Dean Foods milks strategic sourcing for all its value

Dean Foods milks strategic sourcing for all its value

Food giant makes sure its existing plants and new acquisitions play well together in a company-wide procurement process.

When Brad Holcomb looks ahead at the economic environment forecast this year, he sees "unprecedented territory." But that doesn't mean the senior vice president and CPO at Dean Foods' Dairy Group plans to deviate dramatically from business as usual. Instead, Holcomb sees a chance to further hone his organization's sourcing techniques and make an even bigger bottom line difference at the $10 billion Dallas-based company.

Dean Foods' various brands are literally household names in many parts of the U.S. (think Land 'O Lakes) and its Dairy Group, which represents 90% of the company, is the largest processor and distributor of milk and other dairy products in the country. The company sells its dairy products through about 50 mostly local brands as well as national brands. It also distributes through regional supermarkets as well as large national companies such as Wal-Mart, Kroger and CVS.

All of this activity is supported by 110 production plants that span the nation and even include an operation in Hawaii. As Holcomb explains, "we are the only publicly traded company in the dairy market and we are five times larger than our next closest competitor and larger than the next five combined."

Holcomb's team is responsible for sourcing all of the ingredients and packaging supplies that are needed to run Dean's operations, as well as responsibility for maintenance, repair and operations (MRO) supplies, travel, temporary labor, and all those many other things that are required to run the Dairy Group. (The notable exception is milk sourcing, which is handled by a very specific commodities group.) In general, though, Holcomb says the dairy industry is fairly focused. "We all buy the same ingredients and we all need the same supplies, generally from the same or a similar supply base, plus or minus a little bit."

Holcomb, an engineer by training (he holds a bachelor's degree in engineering and a master's in both industrial engineering from Arizona State University and one in chemical engineering from University of Rochester), has been at Dean for just two years, following a lengthy career at Kodak and successful stints at companies such as Praxair, American Precision Industries, Waste Management, and most recently Royal Group Technologies—a Canadian maker of resin-based building materials.

Building up

Since arriving at Dean, Holcomb has roughly doubled the size of the procurement staff—some of whom had worked in other organizations—creating what he describes as a full featured program. "We are a lean organization but have some very experienced people and the key to what we do is our five-step sourcing process," says Holcomb.

The five steps to that sourcing process are:

• Research
• Develop strategy
• Source selection
• Implementation
• Operational excellence.

Holcomb says the first and most crucial sub step under Research is to develop a cross-functional team. "We start and end with that, making sure to involve all the right constituencies. We will involve the dairies, we will involve finance and the business units—and marketing and research and so on," he stresses.

In addition to the five step process, Holcomb says his organization is starting to use an e-sourcing tool from Ariba. In total, says Holcomb, "we have sourced about 90% of our total spend in the last two years and in the process we have saved a whole bunch of money." According to Holcomb, he has been able to unambiguously document about $30 million in savings, "as well as another $17 million that we report but can't prove definitively," making a total of $47 million in savings with an annual staff cost of only $4 million. "We are producing savings at a good ratio, north of 10:1 but our real goal is to create a competitive advantage for Dean," says Holcomb.

Best of the best

Still, he notes, the whole concept of competitive advantage has many facets. Price is just one of them. Holcomb says that means, "surrounding ourselves with the best suppliers in each category," negotiating win-win deals and making Dean's suppliers better. "We want to get their mindshare and get them to work preferentially for us—not only in terms of price but quality, service, support, and offering us innovation."

The result, says Holcomb, is that Dean has a "significant and measurable price competitive advantage established in the market relative to the competition—that's the summation of this organization and this process."

But procurement dynamics are always changing at Dean, since the company continues to grow by acquisition and bought four independent dairies in the last year alone. Holcomb says the process he has worked out is to work with the acquired company to assess its pricing on all the ingredients, packaging and indirects at a target company. "Then, we move them to our more favorable pricing schedule, usually with the same suppliers."

Those suppliers are a prime focus of everything Holcomb and his team do at Dean. It all starts with a strategic sourcing process. "The expression I use is picking our suppliers on purpose through a process," says Holcomb.

Holcomb's team is constantly looking through all the alternative suppliers and picking the ones that are best for Dean. "There are always companies emerging or getting in the door, which puts some pressure on incumbent suppliers to keep up their standards. You want to let competition work for you," he says.

And a continuing supply base rationalization means "more business for those suppliers—if they do well they will win more business since we almost never single source," he says.

For example, Dean has five suppliers for corrugated containers and four for fuel. Those companies that produce the best results will earn a greater share of Dean's business over time. Holcomb says he bases awards and supplier selection on a variation of total customer satisfaction process.

The five dimensions he focuses on are:

• Product and technology leadership
• Service and support leadership
• Quality
• Delivery and lead time performance
• Total cost performance.

"We need our suppliers to perform very well in all five dimensions—even if price is the equalizer we need them to perform in other areas, too," says Holcomb. "Show us what you have got. Become our R&D department. Become our service and support experts, not to mention quality, delivery, and price experts."

On the other hand, when suppliers don't measure up across these five dimensions, Holcomb says, "We give them a wake up call." If they demonstrate poor performance in quality they will get a requirement for a corrective action plan. If they are successful, everything's fine but if they aren't their days as a supplier are probably numbered.

Looking ahead

Holcomb says he plans to tackle the challenges of 2009 with many of the same techniques that have borne fruit so far. In addition, he says he will be watching market indexes and market-based commodities that are important to Dean such as diesel fuel. "We have more than 6,000 trucks in our fleet to deliver product directly from dairies to customers, so we use a lot of fuel," he says. So far, savings have been achieved primarily by cutting the number of fuel suppliers from 70 to four. But Holcomb plans to keep focused on ways to leverage those strategic relationships to save money.

Another area that Holcomb has focused on leveraging Dean's spend is plastic resins, which Dean uses to blow its own plastic bottles at many of its dairies. To gain more leverage in the resins spend, however, Dean partners with another company that is a very large resin purchaser and together the companies pool their buying power.

Sugar is another very large spend for Dean, including both beet and cane as well as corn sweeteners. "We have strong relations with that supply base that allow us to work with those suppliers and those commodities to make sure we have competitive pricing," says Holcomb. The bottom line is the relations with suppliers. "We feel we can demonstrate that we are treated preferentially and have that competitive advantage no matter what cycle we are in relative to any other dairy that is out there," he adds.

Furthermore, although he declined to be specific, Holcomb says Dean will sometimes take a fixed position for an extended period "when we think pricing is right."

Looking ahead, Holcomb admits he probably won't be able to achieve the same percentage improvement every year but as long as he is able to maintain a 10% price advantage, "We won't try to chase price and squeeze the last drop of juice out of the lemon, that is not in our best interest as long as we can determine that we are competitively advantaged," he says.