Keeping the “ROAR” in CSX Purchasing

Fran Chinnici, a Penn State University engineering graduate, knows all about the Nittany Lion “roar” from his days in State College (a.k.a. Happy Valley). When Chinnici was named vice president of Purchasing & Materials at CSX Transportation just over six years ago, he felt that major changes were needed to get his sourcing team on a faster track. Since his appointment to the job, he has put the purchasing function on the “global” track to twenty-first century excellence.

CSX is one of four Class 1 Railroads in the United States. In 2009 the company had sales of over $9 billion and earnings of $2.87/share. With a barrel of crude oil fluctuating in the $70 to $125 range the past three years and fuel prices in the $2.50 to $3.00 a gallon range, railroads have become a favorite of many shippers. The U.S. railroads’ low cost-per-ton-mile allows them to compete very favorably with other transportation modes.

Supporting this favorable business growth trend and sustaining high levels of service, while controlling materials costs, posed major challenges for the CSX Purchasing and Materials Department. Meeting the challenge was compounded by a changing supply base. Chinnici states, “A reduction in the number of railroads and the subsequent consolidation of purchases resulted in a downsizing of our domestic supply base.” With the growth in shipments experienced by the U.S. Class 1 Railroads, the lack of domestic suppliers is a concern. This is especially true considering that Chinnici and his team are responsible for over $4 billion in purchases. This money is spent on over 100,000 items necessary to keep 21,000 route miles of track, about 100,000 freight cars, and over 4,300 locomotives moving freight. The geographic range is large, consisting of 23 eastern states and the District of Columbia, as well as two Canadian provinces. CSX serves thousands of localities and customers and connects to more than 70 ocean, river and lake ports. “Based on the demands of our operating environment, the shrinking supply base, and the need to continuously add value to the company from a supply perspective, it was a no-brainer that we had to develop a more global perspective,” says Chinnici.

His goal was to raise the skill levels of his organization to meet the global as well as other challenges required of a twenty-first century supply function. Toward that end, he made it a requirement for all current employees and new hires to further develop their skill sets and attain the status of Certified Purchasing Manager (C.P.M.). Leading by example, Chinnici attended C.P.M. training along with his staff members and successfully passed the necessary exams. He proudly displays his C.P.M. certificate in his office overlooking Jacksonville’s growing skyline. “Attending classes with my people was a way of visibly demonstrating my commitment to raising our level of professionalism,” he says, “and the C.P.M. is just a start.” After five years he is proud to say that over 95 percent of his supply management professionals are C.P.M. certified. The team is now raising the bar further with a goal to have 50 percent of these managers certified to the new CPSM standard. “As we move to an even more strategic focus, CSX must continue to raise the bar for its highly talented professionals. The CPSM provides a basis for this growth,” says Chinnici.

“The journey from a domestic to a global supply base is not always smooth and it requires both time and effort to make a significant impact,” Chinnici states. Without adding headcount, Chinnici reorganized his resources and formed a team focused on developing current suppliers and growing the supply base. He formed a Strategy and Supplier Development team and placed it under the leadership of staff member Rod Keefe, formerly a technical standards and quality officer with CSX. The mission of the new team is to identify commodities with sourcing sensitivities, and then develop new or existing suppliers to meet the needs of the company from a global perspective. An early success was the development of a new rail supplier from Eastern Europe. With this addition, CSX now sources its rail from two domestic rail mills, a Japanese mill, and a recently approved mill in the Czech Republic. On the locomotive side of the business, Chinnici had 28-year purchasing veteran Jim Fronckoski scouring the globe for wheels, brake shoes, and freight car parts. “Many of the commodities in the marketplace where we play are becoming global,” states Fronckoski. So, in another effort to enhance the skill set of his purchasing team, Chinnici had his key managers and staff attend a series of global sourcing workshops. “The customized workshops provided my team with a much deeper understanding of global sourcing issues and required relationships,” he states. To date, the department has several global sourcing initiatives in the pipeline. Some are pending approval from standards agencies like the American Association of Railroads (AAR), while others require physical, metallurgical or service testing to ensure their integrity.

“We won’t cut corners,” says Chinnici. To support that statement, the Penn State Metallurgical Engineering major huddled resources from around CSX to centralize and expand supplier quality and product performance efforts into his group. With the cooperation and support of Gary Bethel, vice president of Mechanical (freight cars and locomotives) and John West, vice president of Engineering (track and structures), the group was centralized in Purchasing, and the scope was expanded to include all critical materials for these key internal customers.

