White Paper. Reshaping Traditional eprocurement To Achieve Extraordinary Savings on Indirect Spend

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1 White Paper Reshaping Traditional eprocurement To Achieve Extraordinary Savings on Indirect Spend Procurement and financial leaders need to evolve the way they think about B2B e-commerce, supplier relationship management, procurement savings and ROI. It is time to realize the indispensable value that real-time data delivers to their organizations and to understand that eprocurement needs to move at the speed of now Alliance Road Cincinnati, Ohio / Aquiire.com

2 2 The Evolution of Procurement In Deloitte s 2016 Global CPO Survey 2016 report, 74% of respondents stated cost reduction as their top priority in Also, 70% of the surveyed procurement executives cited indirect spend as a top focus for controlling and reducing costs. Indirect procurement costs are often considered insignificant. However, recent studies have found that indirect spend can account for up to 50% of a company s purchases and manufacturers specifically can spend or more of their total revenue on indirect expenditures. It is clear the next great impact area for procurement organizations is in accessing hidden, unexploited areas of indirect spend. However, to maximize the savings that automated eprocurement solutions can provide, procurement and purchasing leaders need to rethink and reshape the traditional approach to B2B e-commerce. Some approaches that seem counter-intuitive can and should be leveraged to drive unprecedented savings and value. Significant Indirect Procurement Challenges Thousands of suppliers to negotiate/manage Reduced negotiating power in tail spend B2B purchasing behavior is influenced by B2C experience Millennials are twice as likely to pursue competitive marketplace shopping Prices and items change dynamically all the time The Problem with Indirect B2B Purchasing Today The traditional indirect purchasing model is to consolidate suppliers, negotiate strong discounts, set up an eprocurement or marketplace system (using hosted and punchout e-commerce web catalogs), and compel users to purchase from preferred vendors at pre-negotiated contractual pricing. By consolidating to key suppliers, the belief is organizations can develop powerful, mutual relationships and leverage volume buying. This approach is a natural extension of direct supply chain models requiring focus in order to optimize the full lifecycle of critical suppliers. Organizations have done a great job of optimizing direct supply relationships and are now targeting indirect procurement for the next area of incremental savings. In indirect, with large numbers of suppliers and potential suppliers to manage, this optimization becomes difficult. Hosted catalogs are easy to use, but the information is usually only updated periodically. Once supplier contracts are finalized, the products and pricing immediately become stagnant and quickly outdated. Also, the eprocurement purchasing process for an end user is usually clunky and time-consuming, leading to poor user adoption of the procurement system. With punchout (web) catalogs, users must search one at a time to find the items they are seeking and are exposed to many products not under contract or approved. Employees who are forced to deal with exhausting product searches and outdated information are more likely to get discouraged with the purchasing process.

3 3 Thus, user commodity purchases are often made from the same vendors (without comparing alternative pricing options); or via rogue spending, which are purchases made outside of the ERP or eprocurement system and nullify the benefits of the prenegotiated discount pricing. Both scenarios result in a significant loss of savings. The Reality of Real-Time Data Rather than follow traditional procurement approaches of rationalizing suppliers to drive compliance and efficiency with each relationship, it is much more impactful (and practical) in indirect procurement to optimize across the complete pool of available suppliers by creating a competitive, real-time marketplace. Supplier products and pricing isn t and shouldn t be static. Suppliers such as Staples, Amazon Business, Dell, Fisher Scientific and thousands more are continually discounting commodity segments and products on a 24/7 basis (even below the best pre-negotiated pricing costs). individuals do not all purchase from the lowest price store, because they find it uneconomical to search out better buys. - Steven Salop and Joseph E. Stiglitz, Princeton University As a result, any one vendor will not be the best choice at every given moment in time. Real-time product/pricing data and alternative supplier choices for end users are essential to deliver significant, untapped savings on indirect and long-tail spend. While end users have come to expect this type of online competitive shopping in their personal lives, most eprocurement or Procure-to-Pay (P2P) software solutions have never been able to truly deliver on the shopping experience or savings promised. Real-time technology makes it possible to rethink the traditional indirect procurement business model and provide users with true comparison shopping within corporate purchasing processes alongside procurement guidance and visibility. An Evolution to Real-Time Procurement Procurement and financial leaders need to evolve the way they think about B2B e-commerce, supplier relationship management, procurement savings and ROI. It is time to realize the indispensable value that real-time data delivers to their organizations and to understand that procurement needs to move at the speed of now. Price dispersion occurs when different sellers offer different prices for the same good in a given market because some at least do not know who the lowest priced seller is. * - Ed Hopkins University of Edinburgh Having the ability to quickly search and aggregate real-time product information from all approved supplier websites and hosted catalogs and instantly offer lower price alternatives for the same or similar products at the time of checkout can deliver previously unattainable savings for procurement organizations. This is based on making intelligent choices and takes advantage of an online marketplace reality economists call price dispersion.

