Easy at First Sight
At first sight it seems easy: Divide your total spend into different categories (e.g., indirect such as office supplies and IT and direct strategic goods), identify the number of vendors per category, focus on the biggest fragmented spend area and negotiate better contracts with your key vendors. But your organisation’s reality will soon prove that it is not all that easy.
Key Challenges
There are four common challenges in sourcing/procuring in a multi-national company:
- Weak transparency: Lack of transparency on global spend, e.g., each country will record the spend in its own way making it difficult to consolidate cost categories.
- Fragmented supplier landscape: Global vendors acting as multiple local companies, e.g., although a global facility management company has presence in many countries, they might be structured and incentivised per country, making it difficult to negotiate a global deal.
- Resistance from procurement itself: Internal resistance in capturing the potential from your own purchasing organisation. Often local procurement organisations tend to, over time, position themselves as performing strategic sourcing work rather than optimising existing procurement contracts. While strategic sourcing, e.g., replacing one ingredient with another in the food production industry, is important, it is rarely the first step to be taken to capture a cost savings potential.
- Maverick buying: Your line managers are too hands on refusing to leave the procurement work to the purchasing department because of historic relationships and/or distrust in the corporate purchasing department. The consequence is widescale maverick buying.
The Way Forward
To overcome these challenges global companies must launch integrated purchasing and organisation projects, starting with procurement/sourcing strategy before procurement/sourcing structure.
They should follow a clear 6 step approach.
Step I: Diagnose the opportunity by creating a rough overview of the global spend and optimisation potential per category (based on, e.g., number of vendors and vendor market position).
Step II: Select the focus categories and establish global transparency.
Step III: Identify improvement levers per category, including both externally oriented opportunities (e.g., consolidate spend with fewer vendors), as well as internal levers (e.g., better use of procured goods and better coordination).
Step IV: Identify the organisational prerequisites to capture the identified potential.
Step V: Perform the first phase of reorganisation and execute the category optimisation phase.
Step VI: Establish process, tools and procedures to enforce the new procurement policies.
About the authors: This article was written by a team of consultants from Oleto Associates, a strategy consulting firm based in Denmark. For more information please visit www.oleto.com.
February 2012