Kennametal Cuts Supply Budget With Teeth

Mark Steele's wallet was on the line. Just days after he was hired in May 2000, Steele sat across a table listening to his new boss, Stan Duzy, chief administrative officer at Kennametal Inc.

Kennametal, a $1.6 billion Pennsylvania company that makes tools for metal cutting, coal mining and highway building, was in for a rough patch, and Duzy knew it. Companies just weren't building as many new buildings. Funding for new road construction projects was shrinking. Carmakers were slowing production. Kennametal makes hundreds of thousands of products under two dozen brand names, but a global recession was eating into demand for those tools. Sales had begun a slide that would ultimately result in a 17% drop between 1999 and 2002.

To compensate, the 65-year-old company started an austerity program, including an effort later called Kennametal Lean Enterprise. The idea, as the latest annual report puts it, is "to eliminate all forms of waste [and] unnecessary complexity."

Steele, the new director of purchasing and supply management, sensed he was about to get some marching orders. He did. Duzy ordered that he cut $35 million from Kennametal's annual procurement costs of $700 million.

The goal must be reasonable, Steele figured—until he was then told that Kennametal didn't actually know what it spent every year on supplies because there was no central database to track it. The $700 million was merely an estimate, not an actual figure calculated from any real, consolidated data.

"That is when it started to get scary," he says. "How was I going to identify the categories to work on if the data did not exist in one place?" he wondered. "[My] compensation is tied to this."

Where Does Money Go?

Ever try to document every dime you spend? It's hard enough to do at home, never mind at a company with almost 12,000 employees and 50 factories in 12 countries, plus sales or customer-service offices in another 48.

Certainly the company had procurement policies. And it had a list of preferred vendors from which employees were supposed to buy their supplies—everything from staples to PCs to tungsten for making knives that slice through steel. Plaintive memoranda on the topic were regularly sent to all offices worldwide.

But without software to analyze spending at all locations, Steele couldn't determine who was doing what or how to find $35 million worth of savings.

A factory manager in Shlomi, Israel, may be buying 25% of his office supplies from the sanctioned vendor but 75% from local shops. Back at the corporate office in Latrobe, Pa., Kennametal's category manager for office supplies just didn't know.

That was then. Now, nearly three years later, Kennametal can tell how much each facility spends on nearly all of its supplies, and with which suppliers. Managers also can cajole reluctant employees into compliance by whipping out detailed reports on their spending habits.

Potholes on the Road to Wisdom

One big problem was simply collecting all the data. Kennametal runs five different enterprise software applications, including SAP's R/3; two versions of Computer Associates' Ask Manman, which is late-1980s software for Hewlett-Packard and Digital Equipment minicomputers; and two older packages specific to industrial manufacturing.

"We really wanted to identify every dollar that leaves the company, so being able to get data from all those systems was critical," says Jim Cebula, director of global purchasing and travel in Steele's department.

A summer 2000 deal with one software company ended with Kennametal booting the company out.

The company had a package that could categorize purchasing data. But the package couldn't automatically talk to and extract data from Kennametal's various applications and, thus, put the data in the categories it created. Yet promises were made to find a way. Speed and low cost were Kennametal's top criteria—traits of which the vendor boasted.

But after several weeks, there was little progress. "We were frustrated with the pace and lack of project management," Steele says. Kennametal continued to work with the company, which he declines to name, but at the same time enlisted Tigris Consulting, a $10 million, 100-employee firm in New York.

Kennametal asked Tigris to deliver a fully functional purchasing database for three of its enterprise systems within eight weeks. If Tigris could do it, it got paid. If not, no pay. At the end of the two months, Tigris had done it.

"The other company still had not delivered a prototype," Steele says. "We disengaged them amicably but not pleasantly." Meaning there were no lawsuits, but nor were there many smiles and handshakes.

Tigris was hired in November 2000. But with a project budget "in the low six figures," the Kennametal deal wasn't going to be a playground for the consultancy. "We do this work for clients much larger than Kennametal. We were challenged to have this fit into their budget," says Brent Habig, chief executive at Tigris. Other customers are Unilever, a $46 billion consumer products company, and Pharmacia Corp., a $14 billion pharmaceutical firm.

One tack for the Kennametal project: simpler, less expensive software.

An Oracle database or data analysis tools from Hyperion or SAS Institute can cost upward of $100,000 each. Instead, Tigris chose Microsoft SQL Server database, which is in the $20,000 range, and Microsoft Access, which Kennametal already had, bundled with the Windows operating system. For the analysis tool, the choice was DataBeacon Inc.'s self-named package, which is priced at about $10,000. DataBeacon is a private software maker in Ottawa, Canada.

