The company was founded in 1969 as a flour milling company, after some diversifications the company has today three major groups: Consumer foods, Agricultural foods and Restaurants. Quality The company’s most important measure of performance is the food safety and quality. They use a broader concept of quality: Quality of people, products and performance. Quality is a big issue for the company. Quality sector: QA (Quality Assurance).
Procurement
Procurement has five areas: commodities, ingredients, capital goods, packaging and MRO (maintenance, repairs and operating parts).
The major area is commodities, followed by ingredients, creating the C&I department. Buying the commodities involves two sets of activities. Hedging in the commodities market and working with the commodities suppliers. Before 1972, quality was not a concern for Procurement. The mission was get the lowest prices in the supplies and let quality with the QA. In 1974 they hired Carl Reichers to be the risk manager.
He created a Commodity Analysis department to analyze and predict the market trends. In 1978 he hired Leah King for the department, because her experience and market knowledge. In 1978 the company hired Stuart Erikson, to be the director of the C&I department. He changed the low-cost and risk-management orientation of the firm to a focus on supplier relationship, quality and total value orientation. Erikson had a good relationship not only with buyers and vendors, but also with marketing and R&D. Sometimes Reichers didn’t agree with Erickson, he thought Erickson was getting too close to the suppliers.
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Tom Hill, from R&D, started helping to build the link between R&D and Procurement, using monthly “R&D updates”, that helped the link with QA as well. Bill Nesbit is the vice president for R&D, and he wanted to take this information exchange even further. He wanted to share more information with his suppliers. In 1979 the company acquired the VanWyck, a packer for frozen and canned vegetables. It resulted in a reorganization. The purchase department was split into two departments: Corporate Procurement (working with major commodities, with high risk).
Erikson stayed in this department.
And Consumer Procurement (working with ingredients, packaging, capital goods and MRO).
A new office was created: the Office of Operations and Technology. It was directed by Bill Nesbit, and it covers R&D, engineering, manufacturing, QA, product safety and distribution. Erikson now is the vice president for Procurement, still reporting to Reichers, but with a dotted-line responsibility to Nesbit. Leah King is now in Erikson’s old position, as director of C&I. The Procurement department has a monthly report summarizing how it performed relative to plan and to the markets.
Procurement Relationships Procurement interacts with R&D, vendors, QA and business units. * R&D and vendors R&D worked for the business units. The role is to keep the business strong and identify opportunities for growth. The company tended to choose vendors based on scientists and technical representatives, and they tended to choose those ones they had good experiences in the past. They didn’t have any way to pay attention in non technical areas like: quality, on time delivery, if the product worked well in the line. And those were the main complains from the buyers.
Who made the contact between vendors/R&D and coordinated the suppliers, and the alternate supplier approvals, was Hill. R&D usually wanted to have the alternative suppliers approved. R&D worked close to QA. * Quality Assurance QA coordinated: writing specifications, vendor plants inspection, company’s plants auditions, materials compliance and budget. The day-to-day responsibilities were: quality of the final product, raw materials and in-process goods; sanitation and food safety. Specifications provided the standards against which raw materials and work-in-process were tested and measured.
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These specifications could be revised. In general what QA wanted from Procurement was consistency of ingredients and suppliers. * Business units Each business unit focused in a group of products, they were evaluated based on their profitability and their objective was returns on invested capital. Since Erikson joined the company Procurement has been increasing the links with the business units. An example was the monthly procurement strategy meeting between them. Procurement also made recommendations for the unit’s ingredients. The meetings were considered very important by both. King alternatives and improvement programs
Since King assumed the commodities direction, she initiated three programs to improve their own and their supplier’s performance. She was also concerned about the deterioration in the performance of Squier, a major supply of oils. * Vendor Analysis Program She wanted a uniform method to evaluate vendor performance (different areas evaluated different things).
She developed, with Erikson, a instrument for rating vendors on a number of key criteria, the form was kept as simple as possible. The buyers gave equal weight to the following performance areas: technical assistance, pricing, logistics and quality.
The forms were evaluated by different areas, and possible inequalities were investigated. They had them a chart “Vendor Quality x Volume of Business”, the goal was to push the vendor to the upper right-hand quarter of the chart. It gave them a focus for meetings and a stimulus for change. In the meetings vendors were provided with the charts and specific feedback from the buyers. So they could start fix-it plans. As result of the program, they increased the communication between buyers and vendors, and R&D and buyers were now working together, increasing their power with the vendors.
A lot of suppliers have shown the intention to move for the upper right-hand part of the chart. But they didn’t have plant involvement yet. King chose to go to a higher level of authority, rather than approach the plants directly, she chose to talk to QA. King was concerned that contact with R&D need to be broadened. * Plant Performance Survey The idea of a survey focused in ordering and communication was given, asking the plants what they think about the Purchasing department. In exchange for their time they would get feedback as well as efforts from Procurement to solve the concerns.
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The biggest problem that has emerged was that plants did not see enough of the buying teams. King gave feedback to each individual buying team, summarizing what the plants have said and using the survey to improve performance. But nothing has been sent to the plants. She had some goals: give the plants information that would be useful to them, but that would neither cause new problems nor violate confidentiality. How to handle situations when the scores were low? Should the survey be opened to QA for its assessments?
King decided that the assumption would be that buyers would not be penalized because of the results, but then, there is no incentive if they are rewarded because of good performance. She wondered if plant assessments of buyers should be incorporated formally into their performance evaluations. * Seal of Approval Program The program means that for select vendors, the company would not repeat the tests the supplier had already done. They would have to agree about the criteria, and just products that met the criteria would be delivered.
The idea was expected to meet high resistance because of the food safety consciousness and testing orientation of the company. It would lead to less work for QA at the plants. It would improve the exchange of technical data. The problem was how to implement the program: top down or bottom up? As a costing reducing or on the basis of better quality? She needed top level support. Solving these problems they still needed to find a vendor to start the program, what should be the selection criteria? It was a big choice. * Squier Oils Oil was a critical ingredient.
Squier Oils had an advantage over the other firms because they were the first firm that discovered how to fractionate the oil, they have a good service and prices as well. But after four or five years, other companies started to fractionate oil, and Squier performance was not the same. It was unwilling to negotiate prices, and its limited order-entry system gave it little flexibility on deliveries. It has failed to notify American’s about late arrivals. But the other companies were still not able to duplicate Squier’s offerings, quality and features, so it was still the only supplier for several products.
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American’s efforts to get Squier’s attention had produce little change. King’s options One option was just keep talking to Squier about the problems. But experience suggested that it would produce no changes. Maybe if the communication comes from higher levels. The other option was whittling away Squier’s business. But there were no available suppliers, so this cut-off was not possible. R&D could work with other suppliers and maybe they can meet the specifications on critical oils. But they could be losing the specifications in other oils.
The company can try to find process changes that can allow the use of another supplier’s oil. R&D was already working on some process changes. Procurement can also discuss this oil change with the business units, and try to show them the cost savings that it would cause. The business units would then pressure R&D to qualify other suppliers. If American really wanted to relate purchasing volume with vendor performance, they would have to work hard and put some effort in a direction that is common to plants.
