ELCAN Málaga Wins President's 6Sigma Award
Material Acquisition Cost Reduction

Visualize, Commit and Prioritize

In July 2000 a cross-functional baseline team was organized in Raytheon Microelectronics España (RME) [now ELCAN Málaga]. We as a team identified main UDEs, root causes and possible solutions/projects. After the baseline, a Contract for Change outlining leadership's commitment was signed by members of both the baseline team and leadership. The team identified five projects:

• Increase Process Robustness/Discipline and Improve Productivity
• Total Acquisition Cost Reduction
• Inventory Reduction
• Reduce Forecast Variability, and
• Gain New Business.

  The joint team was convinced that the Total Acquisition Cost Reduction project could have significant and immediate impact on our Net Operating Profit (NOP). As a contract manufacturer, RME spends more than 65% of its revenue on material. A reduction in material cost would improve RME's competitive position to win new business. Opportunities for improvement within the Total Acquisition Cost Reduction project were prioritized to achieve the greatest return for our business. The key projects that resulted were:

• Reduce Supplier Base
• Improve Payment Terms
• Improve Customer Collaboration/Responsiveness, and
• Improve Transaction Accuracy and Speed.

  Through improvements in those areas we expected a NOP benefit of $600K and a Net Cash Flow benefit of $397K. As a proof of their commitment to the improvement, many members of the Supply Chain Management team received Specialist training and many have since been qualified. My greatest satisfaction was to see how committed the people were at this early stage of the project to direct the change, not just with nice words, but also with actions.

  The leadership team agreed to launch cross-functional core teams and commit the necessary resources to these projects and identify them as top business priorities since it could have significant financial impact and serve as highly visible examples of cultural change achieved with R6S. As additional proof of commitment I was nominated as the second Six Sigma Expert candidate for RME.

  Characterize

  Total Acquisition Cost Reduction: The team collected the following data to characterize in great detail our current supply chain performance and identify improvement opportunities:

• Supplier payment terms
• Spending by supplier and commodity
• ABC analysis by commodity
• Supplier and component lead times
• Number of suppliers
• Production scheduling procedures.

  This data analysis showed that the team's focus should not just be on achieving material cost reductions, but that there were also opportunities in payment terms flexibility and transportation cost, so we broadened our focus from material cost to total acquisition cost.

  Improve

  The core team developed an improvement plan; the business leadership approved the plan. The key points of the plan were:

  • Reduce Supplier Base
    • Develop matrix to consolidate parts and spending with same supplier.
    • Perform win - win negotiations with key suppliers (on more than price).
    • Clearly establish preferred supplier criteria (logistics, lead time, price).
  • Improve Payment Terms
    • Develop target matrix to identify suppliers with top spend and unfavorable terms.
    • Perform win - win negotiations with target suppliers with cost-terms tradeoffs.
  • Improve Customer Collaboration and Responsiveness
    • Establish one-piece flow for procuring prototype material
    • Implement standard operating procedures.
    • Redesign and streamline process flow for procuring prototype material.
  • Improve Transaction Accuracy and Speed
    • Educate process owners in using Theory of Constraints to identify bottlenecks.
    • Deploy "mistake-proof" process using poke-a-yoke.

  Achieve

• Material cost reduction Gross Benefit 2001 - 2003 $1.7M
• Net Operating Profit benefit in 2001 of $666K (22% of RME's 2001 NOP!)
• Net Cash Flow benefit in 2001 of $415K
• Reduced number of suppliers 36% (from 450 to 289)

  The people who worked on this project now have greater ownership of their processes and work with greater discipline. They feel accountable to each other and the business for continuous improvements and are proud to help our business reach its goals. They appreciate the contribution that R6S has made to the business and are now used to their efforts being recognized and their success being celebrated and rewarded!

  Contact person: German Pelaez Mena
  Phone number +34 95 224 9259
  e-mail gpelaez@raytheon.com