Strategic Sourcing: A Winning Strategy for Improved Profitability. Audit Tax Advisory Risk Performance. The Unique Alternative to the Big Four

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1 Strategic Sourcing: A Winning Strategy for Improved Profitability Audit Tax Advisory Risk Performance The Unique Alternative to the Big Four

2 The pressure to reduce costs is constant, and it is the procurement group s role to see that materials and services are purchased in a cost-effective manner. Often, however, procurement resources are overwhelmed with the tactical aspects of the work and are unable to maximize savings opportunities year over year. Crowe Horwath LLP developed strategic sourcing services to help manufacturing and distribution (M&D) businesses overcome this challenge, setting in place sourcing plans and processes that could ultimately lead to a 2 to 5 percent improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA). By taking a broader, more strategic view of procurement s role, the purchasing organization can deliver significant and sustainable cost savings in a way that does not sacrifice quality and service or damage supplier relationships. Crowe strategic sourcing projects are typically completed in only four to eight weeks, using an approach that minimizes the amount of time and resources required of the client s procurement team. It is common for such companies to achieve 1 to 5 percent savings in raw material-type purchases as well as savings of 10 percent or more for indirect and selling, general, and administrative (SG&A)-type categories. What Is Strategic Sourcing and Why Do You Need It? Failure to overcome procurement s challenges costs much more than the immediate price of the goods or services being purchased. Lack of parts or materials means lack of work. Poor quality drives up costs for rework, returns, scrap, and lost customers. Overpaying means your company loses competitive ground, which eventually translates to lost sales and revenue. The bottom line is this: If your sourcing practices are suboptimal, so are the products and services you sell. Conversely, strong sourcing competencies are a competitive advantage. The Crowe strategic sourcing solution takes a more thoughtful approach to procurement challenges an approach that goes beyond leveraged costreduction areas, beating up suppliers, simplified should-cost models, and supplier rationalization plans. Strategic sourcing enables you to take advantage of your company s capital resources to procure goods and services at the highest levels of safety, quality, delivery, and customer service. It does this by overcoming the limitations of a simple, transaction-based customer-supplier business arrangement and instead helps create value across many aspects of the relationship. As a consequence, the benefits of the Crowe strategic sourcing solution go beyond immediate bottom-line savings as important as those are. By focusing on those areas that will have the largest impact on your business not simply the areas the procurement team knows best the Crowe strategic sourcing solution can reduce the total cost of ownership of the commodities and services in question and help the procurement process more fully align with your broader strategic objectives.

3 Strategic Sourcing: A Winning Strategy for Improved Profitability Common Procurement Dynamics Procurement s role is not typically viewed as strategic, and its personnel are often mired in transactional work. The dilemma is further complicated by a lack of training and business credentials among those responsible for purchasing as well as incentives that focus on making sure materials are available for production, with quality and cost-effectiveness as afterthoughts. As a consequence, procurement leadership is often on unequal footing with other department leaders and does not have a voice early enough in the process to drive proactive savings and better sourcing decisions. All too often, procurement becomes the center of focus only during financial events, such as when companies respond to profitability challenges by aggressively pursuing savings, focusing in particular on purchase price only, in the expense categories where they are most comfortable. At the same time, right-sizing efforts often hit the purchasing function hard, further stretching already-thin procurement resources. As executive teams turn their attention to expanding their way back to profitability, they can easily lose sight of the fact that there is little value in increasing sales if the business and its supply chain cannot support the growth in a cost-effective way. What Good Looks Like In contrast to procurement operations that are struggling, an effective sourcing operation presents a very different picture. In most instances it will be led by an experienced leader and skilled communicator who is able to support and drive action on an equal footing at all levels of the organization. Much of the transactional purchasing and materials management work in the best procurement organizations is automated, so the team can focus its specialized skills in areas that produce greater savings. While they work hard to develop close and strategic relationships with suppliers, they also are willing to take a critical look at every relationship and develop qualified alternative sources. As a result of their proven effectiveness, best-in-class procurement teams generally have responsibility for the full spectrum of purchasing categories, not just direct expenditures alone. While the proportion of a company s total expenditure that is strategically sourced averages around 35 percent in typical M&D companies, this number jumps to about 82 percent in those companies that operate best-inclass procurement operations.* It is significant to note that, while these best-in-class operations generally run about an equal number of sourcing events as the typical M&D company, they achieve almost twice the results. Best-in-class performers, on average, carry out 54 sourcing events per year, compared to

