Seeing Through the MudBy Mark Roberti
Case Study: Emerson Electric Inc. and Innovation
From its nondescript exterior, Emerson Electric Co. appears an unlikely innovator. The 111-year-old St. Louis-based maker of power tools and measurement devices for heavy industry was founded in 1890 as a manufacturer of electric motors and fans at a time when electricity was driving a new wave of innovation. Now that the Internet is driving a new wave of cost-cutting, Emerson is revolutionizing again.
But don't look for Emerson's latest smarts to come in the form of new products. Instead, check out the company's purchasing departmentwhich, until recently, was No. 1 on the Top 10 list of dullest departments at Emerson, as it is at just about any company. There, Senior Executive Vice President Charles Peters and CIO Greg Carmichael have been using the Net to turn Emerson's purchasing practices on their ear at factories from Cleveland to Singapore. Sure, dozens of companies have talked about how they hope to be able to cut the costs of raw materials such as steel and plastic by shifting purchasing to the Net. Emerson, though, is doing something different. It's using the Net to get better information about itself and what it buys and spends, and then is using those insights to pinpoint places where costs can be cut. It might not sound like much, but it's already racked up some $30 million in savings for Emerson so far. Carmichael calls this new purchasing trend "strategic sourcing"not possible before the Net. "Savings once hoped for from online parts exchanges just haven't materialized, as everyone had hoped," says Alister Sutherland, a software analyst for IDC, a technology research firm. What Emerson is doingusing the Net to find places where, say, orders placed by individual divisions can be combined and leveraged for greater savings"is far more difficult and time-consuming, but ultimately should reap deeper savings over time," he says. Indeed, Emerson hopes to save $100 million-plus by the end of 2005. "All large manufacturers ultimately will have to do this to remain competitive in the future," Sutherland says.
Better management has been key, but better information has been Emerson's ace in the hole. Emerson's installation three years ago of a $12 million, state-of-the-art in-house communications network is helping those responsible for Emerson's $5 billion annual purchasing budget to push prices down and streamline and reform sloppy purchasing practices. So far, it has stopped some suppliers from charging different divisions of Emerson different prices for identical parts. It has let Emerson pool its purchasing power across divisions for millions of dollars' worth of volume discounts, and it's keeping suppliers from overcharging the company on key contracts. It's also boosting Emerson's own parts business by giving all divisions inside the company information about who's buying what inside the firm. The results have been based on the simple axiom: Information is power. "Before, we didn't know who was buying what, from whom or at what price," says Peters, who has been in charge of the effort. Carmichael adds that three years ago "we could only see the surface. Now we can see all the way to the bottom."
It hasn't always been a pretty sight. Before Emerson rolled out its new Materials Information NetworkMIN, for shortpurchasing execs at three of the 18 factories run by Emerson's Fisher Valves division, for example, had unknowingly been buying the same 12-foot stainless steel tubing from two suppliers at three different priceswhich varied by as much as 35 percent. MIN discovered the overlap, enabling the three factories to pool their purchases of the tubing. The payoff? Lower prices for raw materialsin this case, savings of $45,000 on just one order.
MIN also gives Emerson the ability to second-guess suppliers and boost billing accuracy. Example: Before MIN, Emerson's accounting staff had no way to know whether suppliers were giving divisions the contract rate for goods sold. In one case, Emerson Motor Co. was overbilled $328,000 on $50.7 million in purchasesand that's no small change. Now that MIN is being used to help accountants spot overpayments, suppliers are getting a tougher once-over. Peters expects such monitoring via MIN could lead to an average cost savings of $3.5 million companywide per year.
Emerson is going to need those kinds of savings. Facing its harshest economic climate since the 1970s, the company is suffering from a recent move into telecom products, which now make up some 25 percent of the company's revenue. The move backfired during the past year, as the telecom sector imploded and demand for products shriveled. Orders at several of Emerson's other businesses, such as industrial automation equipment and appliances and tools, were already slowing at the time of the Sept. 11 terrorist attacks on New York and the Pentagon, and the attacks only exacerbated that decline. On Oct. 15, Emerson announced that for the first time in 43 years, it won't reap a growth in annual profits this year. Says Robert Friedman , an industrial equipment analyst for Standard & Poor's: "The telecom market may recover somewhat from Sept. 11, but Emerson's other industrial businesses definitely are vulnerable to the economic downturn, which is probably going to accelerate now."
