As direct materials procurement rarely sees challenges in the compliance space; this post will focus more on the potentials that lie within indirect spend including services.
High levels of compliance often owe a lot to a solid category management process; where dedicated category managers (and supporting staff) can exploit their negotiated contracts to maximize returns and minimize savings leakage (the difference between savings identified in the sourcing process and the savings realized on the invoices). Over time, Category Management can be seen as a process that not only addresses the strategic upstream procurement process, but also places focus on delivering the savings downstream by ensuring compliance both to contract and process through ongoing supplier management, dedicated compliance initiatives as well as continuous improvement and demand management.
One of the more pragmatic schools of indirect materials Category Management is rooted in Booz&Co models for Continuous Sourcing (see below). Traditional sourcing activities are mostly focused on capturing margin and reducing costs, whereas Category Management also operates in the upper phases of the model – for some categories, the category teams will traverse up and down this model over the course of the length of the contract.
To ensure that this is done, Category Management should continuously monitor their procurement transactions to identify where necessary measures need to be taken. Done correctly this will eventually enable procurement to address identified potential through a structured category management governance process model (see below) where stakeholders are actively involved in all stages of the savings process and where most work inevitably will fall into the compliance and continuous improvement categories.
Yet in order to enable this structured category management process, the procurement function needs to indentify the necessary skill sets and the appropriate supporting tools.
Working within this model, procurement needs to actively seek out and engage with stakeholders not only to enforce compliance but also to anchor any savings initiative to minimize savings leakage. This implies that procurement staff needs to be able to communicate business benefits and business cases in a manner many are unused to from previous experiences. Playing hardball may work well when you’ve plotted out your suppliers in the Kraljic matrix, but it’s a completely different ball game when interacting with business unit or site management to ensure they too wear the spend management cap in day to day situations.
Sourcing strategically when you are part of a Procurement organization takes on a level of complexity that you have to be weary of throughout the sourcing process. When you see yourself as part of Procurement, you start to think long term for each of the commodities you manage because you still will be managing your commodities 6 months, 1 year or even 3 years from now. Questions like the following are key to consider when determining the timing of your sourcing initiative:
- What is my spend?
- Who are my suppliers and how many contracts do we have?
- How am I getting my savings today?
- What are my savings going to be and where are they going to come from?
When deciding to run a RFP for a commodity all the above questions play a big factor into develop the RFP and all the other items I want to negotiate with suppliers. A prime example has recently come from RFPs run within the MRO space. In the past, discounts were primarily used to negotiate with suppliers even if there really was no visibility into the published price. The challenge we run into with this is that while the contractual discount can remain the same, the price can still change if the published price changes. These price changes lead to invoice exceptions if the price increase or decrease is not updated proactively into your MRP systems so it can be captured within your outgoing Purchase Orders. Can you imagine having this problem and suppliers calling you with their aging reports due to unpaid invoices!
So what is the solution?
Your RFPs should be set up parallel to how you currently are or how you intend to buy the product or service in the future. An example of this could be to increase the number of items in your market basket that is pulled from your MRP system. A large market basket will not only allow you to test the market but also to expedite initial implementation which should in theory need you to change the supplier name and the price for the products already set up in your system. To set up a sizable market basket will take you much longer at the beginning of the process but should help with the implementation timeline. Taking this approach will give you additional creditability with stakeholders as you touch base with them through the process and discuss specific topics like the data, market basket, suppliers, implementation and ongoing compliance to deliver the maximum negotiated contract value.
If we place the sanitary level of spend under management at about 60-some percent, our experience is that companies at this level (or above) see greater effects on their savings through increasing their focus on compliance issues and demand management rather than attempting to probe their supply base for potential savings (although this needs be done as well).
Torbjörn Thorsén & Nylah Razvi
Product Strategy Innovation & BPO