Managing Indirect Spend: An In-Depth Review, Part II.1

In Part I we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last two posts, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. Part I reviewed the process. Here, in Part II, we will review the tools.

The first “tool” that we are going to review is Market Intelligence. Market Intelligence can be defined as a branch of market research, involving collation and analysis of available and relevant information and data on specific market. The information that is gathered varies based on the type of product or service that your organization is purchasing and how critical that product or service is to your overall supply chain and sales of your end product. However, regardless of the product or service being researched, there are critical types of market intelligence that will always need to be collected, including intelligence on global market conditions, benchmarking data, and market pressures. For starters, a buyer needs to understand the forecasting that suppliers use to prepare for competing in a global market. For example, even though a product might be purchased for domestic usage from a domestic supplier, that supplier may be making plans based on forecasting for markets outside of your home country, because if demand for the products grows significantly in foreign markets, or if currency exchange rates shift so that it is more favourable for that supplier to sell internationally rather than domestically, it may cause a shortage off domestic supply, or higher prices.

Bill and Joe are right when they state that world class organizations spend a lot of time constantly (re)evaluating their supplier chains to identify risks and non-competitive pricing. This is how they get ahead. However, it takes a lot of time to collect intelligence, and even more time to separate bad intelligence from good. Once the global market conditions are understood, the next thing the buyers will have to sift through is benchmarking data. This can be difficult in a new, or closed, marketplace if suppliers are overprotective of their data. The best way to get this data is often by working with sales and marketing. It may sound crazy that sales and marketing should be the first stop, but when one considers that all they do is benchmark their competition every day to help with daily sales efforts, they are the perfect guides to get the market intelligence team on their way.

Market pressures are also important. Not only do they impact your organization, but they impact your suppliers’ organizations as well — and these market pressures are critical. If the supplier is cash strapped, in danger of a labor shortage, or located smack-dab in the middle of an uprising-in-the-making, that supplier could be a high risk. And since suppliers are typically an organization’s biggest supply management risk, this is important intel. (Other big risks are impending government regulations, cultural shifts, and natural disasters.)

Of course, the big question on everyone’s mind is how do you succeed with such a hard task? Dedication is key, but so is insuring that each of the components of success are there, including:

  • Right Team
    You need a technical, analytical, and communicative cross-functional team working collaboratively.
  • Sufficient Time
    Make sure everyone on the team has enough time dedicated to market research. It can’t be just another task on an already full plate.
  • Right Metrics
    The right hard metrics, that measure tangible things, and the right soft metrics, that analyze intangibles that can effect the end product or service, need to be defined. Hard metrics may include hard-dollar savings projections, payment term improvements, lead-time improvements, and measurable quality improvements. Soft metrics may include exclusive distribution rights, material changes that will change customer perceptions, better relationships, or process improvements.
  • Right Suppliers
    Researching suppliers that cannot meet organizational needs is a waste of time.
  • Component Costs
    What is driving the costs? Raw materials? Labor? Currency fluctuations? Look for, and track, appropriate indices.
  • Adjacent Technologies
    If a product is too new or there is a relative lack of data, identify adjacent technologies that can provide insights into costs and supplier performance. For example, instead of trying to find iPad component pricing, you might try to find generic tablet component pricing.
  • Right Questions
    Don’t look for a specific part or product, look for all parts or products that could potentially meet organizational needs by describing what it should do instead of naming it.
  • Know When To Stop!
    As with any investment of time, you eventually reach a point of diminishing returns. While you should have enough data to intelligently raise counterarguments with the supplier about price increases and, at a minimum, have a firm understanding of the supplier’s cost models, knowing what drives the costs of a sub-component that is only 5% of the cost might be going to far. Saving 3% on 5% only saves the organization 0.15% in the long run, and will generally not be worth the investment of time to realize that savings.

It’s great advice. Stick around for Part II.2 where we will dive into tools for gathering data and expediting the sourcing process and complete our review of Part II of Managing Indirect Spend.