SPENDLINK White Paper

Transcription

1 SPENDLINK White Paper Driving Cash Flow and Bottom Line Results From Procurement Excellence September 2008 Steve Tucker Grant Oliver Hubwoo Spendlink

2 TABLE OF CONTENTS 1. Introduction Definition of Indirect Procurement Differences between Direct and Indirect Procurement 3 2. Current Situation 5 3. Indirect Procurement Spend and Potential Savings Typical Indirect Spend Potential Savings 7 4. Best-In-Class Procurement Processes 9 5. Conclusion About the Authors 12 Pa g e 2 o f12

3 1. Introduction Given the current global economic conditions, organisations are naturally looking at ways to reduce costs and improve cash flow. Recent studies have shown that the top three opportunities for cost savings are: 1. Purchasing Material Costs 2. Capital Expenditures 3. Inventories Fortune 500 industry leaders have known this for years and have focused on purchasing costs for the past 5-10 years, effectively driving profits up through streamlined costs and processes. In light of the economic climate faced by most organisations today, it is imperative that company leaders look to adopt best practices and processes in order to transform their procurement functions into bottom-line contributors. Luckily, much of the hard work has been done by the early adopters and strategic consultancies so your organisation can leverage the best-in-class procurement processes and technologies available today. Furthermore, with the recent rise in Software as a Service (SaaS) capabilities and services, the barriers to entry have been removed. Industry leader SAP, for example, offers it s eprocurement, esourcing, and Spend Analytics solutions in an On-Demand fashion through it s strategic partnerships. 1.1 Definition of Indirect Procurement In general, any purchased good or service that does not end up in the product or service delivered to the customer is considered an indirect good. Indirect spend, although percentage by category may vary, is often common across all industry verticals and includes: Services office supplies, courier, duplicating, legal, accounting, advertising, and temporary staff. Travel and Expense air, hotel, car rental, meals, entertainment and other travel related expenses. Maintenance, Repairs and Operations (MRO) facilities management and repairs, facilities planning and fleet maintenance. Capital heavy equipment and machinery used to manufacture products/services. Miscellaneous computers and telephone services, utilities, etc. 1.2 Differences between Direct and Indirect Procurement As Alf Noto, Vice President of Indirect Sourcing at Nokia notes in his article in Procurement Leaders, there are five major differences between indirect/direct procurement: Creating Business Advantage: 1. Direct procurement s job is to source and manage suppliers who can support the business need for supply chain integration; these considerations usually do not concern people working in indirect sourcing. Pa g e 3 o f12

4 2. Preferred Suppliers: In indirect sourcing, increasing your company s use of a preferred supplier is critical to success. In the direct environment, very few (if anyone) on the manufacturing line will buy a component from a non-preferred supplier, while for many indirect categories, everybody can. 3. Number of Stakeholders: In direct procurement, you are usually working with relatively few stakeholders (design engineers, quality managers, production specialists) who are located in a few centres of activity. The opposite is the case for the business stakeholders who influence indirect expenditure. 4. Buyer-Seller Power Relationships: Large companies can build a position of significant power over many key direct suppliers. On the other hand, almost by definition, indirect suppliers are not restricted as to which industries they can supply, so it is only on rare occasions that a company can use its volume buying power to attain a dominant position over an indirect supplier. 5. Measuring Savings: In the direct world, the focus is on cost of goods reduction. Every product has a bill of materials, and in most big companies, this is held within an ERP system. If procurement reduces the price of something, the impact on profit and loss is clear. With indirect, however, each saving made by procurement is open to questions: How much will we buy in the future? What level of compliance should we assume? Procurement Leaders, May 04, 2006 ( In addition to the above, industry leaders look to create strategic relationships which lower supply chain costs across both categories of spend. However, direct goods cause an increase in the need for strategic relationships and supplier performance management. Pa g e 4 o f12

