Managing Indirect Spend

Enhancing Profitability through Strategic Sourcing

Joe Payne, William R. Dorn, David Pastore, Jennifer Ulrich

• Publisher: Wiley
• Year: 2021
• ISBN:
  9781119762362
• Edition: 2
• Topic: Business
• Subtopic: Contabilità gestionale
• Index: Business

Managing corporate spend is far more complex than conducting RFPs. Learn how the most efficient and effective procurement departments operate, control costs, enforce compliance, and manage indirect spend.

Managing Indirect Spend provides executives and procurement professionals with the knowledge and tools necessary to successfully reduce costs with a strong focus on the often-overlooked area of indirect spend. It also offers great value to those procurement and purchasing professionals aspiring to be leaders in the profession, regardless of the spend they manage. It includes an overview of the challenges faced when sourcing indirect spend categories, a detailed dive into the strategic sourcing process, tools that can help drive savings, technologies that drive efficiencies and compliance, and examples of success based on real-world experience. It is a how-to guide that clearly covers sourcing engagements of any complexity and provides the details needed to source effectively. The book is structured into sections covering the sourcing and procurement process, the tools and technologies, examples from the field, walkthroughs of specific sourcing engagements, guidance on building an effective sourcing team, and the information needed to become a best-in-class sourcing organization.

Since the initial publication of this book, the procurement profession and the discipline of Strategic Sourcing have matured. Markets have changed, processes developed, trends have come and gone, and technology has experienced leaps and bounds, posing new and interesting challenges for procurement professionals. In addition to covering tried-and-true practices for strategic sourcing, this Second Edition discusses how strategic sourcing has evolved and provides an update on the techniques, tools, and resources available to purchasing groups. This book:

• Includes updated coverage of everything you need to know to source more effectively
• Covers the latest trends in procurement and sourcing, including technology, process improvements and organizational design
• Presents guidance for reducing costs through strategic sourcing, no matter what the economic climate or level of maturity of the existing procurement organization
• Shows how effectively managing indirect costs can provide a huge impact on bott
• m line growth
• Introduces Market Intelligence (MI), including techniques, tools, and resources available to procurement and supply chain management groups

With tools, real-world examples, and practical strategies, Managing Indirect Spend provides insider guidance for big bottom-line growth through effective management of indirect costs.

PART I
The Process

CHAPTER 1
An Introduction to Strategic Sourcing

MANY AUTHORS HAVE ALREADY WRITTEN on Strategic Sourcing and Supply Chain Management. In general, each describes a sourcing process that includes somewhere between five and seven steps. The primary differences among their books are in the ways those steps are defined and segmented. The process described in this book should look familiar in that it includes six steps, starting with the inception of the initiative (Project Kickoff) and concluding with final monitoring of the implemented program (Continuous Improvement). This book's process, however, specifically applies Strategic Sourcing techniques to indirect spend categories and offers insights and strategies that have been applied successfully for decades. Our process is not based on theory; the techniques described have been refined through years of experience alongside many types of organizations to reduce their costs for indirect goods and services. As you will discover, the process itself serves primarily as a project management tool. Creative strategies and adaptability in the face of uncertainty are the key elements that make your sourcing initiative truly strategic.

In the first edition of this book, published back in 2010, we noted that many organizations still neglected to apply Strategic Sourcing techniques to their indirect spend categories. Instead, indirect spend was treated as a series of one‐off purchases or was sourced with a simple three‐bid strategy with little effort beyond reviewing the supplier price responses. Typically, with indirect spend, per‐item prices are relatively low, the product or service is not crucial to the business, and the overall costs are rarely examined because of the difficulty entailed in gathering meaningful spend and market data.

Things have changed in the years since our first edition, but not as much as we might have hoped. Most organizations are now familiar with a Strategic Sourcing process. True best practices for sourcing indirect spend, however, are still rare. Sourcing managers are still accustomed to the old way of running bids and still continue to engage suppliers at arm's‐length, which does not engage the supplier community in a way that maximizes competition. Concepts like category management have become even more important, yet even organizations with dedicated category managers suffer from diminishing returns and increased costs as they attempt to hire in‐house specialists for virtually every category of spend.

