In addition to being an option for solving problems and completing tasks your organization does not have the manpower for, it can be a great mechanism for knowledge transfer as it can connect people who have ideas and knowledge about certain ways to solve a problem with those people who need a problem solved but don’t have the right knowledge or ideas. It allows an organization to take advantage of a team that is larger than the number of people that can be supported on the organization’s payroll and it can save an organization a lot of money if external experts can get it done more efficiently and cost effectively.

For more information crowdsourcing, check out the following posts:

• Innovation Matters
• Democratizing Innovation vs. Crowdsourcing
• Move over Crowdsourcing, Here Comes ITO 2.0!
• The Long Tail Wags the Dog

A cost reduction, which is a “hard” cost saving, usually takes the form of a tangible year-over-year bottom-line cost reduction such as:

• the direct reduction of a capital or operating expense, such as a decrease in the annual lease payments, a reduction in the telecommunications cost, or a reduced annual IT maintenance fee
• a process improvement that results in real and measurable cost reductions, such as a process improvement that allows more units to be produced on the line in the same time-frame (productivity improvement) and/or with the same amount of raw material inputs (waste reduction)
• a net reduction in prices paid for the raw materials procured when compared to prices paid in the previous year

A cost avoidance, which is a “soft” cost saving, usually takes the form of a more intangible cost avoidance, which does not show up on, but materially impacts, the bottom-line cost such as:

• a delayed price increase, despite rising costs on the commodity markets
• a negotiated purchase price that is lower than the initial quote
• additional value-add services in a contract that are free-of-charge
• long term contracts with price-protection provisions
• the identification of a new production process that supports utilization of a lower cost material

If you haven’t conducted a supply chain efficiency audit recently, chances are that your supply chain is ripe with cost reduction and cost avoidance opportunities. Start by looking at the six fundamental sources of cost:

• labor (raw material collection, processing, & handling costs)
• parts (design, raw material, component, & production costs)
• operations (inventory, distribution, & overhead administration costs)
• transportation (loading, shipping, and insurance costs)
• buying (negotiation, requisition, approval, receipt, reconciliation, and payment costs)
• selling (negotiation, processing, reconciliation, and collection costs)

And ask the following questions to help you identify where you are most likely to be hemorrhaging cash:

• Are we applying lean and six sigma methodologies? Where might they be appropriate?
• What indirect materials and service spend categories are not being (actively) managed?
• Are we employing the latest technologies to help us analyze complex direct materials and strategic part categories?
• Are we employing best-in-class processes and supporting technologies in our day to day operations?
• Do we have sufficient (at least 90%) visibility into our spend and are we taking full advantage of that visibility to identify new cost savings opportunities on a regular basis?
• Are we taking a Total Cost of Operations (TCO) perspective when computing our operational costs and a Total Value Management perspective when computing the value of each prospective purchase?
• Are we outsourcing non-core categories and operations to a provider who can give us better service at a lower cost of TCO?

Once you’ve identify those areas that are hemorrhaging cash, you reduce the costs by identifying cost reduction strategies and change management plans to implement those strategies. The following strategies are often good starting points:

• Labor (talent management and contingent workforce management)
• Parts (strategic sourcing, design for supply, and enterprise cost management)
• Operations (manufacturing intelligence, best practice implementation, supplier management)
• Transportation (distribution network re-design, shipment consolidation, multi-mode utilization)
• Buying (spend analysis, strategic sourcing, decision optimization)
• Selling (market intelligence, partnerships, green and sustainable, brand building)

In addition, you should consider bringing in some external expertise to help you with this effort, as consultancies that live and breathe cost reduction are often able to quickly identify significant cost savings opportunities and help you realize them faster, and at higher rates of return, than internal efforts.

For more information, check out the following blog posts:

• Getting the Most Out of Cost Reduction
• Don’t Wait for the Burning Platform
• We Don’t Need No Consultants
• A Strategic Sourcing Plan Outline
• Lean Commodity Sourcing
• The Internet & The Purchasing Knowledge Revolution

Contract management is important to procurement and purchasing for a number of reasons. Not only does it insure that a business lives up to its obligations, which protects it from legal risks, but it brings with it a slew of operational and financial benefits that can drastically improve company productivity and profitability.

