In Part 1, I discussed why some companies don’t have a solid control over indirect spend. Click here to read Part 1. In Part 2, I will cover some tips Sindewald shared on how to better manage indirect spend from his years of experience.
First, procurement should partner with departments business owners to better understand their needs, supplier relationships and processes. It’s important to show them that you’re not just trying to come in and find a lower price at the expense of their quality requirements and supplier relationships.
Second, procurement needs to understand the company’s indirect spend amount, categories and how many suppliers are currently being used in that particular category. Leverage consultants, spend analysis tools or request data from suppliers to achieve better visibility into your spend data.
Third, Sindewald encourages procurement teams to look for opportunities everywhere: spend aggregation across departments, better negotiation of existing contracts, risk management of suppliers. To ensure you are getting what you pay for and not ignoring possible areas of cost reduction, closely examine service specifications, monthly services with variable fees, and deregulated industries (telecom).
Fourth, Sindewald advocates that procurement teams implement an eSourcing tool to better manage indirect categories. eSourcing tools help develop an automated process for purchasing indirect goods and services. In addition, reverse auctions assist in cost reduction by driving competition between suppliers. During his time at Sony, Sindewald observed that the size of the bid did not correlate to cost savings. However, the number of participating suppliers does correlate with savings because more bids increase competition. I found it interesting that when Sindewald asked the group (about 40 people) to raise their hands if they had experience using an eSourcing tool, only about four people raised their hands. eSourcing is definitely not as widely used as I assumed.
During a challenging economy, a well-developed indirect spend strategy can create a strong impact to the company’s bottom line. Procurement can bring an informed approach to indirect spend by using a formal sourcing process, negotiation expertise, risk management and industry best practices. Indirect spend is ripe with opportunities for driving cost reduction.
Incredibly naive to think that these four steps guarantee delivery to the bottom line. There has been a long discussion (500 comments) amongst procurement professionals on LinkedIn as to the reasons why many procurement team initiatives fail to deliver. Their views are summarized here:
18 Reasons why procurement cost-saving initiatives fail to deliver to the bottom line
http://acuityconsultants.com/wp/?p=397
(includes link to the discussion)
This post was in no way intended to suggest an easy path to guaranteed cost savings, instead it was meant to give procurement professionals some ideas and a starting point for tackling the often times untapped indirect categories. Of course, aligning with the business unit stakeholders is not always easy. However, indirect categories do hold enormous cost savings potential. From basics like office supplies, or equipment to the more complex marketing or legal services there is often similar spend across the entire organization, which if leveraged properly will deliver savings. With many companies experiencing the strains of slower sales, cost savings is a critical way in which procurement can use their talent and experience with sourcing strategy to impact the bottom line of their organization. I really like your other article “7 Essential Elements of Stakeholder Engagement” because it offers important strategy for procurement to consider when working with stakeholders. I think that your article takes a deeper dive into the high level themes discussed in my post. It is definitely critical for procurement to consider these potential threats to the success of their cost savings initiatives so that they can work around the challenges. Furthermore, by being aware of the potential pitfalls, procurement can set reasonable expectations around the actual cost savings that will be delivered. Thanks for your comments, I enjoyed reading your blog post and the other links attached. I think these are all hot-button issues for procurement leaders to consider.