Reference no: EM133674852

Good practice example: United Applies Clean Sheets to All Contract Negotiations

When Grace Puma arrived at United Airlines in 2009, she brought with her more than 20 years of experience leading global strategic sourcing organizations for companies such as Kraft Foods, Motorola, and Gillette. Because a major airline like United requires a variety of sourced products and services spanning many different potential contractual forms, she saw an opportunity to implement a standard sourcing process through category management teams focused on driving the lowest total cost of ownership (TCO) in supplier relationships. This occurred through improved alignment with strategic suppliers through collaborative development of relationships. "We set the expectation that our supplie operate in a transparent and fact-based manner," explains Puma. "Specifically, we discuss opportunities to enhance service performance and drive out cost via supply chain inefficiencies and engage with key partners on driving innovative solutions to increase revenue and customer satisfaction."

When it comes to offsetting costs with outside suppliers, one of the department's most valuable tools is its Clean Sheet model, which is a financial model to determine what a particular item "should cost." The team identifies the cost drivers in detail and uses industry research on those cost drivers to develop an estimate of what the item should cost, building in over- head and profit levels as well. This information is solely for internal use at United and is not shared with suppliers but is used to develop a common language template using the cost drivers derived from the Clean Sheet. Once supplier bids are received, the strategic sourcing team has detailed negotiations on each component of the pricing and focuses on areas where large variances exist between the Clean Sheet and the supplier bid.

"The Clean Sheet allows us to have a very different kind of conversation with our suppliers about what United is willing to pay," notes Puma. It gives us better knowledge around the subcomponents of the cost, because we can discuss precisely why the supplier is much more expensive in a specific subcategory of the cost than what we have found in another bid. It could be that their accounting department has certain procedures, or we might be driving specific specifications that are more costly to them. These are fact-based discussions-much more intellectual than just the end-bid price.

In addition, collaborative workshops with suppliers have opened up communication and trust between suppliers and United. The information gleaned from these sessions help the strategic sourcing team as it develops the Clean Sheets. These individual workshops occur prior to commencement of a competitive bid, and two or three known suppliers are invited. Suppliers are asked to provide specific "homework" two days prior to the meeting so that both teams are prepared for the discussion, which ranges from current market dynamics and trends to supplier cost structures. Typically, supplier participants are limited to technical, operational and financial/ contracting representatives, so that they do not turn into sales pitches. "Our approach to sourcing is really around supplier development, helping them to understand that our success is their success, and that they have an active accountability to ensure that our customers have a good experience on board our planes." says Puma.

Questions

1. How do you think suppliers feel about the use of "Clean Sheets" in nesgotiations?

2. Do you think that Clean Sheets will always drive the supplier's margins lower? Why or why not? Under what conditions might margins actually increase?

3. What is the fundamental element emphasized by Grace Puma as critical to using a TCO approach to contract negotiations? Is United applying this element?