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It's been an eventful decade or so for those who manage purchasing departments in Class I country. The technology evolution. Supply-side consolidation and the drive to extend sourcing reach. The strategic partnership push. Ever-increasing regulatory scrutiny. A renewed focus on quality and service — and idea generation — while keeping costs in line.
How have purchasing managers adapted? How are they preparing for the change to come? For perspective, Progressive Railroading posed a couple of questions to three Class I purchasing managers: Paul Bischler, vice president and chief sourcing officer, BNSF Railway Co.; Fran Chinnici, VP-purchasing and materials, CSX Transportation; and Joe O'Connor Jr., VP-supply, Union Pacific Railroad. Their responses follow.
BNSF's Bischler: At BNSF, our sourcing department has focused on providing outstanding service to our internal stakeholders, and ensuring the products and services we acquire provide quality and safety at a reasonable total cost of ownership. Over the last decade, the importance of strategic sourcing was recognized by our leadership and we've realigned the organization to enhance our effectiveness. We take a cross-functional approach to how we serve our internal customers and how they partner with our team. Over the last decade, our strategic sourcing footprint has broadened and the BNSF team has welcomed our involvement.
Technology has also had a significant impact on how we procure goods and services. Historically, this was a manually intensive process that required a significant number of people. There have been many technological improvements that have made it easier to buy goods and services for our employees. Our suppliers have also been very helpful by supporting technology to improve procurement and payment processes.
Supplier partnerships also have been an important focus of BNSF. With the continued consolidation of the supply base over the last decade, BNSF has looked for partners that we know will be there for us over the long term. Innovative partners who will listen to our needs and respond creatively have been our most successful relationships. We've seen a number of our suppliers grow outside of their core business because of their willingness to be creative, constantly searching for opportunities that provide a cost/benefit to BNSF.
Lastly, significant changes in environmental regulations over the past decade have required partnership with our suppliers to meet ever-growing state and federal requirements. Innovative products that solve both regulation compliance and ongoing monitoring placed additional challenges for both our suppliers and BNSF.
CSXT's Chinnici: At CSX, we take our lead from our core values: It starts with the customer; people make the difference; safety is a way of life; fact based; and right results, right way. Those core values have been part of the evolution of the purchasing team, which is remarkably different today.
Many years ago, purchasing was viewed as a back-office function, methodically processing purchase orders or sending out requests for quotes and awarding work to the low bidder. A more competitive global market and other circumstances have resulted in elevating the importance of the purchasing function, and that has been validated by no less an authority than the late management consultant and iconic author Peter Drucker. Drucker said that purchasing was an important player in a company's path to profitability, and should report to the executive team. CSX, like many other Fortune 500 companies focused on reducing costs and increasing profitability, has turned to its purchasing team for new, strategic ideas to add value. Our group's structure and paradigms must continually be challenged to ensure that today's "good" is not the enemy of tomorrow's "better" or "best" as it relates to materials, products and services.
Today, CSX seeks stronger, more strategic relationships with its key suppliers. These relationships are the catalyst to finding new ideas and better ways of meeting our customers' needs.
Likewise, we also challenge our employees to look hard at what is really needed from a product or service, and to eliminate waste from the supply chain. Such waste may exist in product specifications, logistics and disposal, to name a few. In fact, purchasing has been a critical part of the team that evaluates a range of products to determine not only cost and value, but impact on our environment. Purchasing processes have been streamlined with electronic data interchange that virtually eliminated paper invoices, e-catalogs that provide pictures and product data with a click of a mouse, and supplier portals for transaction status monitoring.
CSX is relentless when it comes to training and certification for our purchasing team. Higher-level skills and professionalism help our team to properly examine product offerings and understand new technologies and the anticipated value. Today, 95 percent or our purchasing managers have obtained their CPM or CPSM certification from the Institute of Supply Management, and a large number hold MBA degrees.
Additionally, a brand-new group within CSX purchasing is strategy and supplier development. The mission of this new group is to further develop existing suppliers and bring new suppliers and/or concepts into CSX. This team solicits, develops and evaluates innovative ideas that may result in significant process or product changes. Some of these ideas may appear radical at first glance, but ultimately lead to significant business improvement.
The supply base has also changed dramatically as consolidation has eliminated a large amount of competition and brands in some areas. And yes, the purchasing groups were responsible for some of this supply base reduction. But to a greater degree, it is the nature of competition, railroad consolidation, our global economy and the continued quest to reduce costs and remain as efficient as possible. The supply base is an area that we will continue to monitor and improve to ensure that we always have high-quality suppliers to support the rail industry and its critical mission to move freight in an environmentally friendly way.
UP's O'Connor: Over the past decade, UP's supply department has focused on providing materials and services to our internal customers that meet their business needs at the lowest total cost of ownership (TCO) while doing this in a manner that ensures ethical and safe business practices. Providing high levels of service to our internal customers in turn enables the railroad to meet or exceed the service needs of its customers.
The business cycles the economy has experienced over the past decade have reinforced the need to help our suppliers better understand our business requirements so they are best positioned to efficiently meet them. This requires working with suppliers that understand our business and issues we face, and that are also able to provide innovative solutions that generate value to UP and our customers. Improved understanding of market conditions and the resulting implications also have enabled UP to better meet the needs of our internal customers.
Our approach has been to work collaboratively with our internal customers and suppliers to identify the total cost of ownership across the entire life cycle of products and services, and then identify opportunities to reduce TCO. This has resulted in better alignment of our objectives with those of our internal customers and the overall strategies of the company. Supplier partnerships play a key role in reducing TCO. We identify business practices of either the railroad or our suppliers that adversely impact TCO and find ways to eliminate them. In addition, UP has utilized our continuous improvement group to help identify opportunities for suppliers to reduce their cost structure or improve productivity, which in turn can be used to reduce costs across the entire supply chain.
It is important that the rail industry has a strong supply base, and we believe that focusing on opportunities to reduce the TCO across the supply chain provides the best opportunities to achieve this by reducing costs and improving productivity.
BNSF's Bischler: RailMarketplace has been a successful partnership. Its impact has been limited because of the breadth of what we've been able to collaboratively source, however all of the railroads continue to see value from the partnership. As RailMarketplace has evolved, we've also leveraged the partnership to identify best practices used by each of the railroads.
CSXT's Chinnici: Originally, the consortium was envisioned as a tool to leverage volume and spend of the major Class Is to attract more competitive pricing, terms and conditions. RailMarketplace has managed to survive while similar efforts in other industries have not been successful.
The business model has evolved into an effective, streamlined method for contracting commoditized goods and services offered by suppliers of both technical and administrative products. While all of the objectives originally developed by the founding members could not be achieved in whole, the consortium has been successful in developing joint contracts for many generic items such as tires, computers, office supplies, safety supplies, paper products and bottled water, to name a few.
Additional value is being added from the consortium through benchmarking best practices that often introduce new concepts or more efficient processes.
In all, RailMarketplace has survived and added value for the last decade because of a solid process, appropriate oversight and an ongoing commitment from each of the six Class Is participating in the venture.
UP's O'Connor: RailMarketplace has been a successful venture for the railroads. It has clearly evolved from the original vision as the breadth of materials and services sourced jointly is limited. I believe that each of the owning railroads find value through the partnership through joint sourcing and by sharing best practices across the industry.