Strategic sourcing spreads: Railroads and suppliers are moving toward long-term relationships based on total cost of ownership purchasing - Brief Article - Industry Overview

Railway Age, Feb, 2002 by William C. Vantuono

One of the newest terms to enter the railroad vocabulary is "strategic sourcing," a process for reducing the total cost of purchased goods and services. It is redefining railroad/supplier relationships and replacing short-term "reactionary" purchasing. Suppliers are beginning to understand that providing low "cast of ownership"--life-cycle, distribution and logistics, labor, warranties, and investment recovery costs, not just purchase price--doesn't have to mean getting squeezed on price (RA, March 2000, p. 29). Railroads are beginning to see significant bottom-line savings.

Strategic sourcing is fast becoming standard practice among Class I's. The concept was introduced in the early 1990s by CSX Transportation with its "Mentored Champion" program. Burlington Northern and Santa Fe inaugurated its program about three years ago, and Norfolk Southern started strategic sourcing just last year. The methods--cross-functional "buying teams," regular reviews with suppliers--are used across the board.

The Class I's Railway Age spoke with said that their goal is a win-win relationship with suppliers. They are tough in terms of expectations and performance requirements, and their suppliers are transitioning from selling based in part upon relationships to selling based on lowest total cost of ownership. For some suppliers, it's been a hard lesson learned.

For BNSF, "the past 33 months have been a learning experience for us and our suppliers," says Vice President-Strategic Sourcing and Supply Jeff Campbell. "We have gone from a concept introduced by consultants in a combative test mode to making the methodology our own." Strategic sourcing is a multi-tiered program at BNSF. "We're in our third full year of using cross-functional company teams that make all of our buying decisions," says Campbell. "We're making the best buying decisions we've ever made, and have enjoyed an average of 6% savings across all our sourcing initiatives--around $200 million in total thus far." CSXT, which says that only 25% of its cost of ownership of purchased materials is in the actual purchase price, has realized about $100 million in savings over the past three years, plus about $60 million in investment recovery. NS anticipates saving $1.5 million this year by strategically sourcing ballast, and is extending the concept to include such areas as locomotive and freight car parts.

Such savings "aren't necessarily money in our pockets or our of our suppliers' pockets," says Campbell. "We have redesigned our internal processes, and outsourced some warehousing and distribution functions. We've re-engineered how we do business as we go through fact-based negotiations with our suppliers and enter into long-term contracts. So the savings also apply to them."

Another BNSF strategy is "supplier contract management," where key relationships and performance parameters are identified in a process called "scorecarding." This involves quarterly account reviews and establishing yearly improvement goals. Yet another is e-commerce. BNSF is rolling out an internal e-procurement program, beginning with nonrailroad-specific items like office supplies. "Our people can go online to purchase items directly from the supplier," says Campbell. "We have catalogs based on the long-term contracts we source loaded into the search engine. We are migrating toward direct goods, and are in discussions with core railroad suppliers about adding their digitized product catalogs to our e-procurement system."

E-procurement at BNSF is being extended to an area called "e-auctions," described as "a way we can quickly conduct buying decisions for high-volume, off-the-shelf commodities." Railroad-specific supplies and outsourced projects like grade crossing rebuilding contracts are conducted via online "sealed-bid reverse auctions," where suppliers don't have to worry about the competition seeing what they're bidding or where pricing may end up on a particular commodity. The next step is "e-contracts," described as "loading all our supplier contracts online so that our buyers can get them approved and executed and manage them in a real-time environment."

How do suppliers feel about strategic sourcing? BNSF is one of the largest consumers of freight car wheels in the world, and Griffin Wheel, with a five-year contract, is its principal supplier. Regional Sales Manager Brett Holst says Griffin is pleased with how the partnership has gone. "This is the first time we've had a long-term contract," says Holst. "It's significant because it allows us to schedule production more efficiently, and we can do better with pricing on high-volume orders. At first, there was a little uneasiness, but as we worked through the process, we saw the benefits. We found common ground where we're comfortable sharing information. Before we formed the alliance, it was a month-to month relationship. Now, we have six-month forecasts, It's a win-win."

The key to strategic sourcing, says CSXT Senior Vice President-Purchases and Materials Howard Levy, "is respect for suppliers, the understanding that they can bring better ideas to the table. They're the experts, and they have a broad perspective, since they supply all the railroads."