Increasing Profits: Improve Indirect Spend Management

A number of world-class operating organizations in a variety of industries recognize that improving their indirect spend management was a significant source for increasing profits.

Based on various studies, performance differentials in indirect spend between Best Practice and Average Performing Companies include:

1. 12%- 18%  lower material and service purchase price; 
2.   60% few part numbers;
3.   3x the inventory turn; and
4. ½ the internal transaction cost.

The opportunity for these saving exists in a wide variety of industries including communications, utilities, high technology, consumer products, manufacturing, construction, automotive, oil & gas, government, and other process industries.

The typical indirect spend situation in the client that indicates that there could be a significant opportunity for savings includes:

  

1. Inadequate sourcing strategy coverage across entire spend;
2. Current negotiated pricing not competitive
3.  Low compliance of preferred contracts; 
4. High percentage of spot buys and no disciplined spot buy process;
5. Inconsistent inventory management processes across sites with inventory turns <1
6.   Proliferation of systems, with no visibility across systems;
7. Proliferation of suppliers; and 
8. Inventory managed in multiple locations.

Some companies have increasingly used outsourcing of indirect procurement as a new and enhanced opportunity to reduce cost and increase efficiency.

1.    Outsourcing of non-core processes is a strategic trend

  

1. Allows more focus on core processes and reduces management effort
2. Reduces cost by shifting management to industry leader with scale and expertis
3.    Optimizes/minimizes investment in technology and assets

2.    Outsourcing of indirect procurement has been a relatively new and promising service offering for top operating companies

1.   Indirect spend management typically receives low priority on the procurement agenda and is under-invested in 
2.   The promise of B2B has proven difficult to achieve 
3. Top operating companies are looking for someone to manage this spend while they closely manage 1 entity instead of thousands

Current Stated Reasons for Outsourcing from Our Clients:

1. Reduce Costs (estimates generally are a savings of 15%- 20% of Total Cost of Ownership of Indirect Procurement Cost over a 2-4 year period). 
2.   Increased focus on core competencies to drive shareholder value (eliminate non-strategic processes) 
3. Tight labor markets
4. Need for workforce flexibility 
5. Fast paced changes in technology and significant upfront infrastructure costs to take advantage of new technologi 
6. Supplier consolidation efforts 
7. Emergence of organizations that can provide a wider range of services and stronger value proposition than indirect-related outsourcing organizations in the past

Is this an opportunity for you to save money? Is outsourcing or an internal approach the answer?

Please feel free to contact us if you would like to discuss this or any other opportunity to reduce cost or increase revenue in your company. We look forward to helping you in any way we can

Joe Bonocore

jbonocore@bonocore.com