How Central Purchasing improves 

 Smurfit Kappa’s bottom line

In 1999, following the implementation of SAP, Smurfit Kappa in Ireland established a Shared Services Centre and three years later Central Purchasing was set up as a department within the Shared Services offices.

Michael Binchy is general manager of the Shared Services Centre and heads Central Purchasing, which provides a service to the 12 Smurfit Kappa plants in Ireland .  He is a Certified Accountant and has been with the Group for 22 years, mainly on the financial side. Shared Services functions include purchasing, SAP processing, master data management, treasury and various other financial functions. It has a staff of eight, two of whom are in Central Purchasing. “My function is to apply management skills to the procurement process and to drive it, “ says Binchy.

Smurfit Kappa’s annual purchasing spend in Ireland is around €60 million. Paper used in the manufacture of corrugated board is predictably the biggest category, followed by transport.  Being a commodity, paper prices are market driven and market forces such as demand, capacity and inventory levels determine global prices. The biggest issue is ensuring source and supply.  Most of Smurfit Kappa’s paper is bought internally from its mills across Europe .

Within the Smurfit Kappa Europe structure, Binchy is the Irish Purchasing Coordinator and has direct contact to the Group’s vice president of purchasing, so that there are both local and European synergies. Practices set at European level are adopted by each country to ensure that purchasing policies and processes are standardised across all plants.

“European procurement strategy is fairly straightforward – product categories are put to tender across the European supplier base. Benchmarking plus negotiation results in a shortlist of preferred suppliers.

In the European procurement operation, category managers are assigned to the main  purchasing categories that are common across Smurfit Kappa corrugated plants and mills. Their responsibility is to meet pan-European suppliers and negotiate prices at European level. “They communicate that back to country coordinators,” says Binchy, “and it’s our responsibility to implement those prices across the plants in our respective countries. This process gives us transparency of pricing across Europe over a wide range of product categories. There is two-way dialogue. We obviously feed back to the category managers how we are progressing or what difficulties or challenges that we may be facing with suppliers here. It works well.”

Everything feeds down from Europe , through Shared Services to the individual Irish plants, each of which has its own purchasing coordinator with responsibility for local tenders from suppliers or for goods that are unique to that plant. The role of the plant purchasing coordinator varies with the size of plant. In some of the larger plants, it is a full time role, whereas in smaller plants, it is part time.

“Quarterly meetings are held with our local Irish plant purchasers to ensure European policy is implemented, to monitor progress on local purchasing initiatives and provide training so that all users are aware of the tools within SAP that will assist the purchasing function.”

“What I’m trying to do is consolidate and leverage our spend and adopt best practices across the plants. Prior to SAP, every plant managed its own procurement and selected its own suppliers. What we have done is coordinate all expenditure, review existing suppliers and reduce their number and leverage off the consolidated spend with the aim of getting better value.”

But Binchy sees cost as only one element. “We are looking for three things from suppliers – good product,  good service, all at the right price.”

In a company of the size of Smurfit Kappa, working capital is exceptionally important, so Central Purchasing looks at what suppliers can offer in areas such as consignment stock, payment terms, how often can they make deliveries into a plant, what kind of quantities they can deliver, minimum orders, and similar issues. “We take all these factors into consideration because they affect our working capital. The ultimate strategy is to achieve cost savings and improve working capital,” he says.

According to Binchy, the biggest challenge has been changing the mindset, not only of the purchasers in the local plants on what their function should be but also getting department managers to see what Central Purchasing is aiming to achieve. “With support from plant general managers, the focus has been to get buy-in from all departments including maintenance, production, finance, inventory control – everyone needs to be involved in the process and fully commit to it.”

From the outset, Binchy strongly believed that Central Purchasing needed to be viewed, not just as a cost centre, but as adding value to the organisation and the plants. It took a while for this message to get across and initially there was a tendency to view Central Purchasing as an unnecessary layer of administration. “We needed to show that Central Purchasing saves money.  In the past, purchasing didn’t really sell itself.  What we have achieved is to raise the profile of the purchasing function within Smurfit Kappa and demonstrate the results it can deliver.

