KennametalBy Kim S. Nash | Posted 2006-09-05 Print
The winning projects in the Baseline/The Hackett Group ROI Leadership Awards pulled in relatively quick returns with hosted, Web-based systems.: Attention, Shoppers!">
Return on Investment: 161%
Jim Cebula, like any good bean counter, wants to save his company some beans. He did$2 million over three years, from one $720,000 project.
As the director of global purchasing and travel for Kennametal, a maker of tools for metal cutting and other industrial projects, Cebula oversaw the rollout of a Web-based procurement system in 2002 from hosted application provider Ketera Technologies.
Today, the system lets 425 employeeslocated around the world at more than 25 facilitiesuse an online shopping cart to buy materials from Kennametal's 15 key suppliers. Those vendors, which include Staples and manufacturing-equipment parts dealer Kaman Industrial Technologies, account for about half of Kennametal's expenditures on "indirect materials" from 300 vendors in all. Indirect materials are things like office supplies; "direct materials," meanwhile, are those a company uses to produce its own products. Kennametal, which had $2.3 billion in sales for the fiscal year ended June 30, spends about $800 million on goods and services (both direct and indirect).
Four years ago, Cebula and his team were looking for a way to drive more purchases of printer ink cartridges, machine parts and other indirect materials through preferred suppliersthose with which Kennametal had negotiated volume-discount deals. At the time, up to 70% of all indirect spending was "maverick," which means they were purchases from suppliers that didn't have a companywide purchasing agreement.
Trouble was, Kennametal employees place more than 50,000 purchase orders for indirect materials every year. There wasn't a feasible way for someone on Cebula's staff110 professional buyers globallyto investigate every time someone didn't buy from a preferred vendor.
"There comes a point where the policing costs more than the benefits of compliance," he says. "We don't want to be tracking down every stapler bought off-contract."
And while Kennametal encouraged employees to use contracted suppliers, that meant going to each individual vendor's e-commerce site and signing in. "People didn't use suppliers as much because they had to remember 15 different passwords," Cebula says. Each supplier's site also had different ways of dealing with various taxes and freight-handling charges, further complicating the picture.
Virtual Private Megastore
Enter the Ketera application, which employees access over the Internet; it provides a consolidated, consistent view into the products available from the 15 suppliers. Plus, the system is much simpler to use than most partners' ordering sites, Cebula says.
That seemingly basic change has driven the proportion of on-contract buying to between 70% and 75%, and saved $2 million that would have otherwise been spent on higher-priced products, according to Cebula.
The company paid Ketera $647,500 over two years for a three-year contract to use the e-procurement system, effectively prepaying for the third year (an insurance mechanism for Ketera, as the deal structure gives Kennametal an incentive to stick with the service in the third year).
Factoring in $42,000 in ongoing internal labor costs over three years plus $31,000 labor up front, Kennametal's total spending on the project has been $720,500. Cebula notes that Kennametal this year re-signed another three-year contract with Ketera, with similar terms.
And because Ketera hosts the software and servers that run the system, Cebula says the launch was comparatively swift: Kennametal had the first nine suppliers in the Ketera system within 90 days, he claims.
Kennametal sees room for a bit more improvement, with a goal of getting to 85% of all indirect spending coming from contracted vendors. Why not shoot for 100%? Cebula says he wants to allow buyers the flexibility to take advantage of special, one-time deals from competing suppliers.
"Almost all suppliers have loss leaders, so at times you want to take advantage of those," he says.
Kennametal has found other, less tangible benefits from the e-procurement system as well. It can now analyze nearly all of its purchases immediately, by consolidating spending information from Ketera with that of purchases made through a corporate MasterCard procurement service from JP Morgan Chase. The nearly real-time view into spending lets Kennametal cut back spending if, say, it's nearing the end of a quarter and wants to control expenses that could drag on the bottom line.
"We now have tighter, more current controls on our indirect spending," Cebula says.
The big challenge for Kennametal's procurement team was to get buy-in for the project across the globally distributed company, which is based in Latrobe, Pa. That required many meetings with personnel in areas as far-flung as Switzerland and Singapore. "It was challenging," Cebula concedes.
How did the vendors react to being stuffed into a virtual shopping cart? Cebula claims they loved it.
"The supplier relations actually became stronger," he says, "because they had a good understanding that we were in complete control of our spend categories." Let's hear it for a project that gives bean-counters, bean-eaters and bean-spenders something to cheer about. TODD SPANGLER
Total Spending: $720,500
Total Benefits: $2,025,000
Return on Investment: 161%
Note: ROI assumes 8.73% annual discount rate on cash flows.
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