As a result, Emerson is slowing some of its technology initiativesbut not MIN, which it believes will help it weather the storm through cost-cutting. In the past year, Emerson has rolled out its MIN network to roughly three fourths of its 380 factories, and completion is slated for March.
How has Emerson been able to realize such savings so far when so many other companies have faltered? Data quality. Emerson executives point to early decisions three years ago to get the company's computers talking the same languagestandardizing data across Emerson's 125 computer systems in 60 divisions and 380 factories, a step that purchasing experts say too many companies don't bother with before they attempt to cut purchasing costs via the Web.
For many of Emerson's suppliers, the arrival of the Internet to their old-line businesses is jarring and not altogether welcome. Indeed, part of the goal of MIN, says Peters, is to shave Emerson's supplier roster from 30,000 down to as few as 3,000 over the next few years. In the past, he says, suppliers took advantage of the lack of transparency from one division to the next. Now, Emerson can use MIN to rate suppliers on quality, price and track record. "Suppliers have been counting on the fact that most companies don't have that kind of information at their disposal," says Eric Carlson, Emerson's director of strategic planning. Jose Morales, a source expert at A.T. Kearney Inc., predicts Emerson's sourcing reforms will only help to fuel an industrywide supplier shakeout already under way. "Suppliers who have their financials, supply chain and total-cost models well documented and understood" will have an advantage over those who don't, Morales says. "The ones who are less sophisticated will probably be bought out or go out of business."
Not all of Emerson's suppliers are grumbling. Bill Swift, director of Cargill Inc., acknowledges that MIN will let Emerson carve out lower prices from Cargill. But that could also mean more business from Emerson, he says. "When you can get your arms around the data about what you are buying, it makes it easier for a supplier like ourselves to take a look at the opportunity Emerson has and see where there are fits," Swift says. "Hopefully, we can both share in the savings that MIN offers, because it will mean, for us, larger runs and fewer minor differences in orders between divisions."
MIN has also brought jarring internal changes. One of Peters' top concerns remains the challenge of getting all the divisions to work together, instead of buying materials separately. "Direct materials are the lifeline of every operation, so the divisions were very reluctant to cede control," says Peters. "The whole initiative is rife with turf wars." To ease the cultural frictions, Peters and Carmichael created what they call "commodity groups" organized around the company's 18 purchasing areas. The most politically influential and experienced leaders from each division were appointed to head them up. It's working, but Peters acknowledges it's not yet perfect. Emerson executives, however, remain committed to MIN as one of a handful of examples of so-called "strategic sourcing" actually working in the U.S. And Peters says Emerson is just beginning to discover what MIN can do.
Seeing Through the Mud
Seeing Through the Mud
Consider the changes MIN has brought to the single task of standardizing materials lists. Before MIN, for example, some units described sheet steel in inches, while others used millimeters. Even the same gage number could mean different things on different continents. The 16 members of the MIN team spent six months working with suppliers, industry organizations, and each division's procurement and engineering teams to create a common language for all of the divisions. "If we had 14 divisions using the identical product, they probably had 14 different ways of describing it," says Carlson. Adds Sutherland: "There's so much legacy in some of this stuff that it's hard for the left hand to know what the right hand is doing. That's why strategic sourcing, for many companies, is the only way to get a really full and clear view of what you need to be doing." Example: Copeland, a Sidney, Ohio-based subsidiary that makes compressors for refrigerators and air conditioners, referred to one type of sheet steel as AISI Grade 1008, while the Emerson Tool Co., which makes the Ridgid line of power tools sold at Home Depot, called the same sheet steel 10 Gauge HRS.
Carmichael's team also worked with the IT department and consultants to build the MIN databaseessentially an electronic catalog of what Emerson buysin a way that would yield the most savings. Related items were grouped together so commodity teams could easily spot overlaps, thereby making it possible to pool purchases and get volume discounts from suppliers. The steel team recently discovered, for example, that Copeland was using hot-rolled carbon steel bars that were similar to the hot-rolled alloy steel bars the Emerson Tool Co. was using in its products. By combining their purchases from one steel company, the two divisions were able to get a better price on both materials. The savings to Emerson: $500,000.
