How P&G buys plastics

Back to the future

Big companies are putting much more effort and firepower into their supply management in an effort to boost corporate results. You will be affected. There''s a lesson to be learned.

There are dramatic changestaking place in how major companies buy plastic products.

They''re building leverage to reduce costs; they''re partnering with suppliers who can offer key services such as design; and they''re deploying sophisticated Web-based electronic procurement tools that drive down cycle times and costs. And no surprise here: They''re going global looking for low-cost sources.

One of the leaders is Procter & Gamble, the giant consumer products company that spends close to $3 billion a year on injection molded, blowmolded, and other types of packaging for products that range from Tide and Downey to cosmetics and health care items.

Chief buyer Richard A. Hughes has the ear of CEO A.G. Lafley because of the growing impact of external costs on corporate profitability and the increasing inability of consumer products'' manufacturers to increase prices. Reason: Continued focus by consumers on product innovation and value at what P&G calls the "First Moment of Truth" (when a consumer chooses its product from the shelf).

The trend affects all parts of the plastics supply chain from polymer producers to processors. Expect the impact to increase significantly in the next two to three years as more Global 1000 manufacturers boost the role of supply-side management.

What it means: Customers will demand annual cost reductions of 3% to 10%. The upside: The most efficient, highest-quality suppliers are in line to get a bigger share of business from the world''s biggest spenders. You''ll get an opportunity to determine bundling options and other parameters, such as shipment times, to optimize your own production. To be a player, you''ll have to dramatically improve your own supply-side management and be prepared to offer global reach.

Is this all about electronic reverse auctions? Not at all, and if you think so, you will miss the boat on developments that could significantly boost your business or leave you on the corporate trash pile.

Here''s what''s happening

At most major companies, the business units are the kings. They have complete P&L responsibility and full authority from purchasing to distribution. Purchasing in that environment has often been sublimated under operations and given the tactical job of implementing contracts and making sure that products are delivered on time.

That''s changing for a raft of reasons. One, Western companies traditionally were highly integrated, making their own injection molded parts or castings. Today, the typical Western company buys 50% to 70% of its total costs of goods sold.

Two, companies are reorganizing globally and recognize the value of smarter buying. From 2001 to 2003, many companies moved from regional to global business units. Companies also began to build global purchasing leverage by identifying all of the like products they buy: personal computers, office supplies, steel, plastics, whatever.

It''s a massive undertaking because no central database of purchased products previously existed, and almost no one even used common identification systems internally. P&G, for example, at one time had 20 different specifications for water. Even major consumer products companies such as General Mills could not agree on definitions for products such as boxes or film. So, identifying corporate spending for seemingly simple products such as corrugated containers or standard fasteners required an army of people.

Adding to the problem has been the complete absence of effort to specify products according to common types used across the enterprise. For instance, a company such as John Deere had a plethora of polypropylene specifications and a multitude of suppliers. A cross-functional team at Deere determined that more than 90% of the company''s PP requirements could be consolidated in three grades, with focus on one or two suppliers.

At the same time, resin companies tried to build margins and market share via constant and incremental development of polymer grades. Each enhancement in impact strength and melt flow was added to an increasingly complex slate of ABS, polycarbonate, or polyacetal.

No one cared much about the impact on anyone''s supply chains. But when telecommunications and electronics markets crashed in 2001, companies such as Lucent Technologies were awash in billions of dollars of highly specified inventory that could not be re-used or even re-sold at anything approaching purchased prices.

Born again

At that time, many companies got purchasing religion. Lucent, for example, established a powerful operating unit called Supply Networks in which purchasing, manufacturing, and design were aligned under a president, Jose Mejia. Purchasing was not treated like a discrete function; it became an integrated strategic function. Supply chain goals were drilled into the minds of design engineers. Inventories at Lucent plunged. A turnaround at Motorola was built on a similar tactic under the leadership of Theresa Metty, who learned her supply-side skills at IBM.

Around the same time, information technology companies developed software that allowed aggregation of spend items through use of artificial intelligence and other semi-automated methods. Some claim success rates of 90% or better. They often use standard classifications systems, such as United Nations-supported product numbering.

