Illinois Tool Works Consolidates 7,500-Unit Fleet Through Strategic Sourcing
Sometimes, a company will experience organic growth, and its fleet will grow accordingly. Other times, companies merge, or acquire others, and management must determine how best to combine their fleets.
It isn’t often, however, that a company will make literally dozens of acquisitions, in a relatively short period of time. Then the task of merging fleets ranging from a small handful to hundreds, a smorgasbord of different suppliers, and the same number of fleet policies (or none at all) can look daunting, to say the least.
Not to Gary Anton, vice president of strategic sourcing /IT for Illinois Tool Works (ITW) of Glenview, Ill. ITW is a $12 billion, diversified manufacturer with 650 decentralized business units operating in 45 countries around the world. Anton joined ITW in 1978 and has held the position of director, audit and due diligence, before being named to his current position in 2001.
The company grew dramatically with a series of acquisitions, large and small, to the point where the fleet numbered 7,500 worldwide. “We found ourselves with thousands of vehicles,” he recalls. “Nearly 4,000 in North America, and another 3,500 globally.” The domestic fleet consists of some 1,100 cars, 1,805 vans, and 471 class 1-2 trucks, 378 class 5-6 trucks, 57 SUVs, and 163 pieces of other equipment (trailers, etc.). In addition, there weren’t just a handful of fleet vendors, there were dozens. “Big lessors, small lessors, local dealerships, local shops, management programs, we had far too many vendors to deal with,” said Anton. Although not all the business units’ vehicle requirements were the same, Anton also saw a need for some level of broad, corporate fleet policy/procedure.
Getting Management On Board
In some ways, ITW’s management philosophy provided a challenge to the concept of centralization. “One of our company’s major strengths is the entrepreneurial spirit that is encouraged at the business unit level,” explained Anton. “Responsibility, as well as authority, is pushed out to the field where our customers are.”
Although the benefits of leveraging the company’s fleet volume were obvious, at least in theory, there was concern that if the process became too onerous, that entrepreneurial spirit might be compromised.
With this in mind, in 2001 Anton led the effort to examine the possibility of centralizing fleet functions where both the company and its business units would best benefit, without stifling the creativity and agility that was the hallmark of their success.
“We ultimately determined that the best route to success would be the establishment of a strategic sourcing function at the corporate level,” Anton said. “In essence, we would ‘package’ our fleet volume, and solicit pricing and programs from fleet vendors based upon all 4,000 units.” That kind of volume pricing would provide even the smallest division with pricing that they could never command on their own in the marketplace.
They also surveyed all company divisions, asking each how the fleet was handled, and what kind of improvements would be valuable. Anton ultimately presented his proposal to the CEO, who approved moving forward with the plan.
“We discussed the concerns we all had about being too heavy handed,” Anton said, “and decided that it would be best not to mandate the programs and pricing we came up with.” It was clear, however, that the case for participating in the programs negotiated by the strategic sourcing group would be compelling enough that most, if not all, of the divisions would participate.
Fleet Expertise Required
Thus, Anton now had senior management on board and he set out to get the job done. However, there was one problem he hadn’t anticipated. “I was looking at things, so to speak, at 30,000 feet, taking somewhat of a ‘macro’ view of what was needed and how we’d meet those needs,” he said. Once the go-ahead was given, he was at ground level, and the requirements were far more specific.
“I was, to an extent, surprised at the detail and extent of the information I needed to really do this thing right,” he recalled. “Add to that my other responsibilities, and it quickly became clear that I would not be able to handle this thing alone.” He would need, he realized, some experienced, qualified fleet management expertise to take the strategic plan and develop the tactics to make it work.
Enter, in 2002, Keith Scolan. Scolan brought with him 14 years experience in the fleet industry, including stints with fleet lessors Sutton Leasing and Donlen. “Keith brought the kind of detailed experience and understanding of leasing and fleet management that I didn’t have,” Anton said. “And he has been able to take the broad outline and flesh it out into a working program.”
The consolidation of ITW’s fleet was part of a broader strategic sourcing initiative, begun in 2001, whose goal was to coordinate and leverage the purchase of indirect commodities with a select group of preferred suppliers. The initial phase of the project chose office supplies, fleet management, telecom, travel, packaging, and maintenance/repair/operating supplies (MRO).
The Process Begins
Anton determined that the obvious place to begin implementation was with the vehicle manufacturers and fleet lessors. “Clearly the most obvious source of savings would be in our procurement; that was the low- hanging fruit,” he explained. “We set out to determine what our spend was with each manufacturer, with the ideal of leveraging that buy into strong, direct incentives.”
