Purchasing as a competitive advantage

Oct. 4, 2002
A little OEM Insight shows that when sourcing their control systems, machine builders should factor in soft costs.

By Doug Bartow, Strategic Sourcing Manager, FMC Technologies

Traditional purchasing for industrial machinery has focused on component costs but has avoided reviewing some of the softer costs. When sourcing their control systems, machine builders face some unique challenges that reflect these softer costs.

When we sell a machine, we are not selling a component but rather a unique part of the customer’s production process. Naturally, the customer would like each machine to be tailored as closely as possible to its process, and as a result the control systems are most affected by this customization.

Sometimes the customer has standardized its facility on a certain brand--e.g., Modicon, Omron, Rockwell Automation, Siemens--and expects machinery suppliers to provide controls systems with its standard brand. In these cases, the engineering costs are significant. Not only do we have to convert existing codes for an unsupported PLC, but resources are also diverted from developing new software that can make our product offerings more robust.

Naturally, each time a customer specifies an unsupported automation package and each time we customize our control system, the less leverage purchasing has. So, a key to good sourcing is to select the supplier that the most customers prefer and that engineering can best support. In doing so, we may be paying more for the hardware, but we're avoiding some major engineering costs.

The trick is to get engineering, sales, and purchasing on the same page. Technically, many brands may be close in performance, but a few product details could be an issue when standardizing. Meanwhile, the sales organization is focused on selling machines, and its focus is simple: provide what the customer wants. Naturally, the sales organization wants to avoid making the control panel a major discussion point.

Once agreement is reached on what supplier to switch to, we have to convert all the systems to the selected brand. After engineering designs the hardware, the supplier typically writes the basic code and our engineers check and test the code. Testing alone is a huge cost, and if not done correctly we are open to all kinds of risks--injury to customer personnel, lack of product quality to the end user, etc.

So if switching is so difficult, what can a procurement person do to strengthen the bottom line? Certainly basic parts like relays, circuit breakers, etc., can be sourced as aggressively as most commodity parts. Yet automation is typically more than half of the spending, so here are some ideas.

Unlike steel or other commodities, there is no global price. My company has manufacturing in Asia, Europe, North America, and South America, and as we compare prices of similar components, we discover huge differences. The same automation components (same manufacturer, as well) we use in Europe cost at least 50% less than the exact same components we use in North America.

The obvious option would be to purchase the high-dollar components--the PLC, the drives, and operator interfaces--overseas. Some of the tricky issues to deal with will be warranty issues and product support. If your local distributor isn’t getting any business from you, they are not going assist you when issues arise. You need to make sure your overseas sources will support you as you need it.

For warranty, you may end up shipping product back overseas and covering your customer with locally purchased items. This might work if the defect rate is low. For example, if I save 40% and have a defect rate of 2%, I come out ahead.

Another option is to use this information in your negotiation strategy. At first your supplier will think you are bluffing, so you will have to take some action--such as to identify overseas sources or even purchase a sample control system overseas.

Don’t expect to make this happen overnight. But at the same time, suppliers cannot ignore the reality that we live in a shrinking world and we can do business in nearly every country.

The second major area would be to look at outsourcing strategies. Labor makes up perhaps 20-30% of control system cost and larger companies might be able to cut this by 40% or more. In addition, there can be a significant reduction in inventory, reducing working capital and inventory obsolescence. Transactions will be reduced not only because fewer purchase orders are being processed, but also because there is no need to process components into and out of inventory.

Sourcing control systems is certainly not a straightforward task. Yet there are creative avenues to savings.

  About the Author
Doug Bartow is strategic sourcing manager for FMC Technologies, a manufacturer of industrial equipment for the processed food industry. You can reach Doug at[email protected].

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