In the current world of procurement, leaders and managers shouldn't focus on effective sourcing processes alone, but they should also turn their attention toward ensuring a high return on investment for the function, creating efficiency and effectiveness metrics that drive results faster, increasing visibility, and engaging their stakeholders and suppliers effectively. Strategic Sourcing, combined with proper category management techniques, continues to allow organizations to shift away from thinking about indirect spend in an ad hoc manner and provides spend visibility, objective decision‐making, and a project management tool to ensure efficient use of the sourcing team's time and efforts.

VISIBILITY

Strategic Sourcing provides a new level of visibility into business processes, operational concerns, and spend details that may not have been available to management and stakeholders in the past. The process provides a road map for collecting and analyzing this information and determining how particular products or services truly fit into the overall business operations of an organization, from the identification of a need to the use of the product or service, and (if necessary) its disposal. This includes identifying the following:

• Who buys the product?
• How is it ordered?
• How is it received?
• How it is paid for?
• Where is the payment information stored in your systems?
• What are the payment reconciliation processes?
• Where is the product stored?
• When is it used?
• Why is it needed?
• Who are the suppliers?
• What value‐adds or services are provided?
• What happens to the product after its useful life is over?

As we discuss throughout the book, all of this information is necessary to properly perform Strategic Sourcing, to ensure the most efficient processes and tools are utilized, and ultimately to implement and maintain the final program developed through the process.

OBJECTIVITY

Strategic Sourcing allows organizations to change the way they manage indirect spend, shifting it from a series of one‐off purchases to a more coordinated effort with checks, balances, and objectivity to justify costs and requirements. Historically, indirect purchases and spend for most organizations were managed by one or many individuals, with little oversight from management and no requirement to justify their selection of suppliers. Strategic Sourcing provides a process to identify the true requirements of the organization (rather than those of the individual(s) managing the spend) and to identify suppliers and price points that appropriately meet those requirements. The process is performed in such a way that requirements are identified well ahead of supplier identification, and stakeholders agree to those requirements before exploring alternatives to the existing arrangement.

PROJECT MANAGEMENT TOOL

Finally, a well‐designed Strategic Sourcing process becomes a project management tool that can ensure engagements will not end in failure due to scope creep or lack of clear paths forward and that those working on the project will make the most efficient possible use of their time and resources. Attempting to reduce costs without a formalized Strategic Sourcing process can easily end in frustration, as roles are not clearly laid out between team members, steps are not identified, and timelines are not set.

As discussed throughout this book, even organizations that employ a strong Strategic Sourcing process will face many challenges, and teams can easily get bogged down in noncritical details or fail to reach consensus at critical points. The process in itself includes steps that can be integrated into a comprehensive project plan to avoid convoluted outcomes.

The Strategic Sourcing process has six basic steps:

1. Data Collection and Spend Analysis
2. Research
3. The RFx Process (requesting information, quotes, and proposals from suppliers)
4. Negotiations
5. Contracting
6. Implementation and Continuous Improvement

Our goal is to help you navigate through specific activities that most sourcing books fail to cover—dealing with and effectively utilizing internal constituents, motivating the supplier marketplace, and gathering the information required to make informed decisions during each step of the process.

Data Collection and Spend Analysis

Once you identify the need for Strategic Sourcing, the next step is collecting and analyzing spend data. The purpose is twofold. First, you need this data to determine where you should focus your efforts. Your resources are more than likely limited, and it will not be possible to immediately reduce costs across all of your organization's spend areas. You need to identify areas of opportunity and develop a project road map to provide context and timelines for your efforts.

Second, you need these data to determine both the quantitative and qualitative requirements associated with a particular spend category. When we discuss the quantitative aspects, we are referring to current price points, discounts, payment and freight terms, and other costs associated with a particular area of spend or specific suppliers. Qualitative requirements refer to the quality and services tied to these costs. The current suppliers were more than likely chosen based not just on price, but other value‐added considerations as well, and these factors need to be understood and considered. The quantitative baseline and qualitative requirements become the launching pad for the rest of the engagement, which makes it critical not just to identify them, but also to make sure they are agreed on by other interested parties within your organization before moving to the next step.

Research

The research phase provides context for the categories you are sourcing. The purpose of research is to develop or refine your sourcing strategy by determining what competition exists in the marketplace. This entails identifying any available alternative products, services, or processes and whether or not current market conditions make it a good o...