Another way around the time and money constraints was to have Tigris host the finished application for Kennametal, providing secured Web access to the system. That way, Kennametal's information-technology department avoided having to install new software and the system was up and going faster. "There was no capital cost or internal support requirement," Steele adds.

On the other hand, if Kennametal decides to take over the application, it will have to buy the software and spend money and time to train its people in how to work it. Right now, though, during the company's austerity program, Steele says it makes more financial sense to have Tigris host the system indefinitely, updating Kennametal's purchasing data every quarter.

Preparing Kennametal's data to be analyzed was a bear.

For example, different offices referred to supplier IBM in different ways: International Business Machines, IBM, IBM Corp., even Armonk, for the town in New York where the computer company has headquarters.

Similarly, units of measure had to be reconciled. One office, for example, accounted for envelope purchases in boxes of 50. Another recorded the number of cases. The company couldn't compare the price paid in each instance until the unit of measure was made comparable.

To make sure they were really seeing all dollars spent, Tigris and Kennametal matched accounts-payable records with purchase orders as much as possible. Purchase orders typically have nice, neat line-item detail. But an accounts-payable record can be as scant as a vendor name, an amount and a date. "That's where we had most of our bumps in the road," Cebula says.

To shed more light, Cebula and others from the project team cross-matched information by hand from general ledgers, such as supplier names and account numbers, with the names on accounts-payable files. The account numbers often could be traced backward to contracts for specific goods or services. Then old-fashioned interviews with factory managers or the employee who made the purchase helped uncover other details.

Some spending was harder to track, such as smaller purchases people put on credit cards, for which they were later reimbursed.

Still, uncategorized spending—the portion of its 4 million annual transactions that Kennametal knows it has paid for but can't readily attribute to one of its 50 designated categories—was 35% at that initial accounting. Since then, as the process has been refined and employees have become better about inputting records on what they buy, uncategorized spending has dropped to less than 5%, Cebula says.

New Data, New Deal

After it is cleansed, the data is downloaded to the DataBeacon "spend cube," so named for the ability to view the data from several dimensions—by item category, supplier, office location, amount spent, time period and so on. The knowledge helps Steele and Cebula save money in two ways.

First, once Kennametal was able to see what it was spending in different categories across the company, it started to negotiate global deals with some suppliers, rather than let each location fend for itself.

Telecommunications service was an early target. "Tigris said, 'We think you're spending more than you realize. There's negotiating leverage you have that you didn't exploit,'" Steele recalls.

Although a contract had been signed less than 12 months before, Kennametal went back to its telecommunications provider with fresh data and aggressive demands for a better deal. It saved $800,000, which more than paid for the work of Tigris, Steele says.

Likewise, in abrasives, which are grinding wheels used to sharpen cutting tools, Kennametal has saved $500,000.

Second, managers have more power to get employers to comply with preferred-vendor agreements. Compliance is crucial. If Kennametal has negotiated a 10% discount for tungsten or titanium from a specific company, it does no good if no one buys from that company.

In the past, when managers called factories to check on compliance, they had no real ammunition other than a complaint from a supplier that so-and-so was not buying from it. "The factory would then buy some of their stuff from the vendor but not all of it, in hopes we'd go away," Steele says. "I don't mean to imply that factory managers don't want to do what's right, but we all prefer independence over direction," he adds diplomatically.

Now, though, the manager can run a report and cite names and numbers showing just what percentage of buys followed the rules. "When you're being managed with facts, you're more inclined to comply than if you're being managed by anecdote from a vendor," he says. "Resistance is broken down pretty quickly when you have good data."

Most of the savings are reflected in lower operating costs for Kennametal. But cost reductions also contribute to how competitive the company can be in pricing its products, Steele says.

Kennametal will have to be plenty competitive. It lost $212 million in 2002, the company's first losing year since its $4 million of red ink for 1994.

That $35 million mandate? It was met last November, six months ahead of schedule. Steele not only got his bonuses, he was promoted. Last month, he was made general manager of Kennametal's 300-employee electronics division.

Kennametal Base Case

Headquarters: 1600 Technology Way, Latrobe, PA 15650

Phone: (724) 539-5000

Business: Manufacturer of tools for metal cutting, mining and road construction

Chief Information Officer: Ralph Niederst

Financials in 2002: $1.6 billion in sales; $212 million net loss; $119 million operating profit

Challenge: Identify every dollar that leaves the company, then cut spending by enforcing corporate procurement policies at its 50 factories worldwide

BASELINE GOALS:

Cut $35 million from $700 million in managed procurement costs by May 2003 Reduce the number of suppliers to 2,000 by 2005, from 8,000 three years ago Get employees to comply with preferred-supplier contracts for 80% to 85% of all purchases by 2005, up from less than 40% in 2000

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.