4 4 Price dispersion occurs when different sellers offer different prices for the same good in a given market. Thus, it differs from price discrimination under which a single seller offers different prices to different groups of buyers or in different geographical locations. A simple explanation for price dispersion is that it arises from imperfect information on the part of consumers who do not all buy from the lowest price seller because some at least do not know who the lowest priced seller is. Ed Hopkins, University of Edinburgh Instead of constraining users to purchase only from one or two large suppliers with stale, pre-negotiated pricing, procurement and financial leaders can empower them to become champions for savings at their organizations, by providing visibility to all prices in real time, allowing them to choose the lower-priced options at any specific moment of purchase. Studies indicate that these previously untapped savings can be significant: Price dispersion is found to be significant and persistent. Baye et al. finds an average coefficient of variation of about 9% for goods being sold online. - Ed Hopkins, University of Edinburgh Beyond Theory: True-Life Case Studies On behalf of a large global enterprise, the Aquiire data team conducted an experiment to measure actual missed savings opportunities by not leveraging alternative competitive supplier pricing against their current, negotiated contract pricing. The results were quite astonishing. Here are the testing scenarios: Analyzed 65K purchased items for real-time pricing comparisons. This sample analysis is consistent with results from other analysis we have conducted for other organizations. Real-Time Pricing Comparison - Scenario 1 The study compared 65,000 purchased items made leveraging the client s negotiated pricing from their preferred MRO and Office Supplies against a large e-commerce supplier that provides both categories of items. Analysis of each supplier s item pricing at the point in time that each purchase was made allowed the research team to assess the additional cost savings that could have been captured if the lowest price supplier was chosen each time. Real-Time Pricing Comparison - Scenario 2 Our research analysts then compared and measured the MRO and Office Supplies savings opportunities if two buying cooperatives (GPO s) were introduced as competition alongside negotiated suppliers and a large e-commerce supplier. Again, each purchase was analyzed to compare each supplier s item pricing at the point in time of each purchase and the additional potential cost were calculated for the scenario where the lowest price supplier was chosen each time.

5 5 Scenario 1 Results 1 100% 80% 60% $1,237,012 $1,541,440 $1,071,252 40% 0% Office Supplies Comparison Negotiated Supplier Third Party E-Commerce Best-Priced Option Office Supplies Cost Comparison Negotiated Supplier - $1,237,012 (total cost per negotiated contract discounts) Third Party E-Commerce - $1,541,440 (24.61% HIGHER COST if all items were purchased through website) Chose the Best Option - $1,071,252 (13.40% LOWER COST if users purchased the lowest-priced option)

6 6 100% 80% 60% $1,072,110 $1,140,725 $974,333 40% 0% MRO Cost Comparison Negotiated Supplier Third Party E-Commerce Best-Priced Option MRO Cost Comparison: Negotiated Supplier - $1,072,110 (total cost per negotiated contract discount average of 8%) Third Party E-Commerce - $1,140,725 (6.40% HIGHER COST if all items were purchased through website) Chose the Best Option - $974,333 (9.12% LOWER COST if users purchased the lowest-priced option)

7 7 00% 80% 60% 2,309,122 $2,682,165 $2,045,585 40% 0% Combined Cost Comparison Totals Negotiated Supplier Third Party E-Commerce Best-Priced Option Scenario 1 Combined Cost Comparison Totals: Negotiated Suppliers - $2,309,122 (total cost if all items purchased only through negotiated suppliers) Third Party E-Commerce - $2,682,165 (16.15% HIGHER COST if all items were purchased through e-commerce website) Chose the Best Option - $2,045,585 (11.41% LOWER COST if users purchased the lowest-priced option) $263,537 Savings on purchases if users chose the lowest-priced supplier at that given point in time. So, of the 65,000 items purchased, if the enterprise users purchased the lowest-price item in a competitive marketplace environment, the company would have saved $263,537 over their negotiated supplier pricing. And this is just a small sample of the total company spend per year. Now let s look at Scenario 2 total cost results when introducing products and pricing of two buying cooperatives into the marketplace.

8 8 Scenario 2 Results 1 100% 80% 60% $2,309,112 $2,682,165 $2,241,119 $2,193,081 $1860,921 40% 0% Total Cost Comparison Negotiated Suppliers Third Party E-Commerce Buying Cooperative 1 Buying Cooperative 2 Best-Priced Option Total Cost Comparison: Negotiated Suppliers - $2,309,122 (total cost if all items were purchased through all suppliers) Third Party E-Commerce - $2,682,165 (16.15% HIGHER COST if all items were purchased through website) Buying Cooperative 1 - $2,241,119 (2.94% LOWER COST if all items were purchased through cooperative 1) Buying Cooperative 2 - $2,193,018 (5.01% LOWER COST if all items were purchased through cooperative 2) Chose the Best Option - $1,860,921 (19.41% LOWER COST if users purchased the lowest-priced option) $448,201 Savings when two buying cooperatives were brought into the marketplace. These test results show that as more competition and pricing options are brought into the eprocurement marketplace, the higher the savings potential for the organization when the lowerpriced items are selected at the time of purchase. In this scenario, the enterprise would have saved $448,201 on the 65,000 items.

