Some would consider Todd Smith a pioneer of the supply chain management industry, a concept that originated back in the 1990s. He studied at Stanford University with industry leaders Corey Billington and Professor Hau Lee, who launched the field with their studies of logistics for HP’s Deskjet printer. But as the vice president of supply chain at American Water, Smith faces a unique challenge: implement the best practices that have evolved since the 1990s at a company that has been in business since 1886.
His task is made more daunting by the fact that American Water serves approximately fifteen million people in forty-seven states, as well as parts of Canada. That means reenergizing a department and unifying a system that handles procurement and purchasing decisions for an incredibly diverse group of markets.
When Smith assumed his role, the supply chain was functioning as a traditional purchasing group that focused on bidding, contracting, and reacting to requests from the business. “We’ve been transitioning to a more strategic approach of holistically understanding supply market dynamics, cost drivers, competitive issues, and being responsible for developing solutions that go beyond the specific that’s being requested and benefit the entire business,” Smith explains.
To accomplish this—and to enable the supply chain group to become more engaged with ongoing operations—Smith launched an initiative to change the company’s approach to water meters, which had been viewed as commodities. Instead of making purchasing decisions based on the lowest cost, which Smith characterizes as “myopic,” he is emphasizing quality, accuracy, and reliability. He points out that a more accurate meter not only allows the company to fully capture revenue, but also increases customer satisfaction.
Similarly, higher reliability reduces maintenance expenses while also improving reliability. “We can put a value on each performance dimension of a meter. So even though one might cost more initially, it pays for itself with significant savings on lost billing and repairs over its life,” Smith says.
Another benefit has been shifting to a broader set of meters aligned to specific applications such as residential fire sprinklers, irrigation systems, and apartment buildings. (fig. B) “Historically we had a one size fits all approach to residential metering, but by using a total cost of ownership approach we found that certain customers were better served with more expensive, technically advanced models,” he says.
Safety gear also receives special attention. Decisions are often made in order to obtain the product that individuals prefer because if it doesn’t fit properly they won’t wear it. “The cost of not wearing safety gear is much higher than the cost of the product if they get hurt. We have to determine the value of standardizing, and in some situations, there’s more value in providing variety,” he admits.
In addition to water meters, Smith has made progress realizing savings in American Water’s vehicle fleet by specifying not only particular brands and models, but also features and options. “We don’t want a Cadillac when a Toyota will do the job,” he says.
The group’s biggest challenge is that it operates without a formal mandate within the company. To address this, Smith has adopted a philosophy of needing to demonstrate value so the business units realize they should seek out his team’s advice. “We have to be proactive and increase our engagement by showing the payoff that comes from following our recommendations and expertise,” Smith says. “If we help bolster the business units’ P&L [profit and loss statement] and provide solutions for other issues they face, then we make big advances toward becoming integrated early and often into their decision-making processes.”
The supply chain group now spends approximately 90 percent of its time on procurement activities along with a much smaller portion devoted to inventory management. In addition, Smith would ultimately like to address the fact that American Water has no internal distribution network and views the current procurement responsibilities as a strategic way of working toward developing and implementing one.
In the meantime, he is pleased with the direction the department is moving. When he began this transformation in 2012, it was delivering savings at approximately 1 percent of the company’s $1.5 billion annual sourceable spend. It is now well on the way to Smith’s goal of 3 percent. Much of this is the result of efforts to educate the business units on how much value the supply chain group can deliver.
Additionally, Smith is implementing a risk management framework covering nine different categories, including vendor financials, quality, safety, environmental impact, ethics, and data security. “Risk management wasn’t historically thought of as part of supply chain, but we’re trying to raise awareness of the risks,” he says. “In our industry that’s essential because any critical materials that touch the water or get buried in the ground for one hundred years—you want to be as certain as possible they are good.”