CUTTING INDIRECT SPEND COSTS THE POWER OF THIRD-PARTY SOURCING

CUTTING INDIRECT SPEND COSTS THE POWER OF THIRD-PARTY SOURCING

INTRODUCTION The business environment is ever-evolving, fluctuating moment to moment and year to year. The marketplace in which you deal today is likely vastly different from a decade ago, but regardless of the degree, change is one of the few constants in the business world. Here s another: controlling costs is critical to creating profit. Of course the corollary to cost control is the need to maximize the value of every dollar you spend on your business. That s especially true of indirect spend everything you buy that you can t resell to customers for a profit. You must spend this money with no way to recoup the costs, so it s vital that you invest as little money and time as possible while accomplishing the optimum impact and achieving the best possible quality.

Cutting the cost of indirect spend can be a profit-building tool for any business. It is particularly relevant to retailers, wholesalers and foodservice companies where profit margin is traditionally slim especially for small to mid-size regional companies. While Fortune 500 companies have the buying power to negotiate the best prices, smaller companies lack this heft in the marketplace. Often, these smaller businesses can feel as if they re at the mercy of suppliers and many times they are. How, then, can a small or mid-sized company borrow the kind of buying power a big company wields? IN THIS E-BOOK, we ll explore the tool that can give your independent store or regional chain the purchasing clout of a Fortune 500 company: third-party sourcing. We ll help you understand the true costs of indirect spend, how third-party sourcing can help maximize every dollar you invest in indirect spend, how sourcing through a third party works and the options available to you.

UNDERSTANDING THE TRUE COSTS OF INDIRECT SPEND To truly comprehend the impact indirect spend has on your bottom line, let s revisit the definition of the term. We ve stated that indirect spend is everything you purchase that can t be resold to customers in order for you to recoup all or some of the costs, let alone achieve profit. Consider the scope of items encompassed by that criteria. Not only do everyday necessities such as grocery bags and takeout boxes fall into this category, so does the electricity and natural gas needed to power your operations. Further, when you renovate, expand or construct a new facility, the materials required are also part of your indirect spend costs. In fact, indirect spend can represent 10-15% of a company s total operating costs, encompassing categories such as: Construction Structural steel, light fixtures, etc. Utilities and fuel HVAC units, generators and refrigeration units Waste removal, pest control and fire-prevention services Human resources functions such as background screenings and drug testing Technology and telecom Logistics and distribution Marketing and advertising Office supplies, furniture and equipment Packaging and consumables Business-related travel Companies of every type face these costs, from gas stations to grocery stores, retail operations to restaurants. However, how they manage indirect spend can vary. Foodservice companies, for example, typically manage indirect spend through internal procurement managers and a procurement staff. Factor the costs of salaries and benefits for procurement staff beside the cash costs of indirect spend and the total of indirect spend can constitute a large portion of a company s overall expenses. Therefore, your campaign to control the true costs of indirect spend must address every aspect of the actual cost, reduce the expenses you can manage and enhance the buying power of the dollars you must spend. THE BOTTOM LINE IS THIS: indirect spend is expensive, but it doesn t have to cost you as much as you re likely paying right now if you re attempting to manage procurement without the assistance of a third party.

LEVERAGING THIRD-PARTY SOURCING TO MAXIMIZE YOUR INDIRECT SPENDING DOLLARS Third-party sourcing is a proven cost-reduction tactic; you likely already rely on it, at least to some extent, for products you re reselling. The same principles can work for indirect spend as well, and can help you overcome some common obstacles that prevent you from maximizing your indirect spend dollars. PERSONNEL/RESOURCE LIMITATIONS Small to mid-sized organizations often do not have a full-time procurement staff, or their procurement team may be understaffed or lacking in the expertise to optimally source everything you need. IN-HOUSE PROCUREMENT COSTS Maintaining a fully staffed, experienced procurement team is not impossible but it can be costly. Expenses associated with salaries, benefits and other staff-related items can offset any savings you might see based on efforts to maximize indirect spend dollars. TECHNOLOGY LIMITATIONS Powerful procurement software can streamline processes and reduce reliance on a large staff, but the cost of licenses for this software is often prohibitive for small to midsize companies. LESS NEGOTIATING POWER Even if your procurement team is comprised of experts, a smaller or mid-size company simply can t wield the negotiating power of a larger organization with deep pockets and high volume of business. A smaller spend means your team will have less negotiating power with vendors. INCONSISTENT SOURCING PROCESS If you have more than one person within your organization handling procurement, or more than one location that each has its own procurement team, your sourcing process may not be uniform. The process can vary from department to department or location to location, depending on who s managing the task. This lack of continuity and uniformity can create inefficiencies.