The Benefits

• Productivity Improvements
  If purchasing contracts are centrally managed, and electronic versions always immediately accessible from a centralized repository, there will be no more wasted man-hours searching for, retrieving, and copying the original contract.
• Spend Visibility
  Centralized management of contracts through an appropriate software solution gives an organization unprecedented visibility into the global supply base and global spend. It also allows an organization to automatically identify “evergreen” contracts (well) before they expire and determine whether or not the contract is still right for the business. It also enables a company to quickly identify contracts with suppliers in (new) “high risk” zones due to natural disasters, (rising) political unrest, or (geo)political uncertainty. Finally, it provides a solid foundation for spend analysis.
• Compliance Improvement
  When contracts are tracked and monitored, purchases can be checked against the contracts for compliance, quickly and easily, and, if the solution is integrated with the purchasing system, automatically. This (dramatically) reduces maverick buying, allows rebates and discounts to be tracked and captured, and eliminates duplicate payments.
• Opportunity Identification
  A full-fledged enterprise solution tracks all of your contracts with your suppliers and your customers. While supply contracts tend to focus on acquisition of raw materials to conduct your business, sell side contracts tend to focus on the provision of valuable goods and services to your customers which is based on your IP. A good enterprise solution with a centralized repository allows you to not only get a handle on your Intellectual Property (IP), but also determine which IP has the most value and which offerings, if actively developed, should be focussed on to maximize your ROI.

For more information, we recommend starting with many of the contract management articles here on Sourcing Innovation, and the following classic posts:

• An Introduction
• The Next Generation of Contract Management Solutions
• An Introduction to Enterprise Contract Management Solutions
• The Twelve Days of X-emplification: Some Starting Questions to ask a Solution Provider
• The Six Days of X-asperation: More Questions to Ask a Solution Provider

^* The e-Sourcing Wiki was created and maintained by Iasta, which was acquired by Selectica in 2014 (which renamed itself Determine in 2015). It was retired by Determine (which did not actively maintain it) before Determine was acquired by Corcentric in 2019

In the supply chain, compliance management only has meaning with respect to a given function. The primary functions where compliance is a major concern, and where you can find software-based solutions, are the following:

• Contract Compliance
  In supply chain, the goal of contract compliance is to make sure that your procurement personnel are buying on contract, honoring your commitments, and realizing the negotiated pricing.
• Regulatory Compliance
  In the supply chain context, regulatory compliance can refer to the process of insuring that you are in compliance with financial reporting regulations, product restrictions, trade requirements, and environmental compliance.
  • Financial Compliance
    The goal of financial compliance is to insure that books are kept, and reports are filed, in accordance with accepted accounting practices and, in the US, that the Sarbanes-Oxley Act is adhered to.
  • Product Compliance
    The goal of product compliance is to insure regulatory requirements for safety are met. This is big for companies in, or importing into, the EU where they have to contend with RoHS, WEEE, REACH, and the ELV.
  • Trade Compliance
    Trade compliance is becoming more and more of a challenge each day with recent changes to the Mod Act, the now (more-or-less) mandatory ACE system in the US, the new 10+2 requirement in the US, the Modernized European Customs Code, USMCA, and the thousands of similar regulations and trade agreements around the globe.
  • Environmental Compliance
    Environmental compliance is the process of adhering to environmental regulations in effect, environmental policies, and requirements that you expect may become law in the (near) future.
• Vendor Compliance
  Vendor Compliance usually refers to the process of insuring that your vendors have the requisite certifications, insurance, and authorizations to provide you with goods or services. It might also refer to the process of insuring your vendors are complying with your contracts, but generally refers to the former.

For more insights into Compliance, please see the following posts:

• Product Compliance
• Trade Compliance
• Kick-Starting Your Environmental Compliance
• Tips to Manage Demand and Compliance Risk
• You Need Trade Visibility
• Procurement Contract Risk Management
• Sustainability Should Be Soldered Into Your Platform
• the doctor Exposes A Few More Elephants

In a supply chain context, Business Process Outsourcing can take a number of forms. It can involve the back-office outsourcing of invoice processing and payables in Procurement, the outsourcing of inventory management to the vendor (known as Vendor Managed Inventory) or a third party, and the outsourcing of service agreements (and their management).

Business Process Outsourcing has its advantages and disadvantages. On the up side, it can allow you to leverage:

• economies of scale
• process expertise
• administrative efficiencies
• specialization
• new technology

But on the down side, it can lead to:

• a loss of local knowledge
• a loss of control over performance
• a loss of visibility into day-to-day activity

Whether or not you should engage in business process outsourcing boils down to whether or not the third party BPO firm can do the functions more effectively and more economically than you can do them in house, whether or not you can effectively manage an outsourced relationship, and whether or not you can insure that key knowledge stays in house should you ever have to insource part or all of the operation again in the future.

For more on business process outsourcing, please refer to the following posts:

• Outsourcing Insights from PricewaterhouseCoopers
• Procurement Outsourcing IV: Is It Right For You?
• Seven Myths About Outsourcing
• Why You Should Consider Procurement Outsourcing
• Outsourcing and Procurement Mastery
• Roles of Performance Metrics in the Outsourcing Process
• Outsource
• Baseline’s Seven Sins of Offshore Outsourcing