Managing Indirect Spend: An In-Depth Review, Part II.2

Our last post continued 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. Specifically, it discussed the chapter on Market Intelligence, which is critical to the success of any sourcing initiative and one of the most important tools in any sourcing professional’s toolkit. In this post, we review the other non-software tools at a sourcing professional’s disposal that were discussed in Bill and Joe’s tome on Managing Indirect Spend.

The major tools at a sourcing professional’s disposal when conducting market research can generally be classified into the following categories:

  • Traditional Industry Publications
    One of the first stops should be one or more traditional industry publications that publish in-depth case studies that include best practices, savings achieved, and new processes or technologies being employed by suppliers and your competition.
  • Indexes
    Indexes such as the CPI (Consumer Price Index), the ISM Manufacturing Report, the ISM Non-Manufacutring Report, and speciality indexes such as the Pulp and Paper Weekly and American Metal Markets can be extremely valuable. Furthermore, for just about any commodity that can be listed, somewhere in the world is an index tracking it. For example, Mintec has over 15,000 indices in its database.
  • Blogs
    Practitioner, Commodity Specific, and General Supply Management blogs can all be helpful. Of course, we agree with Bill and Joe when they indicate that you should start your search in the latter category with SM and SI.
  • Import Records
    This is a great source of competitive intelligence. You can find out who your competitors are using, what types of products they are importing, and in what volumes. Sites like Panjiva, Import Genius, the Datamyne, and PIERS are great places to start for easy access.
  • Search Engines
    It is surprising just how much information is available through Google, especially if one takes the time to learn advanced search capabilities, like restricting to a domain or a set of document types. There are often a considerable number of presentations in PDF and PPT format on the web which already contain the data you need free for the taking. One just has to find them.
  • Social Networks
    It’s amazing the information that some people will let slip on a social network or how frank they will be in a one to one discussion in a group or forum. Don’t forget to use these tools as well – but be careful what you post – it may be archived for eternity.
  • Research Reports
    While most research reports are sponsored and skewed towards the sponsors, the generic market data as well as the capabilities they describe are always useful, and it’s especially useful to see which vendors didn’t make the tragic quadrant or grave analysis. Sometimes they are just as good for your organization’s needs.
  • Group Purchasing Organizations
    GPOs often have oodles of benchmark data. Your organization might need to join, and use them for some non-critical spend, but a judicious use of their master contracts where other members have more volumes can often result in better rates for the organization with very little effort.
  • Electronic Sourcing Tools
    Some SaaS/Cloud providers will often bake-in aggregate market intelligence into the tools they offer. If the organization is already paying for these tools, use them to their full advantage!

Another tool at the organization’s disposal for a successful sourcing project is a spcialized consultancy or Procurement Services Provider (PSP). A PSP with the tools, consulting experience, and skills in the right categories can jump-start an organization’s indirect sourcing efforts and get significant returns months, if not years, earlier. The key is to find the right one that is incentivized to do the job. As such, the organization should probably look for contingency providers that only get paid when hard dollar savings are realized. Providers that get paid based on man-hour effort often have no incentive to get the organizatio the best deal possible as they are paid regardless and providers that get paid based on estimated savings have no incentive to make sure the savings are actually realized. And while contingency providers that get paid on hard dollar savings may ask for a (significantly) higher percentage, it’s better to pay 30% of realized savings and realize 80% of the estimated savings than to pay 15% and only realize 40% of the estimated savings. In the first case, the organization still nets 56% of the savings in its pockets while, in the second case, it only nets 34% of the savings.

However, be sure to follow the best practices outlined by the authors if engaging a (contingency) PSP, or your organization might not get what it bargained for. Specifically, don’t engage an organization that

  • Baits and Switches
    Insist that if the organization provides a resume, that resource actually works on the project.
  • Overstretches
    Make sure the organization has the resources to complete the project – manpower and financial stability.
  • Asks for Double Payments
    If the consultancy gets a commission for (re)selling a certain product or service, they aren’t out to get you the best deal. Period.
  • Asks for Up-Front Payments on Soft-Dollar Savings Claim
    It’s not a savings until the goods are received, invoiced, and paid at the negotiated price without any extra financial gotchas tagged on.
  • Bakes in Hidden Additional Costs
    Read the Fine Print. If you are responsible for travel, software, hardware, and miscellaneous expense costs, your organization could pay more than it saves.
  • Makes Ridiculous Savings Claims
    If a PSP comes in and promises 30% off the board in a category where the base market index has gone up 20% over the last year, that’s probably not a valid claim (unless your organization has the worst sourcing team imaginable).
  • Lacks Analytical or Technical Skills
    Long-Gone are the days when hardball negotiations or reverse auctions were enough. Creativity and deep analysis are often key to uncovering new savings opportunities.
  • Doesn’t Include Audits in their Proposals
    How else will you insure you get the promised savings? Seriously – if the PSP forgets the audit, you forget them.

Finally, it’s important to note that if the organization uses an electronic sourcing tool, it’s doubly important to remember what not to do or the tool will blow up the event faster than you can read this post. Tools don’t replace the necessary human contact and it is vital that the team does not neglect to:

  • insure the right tool has been selected for the event
  • insure the right suppliers are being invited
  • personally invite suppliers
  • follow up on the RFx/Auctin invitation
  • insure the right specifications are included
  • insure the right training is provided to supplier representatives

There are a lot of tools at a Supply Management organization’s disposal for conducting market intelligence and managing indirect spend, but they have to be used wisely.

At this point SI is going to take a short break, but next month it will continue with Part III of it’s review of Managing Indirect Spend and discuss some examples from the field.