Clerk
Manager IT Purchasing
Asset Management
Clerk
Buyer
Travel Coordinator
Cathy Ritchie Analyst
Jose Sousa CFO
EXHIBIT 1 Iowa Elevators Purchasing Department
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Chapter 3 Supply Organization 71
operation. Purchases for elevator operations were handled locally and monitored based on spending limits set in an- nual operating budgets.
The farm supplies division had a group of four product managers who were responsible for the three main prod- uct segments (crop-protection products, equipment and supplies, and fertilizer and seed). These individuals were responsible for supplier selection, product mix, branding, and promotion and assisted elevator and marketing center managers in the areas of promotion, new product develop- ment, and inventory planning.
ANALYSIS OF CORPORATE SPEND In a meeting in early May, Scott was asked by Walter Lettridge and Jose Sousa to present his five-year plan for the purchasing department at an executive management team meeting on June 11. Walter had scheduled time for a number of senior managers to present their plans and ideas aimed at returning the company to profitability. During the meeting, Walter commented to Scott: I expect pur- chasing to deliver cost savings and your group needs to play a more significant role in the company. You need to explain what you can deliver and explain how you intend to accomplish your objectives. As far as I am concerned,
everything is on the table right now. We need to return the company to profitability and I am not afraid to make some major changes in terms of how we run this business.
Recognizing the need to present a thorough plan, Scott enlisted the support of his analyst, Cathy Ritchie, to help him collect and organize data. The data collec- tion focused on two questions: (1) How much money did Iowa Elevators spend with its outside suppliers? and (2) How much inventory did the company carry? The data collection process had been complicated by the variety of management systems at different levels and at different locations. Scott believed that if more time had been avail- able, Cathy might have been able to capture more spend and inventory data.
Cathys analysis identified a total corporate spend of $728 million. Although the company dealt with more than 1,500 suppliers, 20 suppliers accounted for approximately 45 percent of the total spend and the top five represented 35 percent. (The top five suppliers consisted of two rail- way companies and three suppliers to the farm supplies division for crop protection and fertilizer.) She estimated that average annual inventories in the farm supplies divi- sion were nearly $120 million with annual purchases of $310 million. A summary of Cathys key findings is re- ported in Exhibits 2 and 3.
EXHIBIT 2 Total Purchases by Category ($000)
Spend Category Annual Spend*
Farm supplies $ 254, 406 Information technology and telecommunications 17, 187 Fees, levies, memberships 26, 301 Energy 8, 602 Financial services and interest expense 24, 461 Fleet 4, 229 Insurance 5, 239 Packaging 10, 551 Professional services 7, 708 MRO & construction 127, 829 Transportation services 208, 927 Travel and entertainment 3, 557 Other 17, 350 Miscellaneous and unclassified 11, 926
Total $ 728, 273
* Data for the most recent fiscal year.
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72 Purchasing and Supply Management
THE MIS PROPOSAL Scott was aware that the MIS Group had been asked to make a similar presentation to the executive management team. The chief information officer (CIO) had informed Scott that he would be requesting $10 million in addi- tional spending beyond standard upgrades over the next five years with anticipated cost savings of about $500,000 per year.
PREPARATION FOR THE MEETING Scott viewed the upcoming meeting as an opportunity to redefine the role of purchasing at Iowa Elevators. His session with executive management was expected to last approximately 90 minutes, and he wanted to prepare a five-year plan with specific objectives for each year, including cost reduction targets. In particular, his plan
for the coming year had to be very specific and include identifiable projects and initiatives, schedules, project plans, and expected costs and benefits.
As part of his proposal, Scott also wanted to establish a budget and human resource requirements that would be needed to support his recommendations. While he regarded his staff as competent, Scott recognized that he would require new managerial resources if the role of corporate purchasing was to be expanded. Consequently, he also planned on proposing a new organization structure and establishing a headcount plan and budget for the purchas- ing department.
As Scott reviewed Cathys report, he began consider- ing where he was going to start and what could be accom- plished. His major concern would be resistance from the divisions and field elevator managers, and he wondered what, if anything, could be done to address any organiza- tional resistance to his recommendations.
EXHIBIT 3 Farm Supplies Division Inventory ($000)
Category Average Inventory Annual Purchases
Crop protection products $ 65,098 $ 124, 696 Equipment and supplies 22,388 13, 743 Fertilizer 20,938 130, 557 Seed 10,389 41, 787
Total $ 118,813 $ 310, 783
Case 32
Lambert-Martin Automotive Systems Inc.
Arthur Thomas, vice president of global purchasing, En- gine Systems Group at Lambert-Martin Automotive Sys- tems Inc. (Lambert-Martin), was preparing for the biggest challenge of his career. Bill McLaren, president and CEO, had asked Arthur the previous day to take over as the com- panys new chief purchasing officer (CPO), replacing Jeff Trudell, who was retiring in two months, after eight years in the role. As a first step, Bill asked Arthur to put together some ideas regarding potential changes to the purchasing organization at Lambert-Martin. During their meeting, Bill commented, Our business plan calls for the company to grow from $10 billion in sales this year to $15 billion in five years. It is essential that we take advantage of opportu- nities in our supply chain to support our growth objectives and to keep costs in line.