Working with a third-party sourcing company can help your business overcome these obstacles in multiple ways, including: Providing access to a larger procurement workforce than you could sustain internally, enhancing your ability to accomplish more. The vendor workforce should function as an extension of your in-house team. Helping reduce the hours your in-house staff spends on procurement. Delivering access to more experienced procurement professionals. For example, Topco Indirect employs more than 45 sourcing professionals with the majority as Certified Purchasing Managers (CPM). Providing access to leading-edge technology without forcing you to incur the cost burdens of purchasing the software and/or licenses on your own. Increasing your buying, negotiating and leveraging power through aggregation with other purchasers. Your company, small or otherwise, can have the purchasing power of a much larger organization. Giving you access to more modes of procurement, meaning you ll have more options for maximizing the impact of every dollar of indirect spend. Establishing a more efficient and uniform approach to procurement across departments and locations.

When you re ready to choose a third-party sourcing provider for your indirect spend needs, keep in mind the three basic types: 1. 2. 3. Group purchasing organizations (GPOs) typically leverage the collective purchasing power of a group of businesses, such as foodservice companies, to secure discounts from vendors. GPOs may be funded through fees assessed on vendors, participating members of the GPO or both. GPOs typically have pre-established supplier choices and you may or may not be able to continue working with your existing suppliers, depending on the vendors contracted with the GPO or if the GPO requires exclusivity with their vendors only. Consulting companies are fee-based professional advisors who help companies design and implement customized purchasing plans. They can be expensive and have lengthy turnaround times as they work on a project basis. While working with a consulting company can save time and effort for your internal team, be aware that when a project is concluded the consulting company typically won t conduct a follow-up to ensure your project is implemented to your satisfaction. You would need to include all desired components into your contract upfront. Auction facilitators can provide on-line reverse auctions on a range of products, from food to equipment and supplies. Auctions occur in real time, so they can be a faster method of sourcing a specific item. Because you can see the vendors pricing during the auction, there is no uncertainty over cost and you can save significantly on the auctioned item. Auctions, however, are for a single, specific item, so they may not be useful if you need to source a number of different items. What s more, there is no follow up or supplier management. At the end of the auction, the award is made and the process is complete. Depending on your procurement needs or strategy, your company may choose one way of sourcing or choose a combination of approaches to fulfill your goals. If you choose a third-party sourcing company it is important to select a credible and experienced company with proven success.

THIRD-PARTY SOURCING: WHAT TO LOOK FOR IN A CREDIBLE COMPANY Many businesses will benefit greatly from working with a third-party strategic sourcing company to provide procurement and cost management solutions. A credible third-party sourcing company should work closely with your organization to understand: Your corporate vision and goals; Your current procurement strategy and supply chain capabilities; The organizational structure of your in-house procurement team; Your product and service offerings; and The key performance indicators by which you will measure the success of your relationship with the procurement provider. In addition to fully understanding your company s procurement goals, implementing an effective sourcing process is paramount.

A strong third-party sourcing process should tailor to your needs and incorporate the positive attributes of a GPO, consulting firm and auction facilitator, as needed. Topco Indirect, for example, combines the positive aspects of all three basic types of sourcing to meet the procurement goals of our clients. We offer the collective purchasing power of a GPO, the costsavings of auctions and the guidance of a consulting company along with management support rooted in an on-going relationship with clients. A hybrid company, such as Topco Indirect, can deliver an effective, efficient sourcing process that encompasses these steps: An interested company initiates the sourcing process by submitting a detailed request for information (RFI) or request for proposal (RFP) to the third-party sourcing company. The sourcing company should assess participant data to fully understand the company s needs. This step is critical to ensure the sourcing company is always bidding to your specifications or is able to suggest alternative specifications. Next, the sourcing company assesses market data. This allows the company to, whenever possible, incorporate vendors with whom you already have a relationship, or, when appropriate, suggest alternative suppliers that may provide additional benefits and cost savings. The third-party sourcing partner should be able to suggest alternative specifications that can meet your organization s needs while delivering enhanced cost-savings. With the collected data and recommendations for additional cost-cutting measures, the third-party sourcer should work with your company to develop a procurement strategy. A credible sourcing company will be able to assess if you ll find the best savings by combining your spend with others, joining an existing contract, providing a customized solution, or conducting a reverse on-line auction. Once the strategy is confirmed by all parties, the procurement company will work with you to select suppliers and implement the procurement plan. Throughout the relationship, the third-party organization should utilize their category expertise to manage suppliers and negotiate pricing. The third-party procurement company should implement a supplier management program that provides data to help you measure and understand the effectiveness of the procurement program. This type of management program assures the suppliers meet their deliverables through evaluation and follow-up. Finally, a credible company will work with you through the entire contract to assure all your needs are met.

