Beginning in 2016, procurement practices at Pete Lien & Sons made a compelling transformation. Previously, each individual business unit performed purchasing entirely separate from other internal divisions throughout the company. With the establishment of a centralized Procurement Department and related inventory management system we began to standardize purchasing practices company-wide. The challenges we faced not only arose from long-term suppliers but in many cases also manifested with internal personnel. Due to this initiative, our operating efficiencies and total spend have improved significantly and are now better positioned to realize other cost-saving opportunities.
- A consolidation of procurement efforts will uncover many hidden efficiency and cost-saving measures
- Be prepared for resistance, from both external sources... and internal
How many of you think more is better? If I’m referring to zeros in your paycheck, you would probably agree. Or if I’m looking at sports cars lined up in your driveway, you would probably agree that more is better. I know my 16-year-old son would certainly agree with that. But what about the number of purchasing agents? Is more better? I may disagree with that one if you think it is.
Hello, I’m Kevin Brannon, Technical Director for Procurement at Pete Lien & Sons. We’re a mining and mineral processing company headquartered in Rapid City, South Dakota. Our key products include ready-mix, concrete, sand and gravel, crushed limestone, and industrial chemicals. We operate across South Dakota, Wyoming, and Colorado, consisting of many different divisions based on geographical region or particular products produced. We’re a family-owned business founded more than 75 years ago.
Now even though the company has a long history, it was not until 2016, when which we established a centralized procurement department our Chief Operating Officer tasked a small team to establish purchasing standards to be adopted company-wide. In conjunction with formal procurement procedures, we were also challenged to establish a comprehensive inventory management system. Prior to 2016, each division handled both procurement, purchasing, and inventory in its own manner. Now, some inventories utilized proper software systems and associated purchasing methods. whereas others operated from spreadsheets and in some cases, just the memory of what a supervisor remembers having a part on a shelf in a particular warehouse. As a result of this sort of disjointed approach, we found ourselves buying the same part across different divisions paying drastically different prices and different terms. For example, we were buying filters for mobile equipment, from 51 different suppliers, same exact type filters, 51 different suppliers. Also, we were buying parts, often in emergency or rush situations paying for expedited shipping, when we actually had the part on a shelf somewhere fairly close. Effectively, we had multiple procurement departments, none of which were intercommunicating or leveraging the total company’s purchasing power. So we began changing this by first cataloging all of the parts we had on hand going through and counting everything on all the shelves, logging the parts, putting them into an inventory system. And we transitioned all of the divisions to this shared inventory system. Then, as we were going through this, and we identified some of our high-use parts and certain product categories, whether it be equipment belts, or bearings, or filters, or things like that. We put these out for bid, engaged suppliers to supply the entire company, and issued exclusive supply agreements to the successful suppliers.
Now, in order for this to work, our field personnel were no longer able to just call up a local rep and say, “Hey, bring me this part”. What they had to do, then, is issue a request to the centralized procurement department. From there, a purchasing agent would first check the inventory to see if we had that part on hand. If not, the purchasing agent would source that part. Oftentimes, through one of our newly issued exclusive supply agreements, by centralizing purchasing and the subsequent invoicing, we were able to automate so much of this overall process, eliminating so much of the paper shuffle, and we transition to electronic means. Because of this, we’ve been able to fully automate roughly 75% of our total invoice volume. All of this done was previously done I paper by hand. By aggregating our total spend across the entire company, we’ve been able to negotiate better prices, better payment terms, better delivery fees, things of this nature. Establishing these exclusive supply agreements drove our total part to spend way down, way down, we were able to identify the same part and pay the same price across all divisions, no matter which state that particular division was in.
We’ve consolidated suppliers, standardized on parts, and utilize supplier expertise by relying more on requests for proposals rather than just simple basic requests for quotations. We also became much less reliant on our own inventories. And we’ve allowed our suppliers to stop parts for us no longer relying on spreadsheets and memories of employees, we’re now requiring our suppliers to work for us. The successes we’ve experienced are great to brag about and realize the tangible and measurable improvements that we’ve seen. However, they didn’t come about easily. And sure there were the expected technical issues, software issues, logistical challenges, things like this. As we consolidated our suppliers through our exclusive supply agreements, this forced each transition to touch many divisions at all divisions across the company all at once. As you can imagine, that became a very large endeavor working with each Division Supervisor to try to roll out all the new purchasing Procedures and Standards. Now, we’re even though we had one account manager per product category through our exclusive supply agreements, we operated in three different states. So we had a multitude of local reps at each location. Because of that, we ended up with some inconsistencies and things not being as good at each division as we would hope, again, things that we were having to work through. Some suppliers paid big and convincing promises, but just were unable to deliver expected results and issuing RFPs and, in some cases, RFQs from a centralized procurement department was new to our personnel, as well as to many of our long-term suppliers. As a result, several of them didn’t take it seriously and ultimately lost out on our business which resulted in some very hurt feelings.
Now, all of these challenges are not at all surprising. But one challenge did really catch us by surprise and proved to be much harder to recall than we had thought. That was internal resistance by our own employees. From within the newly formed procurement department, it was easy to see the improvements were that were coming to life, the cost savings, the process improvements, the efficiency gains, all of these things from the procurement department were relatively easy to see. But some of our divisional personnel were unable to see those benefits quite as clearly. And what many of them saw was just change for the sake of change, as well as losing some of their authority and control their control being stripped away. As a result of that, there was considerable resistance to many of our new initiatives. They thought more was better, more purchasing agents, every division operating independently, that was the most efficient way for the company to operate.
Again, looking at the entire company, we can clearly see the savings and efficiencies that we were gaining constantly. Fortunately, with much communication, training and commitment to the effort we’ve overcome most of these challenges. We’re now in a place where we can consistently leverage the entire company’s purchasing power, and rollout such initiatives across all divisions. We still do that quite routinely. And the resistance is becoming less and less. Today we have fewer key suppliers, fewer processes. Fewer purchasing agents. So, from that perspective, I would have to argue that lesson has given us so much more. Thank you very much.
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