Bill suggested that Arthur review the current organi- zation structure, develop alternatives, and meet with the group vice presidents to solicit their input. It was Tuesday November 6, and Arthur was scheduled to meet with Bill at the end of the month to review his preliminary ideas and recommendations.
LAMBERT-MARTIN AUTOMOTIVE SYSTEMS INC. Lambert-Martin was a U.S.-based supplier to the global automotive industry, with headquarters in Troy, Michigan. Its origins dated back to the early days of the automotive industry, when the company was formed in 1924 with the merger of Lambert Clutch and Gear Company and Martin
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Chapter 3 Supply Organization 73
Engine Systems. It was a recognized leader in drivetrain technology, providing innovative products that improved fuel economy, emissions, and performance. Its main prod- uct lines were drivetrain components, including transmis- sion control units, engine valve components, friction ma- terials, and turbochargers. With 70 manufacturing facilities across 22 countries, it provided components to most major original equipment manufacturers.
The company invested heavily in product engineer- ing and new product development. Its engineers worked closely with customers on new vehicle programs, and the Lambert-Martin Technology Center, also located in Troy, was a source of new product innovation.
Lambert-Martin operated under a decentralized model with five business groups: Engine Systems, Emission Products, Ignition Technology, Engine Cooling Systems and Transmission Technology. Corporate office func- tions included accounting and finance, human resources, engineering, information technology, legal, and a small purchasing staff. Group vice presidents operated autono- mously with control over sales and manufacturing opera- tions, including purchasing.
The largest group by sales was Transmission Technol- ogy, with annual revenues of approximately $3 billion, while annual revenues at the other four groups ranged from $1.5 to $2.0 billion. For the most recent fiscal year, cost of sales represented 80 percent of revenues, while purchases were 50 percent; and selling, general, and ad- ministrative expenses were 9 percent. Net earnings after tax were $690 million.
The Purchasing Organization Most purchasing staff were located in the five business groups, each with a vice president of purchasing that re- ported directly to their respective group vice president. The group purchasing functions were responsible for commodity strategies, sourcing, quality control, cost re- ductions, and supplier development. The corporate pur- chasing group managed the supplier technology portal, supplier scorecards, risk management reporting, and the supplier manual. Historically, the CPO had a dual role as vice president of purchasing for one of the groups as well as responsibility for the corporate purchasing orga- nization. For example, Jeff Trudell had the title of vice president global supply for the Transmission Technology Group as well as being the companys CPO. Similarly, in his new role, Arthur would maintain his current position as vice president of global purchasing, Engine Systems Group, and add the corporate CPO title.
PREPARING FOR THE MEETINGS Arthur Thomas was a mechanical engineer with 20 years of experience in the automotive parts industry. He joined Lambert-Martin 15 years prior, originally working in engi- neering and product management in the Emission Products Group. After five years in engineering, Arthur was asked to join the purchasing organization in Engine Systems, where he held positions as strategic sourcing manager, director of supplier development, and director of commodity manage- ment before being promoted to his current role, which he had held for the last three years.
As vice president of global purchasing for the Engine Systems Group, Arthur reported to Bill McLaren, who, un- til his recent promotion, had been group vice president of Engine Systems. During his tenure as head of purchasing for the group, Arthur could see where Lambert-Martins decentralized purchasing organizational structure con- strained the company from capturing important opportuni- ties in its supply chain. Specifically, the lack of communi- cation among the purchasing organizations in the business groups meant that spend information for common suppliers was not shared, thereby potentially missing opportunities for price reductions through consolidation of purchases. Secondly, Arthur felt that because purchasing in each of the groups had separate organizations for sourcing, qual- ity control, and supplier development, it would be possible to reduce overhead costs and improve the effectiveness of these activities through increased centralization.
Arthur had recently read a focus study report pre- pared by CAPS Research, Supplys Organizational Roles and Responsibilities, which indicated that approximately 10 percent of the large companies in the survey had de- centralized purchasing organizational structures, and the majorityapproximately two-thirdsused the hybrid structure. With a new CEO who was looking for oppor- tunities to make positive changes at the company, Arthur thought this would be a good time to take a fresh look at Lambert-Martins purchasing organizational structure and the roles and responsibilities of the groups and head office functions. His meetings with the five group vice presidents were scheduled for mid-November. As he sat at his desk, Arthur wondered what questions he should ask during these meetings. Buy-in from the group vice presidents would be essential if any major changes were to occur. Furthermore, Bill McLaren was expecting some alternatives from Arthur regarding where he saw opportunities and how the purchas- ing function would be able to make a greater contribution to the strategic and financial goals of Lambert-Martin.
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