But that was just the first step. Besides needing to know what was being bought, Emerson also needed to know from whom it was being bought, and for how much. Some units, for instance, failed to differentiate between Tyco International Ltd., Tyco International (U.S.) Inc., Tyco Flow Control, and other Tyco subsidiariesall of which sell supplies to Emerson. The MIN team now requires all divisions to use standardized company codes from The Dun & Bradstreet Corp., a third-party information provider that maintains a database of more than 63 million companies worldwide.
But that kind of standardization, Emerson found out quickly, still wasn't enough. In the early days of the MIN rollout, Emerson execs got a rude awakening: Everyone was now calling materials by the same names, but it was still impossible to know exactly what Emerson had been buying over the past 12 months. The reason was that some invoices from the divisions had no supplier codes. Others had quantities and prices wrong, and hundreds of millions of dollars in purchases were lumped into miscellaneous categories, such as I-020, for "direct material not elsewhere classified," and E020, for "electrical miscellaneous and other." In the past, that wasn't a problem, because each division knew what it needed and had its own people doing the ordering. But now that Emerson was using the Net to centralize information about purchasing, the data quagmire was as murky as a mud pond.
Peters, working with CIO Carmichael, assigned five IT people to work full-time with each division to better classify purchases. The MIN team also asked the IT department to create two software programs that would help keep the data in MIN clean. Carmichael let suppliers enter product specificationsthe common descriptive language all divisions had agreed upononline, so it could be transferred to MIN. And a data validation software program flagged possible errors in files from the divisions before they were uploaded to MIN. Now, for example, if spending at a unit soars by more than, say, 10 percent in a month, the file is automatically routed back to the division for the data to be checked.
The new system is also making the company a lot smarterand tougherabout policing its own checkbook. Case in point: Comparing purchases from local distributors against items each division holds in stock, Emerson's MIN team found that In-Sink-Erator, a maker of garbage disposal units, and other divisions were buying steel, bolts and other items at premium prices from local distributors and then storing the goods in inventory. That made no sense: The whole point of paying more to buy from local distributors is because the distributor holds the inventory and can deliver it when it's needed. In most cases, units will now buy from national distributors that charge less.
Yet despite the success of MIN so far, the key to future gains will be how well the commodity teams use the information provided by MIN. Instead of having 12 divisions buying aluminum die casts from 20 or 30 suppliers, for example, the commodity team would be able to analyze the 12 divisions' needs, figure out the appropriate number of suppliers and negotiate volume discounts. The divisions could then buy off of those contracts, and Emerson could then use MIN to make sure it delivers on volume commitments made to suppliers, and to make sure it's getting the price agreed upon.
Emerson has little choice in the current economic climate but to keep cost-cuttingand upping the ante on what the Net can do for the bottom line. Stategic sourcing is just the start.
Mark Roberti is a New York-based freelance technology writer and former editor and writer for The Industry Standard. His work has appeared in a variety of publications, including The New York Times, The Asian Wall Street Journal and The International Herald Tribune. Comments on this story can be sent to email@example.com.
Problem: Emerson's accounting staff had no way to know whether suppliers were giving divisions the contracted rate for goods sold.
Solution: MIN helps accountants spot overpayments. Example: Emerson Motor Co. was overbilled $328,000 on $50 million in purchases.
Payoff: No more overpayments and an estimated $3.5 million in companywide cost savings per year.
Problem: In-Sink-Erator, a maker of garbage disposals, was buying some items at premium prices from local distributors and storing them indefinitely.
Solution: MIN identified the source of bloated inventories.
Payoff: All divisions now buy from lower-cost suppliers using just-in-time systems for inventory savings in the millions.
Problem: Three of 18 factories run by Emerson's Fisher Valves division were buying the same 12-foot stainless steel tubing from two suppliers at three different prices.
Solution: MIN spotted the problem and the three factories pooled their purchases.
Payoff: Lower prices for raw materialsin this case, savings to the company of $45,000 on one order.
e-Purchasing Plus: Changing the Way Corporations Buy
By Larry C. Giunipero and Chris Sawchuk
JGC Enterprises, 2000
Napm.org The National Association of Purchasing Management, Inc.
Apqc.org The American Productivity and Quality Center
Epurchasing.org The site for the International ePurchasing Summit 2001, Nov. 15-16 in Chicago