Anton estimates that about 20-25 percent of the fleet is owned; 75-80 percent is leased. “Again, we leave this decision to the business units themselves, since the incentives we negotiated with the manufacturers would be available in either case,” he says.
An RFP for providing leasing and other fleet management and administrative programs was sent to all major fleet management companies. “After reviewing the responses, we determined that Donlen would be our choice,” Anton recalled. “Not only did they give us the strongest overall response, but Keith was intimately familiar with how they did business.” Donlen, also based in the Chicago area, already had a number of ITW vehicles and had done business with them for years.
In addition to the leasing program, Anton said, ITW has chosen other fleet programs to make available to its divisions. “We use the Donlen maintenance management program, which provides our drivers with coupon books for regularly scheduled preventive maintenance and certified, experienced mechanics on call in the event additional work is needed.”
Although they anticipated some level of resistance in the field to the maintenance program, Anton said the response has been positive. They also offer Donlen’s fuel management program, providing a universal fuel card to drivers, extensive data capture, and license/title/tax administration.
“The license/title/tax administrative program is particularly valuable,” said Anton. “Taking care of registration renewals, title transfers, and such isn’t rocket science, but can be a huge administrative burden.” When asked if collision management or subrogation programs were also included, Anton indicated that although they hadn’t yet used these services, they would be looking closely at the possibility in 2005.
All North American business units are now on the Donlen programs, Anton said. “We’ve been quite happy with the overall results. They have provided the flexibility we need for the kind of strategic sourcing program we’ve put in place.”
Another benefit of the strategic sourcing initiative for fleet management has been the availability of consolidated fleet expense data. “Warehousing a fairly large database of expense data in a single place is an enormous benefit of the program,” Anton said. “ The reporting tools are excellent and enable us to manage by exception.”
Fleet Guidelines, Not Policy
Logically, the next step would be developing and implementing a broad-based, corporate fleet policy and procedure document. That wasn’t the case, however, in a company where the divisions maintain a high level of autonomy and creativity. “We did consider what kind of policy document we might create,” said Anton. “We had to keep in mind that ‘entrepreneurial spirit’ had to be maintained.”
Rather than a mandatory policy, Anton and Scolan developed non-mandated guidelines that the divisions are free to adopt, should they choose. “In reality, the business units like to have a corporate entity making key decisions,” Scolan said, “providing guidelines as to how best to run the fleet. It enables them to focus more on their business.” The guidelines incorporate best practices into a single, overall document.
The benefits of the initiative have been substantial and ongoing. “We can document direct, hard dollar savings of some $3 million per year,” Anton revealed. “And we see no reason why that should not be ongoing.” The bulk of the savings consist of the newly negotiated direct incentives from the vehicle manufacturers, made possible by the overall volume price protection, which shields ITW from the occasional price increases that occur during a model-year, and far better control of maintenance and repair expense, arising from the use of the Donlen maintenance management program and reporting tools.
The strategic sourcing initiative, which extends well beyond fleet management, has been a success everywhere it’s been implemented, according to Anton. “The Donlen program has provided us with the tools without which simple centralization would not work,” he continued. “Benchmarking, annual account reviews, and other formal processes are now in place which will enable us to continue to monitor our fleet operation quickly and effectively.”
With the domestic program in place and functioning well, ITW entered into an agreement with Donlen for business units in Canada in the summer of 2003, and, most recently, with LeasePlan for its European fleet operation.
“There are, of course, limits to what a domestic corporate fleet function can do in the global arena,” Anton said. “We’re no more looking to directly ‘manage’ our global fleet than we are our domestic one.” The Canadian and European agreements are very much in keeping with the spirit of the strategic sourcing project, by leveraging the company’s volume into a single supplier.
In-House Fleet Function
As with all successful managers, Anton is clear in stating that one of the keys to success has been hiring the kind of expertise that he did not possess. “The overall concept of leveraging the overall volume was clear,” he says, “but the nuts and bolts of how exactly to make it happen was something I didn’t have.”
Adding headcount, in any company, can be difficult, he adds, but bringing Scolan on board was easy. “It’s a matter of simple arithmetic,” he says. “There is a cost to hiring staff, which must be balanced against the payback that staff will provide.”
In this case, the payback was immense: 10 to 15 times the cost of establishing the in-house function. Scolan is hands-on in bringing the strategic sourcing plan to the field, and, once implemented, providing ongoing training and help so that the business units can take full advantage. “Memos and phone calls are fine, but they are no substitute for hands-on, face-to-face contact,” said Anton. “Keith gives us that, and the payoff has been handsome.”
All in all, Anton has provided ITW with what a seasoned executive should: taking an idea, championing it, developing it into a practical application, and making sure the resources and staff are in place to make it work.