Managing Purchases at Mack Trucks

Managing Purchases at Mack Trucks

Mack Trucks, headquartered in Allentown, Pa., is the third largest producer of heavy-duty trucks in the United States. The company has assembly plants in Macungie, Pa. and Winnsboro, S.C., and manufactures engines at its Hagerstown, Md. plant. Because Mack Trucks sources externally all truck components and subsystems except the powertrain, the company pays close attention to the purchase of production-related items. Each truck requires 5,000 part numbers, with 130 vehicles assembled per day. Mack Trucks manages $1 billion worth of production parts annually at three locations.

Mack Trucks is part of this study for several reasons. First, the methods used to manage lower value production items are efficient and deserving of study. Second, this case highlights the hurdles and frustrations faced when attempting to alter well-established non-production ordering systems and methods at the plant level. Historically, a strong production focus meant that improving the procurement of lower value non-production items was not a corporate priority.

This case discussion has two sections. The first section features the approaches Mack Trucks has taken to reduce the effort and transactions required for managing the procurement of production items, including lower value items. This includes the use of electronic data interchange (EDI), electronic funds transfer (EFT), and kanban systems. The second section describes the systems and challenges associated with managing non-production purchases. Motivated by procurement leadership, the company has begun to show a serious interest in reducing the effort and transactions associated with processing non-production items.

Production Support Systems

Two major systems help streamline the ordering, receiving, use, and payment of repetitively purchased lower value production items—kanban containers and electronic data interchange.

Kanban Containers A kanban system, which is a Japanese idea referring to visible signals or cards, helps control the flow of material at or between work stations and with suppliers. Users of kanban systems attempt to manage the flow of material on a just-in-time basis. Mack Trucks relies extensively on kanban containers and bar-coded labels to reduce the effort and transactions required for obtaining lower value production items (low dollar/high volume usage items) and removing work-in-process inventory.

The kanban program, started five years ago, involves two major suppliers who provide a wide range of fasteners and brass fittings. Vendors deliver kanban containers with material to be placed at assorted points throughout Mack Trucks assembly plants. Each kanban location has two reusable containers of the same part number placed on a rack. The containers have one to two weeks of normal inventory requirements, with the size of the container depending on the usage and dimensions of the part. Containers with parts arrive from vendors with bar-coded detachable labels. When normal production depletes a container’s contents, the user detaches the bar-coded label on the container and forwards it to a central office. A clerk swipes the bar code label with a scanner, which forwards a replenishment request via EDI to the supplier. Plant operators use the inventory in the second container while waiting for replenishment inventory to arrive from the supplier. Normal replenishment cycle time is 48 hours or less. Suppliers gather the empty containers for reuse after delivering replenishment containers to the facility. Union restrictions prohibit suppliers from delivering material directly to final locations within the assembly plants.

A cross-functional team had responsibility for establishing the kanban program at Mack Trucks. This team identified and selected kanban suppliers, negotiated contract agreements, and trained plant and accounting personnel in the use of the system. Mack Trucks expects to expand its kanban program to include additional items that fit into containers.

Electronic Data Interchange (EDI) Mack Trucks relies on electronic data interchange (EDI) with suppliers for a variety of applications, including providing visibility to sequenced truck build schedules. Suppliers can enter Mack’s production system to view forecasts and material requirements schedules that affect them. System firewalls prohibit suppliers from entering other systems or viewing other suppliers’ information. The company also uses EDI for automatic order releasing. Mack Trucks also transmits replenishment requests generated through the kanban system via EDI. Mack Trucks is also beginning to use EDI to transfer funds electronically. EDI development within the truck industry parallels EDI development within the automobile industry. A subgroup of the Automotive Industry Action Group (AIAG), the Truck Action Group (TAG), focuses exclusively on the needs of the heavy-duty truck industry.

EDI benefits include lower transmittal and transactions costs, greater transmission accuracy as releases and information arrive at the correct location, and reduced inventory replenishment cycle times. Occasionally, suppliers download forecasting and production schedules directly into their own production scheduling systems, thereby creating a supply chain linked through information technology.

Non-Production Support Systems (MRO)

A challenge facing Mack Trucks involves reducing the effort and transactions required for processing lower value non-production items. Similar to most companies, Mack Trucks refers to these items as MRO (maintenance, repair, and operating) inventory. Traditionally, most departments and locations throughout the company operated decentrally with users specifying preferred suppliers of lower value items. Each location operated independently with almost no coordination or control. As it related to lower value non-production items, the primary focus of buyers was to keep user groups satisfied.

