Daily Archives: February 3, 2012

Managing Indirect Spend: An In-Depth Review, Part III

In our last post, which ended the review of Part II of Managing Indirect Spend, a new book by William (Bill) Dorn and Joe Payne of Source One that takes you on an excellent adventure through the world of indirect sourcing (that they have been living in for the past two decades, well before Strategic Sourcing and Supply Management became cool), we discussed the non-software tools at a sourcing professional’s disposal, Procurement Services Providers (PSPs), and the (common) mistakes that can kill a sourcing project. This wrapped up our discussion of the capabilities at a sourcing professional’s disposal. Today, we’re going to discuss Part III, Examples from the Field, and focus on some of the results that can be obtained when applying the best practices discussed in the section.

The examples focussed around the gains that can be achieved by collaborating with suppliers, leveraging supplier feedback, and analyzing data — which, as SI outlined in Spend Visibility: An Implementation Guide, we know to be significant even before the application of additional tools and techniques. We’ll start with supplier collaboration.

As Bill and Joe point out, collaborating with your suppliers can produce surprising and profitable results. In fact, collaborating with your entire supply chain (including your suppliers’ suppliers) can often produce sustainable results that equate to large cost savings opportunities. Plus, it encourages partnerships with your suppliers, which may lead to your company being the first in line for new product developments or other supplier benefits.

Consider these examples from the text:

  • specifying printer models and toner requirements, instead of brand name toner cartridges, generally leads to savings north of 50% when suppliers are asked to propose low-cost (non-OEM) solutions
  • the cost of a simple chemical compound was reduced 39% when the buyer worked with the supplier to jointly source expensive regulatory valves at a higher volume
  • the willingness to work with a new supplier that produced a required solvent at an insufficient level of purity (and guarantee them a reasonable amount of business under the right circumstances) if the supplier was willing to refine their manufacturing process to get to the required level of purity convinced the supplier to make the infrastructure investment and saved the customer a considerable amount of money now that a third, lower-cost supplier, had entered the market

In addition to collaborating with suppliers, you can use the information they provide to your advantage. By leveraging the information that your supply chain provides, you can actually achieve deeper discounts in the products or services you are buying, and improve the overall relationship and integration with each of your suppliers. This can lead to results like the following:

  • by working with suppliers to find out what was possible, the buyer was able to approach the incumbent and ask for a new type of telecommunications infrastructure that reduced organizational cost by 35%
  • by working with the supplier to find out when the supplier wanted to make a sale, and the supplier representative, who was quite eager to make a bonus target, the customer was able to get a software product (only available through resellers) at cost with terms of net 30 days, allowing it to delay the purchase to the following quarter (while still allowing the supplier, and the representative, to recognize the sale this quarter)
  • a buyer which needed specialized multi-million dollar computer equipment that could only be supplied by one supplier was able to reduce its costs and get millions of free marketing by allowing the supplier to use its logo in its advertisements (which the supplier promised to spend millions on if the buyer allowed the use of its logo)

Lastly, there are great opportunities to be had through data analysis, including:

  • a detailed line analysis that will often identify a significant number of (secondary) phone lines that are not required that are costing the organization hundreds (or thousands) each
  • the appropriate segregation of MRO spend into the right buckets that will allow suppliers to be more competitive on the categories they are strong in, as this will decrease overall cost significantly
  • the identification of non-compliant spend and the top offenders as a few choice words from the CFO to these individuals (or their superiors) will considerably decrease maverick spend quickly increase realized savings 20% to 30%

There are plenty more examples, but considering that SI essentially co-wrote a book detailing what they are and how to find them in Spend Visibility: An Implementation Guide (free download, no registration required), we’re not going to go into them any further in this post, especially since the important lesson is that you should be leveraging the information provided by the supply chain (for analysis) and then working with your suppliers to implement the best solution(s) you identify.

Stay tuned. After another break, SI will conclude it’s review of Managing Indirect Spend later this month with Part IV: How to Do It.

Series to date: