Driving change in commodity management in engineering led firms through optimization studies, modeling, and data driven decision making

Abstract

Engineering focused companies often find difficulty in managing costs. As the innovations begin to slow and key products are commoditized these companies often find themselves far behind their competition from a cost perspective and quickly lose margin and market share. Shifting the supply organization towards one of cost awareness is a difficult and slow task. The challenge and goal in changing the mindset of the organization is to create a team which actively seeks and analyzes all opportunities to remove inefficiencies in the purchasing and management of supply. Large cost cutting initiatives start the process, but changing the mentality and culture of a supply organization involves more than shifting the factory footprint, reducing inventory, and taking away the free pots of coffee. ABB is a large global engineering company with products ranging from automation to power technology. Historically relying on technological superiority and a strong customer focus, ABB has focused energy on growth of the top line revenues, and was inconsistent in managing the bottom line costs. In 2004 ABB margins were the thinnest among all of their competitors, and they were the furthest behind in EC sourcing.

(cont.) This thesis emphasizes the need for engineering companies to manage commodity costs and describes different activities, performed within ABB to change the mentality and the culture of the supply organization from one of cost acceptance to one of cost awareness. The challenges in managing the indirect commodity spends at ABB will be outlined and the need for optimization studies, modeling, and data driven decision making to control costs and quality will be shown. Discussed will be the difficulties and discoveries from three projects: the modeling and optimization of European ground transportation, the management of a pan-European team to manage the electrical energy spends, and the development of cost models for training of the supply organization. These activities were performed to challenge the complacent mindset toward managing commodity costs and to effect organizational change. Following the discussion of specific projects and results, higher level thoughts and more general considerations will be summarized.