Spending less on spending
For British Airways to aggressively streamline its annual £4 billion in procurement, the company questioned all assumptions. An exercise in change management that produced results, recounted in a case by Jamie Anderson (ESMT) and Dr. Marc Day (Henley Business School)
At the end of the 1990s, management concern was mounting about the cost of procuring almost £4 billion in goods and services at British Airways (BA). In 1999, about 290 people in the UK alone were busy buying for BA, whether for high risk items critical to the carrier’s safety (e.g. spare parts for engines), or low-risk items (e.g. olives for business class lounge martinis), or indirect purchases (e.g. software updates for the ever-expanding website and customer interface).
Over 14,000 suppliers in 80 countries meant almost half a million annual invoices. Yet the critical 150 suppliers accounted for 80% of the total spend. How to streamline this elephant was the dilemma facing Silla Maizey and Jonathon Counsell, the heroes of the case study.
This case, co-written by Dr Marc Day of Henley Business School and Jamie Anderson of ESMT, lays bare some of the intricacies of the changes in the procurement systems at one of the world’s largest airlines. The case mixes operations and systems angles, without losing the reader in a morass of jargon. No small feat.
Phase 1 – Expanding e-procurement
The action starts in late 1999, when Silla and Jonathon appear on scene in one of the BA silos: the procurement department. In short notice they decide to shake things up – with a bit of diktat from upstairs, telling them that £300 million in savings need to be eked out of procurement.
By 2000, with some help from the Accenture experts, the focus quickly turns to the £1.2 billion of so-called Indirect Purchases, which had not qualified for systems-based procurement. The procurement team started looking for suitable software systems: flexible enough to handle the diversity of procurement needs, and strong enough to start small and grow big as e-procurement is rolled out to different product categories and geographic areas.
Phase 2 – Ariba arrives
In 2001, the trial of the Ariba software started up. This coincided with the company-wide “Future size and shape” initiative, a key point of which was reaching a target of 10% operating margin. With the pressure thus applied, and the headcount consistently dropping, the procurement department forged ahead in its technological drive for higher productivity and lower costs.
In March 2003, BA management decides on a complete review of the e-procurement project and analysis of progress-to-date. Ariba was promising, but had been slow to implement. Only 18 product categories had been covered. Cost savings were good, yet roll-out seemed lethargic. What was going wrong?
Time to crack the whip?
Silla and Jonathon persuaded top management that the problem lay in compliance. Many procurement managers were bypassing Ariba’s powerful cost saving functions and simply entering deal data after the negotiations. So top management provided various tools to help our heroes.
On the positive front, an extensive learning program was introduced so that all the procurement staff could fully understand the benefits of Ariba, namely from a company-wide perspective. Case in point? That cost savings through procurement would accelerate BA’s fleet renewal program, which would help the company overall.
Another boost came from the “Z card”, a nifty little booklet that underlined in simple terms the project targets, the cost savings expected, and the procurement strategy.
On the verification front, BA introduced two compliance tools. Firstly, Ariba now became mandatory for purchases above £100,000. Secondly, toll gates were introduced in the seven-step procurement process (see chart). These toll gates were critical points at which members of the senior executive team would review the procurement process and verify full compliance. Ouch.
What benefits after all these years?
The introduction of Ariba as the e-procurement software was definitely hailed as a positive move by BA management. Not only did it bring greater transparency throughout the buying process, it helped tremendously in the consolidation of suppliers. UK suppliers dropped 64% in 2003.
Having this electronic overview of its purchases has also enabled BA to better analyze where further savings could be eked out. The 15% savings on American catering is one effect. The 21% reduction in fuel price differentials among London airports is another effect. The list can go on and on.
In the end, the lesson of this operations-cum-systems case is that a good technological solution will only be as good as the people who use it in their daily jobs, and the managers who oversee its implementation.
Reference:
ECCH ESMT-606-0062-1
“British Airways: A Journey in Procurement Transformation”
Jamie Anderson (ESMT) and Dr. Marc Day (Henley Business School)
Published January 2010