5 2. Current Situation Each stage of the Procurement Process delivers different value and often the ratio of savings is considered to be 75% of the savings from the steps 1 to 5 and 25% of the savings from steps 6 to 10. However, it is difficult to maintain all 100% of the savings unless all of the steps are managed and implemented. For example, a sourcing effort can reduce the cost of a product by as much as 20%. However, this savings is only realised if the company buys against the newly negotiated volume contract. It is often said that contract compliance leakage or maverick spend reduces sourcing effectiveness by 10% or more. PROCUREMENT PROCESS Supplier Collaboration In addition, the lack of a closed loop source-to-settle process often leads to mal-aligned corporate goals and incentives. For example, many sourcing professionals are incentivized on sourced savings as opposed to realized savings and accounts payable managers are rewarded for reductions in transactional costs. In reality, if both groups would work together, sourcing efforts could enforce transactional efficiencies as part of the bidding process and procurement professionals could be the logical handoff once a contract was signed in order to ensure corporate compliance. Listed below are additional common issues that many organisations face today: Many different purchasing processes with highly error-prone manual processes. Duplicate records and double payments. Few centrally managed contracts. No visibility or control of spend leading to off-contract, or maverick purchases, and lack of ability to perform 3-way matching. Poor supplier management, both relationships and information. Best pricing not being obtained. Supplier bills not being paid on time and discounts not being taken. Pa g e 5 o f12

6 While you may recognise many or all of these as native issues to your organisation, the key take-away is how much money and increased risk your organisation is exposed to. As you will see below, you are not alone in this challenge as it has largely been the early adopters and Fortune 500 who have adopted best-in-class procurement processes. In a recent survey, CAPS Research identified the following areas across the companies surveyed: More than 30% use MS Excel to analyze their spend data Only 61% have a standard sourcing process Over 55% do not have an electronic contract management system Over 30% do not have an electronic purchasing system More than 40% of spend not managed by procurement 25% have no formalized procurement procedures Source: 2006 eprocurement Benchmark Report, CAPS Research, July 14, 2006 Pa g e 6 o f12

7 3. Indirect Procurement Spend and Potential Savings 3.1 Typical Indirect Spend While direct spend categories differ greatly by industry, indirect spend and processes tend to be similar across industry verticals. Typical spend for Indirect Procurement as a percentage of revenues according to CAPS Research shows and average of 41% of revenue is spent on indirect goods across the following industries: Aerospace & Defense Industrial Manufacturing Chemical Petroleum Diversified Beverages & Foods Pharmaceuticals Department of Energy Contractors Utilities Financial Services Industrial Manufacturing Petroleum Pharmaceuticals Utilities Source: 2006 eprocurement Benchmark Report, CAPS Research, July 14, Potential Savings Process Efficiencies Based on the amount of indirect spend and as-is and to-be processes, savings and efficiency targets will be defined. It is not uncommon to see savings as Aberdeen Group has identified below: Undisputed ROI and Rapid Payback of eprocurement Performance Area Before After Spend Under Management 42% 60% Reduced Procurement Cycle Time 9.6 days 3.4 days Requisition-to-Order Costs $51 $26 Percentage of Maverick Spend 33% 20% EProcurement Benchmark Report, Aberdeen Group, August 2008 Pa g e 7 o f12

8 Based upon reduction in the above, many of our customers have realised 20% or higher returns from implementing a best-in-class procurement process. Consider a Fortune 500 energy company whose change resulted in the following: Requisition-to-order cycle from 9.6 days to 3.4 days Requisition-to order costs from $51 to $26 Percentage of Maverick spend reduced from 33% to 20% Typical savings In addition to the softer process savings, real costs savings can be transferred to your bottom-line. As industry analysts have compiled below, when combined with an efficient process, savings can be quite substantial: Spend Analysis (2-10%) More spend under management enables better decision making. Supplier Qualification and Vendor Management (5%) Monitor and manage for more cost effective relationships. Sourcing (10-20%) Reverse Auctions to leverage buying power. Procurement (2-5%) More enabled suppliers allows for more spend to be rolled out to the buying organization. Contract Management (5-10%) Enabling contracts maximizes effectiveness of sourcing efforts. Request to Invoice & Reconciliation (5-10%) Allows for leveraging of transactional efficiencies such as einvoice and eprocurement. Pa g e 8 o f12