Smart CEOs are now telling their staffs to develop spend-leverage of optimized pools. P&G, for example, has cross-business unit commodity teams in more than eight major areas. There are three in packaging: injection molding, blowmolding, and fiber packaging. Other groups are chemical raw materials; third-party manufacturing; absorbents, substrates, and components; edible ingredients; and marketing. Like most companies, P&G does not force business units to participate in the spend pools. Instead, they create such advantages in cost, service, and quality that the business units want to participate.

As a result, suppliers are offered a much larger potential share of business. For example, the P&G spend pool for injection molded services is now about $800 million. It''s headed by Dr. Attila A. Tamer, a German national who recently moved to P&G''s corporate base in Cincinnati, OH. In addition to leading the injection molding spend pool team, Tamer is also director of purchases in P&G''s Global Beauty Care business. All spend pool leaders are also senior purchasing managers within businesses units at P&G.

"The team leaders are chosen partly based on the size of their buy for that product, and also on the complexity of the buy," comments Hughes. The Global Beauty Care business places high demands for quality and innovation on its molding suppliers. Suppliers are required to participate in design.

One other important part of the process is that corporate giants began speaking with one voice when addressing the supply base. Previously, technical professionals and purchasing professionals discussed issues separately with suppliers, often with conflicting goals. That changed at P&G when technology and purchasing reorganized along global lines about two years ago.

"We have a totally seamless R&D and purchasing organization with one agenda: the best value to the company, to our customers," comments Ghobad Rahrooh, director of R&D for the Global Baby Care business. Teams are organized by material group, such as plastics, with each co-led by a technical and purchasing, or commercial, person. "They have joint responsibility for the material globally across the board," adds Rahrooh. "The Material Leadership Team is a single point of accountability across the globe. This is a tremendous contrast to what we did when each region had a contact person. We were getting a worse deal then because suppliers were playing purchasing and R&D people against each other."

David Zint, the North American purchasing manager for resins and associate director of packaging in Global Fabric and Health Care business unit, adds: "Typically, a buyer will talk to an R&D person several times a week if not several times a day." Buyers are deeply involved in new product development.

There are two related goals here: supplier development and specifications management. Procter & Gamble''s chief technology officer about 18 months ago started pushing for greater use of suppliers to advance technical development. "Previously it was very erratic," comments Hughes. "The CTO explained that we don''t have enough R&D people in the world to drive the level of innovation that we need."

In many cases, suppliers'' technical staff work directly at P&G sites, and some P&G staff work at supplier sites. Technical problems, including those related to polymers, are even published on a P&G website for suppliers, seeking input. Terms of how each party benefits are spelled out in detail in Master Collaboration Agreements.

The other major initiative in best-in-class companies such as P&G, is a drive to manage specifications more effectively. "We have about 300,000 to 400,000 specifications at Procter & Gamble," says Dennis Begg, associate director for innovation in Corporate Purchases. "We have begun to think about how we can rationalize our spend pools through specifications." A corporate team was launched to determine the critical steps and work processes, with the initial focus on packaging, paper, and plastic. "The idea here is how can we move from proprietary P&G specs to broader industry standard performance-based specs. This is a collaborative effort with our suppliers." Previously, P&G had more than 15 global specifications for low-density polyethylene (LDPE) shrink wrap. Now it has three.

Once spend pools are built and specifications optimized, huge savings can be earned through new Internet-based procurement tools. The newest and hottest idea is called combinatorial expressive bidding. P&G uses a technology developed by Pittsburgh-based CombineNet, which uses mathematical algorithms to let suppliers bid on a huge chunk of business and then offer variations that allow savings for both parties. Typically, purchasing departments organize bids into predetermined lots and bundles based on their needs. A supplier might, for instance, say, "Give me at least 80% of lot X and at least 20% of lot Y and I can offer you savings of 30%." A molder, for example. may have significant unused capacity on 500-ton presses and wants to use its assets more efficiently. So it pushes the work in that direction with a huge benefit for the buyer. The Internet makes the process immediate and gives other suppliers the opportunity to offer similar deals. P&G saved more than $120 million with the new tool in the 2003 fiscal year. In the fiscal year that ended last June, the savings total more than doubled. The tool is used for about one-tenth of P&G''s total spend of $28 billion.