4 Crowe Horwath LLP events for M&D companies in general, yet they typically achieve a 14 percent annual saving, compared to only 7 percent for the average procurement operation. 1 How the Crowe Strategic Sourcing Solution Is Different Unlike many traditional third-party procurement initiatives, the Crowe strategic sourcing solution supports broader improvement beyond cost reductions alone. This is done through a structured approach that includes these steps: Recognize that our clients are experts in many areas, using our team as a tool to provide a lift in savings built upon prior work while finding new opportunities in unexplored categories. The focus is on helping the client gain more time rather than overcoming a perceived lack of capability. Analyze all expenditure categories to define the particular needs of each client, producing a client-specific procurement road map. Manage the Crowe internal team effectively and supplement it with a variety of category specialist firms all under our practice standards and engagement management. Engage for the long term, with a strong focus on the client relationship, as opposed to many sourcing firms that are interested in a quick in and out possibly causing damage. Go beyond strategic sourcing events to include supplier management and process optimization. Addressing the Full Array of Saving Opportunities The Crowe strategic sourcing solution is designed to identify a broad range of saving opportunities, which are found in variety of major expenditure categories. Raw Materials Direct, Indirect, and Maintenance, Repair, and Operations (MRO) SG&A (Typical Savings: 2-9%) (Typical Savings: 10-40%) (Typical Savings: 10-40%) Metals (shapes, wire, plate, bar, tube) Agricultural goods (corn, wheat, proteins) Resins Chemicals (both industrial and food grade) Lumber and wood products Raw materials and products bought through distribution (metal, agricultural goods and food ingredients, resins, chemicals, packaging, lumber) General MRO (fasteners, tools, safety and PPE, janitorial, material handling) Freight (parcel, LTL, bill pay, and audit as well as TL, flatbed, refrigeration, and fleet management) Contract and temporary labor Energy (natural gas, petroleum, and utilities) Machined metal products Metal coatings and finishes Administrative supplies and services Telecom (services and bill pay audit) Procurement cards Facilities services IT (products, services, and audit) Professional services Tax recovery 4

5 Strategic Sourcing: A Winning Strategy for Improved Profitability Do I Have a Sourcing Problem? Warning Signs You Should Not Ignore How can you tell if you need to take a closer look at sourcing issues? Here are some critical questions to ask yourself: 1. Does your procurement team challenge your suppliers the same way that your customers challenge your company to keep the pencil sharp? 2. How is the procurement team viewed by the organization? Does procurement have a seat at the leadership table? 3. How do your procurement team members spend their time? Are they primarily engaged in processing documents and following up on shipments? Or are administrative tasks automated, leaving them time to engage in activities that add value and strengthen the organization? 4. Is there a strategic sourcing plan in place? Is the procurement team familiar with it, and has it been communicated to the company? 5. How confident are you that sourcing initiatives will be completed on time and will deliver the benefits you expect? 6. What is the total scope of your procurement team s management responsibility? Who manages the rest of the expenses? In what expenditure categories does your procurement team have particular expertise? They can t be expected to be experts at everything, so how does their expertise correlate to your organization s major expenditure categories? Where are the gaps? 7. Can your procurement team produce an approved supplier list and contract schedule? If not, why not? If they can, cross reference the contract schedule with your top suppliers. If these questions reveal shortcomings or, more likely, if you are unable to determine clear answers to the issues these questions raise it s a sign that your organization is failing to manage sourcing issues strategically, and you are at risk of incurring unneeded costs. More critically, you could be vulnerable to unexpected and uncontrolled future cost increases as well as potentially crippling supply interruptions. 5

6 Crowe Horwath LLP A Closer Look: What the Crowe Strategic Sourcing Solution Entails The Crowe approach follows a disciplined set of steps, which can be organized into three phases: 1. Data collection, discovery, and analysis 2. Category-specific sourcing strategy development and execution 3. Results implementation Throughout this process, experienced category and industry specialists work to achieve the projected savings using a variety of techniques such as direct negotiation, request for proposal (RFP) sourcing events, evaluation and implementing of the purchasing and demand management processes and controls, supplier contact compliance reviews, and internal purchasing process compliance. The Crowe team explores many alignment aspects of the suppliers complete value proposition to the client supply chain requirements. 6 Immediate and Long-Term Results During the course of many engagements, Crowe sourcing teams have consistently achieved significant savings for clients. But strategic sourcing is not only about saving money. Crowe focuses on improvements in the overall performance of the procurement function and works to increase efficiency and effectiveness in the company s day-to-day operational processes as they relate to the supply chain. The Crowe approach empowers clients to remain ultimately in charge of the strategic sourcing initiative while minimizing the upfront resource investments needed to complete the work. In short, Crowe works hard to deliver significant and sustainable savings that improve the larger organizational performance.