9 4. Best-In-Class Procurement Processes The procurement transformation process consists of several parallel streams of activity targeted at achieving rapid savings while putting in place a best-in-class process to manage spend, reduce risk, and enforce compliance. A typical program can take from months, depending on several factors including size, complexity, and commitment of the organization. The key work streams are broken down in the Gantt chart depicted below: 3 Year Time Period (in months) p r o c u r e m e n t tr a n s f o r m at i o n pr o c e s s e s The first step in any procurement transformation is an opportunity assessment of both the organization and the indirect spending activities of the enterprise. Spend data is extracted from back-end financial systems, cleansed, and consolidated into a sourcing opportunity and wave plan report. Pa g e 9 o f12

10 A phased sourcing strategy prioritizing low-risk, high-savings opportunities based on the spend analysis is shown below: As-Is and To-Be sessions are conducted in order to understand current processes and design an implementation plan to build a best-in-class procurement organization. Executive sponsorship, targets, and savings objectives are created. While the strategic planning is proceeding, tactical work begins in order to set up a technical framework for process efficiencies. Once a strategic sourcing plan and organisational design has been put in place, work immediately begins on transforming the organization. An aggressive wave of sourcing projects targeted at known quick-win, high spend and supplier fragmentation categories is kicked-off utilizing the efficiencies of an electronic esourcing engine that was set-up and configured during the planning phase. As the software is running On-Demand, as a service, there are minimal implementation costs, and time and work towards driving real ROI can begin immediately. During this period, work also continues on configuration of the electronic procurement tool and suppliers are contacted in order to begin electronic collaboration with the organization. By this stage in the procurement transformation cycle, sourcing events have now been completed and contracts negotiated in the online tool so electronic catalogs and online purchasing are ready to be propagated to the organization to ensure corporate-wide compliance to the newly negotiated savings. Electronic invoicing and purchase order relationships are set up for new suppliers and with existing relationships with high transaction volume. Much work is done to ensure suppliers understand the benefits they can garner by transacting electronically such as reduced process costs, improved buyer/ supplier relationships, and the potential for faster payment. Pa g e 10 o f12

11 5. Conclusion The reality of the economy today means cost control is an essential part of increasing profit in today s businesses. Industry leaders across the Fortune 500 have known this for years. Fortunately, their efforts and the advances in technology have made these best-in-class processes and technologies available to global growing enterprises at cost-effective prices. Further, the increased adoption of buyer/supplier collaboration and Software-as-a-Service has dramatically decreased implementation time, costs, and complexity. Those enterprises who are able to take advantage of the technology and knowledge available today will find themselves increasingly successful at driving costs out of their bottom-line. Pa g e 11 o f12

12 6. About the Authors Steve Tucker Senior Vice President, Hubwoo Steve is responsible for Corporate Development at Hubwoo, which includes leading the merger & acquisition strategy and new business development including Business Process Outsourcing. Steve has over 14 years of procurement and sourcing experience including senior buying roles with Mars and United Biscuits. Prior to joining Hubwoo, Steve was a principal at leading Sourcing consultancy, InterSources. stucker@hubwoo.com About Hubwoo Hubwoo enables purchasing organizations to concentrate on their strategic mission of supplier relationship management, automating their business transactions with an integrated suite of procurement tools, processes and services delivered On-Demand/ Software as a Service (SaaS). Hubwoo s Procurement Transformation Outsourcing program helps organization build a best-in-class procurement organization to drive the cost savings with no-risk to the organization. Grant Oliver Director, SPENDLINK Grant has been the CEO of an eprocurement software company, and he has many years of experience working on Procurement and Supply Chain Projects in both the Public and Private sector. Recently Grant is specialising in cost reduction in Procurement and Supply Chain Management, with specialist knowledge in eprocurement, Spend Analysis, Supply Chain Management and project implementations. Grant has implemented over 20 eprocurement and marketplace projects. goliver@spendlink.com About Spendlink Spendlink is a procurement consultancy involved in advising companies on technology solutions for procurement and supply chain management. Expertise has been gained in manufacturing and the public sector particularly Local Government and the NHS. The main focus of the business is on Indirect and Services procurement. Pa g e 12 o f12