Three major plastics events have been held using the expressive bidding tool from CombineNet: two for labels and one for closures. In some cases the events help build enterprise spend pools where they previously did not exist, says Tamer. The tool could be useful in materials of a global and complex nature like resins, says Sergio Hernandez, who is the Global Resins Group Manager. P&G''s direct buy is about $750 million for high-density polyethylene and polypropylene, as well as low-density polyethylene and linear low and other resins. In many cases resins are bought directly by the processor. Hughes says that the purchase is made by the party that can get the best terms. The expressive bidding tool is so powerful that it could tip the balance more to corporate buying.

So far, however, P&G has not been anxious to re-negotiate plastics contracts because most deals were struck more than a year ago when markets were softer. The company has no comment on how its negotiating strategy is changing in the midst of rapid resin price escalation this year. Nor would it comment on strategies to mitigate risk against volatile price swings. Hernandez did say that P&G prefers long-term relationships and buys very little on spot markets.

"There is no specific strategy on producers versus distributors, adds David Zint. "We use a mix of producers and distributors depending on who we have the relationships with and who has the best value," says Zint. The global P&G resin buying team has members in the United States, Venezuela, Japan, and Europe.

Overseas

As a result of these trends, P&G is using fewer suppliers than it did even three years ago, and is using more suppliers from low-cost countries, such as China. About three years ago, P&G had some 55 molding suppliers in North America. Now it has about 30. Global presence is a plus, but not mandatory for molders, which has traditionally been a regional and highly fragmented business. P&G focuses on a special class of molders who are specialists in packaging. Procter & Gamble was one of the leaders in using Chinese sources, starting with "Project Goldmine" in the early 1990s. P&G''s presence in China was driven by marketing of its consumer products in China.

"Almost every important supplier has some type of presence in China today," comments Alfredo (Jet) Antonio, director of innovation in Corporate Purchases and former head of Chinese buying for P&G. Molded brushes for a new Crest toothbrush are all made in China. A Chinese molder even helped design a new replaceable head for the Spin Brush. Tamer says the Chinese molders supply very consistent quality and probably will play a bigger role in the company''s plans. P&G now has 100 buyers based in China and about a dozen in India.

Molds are bought through a specialized purchasing team based in Switzerland. Established three years ago, the team cut mold development leadtimes by 30% while also achieving a significant quality improvement. P&G focuses on about 10 to 15 moldmakers around the world. Most are specialists in high-cavitation (24, 36, or 48 cavities). Further reduction of mold development time remains a major goal. One of the largest factors in a new product rollout is the mold development time. The cost is also an issue. Another mold team based in Cincinnati is scouting new technologies that could reduce cost and time.

"We have an active program between R&D and the mold buying group to determine the right mold fabrication technology," comments Hughes. "Can we get lower-cost molds from places like India and China?"

Another technology effort affecting plastics is research on polymer compounds that can offer more strength, even when light-weighted for heavy containers, such as detergent bottles. There are also a lot of neat developments in holographic films and other decorating capabilities for labels," says Hughes.

P&G is not alone in efforts to better manage its spend leverage and its supply base. It''s among about three dozen companies that are leaders. The rest will soon follow with improved strategic sourcing, electronic sourcing, and specifications management.

This will certainly be one of the biggest trends facing the plastics industry in the next two or three years, in addition to energy economics.

P&G''s top plastics buyers

SERGIO HERNANDEZ,

Group Manager, global resins purchasing

Responsbility: Supervises $150 million direct resin buy, primarily HDPE, polypropylene, and linear and linear low-density polyethylenes from 20-plus suppliers.

Strategies: Drive technology innovation through long-term relationships with strategic partners. Coordinate buy through business unit-based resin purchasing managers located in Europe, Japan, Venezuela, and the U.S. Work with central buying experts to develop innovative tools such as expressive bidding.

Education: Industrial Engineer-Universidad Iberoamericana (IBERO), Mexico City; MBA-Instituto Tecnologico y de Estudios Superiores de Monterrey (ITESM)

DR. ATTILA A. TAMER,

Group Manager, injection molding purchases

Responsibility: Coordinate buying of all injection molded products and services. Total buy for injection and blowmolded and other packaging at P&G is close to $3 billion. Tamer has direct responsibility for the injection molded buy in the Global Beauty Care business.

Strategy: Focus on long-term partners who can provide design services in addition to required quality and value. Employ innovative market-making technologies such as combinatorial expressive bidding. P&G wants to develop as much spend leverage across business units as possible while also developing sources in low-cost countries such as China.

Education: PhD, University of Goettingen, Germany

Doug Smock [email protected]