7 Strategic Sourcing: A Winning Strategy for Improved Profitability Responding to Opportunity Today s M&D companies face an array of pressures as they struggle with implementing cost-effective sourcing. As a powerful ally for more than seven decades, Crowe also helps M&D companies develop and implement high-impact solutions to execute benefits-driven information technology, add value to transactions, and boost bottom-line results with these additional services: IT Advisory Services: Business First, Benefits Driven The Crowe suite of IT advisory solutions provides organizations with a systematic business-first process for developing appropriate IT strategies, making objective IT system decisions, and executing IT initiatives. This comprehensive suite of solutions delivers results through all stages of the IT planning and operational continuum from initial IT assessment and due diligence to architectural design and system selection as well as the development of a strategic IT road map. The Crowe team then helps businesses plan and implement IT solutions and increase IT s long-term impact through ongoing IT effectiveness reviews and service development. Each element is defined, designed, implemented, and managed for the specific purpose of producing clearly defined business results. The overall goal is to successfully meld business needs and company strategy into executable IT plans as quickly as possible to achieve the required benefits. M&A Integration: Achieving Speed to Value The Crowe M&A integration team helps acquirers improve the likelihood of success in their merger and acquisition transactions. The specific aim of our services is to help identify and mitigate critical integration risks, accelerate the time to achieve benefits, and ultimately maximize the value of the transaction. In M&A integration, moving quickly and effectively is critical to deriving maximal results from the deal. The Crowe M&A integration solution enables the acquirer to professionally prepare for the close and drive speed to value during the first 100 days post-close the primary period during which the deal s long-term fate typically is decided. Crowe professionals bring a unique blend of consulting and industry-side experience in the important integration disciplines. Further, Crowe uses a proven method and robust tool kit that is scalable to accommodate the specific dynamics of the deal and leaves companies with a road map to help their teams become more effective integrators in the future. Complementary to our M&A integration services, other elements of the Crowe suite of transaction services include due diligence, business valuation, deal structuring and tax optimization, and risk assessment and mitigation services. Performance Improvement: Direct, Measurable Bottom-Line Results The Crowe performance improvement team helps businesses in a variety of industries achieve significantly higher levels of profitability through improved processes, waste reduction, and management effectiveness. Using proprietary techniques to help pinpoint the root causes of suboptimal performance, the Crowe team identifies specific levers that, if improved, can produce an immediate positive financial impact. Beyond merely making recommendations, Crowe designs and helps implement solutions, working side by side with client teams at every level to deliver immediate and measurable bottom-line improvement during the course of the assignment. This highly interactive hands-on approach has helped businesses in dozens of industries address a broad array of issues from underperforming operations, low productivity, and shortcomings in quality and service to scheduling, inventory, capacity management, and revenue challenges. Even more important, by helping to establish an environment of continuous improvement, the Crowe team helps organizations achieve both immediate performance improvement and long-term, sustainable growth in enterprise value. 7

8 Contact Information We invite you to learn more about the Crowe strategic sourcing solution. Visit us at or contact: Wil Knibloe, Manager Crowe Horwath LLP, Grand Rapids, Mich., and Chicago Crowe Horwath LLP, The Unique Alternative Crowe Horwath LLP ( is one of the largest public accounting and consulting firms in the United States. Under its core purpose of Building Value with Values, Crowe uses its deep industry expertise to provide audit services to public and private entities while also helping clients reach their goals with tax, advisory, risk, and performance services. With a total of more than 3,000 personnel, Crowe and its subsidiaries have offices coast to coast. The firm is recognized by many organizations as one of the country s best places to work. Crowe serves clients worldwide as an independent member of Crowe Horwath International, one of the largest global accounting networks in the world, consisting of more than 150 independent accounting and advisory services firms in more than 100 countries around the world. Ron Melcher, Principal Crowe Horwath LLP, Atlanta ron.melcher@crowehorwath.com Doug Schrock, Principal Crowe Horwath LLP, New York doug.schrock@crowehorwath.com 1 Source: Aberdeen Group, Strategic Sourcing in the Mid-Market Benchmark: The Echo Boom in Supply Management, Aberdeen Group research paper, figure 1, Strategic Sourcing Performance Gap Among Mid-Size Enterprises (December 2005) When printed by Crowe Horwath LLP, this piece is printed on Mohawk Color Copy Premium, which is manufactured entirely with Green-e certified wind-generated electricity. Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International Crowe Horwath LLP PERF14329