9 9 Untapped Savings on indirect spend, above and beyond the savings achieved by implementing an automated procure-to-pay software solution. The Numbers in Perspective If the enterprise s annual indirect spend on products is $100 million, and the organization averaged an additional 19% savings by utilizing the lowest alternative supplier pricing model, that would equate to an annual savings of $19 million. Even if we conservatively predict that overall savings would balance down to theoretical savings predictions of 9%, this organization would have saved $9 million per year by introducing real-time competition into their indirect marketplace. This is worthy of a pat on the back from any CFO or CEO. Additional Saving Through Supplier Competition Not only does real-time pricing allow organizations to measure their true realized savings, but capturing alternative supplier data in real time is also an invaluable tool during renegotiations with suppliers. This historical data can be used to show suppliers the commodity areas and items where they are not competitive across each moment of end-user purchase. Armed with this information, procurement teams have better tools to prompt suppliers into offering lower pricing and incentives, knowing that they are contending for the sale in a competitive, real-time pricing environment. This will drive even more savings potential on annual indirect spend. See the chart below for renegotiation savings results from one of our customers. Additional Savings when our customer drove down pricing by increasing competition in their private marketplace and leveraged the data during supplier negotiations. Suppliers reduced pricing to increase sales in a competitive environment. Data anonymized for privacy. # of Suppliers 6 MRO 6 IT Commodity Type 5 Laboratory 3 Electrical 3 Building 3 Furniture 3 Electronics 2 Office Renegotiating Supplier Pricing with Price Dispersion Data 25% 15% 10% 5% 21% 13% Organizational savings by including multiple suppliers in each commodity category to drive competition. 18% 10% 17% 17% 9% 9% 7% 7% 8% 8% 8% 8% 8% 8% 8% 15% 15% 13% 5% 2 Cylinder gases 2 Internal 0% MRO Supplier MRO Supplier MRO Supplier Office Supplies Laboratory Supplier Benchmark Savings Laboratory Supplier Approximate Additional Savings IT Supplier Summary Finding new ways to contain costs is a constant challenge. Proper vetting and negotiating aggressive discounts with suppliers is still an important part of capturing indirect savings and delivering value for stakeholders. But it is time to evolve the purchasing process to the speed of now by enabling real-time price comparisons across a dynamic, competitive marketplace.

10 10 Utilizing real-time data, comparison shopping, alternative supplier pricing and advanced spend visibility analysis tools, procurement leaders can truly deliver and measure the untapped savings on indirect spend they are bringing to their organizations, as well as the additional value they are providing their organization. Employing advanced automated supplier relationship and catalog management tools make it almost effortless to maintain a supplier base that will fulfill your business needs. It is time to invite more suppliers to the indirect purchasing opportunity, not less. Watch the On-Demand Webinar More information on this topic is available through the ondemand webinar New Ways to Achieve Unprecedented Savings on Indirect Spend. Aquiire s Real-Time eprocurement Solution Aquiire s intelligent real-time Procure-to-Pay suite brings the convenience and simplicity of the consumer shopping experience to the business user with unparalleled compliance and savings. Aquiire features patented universal search and shopping, machine learning, actionable intelligence and collaborative supplier enablement solutions. Aquiire s best-in-class, intuitive user interface and real-time low price comparisons from alternative suppliers deliver untapped savings on indirect spend. The real-time processing of structured and unstructured data also powers advanced capabilities like instant alerts, risk analysis, analytics and price/product compliance enforcement. Qualified organizations can receive a complimentary PO data analysis to measure indirect savings opportunities. Contact info@aquiire.com or visit Additional Resources Click the links below to visit the Aquiire resource center. Aquiire Digital Brochure White Paper: Top Ten Ways Real-Time eprocurement Matters White Paper: Twelve-Step Program for Implementing a Successful eprocurement Strategy White Paper: Is it Worth Investing in an Automated eprocurement Solution Webinar: New Ways to Achieve Unprecedented Savings on Indirect Spend Webinar: Transforming Procurement through Agility, Collaboration, Tech & Real-Time Data Ardent Partners Report: P2P: Best-in-Class Blueprint PayStream Advisors Report: P2P: 2017 Procure-to-Pay for Indirect Spend

11 The only real-time eprocurement solution. Innovative. Intelligent. Intuitive Alliance Road Cincinnati, Ohio / Aquiire.com