Successful chain reaction

As outlined earlier in this report, purchasing costs are an integral part of ST's strategy to reduce costs, one of the key initiatives of 2005. We asked Otto Kosgalwies, Corporate Vice President, Infrastructure and Services, which combines Purchasing, IT, and Logistics at a worldwide level, for a progress report on this specific Execution Excellence campaign, particularly from the perspective of corporate responsibility. Of course, while we were there, we also asked him about other responsibility issues affecting the supply chain.

"To start with a brief overview, the campaign to reduce purchasing costs in 2005 was a great success and achieved its financial objectives. I will describe it in more detail shortly. It may appear that we have been concentrating on our financial imperatives in 2005, before returning in 2006 to our social obligations, which, as Carlo Bozotti has said, are never far from the surface of our company culture. However, I believe our reorganizational work of 2005 has also gone a long way toward enhancing the way we manage our social and environmental impact, and in this short article I hope to show you how. At the same time, our work will build on efforts made by the electronics industry as a whole to integrate wider social and environmental considerations.

The 2005 procurement costs campaign

Over the years, ST has grown organically, and through mergers and acquisitions, but until now we had never reorganized or consolidated our purchasing activity. Our new Global Sourcing and Purchasing organization does this. By sourcing we mean the strategic approach, such as choice of suppliers, whereas purchasing involves the local day-to-day placing and handling of orders, and is now organized into four geographic regions. So, without being centralized, our sourcing and purchasing activity has gone from being fragmented to being directly connected to the global organization. There is a third, and very important pillar: staff functions, which includes supplier quality, control and compliance, purchasing administration, and supplier innovation.

Our short-term objective for 2005 was to reduce costs. But rather than simply cutting purchasing costs, we were aiming to increase our overall efficiency. We also wanted to ensure that given our size and global presence, we were known by the supplier market and that our sourcing strategy was clear.

How did we do all this?

Firstly we introduced second sourcing where we didn't yet have it, to avoid over-dependence on single suppliers. Then we combined more volumes at global and regional levels, increasing the purchasing volume for a smaller overall number of service and material suppliers. While aggregating groups of suppliers, we also assigned special responsibilities to the largest among them. The third area was to analyze our suppliers to focus on those with greater efficiency (quality–price ratio) with whom it would be beneficial to work long term.

Working closely with suppliers

One of the main things we needed to consider was communicating with our major suppliers to ensure they felt comfortable with both the short-term needs of our cost-reduction strategy and with the medium- and long-term benefits of working with us. We were very pleased with their proactive response, and with each we made an individual business decision. This also included working with smaller local suppliers to explore how they could grow by working with us.

Our financial objective for cost saving through procurement was US$100m a quarter by Q4 2005, and it was clear by mid-year that we were on target to achieve this. So this campaign has had a very positive impact on ST's social performance, in helping avoid the need to cut jobs. At the same time, we did not need to make critical changes to our supplier base. In only a few cases did we introduce new suppliers, and we focused for the most part on reinforcing the strong partnerships we have developed over the years, which we consider vital for good business.

Taking the work from 2005 forward into 2006

Our reorganization has allowed us to strengthen the foundations of our responsible approach – in essence by simplifying and reinforcing our processes and lines of communication, both internal and external, so everyone can be absolutely clear about our expectations, and by having clear areas of focus and alignment for our departments.

For example, one of our priorities in 2005 was the strategic categorization of suppliers. Our new supplier quality department has grouped suppliers into categories, such as 'high-risk' or 'strategic.' Suppliers in each group must perform according to a specific dashboard of indicators. In 2006, we will review suppliers' performance regularly against the new dashboard and we will continue to see how we can integrate Electronics Industry Code of Conduct tools into our approach. Also, in 2005, we revised the company Quality Manual to integrate new requirements, for example that all key suppliers must be 100% in line with industry standards, from finance and quality to environment and social. In 2006, we will need to focus on how to communicate this to our suppliers, and monitor their performance accordingly, beyond what we already do today.

Sometimes suppliers propose to reduce costs by transferring facilities to another country, and ask us to qualify a plant, say, in China (this is part of the evolution of our industry). In these cases, we always maintain the same high standards, with no compromise on quality, appropriateness of materials, or environmental standards.

So we do focus strongly on maintaining and reinforcing ethical standards in a cost-cutting climate. And for me, this is another link between the efficiency derived from the reorganization and social benefits. Our Control and Compliance department was created to show the importance of complying with business ethics. The spirit we have followed is to make processes simpler. If the rules are many and complex, you risk infringing them without even realizing it. The message to our buyers on this subject is never to compromise on business integrity.

Last year, all of our purchasing employees signed our company Conflict of Interests Policy and were required to declare any personal links they may have with suppliers. This visibility helps ensure we take a transparent decision on how our business is awarded. Suppliers feel there is an open-book policy about our expectations and our cost structure. Positive compliance such as this is one way of meeting the principles of our Business Conduct and Ethics Policy. Here again, the globalization of our activity is helping spread the right messages, and our suppliers appreciate the fact that we now have this process in place.

I would like to highlight, in addition, two important areas where we have made good progress in 2005 and will continue to work in 2006: supporting our suppliers with the elimination of lead from our products to ensure we comply with the RoHS directive; and tackling the root causes of delayed payment to suppliers. For the latter, most causes were purely administrative. Of the 10% of purchases for which payment was late, we resolved two-thirds of cases in 2005 and we are working on our systems to tackle root causes.

Thanks for a great team effort

As managers, we have traveled to all of our countries to support the reorganization program and this has given us the opportunity to communicate our strategy. We have also spread our cultural message that we support our suppliers in helping them reach the relevant industry standards, from quality to environment and health and safety, but that we will be tough with those that do not act with integrity.

We have also focused on building strong links with our people so they understand the importance of their work and its positive financial and social impact on the company. To draw my own conclusion, employees feel proud about the contribution they make, even though it is hard work. I truly appreciate this tremendous effort and success in 'Execution Excellence', which has already been mentioned by the CEO and COO."

Otto Kosgalwies
Corporate Vice President, Infrastructure and Services