“We’re not just punching in purchase orders – that’s not saving money. We’re adding value to the organisation and generating tangible savings that we can actually measure. So we focus very much on selling to the general management across the plants the concept that we actually help them achieve savings. We are able to show plants what we’ve saved during the year.

“I’m fortunate in having Tom Dalzell as my colleague. He has a strong technical background so he works closely with the engineers and production people in the plants in rolling out new tenders.  We arrange for our suppliers to meet with Tom and the maintenance manager and production manager at the plants to see where efficiencies and improvements can be made. As a result, we develop good teamwork between Central Purchasing, the plant managers and key suppliers by jointly developing solutions.

“Savings is not just purely about the cost of a product, savings can be obtained by changing to a different product that can do the same function, but is less expensive. And trying to work smarter, like with energy – for example, are there components or equipment that we can install in our plants that reduces the voltage that’s going into the lighting in our stores?”

Smurfit Kappa, as a customer, is a good name for suppliers to have when talking to other potential customers because it means that they have proven quality and product standards and are competitive in price. Smurfit Kappa Ireland deals with over  1,600 suppliers and its supplier strategy is based on the type of product and the risk associated with it. If it’s a low risk area, there is usually a single supplier. In more high-risk categories, the norm is two suppliers – with a dominant supplier handling up to 80% of the business and a secondary supplier with the rest.

Central Purchasing tends to place orders with suppliers that value the business, where the spend is relatively big enough to be important to the supplier. That comes from experience, says Binchy. “Where our orders are worth around 10% to 15% of a supplier’s business, we are big enough a customer in their eyes that they will give us top service, and when we pick up the phone they respond. In the past, we’ve given business to major UK suppliers and found that our business was far too small for them and we were not getting the level of service we required. So we brought the business back to an Irish supplier. Our order was substantial in their books and they gave us a level of service that reflected this.

“Conversely, if our business dominates a supplier, it can become a problem, particularly if the supplier goes out of business. There are not many instances where that is the case, but it’s something that we would be careful of and watch.  The last thing we want is to enjoy attractive prices this year and next year the supplier is out of business or cannot sustain the same level of pricing and are forced to raise prices back to or even above previous levels.   We have the cost of change and we lose the investment we have made in building a relationship.

“Changing suppliers can be a costly business, especially in our case where we have twelve plants and we have to manage this change across the twelve plants.  So, we try to develop a relationship with these suppliers where it is open and honest. Where both sides can put their cards on the table and we both know where we are going.  We tend to stay with suppliers unless their service levels fall, or product quality drops, or they increase their prices beyond what is acceptable to us.”

Suppliers are asked to be proactive and come back with new ideas. “They need to work with us to achieve further cost savings and deliver efficiencies to the production process. They are the people with the product knowledge and they are best placed to come to us with ideas and new developments that are relevant to us -- because if they are not doing it, their competitors may well do it.”

That said, it is usually difficult for new suppliers to get business from Smurfit Kappa if an incumbent supplier is performing well. Central Purchasing benchmarks suppliers. “We inform suppliers that they will be benchmarked during the period of the contract. We go back out to the market and make sure that the pricing levels are still competitive. Once a contract is created within SAP, it can be subsequently downloaded and emailed to other potential suppliers. From the responses, we can see how our existing supplier is performing.”

Apart from paper and machinery OEMs, most of Smurfit Kappa’s purchasing is local. “Over the years, Irish suppliers have become more professional,” notes Binchy. “They understand our business well, they know our needs and they know the people within the plants. They are invariably more flexible than overseas suppliers. Where they have a premium on the price, that premium is justified by the level of service that they are giving. They have come a long way and are adapting well to our business and are being more proactive and in providing information back from their side.”

(c) Purchasing and Supply Solutions