In light of economic events of recent years, companies are continuously faced with reducing costs to combat sluggish growth and offset commodity price increases, rising costs of energy and transportation, etc. Despite these pressures and economic instability worldwide, companies must continue to find growth opportunities to compete in the global marketplace. As a result, many large corporations have focused on indirect materials and services as a significant source of cost reductions, while for many mid-market companies, being involved in strategic sourcing of indirect spend categories is still relatively new.
Typically, the indirect materials that have been the focus of attention are office supplies, MRO (maintenance, repair, operation), technology, travel, and transportation, to name a few. Fortune 500 companies have tackled some of the non-traditional areas of spend such as marketing/advertisement, legal services, meetings/exhibitions, fleet management, employee benefits, employee relocation, real estate, insurance, etc. Why haven’t more heads of procurement/chief procurement officers, with the support of their CFOs and CEOs, turned to these areas to create a competitive advantage and fuel for their company growth? The answer is complex, as organizations face a number of issues while dealing with their non-traditional spend management.
Here’s a list of challenges:
- Procurement teams in most product-based companies have traditionally focused on reducing their direct spend and therefore lack the experience and the art of these specialized categories. Providing a high level of influence and performance in non-traditional spend categories requires subject matter expertise and skills beyond traditional negotiating skills. Strategic thinking and data analysis, problem solving, project management, change management, and relationship management are key business skills for sourcing professionals.
- Spend management is spread across a broad spectrum of commodities, thereby increasing the supplier base and the supply chain management complexities.
- Many of these unaddressed spend categories are negotiated and managed by end-users in various departments who know what they need but may not know competitive bidding, industry pricing, or have the negotiating skills and tools required to get the best deal possible.
- Most companies lack the leverage in negotiations with their suppliers due to low volumes and thus lose out on discounts and rebates. In most companies, low volumes may also lead to non-contractual spending, or “maverick spend,” in certain product categories.
- In direct procurement, you are usually working with relatively few stakeholders (design engineers, production specialists, quality managers) who are located in a few centers of activity. The opposite is the case for the business stakeholders who impact non-traditional areas of spend.
- The above challenges are compounded by sporadic buying patterns and by a number of barriers that are difficult to overcome, including a lack of meaningful spend data, fragmented supply chains, and embedded local personal relationships with suppliers.
Despite these challenges and limiting factors, managing non-traditional spend categories is now receiving increased attention by the leaders of procurement departments, CFOs, and CEOs within many large organizations. Within these firms, there has been a realization that a large share of total spend is non-traditional spend and that there is significant potential for cost reductions and improved bottom line. Cost savings in excess of 25 percent have been highlighted in various reports.
As a leader of a procurement department or a CFO looking for new and creative cost-cutting approaches to become a competitive advantage for your organization, you shouldn’t neglect non-traditional areas of spend. Properly facilitating and managing these categories of spend is a huge undertaking, requiring specialized skills and insights to unlock savings. However, the benefits are worth the investment.
Dr. Soheila R. Lunney, president of Lunney Advisory Group, has more than 20 years of supply management, procurement, and business experience, involving both domestic and international activities. She has extensive experience in consulting, coaching, and training in supply management, procurement, sourcing of materials and services, reducing total cost of ownership, and negotiation of complex contracts. Prior, Soheila was vice president of procurement for Education Management Corp. (EDMC) and director/deputy to chief procurement officer at Bayer Corp. for 17 years, holding positions in R&D, logistics, customer services, materials management, and procurement. She can be contacted at email@example.com.
This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.