The driver for change was a recognition by a key procurement manager that cost reduction opportunities existed for the control and coordination of MRO items. Although Mack Trucks spends about $100 million annually for these items, the company has put forth limited attention or talent toward the control of these expenditures. Beginning in 1996, the company decided to focus greater attention on these usually ignored purchases. Mack Trucks is pursuing activities in four primary areas: coordinated buying, integrated systems contracts, procurement cards, and purchase consortiums.

To date assessing the net savings realized from the systems and techniques put in place to control lower value purchases has been difficult. While the company assumes it is becoming more efficient in its processing of lower value items, it also faces dramatic growth in production volumes that have created additional work throughout the company. In fact, the company is planning to add two additional MRO buyers to help with the workload, at least in the short term. Based on unit price decreases under newly established contracts, the MRO manager believes Mack Trucks has saved close to $700,000 over the last several months. Other cost savings, such as those from more efficient procurement processes, are more difficult to estimate.

Coordinated MRO Buying One of the first steps taken to control lower value purchases involved an organizational realignment. Previously, Mack’s three major facilities and corporate headquarters each had one buyer responsible for MRO buying. Each buyer reported to a local production manager. These buyers, who were not responsible for any meaningful performance measures, accounted for 70 percent of total nonproduction purchasing expenses. Keeping internal customers satisfied was the primary concern of each buyer. In addition, 8-10 satellite groups also purchased MRO items. Satellite groups included world headquarters purchasing, facilities, and computer support groups. These groups were responsible for 30 percent of total MRO purchases. Unfortunately, most of the individuals buying MRO items, particularly at the satellite locations, were not professional MRO buyers. In short, MRO buying had few controls with slight accountability.

An organizational realignment placed four MRO buyers, who previously reported to plant management, under the authority of a single manager at corporate headquarters. Because each buyer sourced according to local preferences, no consolidated or corporate-wide contracts for MRO items existed. Buyers also lacked a common set of performance objectives and had no incentive to do the work required to develop MRO contracts. The buyers who now report to the single manager were unfamiliar with how to coordinate their efforts. The procurement manager responsible for MRO purchasing has found it difficult to change established behaviors by users and buyers at the plant level.

Getting past these issues required the development of corporate-wide contracts. As the MRO manager says, "We can't keep using 12 separate plumbing suppliers." The company is currently developing a supply base featuring longer-term corporate purchase agreements. These company-wide agreements define company-wide which items the supplier will stock, reduce obsolete inventories, and provide for standardized pricing. Instead of users selecting suppliers, buyers direct the user to the appropriate supplier. Once purchasing establishes a corporate-wide contract, material releasing increasingly becomes a user responsibility. Purchasing can now focus its attention on value-added activities.

Integrated Systems Contracts A major approach for making MRO purchasing more efficient at Mack Trucks involves integrated supply agreements (also known as integrated systems contracts). A primary objective common to most integrated supply agreements involves reducing the number of suppliers that a company actively maintains. These agreements feature full-line distributors providing a wide-range of value-added services. The types of services provided by integrated suppliers include, but are not limited to:

• stocking standard items for fast replenishment
• providing technical support
• managing inventory on-site and ordering material as required
• working to reduce transactions through fewer purchase orders and requisitions
• streamlining the procurement process
• delivering material with guaranteed service levels and times
• working with the purchaser to identify cost reduction opportunities. An integrated supplier may also be a company hired to manage the inventory but does not have any inventory itself.

A procurement director attended a conference on MRO distributor partnerships and realized that major benefits were available from using systems contracts for controlling lower value purchases. Mack Trucks now has one major integrated supply agreement in place. This agreement covers 5,000 items, has replaced 40-45 suppliers, accounts for $7 million in annual purchases, and relies on EDI to send requisitions to the integrated supplier.

A challenge confronting systems contracting involves agreeing upon a common commodity coding scheme. Currently, each major plant has its own internal coding system. Once Mack Trucks standardizes its lower value non-production purchases company-wide, the company expects to integrate information technology across its plants and with suppliers. As with many large corporations, the systems in place have developed at each location over time. Unfortunately, hardware and software are rarely compatible across facilities. Mack Trucks is currently assessing several enterprise-wide integrating software systems.

