Procurement

Mining for Savings: Sourcing Takes Team Approach

Nov 06, 2014

Credit: Alpha Natural Resources

Credit: Alpha Natural Resources

An economic downturn brings out the worst in some companies. They beat up suppliers to slash prices or delay payments, damaging valuable relationships. A downturn can bring out the best, too. These companies take a good, hard look at current purchasing practices and put in place the people and processes that help reduce cost and improve efficiency over the long term.

The recession and some changes in perception about the use of coal have led Alpha Natural Resources to its procurement operation, not to take it out on suppliers, and to begin a transformation that would instill a sourcing strategy that adds lasting value.

Mark Manno, senior vice president of strategic sourcing and information technology at Alpha Natural Resources, in Bristol, Va., was working in the company's legal group when management tapped him to lead the procurement team. In his role as an attorney at the company, Manno was supporting procurement in its negotiations with suppliers and contract reviews. In his current post, he reports to the president of the company, Paul H. Vining.

Founded in 2002, Alpha Natural Resources produces, processes, and sells steam and metallurgical coal from 81 coal mines and 25 coal preparation plants located throughout Virginia, West Virginia, Pennsylvania, Kentucky, and Wyoming. It's a company that has grown by merger and acquisition. In 2009, it merged with Foundation Coal, becoming the third largest coal company in America. In 2011, the company acquired Massey Energy Co., making it the third largest metallurgical coal producer in the world.

Manno recalls that the mergers left the company with three different views of procurement. Alpha and Foundation favored a decentralized approach, with a small group of procurement and warehouse workers who report to local management doing much of the buying. Alpha had a few corporate contracts, but most agreements were regional or local. Massey had a centralized procurement model.

"As the three companies came together, we recognized our size in the industry and that we now have some collective buying power that we were not using with our suppliers," Manno told My Purchasing Center. "We were buying many of the same types of items from multiple suppliers. We were not looking at sourcing with a total cost of ownership mindset."

Determining that they needed some outside assistance with figuring out how to be more strategic at procurement, Manno and his predecessor chose to work with Bob Rudzki and his team of experienced procurement leaders at Greybeard Advisors, in Pittsburgh.

Alpha began its relationship with Greybeard late in 2011, when the advisors did a baseline review of the procurement operation. Of their assessment, Manno said, "Their whole approach really fit my expectations as well as those of our group and our leadership, all the way to the CEO." After the assessment, Manno asked Rudzki and his team to stay on and help with the procurement transformation.

One measure of the changes they've put in place shows that applying sourcing strategy to $500 million in spend across 14 major categories reduced Alpha's costs by about 8 percent and consolidated the supply base to 50 suppliers from 340.

The key is setting up the right framework, providing procurement training, and getting support from the top, Manno said, adding, "Showing leadership some quick wins at the beginning also really helped get the momentum going."

Transforming Procurement

After the assessment, Manno got to work, hiring people with skills the team was lacking. Many of those he hired were working in different functions at the company. As he saw it, industry experience and familiarity with the company are a plus. His background brought contract and negotiation expertise to the team, and he added individuals with experience in finance, auditing, risk, and sourcing. They also have leadership and analytical skills. "Then, Greybeard provided the procurement training," he said. "And we let their natural abilities come through."

A cornerstone of the transformation is Alpha's use of procurement-led, cross-functional sourcing teams to acquire goods and services for its mines and other facilities. Depending on the category being sourced, the team may include representatives of the company's maintenance, engineering, operations, and accounting groups. Other functions have input, as well, as ad hoc members of the sourcing teams.

"We recruit individuals from different disciplines to create as diverse a group as possible so that everyone has a voice and feels represented," Manno said. "That way, everyone will feel more comfortable with the suppliers we select, that they are capable of providing the products and services the company needs."

While some organizations that use cross-functional sourcing teams ask their members to devote their energy full time to the process, Manno decided to take a slightly different approach. "Typically, full-time sourcing team members hunker down and work for 60 to 90 days doing research, developing the RFIs and RFPs, negotiating the agreement, then implement and go back to their day jobs," he said. "Given our staffing levels, we were not able to do this. While the process may take more time, our teams work on sourcing part-time, attending weekly meetings and participating in conference calls, to help ease the burden on their full-time jobs."

A steering committee approves the recommendations of the cross-functional sourcing teams for strategic purchases. On the committee is the president of the company, the senior vice presidents of the company's northern and southern mining regions, as well as leadership from maintenance and procurement. Manno represents procurement on the committee.

How They Buy

Manno said that many of a coal mine's purchases are similar to those of a construction company -- earth-moving equipment, tires, and diesel fuel -- as well as explosives, shuttle cars, and conveyor belts. A mine also buys a lot of MRO goods and services.

One of the first critical purchases the cross-functional team sourced is conveyor belting and services, a $56 million buy for Alpha. As those familiar with mining understand, conveyor belting is critical in that if it breaks, the mine is essentially shut down, costing the company lost revenue. At the time, Alpha was buying conveyor belting from three suppliers. The team did its due diligence, analyzing capabilities of nine belt and belt service suppliers, running assessments of total cost of ownership (TCO), using services available through ProPurchaser.com, and vetting the suppliers' supply chains for risk. Equally as important to the team is safety, as well as the supplier's ability to produce a quality product.

The sourcing team also developed key performance indicators for the supplier contract and introduced scorecards and quarterly business reviews to measure performance. The team's ultimate supplier selection decision which consolidated the buy to one supplier helped reduce costs by about 12 percent, Manno said.

At first, the sourcing teams generally applied their process to categories of products. Services appeared more challenging, Manno said, because of the remote locations of some of the company's mines and the types of services they regularly buy. He points to earth-moving as an example. "For something like building or repairing a mine access road, where a construction firm comes in and cuts a road into one of our sites, there is no one firm that can do this for the whole entity," he said. "This year, we started branching out. Contract labor is one of our first services. And, so far, we've been successful."

One service the team sourced recently is haul trucking, in which a third party essentially moves coal from surface mines or piles to a preparation plant. In addition to representatives of corporate functions on the team, also included were regional sourcing and operations managers.

"Not only did we reduce the cost per ton to haul the coal, we also worked together to optimize the procedure," Manno said. "We created a template with standard processes that we use not just for trucking. With other services, we find that we're able to improve the price as well as the process, allowing us to take best practices and apply them throughout the organization."

What's the next step in the transformation? The sourcing teams are beginning to take another look at some categories they sourced early on in the process. It's time to renegotiate some of the contracts. They're also considering some services that they hadn't so far. And Manno is checking out technology tools that will help move his team closer to becoming world-class.

One indication that they're on their way: When Manno assumed additional responsibilities this past spring, procurement did not skip a beat in its transformation. He took on IT and hired a vice president of strategic sourcing to handle many of his sourcing responsibilities. "It's easy for a team to slip back, feel a little pressure, and revert back to old ways of doing business," he said. "We have not done that. I feel the department is continuing to fire on all cylinders."

He added that "the original Greybeard assessment suggested that we could achieve results that many thought were a stretch. Three years later, I am happy to report that our teams have exceeded those expectations and have built credibility with internal stakeholders and with our external supply base."

This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.