THE COST-SAVING POWER AND VALUE-ADD OF THIRD-PARTY SOURCING Third-party sourcing can be a powerful tool for managing your indirect spend. It can enhance your purchasing power and help minimize internal costs associated with procurement, including labor. With market leverage of more than $2 billion in annual purchases, Topco Indirect saved its customers over $400M since 2010. Through the power of aggregation, Topco Indirect has leveraged the scale of its customers in procurement to lower costs across 12 categories of indirect spend representing hundreds of products and services. Our innovative solutions and procurement expertise have allowed our customers to think of new ways of operating their businesses. We have proven successful in a variety of indirect spend areas. A few examples include: MEDIA MANAGEMENT We helped a large retail client maximize indirect spend on marketing, advertising and merchandising. The client found inefficiencies in placing and managing their own radio, broadcast TV and cable advertising. The Topco Media Management team met with the retailer to learn about their marketing plans, goals and budgets for each quarter. Then we purchased the media, negotiated value-add ROP, trafficked the spots to the stations, and streamlined the invoicing process. Within 12 months, our process increased the retailer s total rating points by 47 percent, cut the cost per point by 39 percent, and delivered an overall budget savings of 10 percent. FRONT-END PLASTIC BAGS We conducted an aggregated sourcing event for front-end plastic bags (t-shirt bags) with 26 participating companies representing a total spend of nearly $70 million. A dozen participating companies chose to combine their spend into a group award lot that represented $17 million in annualized sales. These companies saved an average of 11.5 percent versus 4.3 percent savings for those that chose to have their business run individually. The group award lot s results underscore the true power of aggregation and how collective spend and sourcing techniques can cut product costs.

COMPACTORS AND BALERS We helped a retail client improve flexibility and effect cost savings in its waste solutions procurement process. Our Waste Solutions team worked with the client to streamline their compactor/baler infrastructure and simplify the process. Bundling of multiple services had left the retailer facing higher disposal costs. Equipment contracts were making it difficult for the client to exit service contracts that weren t maximizing value. While purchasing equipment and services were not within the retailer s budget, rental rates were high and offered no ROI. Topco invited suppliers to bid on the client s business with customized offers. We were able to craft a new program that allowed the client to procure equipment at a better price, gave them the ability to move easily in and out of contracts, and gain access to the industry s lowest waste hauling rates. FLOOR CARE We helped a customer realize significant cost savings on floor care and simplified the vendor structure to improve efficiencies. The customer operated 222 stores with two different types of flooring that both required specialized care. The customer s previous floor care procurement practices resulted in pricing that varied from store-to-store and the need to deal with 13 different vendors. We created bid specifications under four different scenarios: 1) status quo; 2) store level; 3) district level; and 4) national supplier. To assess the savings opportunity under each, we requested volume tiers from suppliers. We compared apples to apples to understand the true potential savings. As a result, the customer awarded a district level scenario to eight suppliers, and realized savings of $1.2 million a year.

CONCLUSION Third-party sourcing can help smaller to mid-size companies overcome a number of common procurement challenges, maximize every indirect spend dollar and realize significant cost savings. As you evaluate potential procurement partners, consider those with a deep experience in your retail sector and a proven track record of delivering exceptional value to their clients. Intelligently sourcing your indirect needs can make a tremendous difference in your bottom line by helping you spend your dollars wisely. To learn about how Topco Indirect can help your organization maximize its indirect spend dollars, please contact: Anthony Hayes, Sr. Sales Development Manager 781-926-6037 ahayes@topco.com