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Managing Indirect Spend, Enhancing Profitability Through Strategic Sourcing

Managing Indirect Spend, Enhancing Profitability Through Strategic Sourcing

Joe Payne

Joe Payne, Vice President of Professional Services at Source One Management Services, LLC, helps companies reduce costs and manage change. He leads a team of project managers and analysts, developing insights into the challenges organizations face when undertaking initiatives to reduce costs through strategic sourcing and negotiation best practices.His areas of expertise include strategic sourcing, supplier relationship management, business process re-engineering, and financial reporting. Mr. Payne has extensive experience helping Fortune 500 companies and mid-market organizations implement sustainable cost savings programs.Mr. Payne holds a Bachelor’s Degree in Operations and Information Management from the University of Scranton.

Managing Indirect Spend, Enhancing Profitability Through Strategic Sourcing

William Dorn

William Dorn, Vice President of Operations, brings experience in areas such as business analysis, mechanical and manufacturing engineering, infrastructure design, business process re-engineering, risk analysis, best practice consulting, and technology solutions. He has extensive experience in large scale projects for Fortune 500 and other large institutional clients including the US Department of Defense, American Institute of Certified Public Accountants and the Goodrich Corporation. Mr. Dorn holds a BSIT degree in Business Systems Analysis, an Associate’s degree in Electronics Technology and Mechanical Engineering, and is a certified Six Sigma Black Belt.

Synopsis:Managing Indirect Spend, invaluable to procurement and financial professionals, provides an overview of the challenges when sourcing indirect spend categories, the strategic sourcing process, tools that help drive savings, and examples based on real-world experience. Those new to strategic sourcing will find a plain-language guide to the process from start to finish. More experienced readers will find detailed examples of specific case studies and applications, with practical tips on how to solve difficult sourcing situations.Published by John Wiley & Sons in 2011

Why did you write this book? The idea for the book was to provide readers with step-by-step presentation of the strategic sourcing process. The authors found that there were many texts on the market that spoke of strategic sourcing concepts, but none that provided in-depth illustration as to how to successfully implement cost-reduction strategies. By including real-world examples and even a chapter dedicated to “what not to do,” Mr. Payne and Mr. Dorn offer useful and applicable information to companies taking a closer look at what they pay for goods and services and how to improve their bottom line.

Why should readers buy this book?The book provides insider tips for improved bottom-line growth through effective management of indirect costs. Those new to strategic sourcing will find a plain-language guide to the process. More experienced readers will find detailed examples of case studies and applications, with practical tips on how to solve difficult sourcing situations.

ARTICLE

Many companies are great at what they do and what they buy when it comes to the components that make up the product or service they sell. Companies like Apple and Walmart have brought the words “supply chain” to the forefront of mainstream media. However, how well are companies managing their purchasing of products and services that aren’t directly tied to the creation of an end product? Managing Indirect Spend, Enhancing Profitability through Strategic Sourcing helps companies manage these overlooked, “indirect” items, such as office supplies, shipping costs, and telecommunications, in which organizations spend money.

Organizations are running lean and continue to find themselves understaffed and unable to properly manage their spending, ultimately hurting their bottom-line profits. Finding unique ways to cut costs without reducing headcount is a necessity. Managing Indirect Spend, invaluable to procurement and financial professionals, provides an overview of the challenges faced when sourcing indirect spend categories. It details the strategic sourcing process; tools that help drive savings, and the book provides examples based on real-world experience. This benchmark resource provides the knowledge and tools necessary to manage indirect costs with clear guidance informed by the authors’ more than 20 years of experience as cost-reduction consultants.

Many companies consider purchasing facilities, marketing, financial, administrative, and IT services to be complex and that they are too customized, and suppliers are too diverse to adhere to the guidelines of strategic sourcing. Chapter 22: Sourcing Services delves into this topic and proves that fundamental strategic sourcing principles can be utilized to create competition, evaluate offers, and negotiate contracts for services, regardless of the targeted purchase. While the process remains relatively similar, when sourcing intangibles, you need to consider different variables, such as service levels as they apply to performance, and not just when and how products are delivered.

As with any sourcing initiative,companies should start by developing a clear understanding of the spend category. The most important step is to define the scope of work. Just as you would need to know how many and what kind of pens you are purchasing for office supplies, you need to understand what services you are currently receiving, what services you should be receiving under contract but may not be, and finally, what services you would like to

be receiving. Other factors included in the scope of work are the frequency of services, response times, and performance measures in place. The scope of work includes identifying whether the service is a want or a need. Questions you would want to ask yourself to determine this include: Is this critical to achieve the goal of the service? Is the service task performed throughout the organization designed or oriented towards one particular group? Can this be performed internally? What is the service’s role and importance as a revenue generator? What is being oversold and underutilized? What can be combined or consolidated?

Some other points to consider are whether the services are tied to material costs. For example, with HVAC preventative maintenance contracts, suppliers often offer the option to include parts in the service contract or offer a discount on parts associated to the labor and repairs. If those parts are heavily commodity based, suppliers will often tie the costs to a market index and include parameters in the contract that dictate price fluctuations with a particular market. Some products such as HVAC filters can even be included in the maintenance cost. Service providers often receive much better discounts on these products than other organizations and therefore have a minimal purchase cost. Comparing the cost difference between purchasing the products as needed and the additional charge to include it in the maintenance fees is something worth reviewing with the provider, if available.

Depending on your organizational structure and where you are located, be sure to understand how your services are affected by union relations. Labor rate escalations are also important in budgeting service costs. Companies often increase the wages of their employees annually and this may affect your costs throughout the life of the contract. Another service factor to consider is the service broker. Service brokers manage multiple service contracts under one umbrella. Do not discount these types of providers as they can be just as competitive while streamlining the management of the contract and scopes of work.

Finally, warranties and preventative maintenance agreements should be factored in when sourcing services. Oftentimes you are hiring a manufacturer-specific, certified technician to perform the maintenance on the equipment. The frequency and type of services being performed may be contingent upon what the manufacturer recommends and not amendable.

Overall, Services often involve a deeper level of integration into a company’s operations and therefore can act as barriers for change, sometimes even with cost savings available. It is important to be aware that even though there may be not tangible product involved, the services you are sourcing do have a market value and are subject to competition. As long as you know the scope of services being performed and what resources are required to source them you can source most any type of service category. The key is to stay connected with the needs

of the end users while maintaining the company’s goal of generating cost savings and ensuring quality service levels.

Using the established tools set forth in the text, Mr. Payne and Mr. Dorn, along with the staff at Source One have helped companies in various industries examine their purchasing habits and significantly relieve their bottom lines. Recently, Source One worked with an educational services company to help them control and coordinate their organization-wide spending including sourcing service categories. What began with four pilot projects, successfully completed by Source One, eventually evolved into 26 separate sourcing projects covering a broad array of spend categories. The end result was an achieved savings of approximately $4 million. Source One’s strategic sourcing experts used the same tools identified in Managing Indirect Spend to achieve savings in categories including medical insurance, property insurance, and general liability insurance as well as local/long distance telecommunication, drug screening, and call center expenditures.

Mr. Payne and Mr. Dorn both accept speaking engagements and webinar opportunities to interested professional groups regarding the content of Managing Indirect Spend.

Source One’s YouTube channel:

features book interviews by an Arizona TV station with both authors. Additional information and free audio overviews of each chapter of the book can be found at www.strategicsourcingbook.com.

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