One indirect benefit that Mack Trucks expects from integrated systems contracting is greater pricing accuracy within its automated purchase order system. The Hagerstown engine plant, for example, uses 45,000 MRO items with 2,400 suppliers. Each item was part of an automated purchase order system, which often contained pricing that was not current. When a user requested material, a buyer issued a release to the supplier that often had an incorrect or outdated price. The price that appeared on the purchase order did not match the invoice price submitted by the supplier, thereby creating an accounts payable exception. In the short-term, management removed the price from all items within the purchase order system, which prohibits automatic generation of purchase orders for items with no price. A buyer now reviews (and inputs the correct price) for all releases missing a price before issuing a purchase order. While this action is not the longer-term solution to the pricing problem, it forced an update of the purchase order pricing file and eliminated invoice exceptions. More importantly, this is encouraging the development of additional systems contracts. These contracts require the input of negotiated prices that are current and maintained within the systems contracting agreement. Integrated systems contracts force accurate and updated pricing across thousands of items at a time.

Specified cost reduction targets 24 hour guaranteed delivery for all standard contract items are perhaps the most important features of integrated systems contracts. These agreements require annual material cost reductions of 3 percent with consideration given to raw material price changes. Furthermore, the integrated supplier commits to further reductions of 4 percent based on productivity savings supported by on-site supplier personnel. The plant controller is responsible for verifying productivity savings. Identifying additional items to place on a systems contract is one example of support provided by on-site supplier personnel.

The use of integrated suppliers is not without risk, which Mack Trucks categorizes as follows:

• Poor supplier selection The selection process takes on increased importance because systems suppliers are responsible for stocking and providing thousands of items. Furthermore, supplier switching costs become prohibitive once a company enters into a systems contracting agreement.

• Supplier financial instability Greater reliance on a single supplier exposes Mack Trucks to greater risk if that supplier experiences financial difficulties, such as cash flow problems. Financial difficulty could affect a supplier's ability to carry the inventory specified within the systems contracting agreement or to provide value-adding services.

• Inadequate supplier support Mack Trucks is relying on integrated suppliers to provide on-site personnel, quality improvement suggestions, technical and systems enhancements, delivery improvements, and cost reduction ideas. A supplier’s inability to provide adequate support risks missing the improvement targets stipulated in the purchase agreement.

• User resistance to integrated systems supplier Plant personnel have been accustomed to contacting or specifying suppliers with whom they are familiar whenever they had a material or service requirement. The corporate MRO director continues to spend significant time with users explaining the benefits of systems contracting. Because of his efforts, resistance to this program has not been as great as resistance to the credit card program. Fortunately, Mack Truck’s union has not resisted the presence of on-site supplier support personnel.

Procurement Cards Mack Trucks is gradually introducing a procurement card issued by American Express for the purchase of certain kinds of non-production items. Accounts payable is responsible for the day-to-day administration of the card program.

Currently, users satisfy their material and service requests primarily in four ways: users can electronically submit requests for purchase order generation for commodity coded standard items, users can submit to purchasing a standard material requisition for items that have no standard commodity code, users can request material or service directly from a supplier who has a blanket purchase order, particularly for services, and users can order directly from a supplier with a procurement card. The goal is to increase the use of the corporate purchasing card, particularly for spot buys and non-commodity coded items, and rely less on submitting material requisitions to purchasing.

Mack Trucks has an older workforce that perseveres in supporting existing ways of doing business. As a result, the procurement card program has not progressed at the rate envisioned by the corporate MRO director. Resistance has come from supervisors and potential card users. For example, although supervisors decide the limits for each cardholder, many supervisors have been reluctant to issue cards to workers. This appears to reflect a mistrust by the supervisor toward the plant employee. Unionized plant employees have also been reluctant to endorse procurement cards, since ordering material directly from suppliers “is not my job.” The MRO director maintains the company must develop a comfort zone with procurement cards and that training is vital to overcoming barriers to expanded card use.

Even with these obstacles, Mack Trucks has identified some preliminary advantages from using procurement cards. Although the company does not formally track transactions costs for all categories of purchases, informal estimates suggest that transactions costs have reduced to $53 per procurement card transaction (compared with $150 for a non-card transaction). The time required for a user to receive a material order has also decreased along with a reduction in billing cycle time. Additionally, the card has provided enhanced reporting capabilities where none existed previously. Procurement cards have helped the company get over some difficulties associated with a lack of commodity coding scheme. Finally, the procurement card has supported efficient communication throughout the supply chain.