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 organization’s reality will soon prove that it is not all that easy.
There are four common challenges in sourcing/procuring in a multi-national company: 1) Lack of transparency on the global spend, e.g., each country will record the spend in its own way making in difficult to consolidate cost categories. 2) Global vendors acting as multiple local companies, e.g., although a global facility management company has presence in many countries, they might be structure and incentivized per country making it difficult to negotiate a global deal. 3) Internal resistance in capturing the potential coming from your own purchasing organization.
Often local procurement organizations tend over time to position themselves as performing strategic sourcing work rather than optimizing 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. 4) 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.
To overcome these challenges global companies must launch integrated purchasing and organization projects, starting with procurement/sourcing strategy before procurement/sourcing structure. They should follow a clear 6 step approach. I) Diagnose the opportunity, by creating a rough overview of the global spend and optimization potential per category (based on, e.g., number of vendors and vendor market position). II) Select the focus categories and establish global transparency. 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). IV) Identify the organizational prerequisites to capture the identified potential. V) Perform first phase of reorganization and execute category optimization phase. VI) Establish process, tool and procedures to enforce 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.