Complementing the global push is CSX’s extensive involvement in e-commerce. The railroads have a long history of doing business electronically, beginning with their pioneering efforts in using EDI with their customers. CSX continues the use of electronic tools to facilitate sourcing. According to Neil Verteeg, Director of Process Improvement, “98.6 percent of our purchasing expenditures are now transmitted electronically. Versteeg further states, “On an average month we run about 2,000 items a day over our Oracle system.” Another major e-commerce initiative is the railroad purchasing consortium group “RailMarketplace,” where the six major Class 1’s (4 U.S. and 2 Canadian railroads) meet to discuss potential purchases of applicable items. Chinnici, who currently chairs the organization says, “The consortium gives CSX and the other major railroads an opportunity to leverage volumes for some of their smaller indirect purchases to provide savings for the participants.”

Putting the right structure in place to achieve results in all these different, yet related areas is no easy task. “I felt my direct reporting staff was somewhat disjointed and hindered the ability to make rapid decisions,” states Chinnici. “I needed to streamline our organization and become able to identify and seize market opportunities quickly.” Chinnici’s vision is to have a lean, responsive supply management organization that anticipates and meets the needs of CSX. “I want to be like a Wal-Mart... by having a quality product available, at a convenient place and at the right cost, while working with both our suppliers and internal customers to provide a very high level of cooperation and customer service after the sale.”

Chinnici is pushing his procurement team to work at a much higher strategic level in the industry, providing even more value-added service to CSX. To that end the supply group is starting to become a player in areas often described as nontraditional, because these areas of spend were traditionally purchased by functional groups outside of purchasing. Becoming involved in these new service areas, such as technology, audit, legal, and advertising allows the CSX supply function to apply professional supply management and contracting practices to areas that were previously the domain of users in other functional areas. Chinnici sums it up by stating, “In today’s rapidly changing environment we need skilled, open-minded supply professionals who can deliver results to our organization regardless of economic conditions and in any area of spend.” Oscar Munoz, CSX executive vice president and chief financial officer, concurs. “I view our purchasing and supply area as a major contributor to the bottom line and critical to the service capabilities of our railroad company.” Accomplishing their mission requires a staff of dedicated professionals who can ensure availability of the locomotives, cars, track, and maintenance parts needed to keep CSX trains running at a very demanding operating capacity. Chinnici and Munoz both are optimistic that their sourcing group will continue to build on their string of recent successes. The ROAR is strong... at least at CSX Purchasing and Materials.

Source: L. Giunipero, Interview with Fran Chinnici and CSX supply management personnel, February 2008 and June 2010.

As the CSX story illustrates, the development of progressive purchasing approaches and strategies can help a company maintain or improve its competitive position. In reality, it is only recently that managers would even place the words “progressive” and “purchasing” in the same sentence. Not so long ago, the life of a purchasing professional was comfortable and predictable. When someone required something, a buyer sent a request to suppliers for competitive bids, awarded short-term contracts based on price, enjoyed a free lunch or ball game with salespeople, and figured out how to meet not-too-demanding performance measures. Although the buying position did not carry much prestige, it was a stable job.

This model worked relatively well until new competitors from around the world showed there was a better way to manage purchasing and the supply base. New and better methods helped these competitors achieve dramatic reductions in cost, exponential improvements in quality, and unheard-of reductions in the time it takes to develop new products. This new model featured closer relationships with important suppliers, performing due diligence on suppliers before awarding long-term contracts, conducting worldwide Internet searches for the best sources of supply, and inviting key suppliers to participate in product and process development. Furthermore, executive managers began to require purchasing professionals to achieve demanding performance improvements. What really changed the purchasers’ comfortable world, and ended the era of free lunches, was global competition. Borrowing a phrase from Thomas Friedman, the world is flat, and competition is now 24/7, anywhere and anytime.

As is illustrated in the CSX story, global sourcing is a requirement and no longer a luxury for most firms. This chapter introduces the reader to the changing world of purchasing and supply chain management. The world has dramatically changed during the first decade of the twenty-first century, and the rate of change will continue to accelerate going forward. The first section of this chapter describes the new competitive environment where we now operate an environment that affects every major industry. We next present the reasons why purchasing has taken on increased importance. Third, we clarify the confusing terminology that surrounds purchasing and supply chain management. The next sections present the activities that are part of supply chain management, discuss the four enablers of purchasing and supply chain excellence, and review the historic evolution of purchasing and supply chain management. The last section outlines the contents of this book.