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Sky High
Air Transat takes sourcing to the top
By Lisa Wichmann
What happens when purchasing is considered mission-critical to a company? Costs are shaved from the budget, and relationships with suppliers improve.
A case in point is Air Transat A.T. Inc. in Montreal, which recently completed a strategic sourcing program—with impressive results.From the 18-month program, the company realized savings of about $7.3 million, or 8.8 per cent, on goods and services such as transportation and IT. “And those savings carry on,” says Jean Cloutier, director of strategic procurement with Air Transat. “Those are continuous budgets we have.”A few years ago, Air Transat embarked on a cost-cutting program. Then came September 11, 2001, which threw the airline industry into turmoil. With sales down, Air Transat had to move quickly to find savings.
With high-level executive support—right up to the president and CEO—the purchasing department set out to develop strategic sourcing. “Before, it was more of a transactional-based procurement system,” Cloutier recalls. “We would receive an order, a purchase order was issued…then we’d continue on to the next file.”
Buyers were trying to find savings by negotiating price cuts with suppliers. But they weren’t noticing how post-purchase events (such as revised quantities, changing specifications, quality issues or delayed deliveries) were affecting the budget.
“Now it’s more focused, where each vice-president is responsible for their budgets and the procurement team, working with each VP, can target some of our major spending categories.”
That’s how it started. The procurement department analyzed major spending areas to highlight the largest payback opportunities. A focus group was assigned for each category.
They assessed the specifications for each good and service, sometimes opting to substitute it in favour of better quality, price, or more advanced technology. A thorough request for information was issued to potential suppliers, and the results were used to narrow down the choices of suppliers who would receive official requests for proposals. Once the bids were in, it got tricky.
For years, buyers at Air Transat had been dealing with the same suppliers, and were on a friendly basis with them. Those emotional obligations made it tough to get a clear picture of who was really the best supplier for each category.
“So we built a matrix, just to take the human element out of the analysis,” Cloutier says. The matrix gave Air Transat an objective, bias-free way of choosing suppliers based on cost, quality, and other critical factors.
Negotiation strategies were developed and volumes were consolidated across the company. The team also worked with suppliers on their cost models. Winning suppliers were selected, and a system was put in place to analyze the agreements on an on-going basis.
Top-level support
The key to success in the endeavor was upper management support. Fortunately, Air Transat’s president and CEO, Allen Graham, is a champion of procurement.
“The procurement branch sees the numbers every single day,” Graham says. “It’s probably the group that is most sensitized to costs and making sure they deliver what they promise on time, at the costs they’d committed to deliver it.”
When Air Transat was forced to move from Mirabel Airport to Dorval earlier this year, the procurement department played a lead role. “It was a huge move, the largest move in the province of Quebec in the last 10 years, and the largest corporate move in 2004 in Canada,” says Graham.
“And I’d say 95 per cent of the responsibility was given to our procurement department. So to me, it was a natural alignment. Very clearly, the head of our move and the construction from the get-go was the head of our strategic procurement. We believed that’s where it belonged.”
Air Transat defines itself on four pillars—cost, safety, people and customer service. Each pillar has a committee, which Graham chairs on a monthly basis. “Because of the role that I’ve had purchasing or strategic sourcing play, they’ll also sit on each one of those committees…So they understand exactly where we’re going from the [start] and I really believe that’s a very important element that our sourcing group plays that maybe it doesn’t play in many other organizations.”
Air Transat, a wholly-owned subsidiary of Transat A.T., a vacation package provider, employs 2,000 people. “So it’s pretty easy to develop the levels of authority,” Graham says. “And to make sure spending is totally under control in the company at all times...It’s very centralized and I work extremely closely with the purchasing division.”
Long-term deals
Now that Air Transat is assured it’s getting the best quality for the right price, the procurement team is looking to build on supplier relationships, says Gordon Greene, vice-president of strategic procurement.
“By signing long-term contracts and entering partnerships, we can then work together as two organizations to see where we can reduce costs. We’re also making sure we have rewards and recognition and penalties in each one of those contracts. So we have service level agreements to ensure we’re getting what we pay for.”
Air Transat buys services such as crew pick-up, hotel rooms and cabin cleaning. If the service isn’t up to par, the money comes off the bill, adds Graham. If performance is good, suppliers are offered long-term deals.
The airline has definitely reached cruising altitude with the strategic sourcing program. Asked about the main reason for its success, Graham emphasizes the importance of commitment at the top of the company.
“It’s the only way you’re going to drive it straight through the company, especially if it’s a brand new initiative and you’re serious about it. To me, it’s got to be executive sponsored and then everybody commits themselves to it,” he says.
“You’ve got to have a strong team as well because there’s push-back from the other divisions, especially if you’re not centralized, and then you want to centralize. Believe me, there’s big-time push-back because people are losing their authority or perceived level of authority.”
Clearly, there’s a lot to be gained from a well-controlled strategic sourcing program. As Air Transat demonstrates, a top-down approach and a well-skilled procurement team gets the project off the ground.
Sidebar
Step-by-step strategic sourcing
• Conduct a thorough analysis of the organization’s major spending categories, in order to highlight the highest payback opportunities.
• Concentrate on measurable categories only.
• Train your procurement staff or recruit highly-skilled individuals. Personnel should have a business background, be experienced and trained in procurement, understand the company’s mission and be aware of the industry’s best practices.
• Name a project manager.
• Create a focus group for each category.
• Review internal policy and procedures for the categories. Re-engineer where required.
• Communicate the progress and results to senior management on a regular basis.
• Re-assess the specs of the goods or services. Opportunities will often arise to substitute current goods.
• Send a request for information (RFI) to potential suppliers.
• Send an official request for proposals to targeted suppliers. At this stage, the list of suppliers should include only those with a solid background and references.
• Assess and analyze the bidders using a productive and clear matrix, which will eliminate the effects of favoritism and friendly relationships with suppliers.
• Using the matrix results, select two or three suppliers to begin discussions with.
• Develop a negotiation strategy.
• Select the supplier and finalize a long-term agreement.
• Continue to follow-up and report on the agreements, even after the contract is signed.
—Jean Cloutier, director of strategic procurement,
Air Transat
Lisa Wichmann, editor of Purchasing b2b magazine, may be reached at lisa.wichmann@pb2b.rogers.com
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