The advantages of well-managed procurement and supply management should be tied to the company’s business strategy and touch every department.

by Peggy Cope

From an evolutionary standpoint, procurement is a bit behind the eight ball. Although the area is white hot these days, with demand for procurement professionals on the rise, executives are scratching their heads trying to figure out the best approaches.

According to Chris Sawchuk, senior business advisor at the Hackett Group, procurement ties into some of the biggest challenges the C-suite faces. “Talent management comes up consistently,” said Sawchuk, “and it’s especially challenging in procurement. People can get trained for IT, get an MBA in finance, but until recently, there were no schools focusing on supply chain or procurement management. There are a lot of changes going on in this field.”

The procurement evolution is ramping up, with associations providing certification for procurement and supply management and colleges starting to offer classes in these areas. However, “procurement organizations continue to struggle in trying to make themselves part of the business fabric,” Sawchuk noted.

Corning Inc. is among the corporations working hard to get a grip on procurement. According to Thomas Blumer, vice president procurement and transportation at Corning, the organization was not leveraging or aggregating its spend, resulting in 60 cents of every dollar in revenue going to a vendor. Business units were left to their own devices when it came to purchasing, and the procurement environment was decentralized.

According to Blumer, Corning had too many suppliers for a company of its size (less than 170k); it was not global; it had too many separate procurement systems; it was not leveraging “modern” procurement tools; it had very poor data; all the company’s buyers were doing RTP, and there was no consistency; and purchasing cost too much as a function. Citing Einstein’s definition of insanity (continuing to do things the same way while expecting different results) Blumer knew something had to change.

The company set out to develop a new procurement approach in six strategic focus areas that aligned more closely with the business strategy: functional costs at benchmarks; strategic sourcing done differently; transaction optimization; consolidation and simplification of systems; promoting data integrity; and investing in the competencies and development of Corning staff members.

Much of what the company is doing reflects trends seen in other areas. Procurement now is expected to align with business strategies, proactively seeking solutions rather than reacting to situations as they arise. The war for talent is also being fought on the procurement field.

Hackett’s data support the drive to simplify. Its research shows a direct correlation between efficiency and the reduction of complexities in the area of procurement. The number of suppliers per billion dollars of spend totaled 3,010 for companies Hackett classifies as world class, whereas peer-group companies that had not achieved the same levels of efficiency had 5,906 suppliers per billion dollars in spend.

Hackett president Wayne Mincey said, “World-class procurement companies continue to show cost advantages to peer companies, but the real story is effectiveness.” Efficiency in transactional execution enables the companies that are using procurement best to allocate more resources to sourcing and supply base management, planning, and strategy. In addition, procurement is making inroads into areas it has not penetrated to a large extent in the past; namely, globalization, innovation, supply risk management, and sustainability.

“There’s a great opportunity out there” in efficient sourcing, said Sawchuk. Some companies have globalization leaders, but many are still operating in business unit silos. “If you look at finance, it’s driving its own sourcing, as are legal and HR—it’s not done consistently. We are going to look at sourcing across the entire organization.”

One catch with procurement is that the potential to cut costs is finite. Sawchuk said, “We were challenged by companies spending a lot on procurement, with the promise of higher cost savings. Some looked at it like revenue, with infinite improvement potential. We’ve seen in the past several years that the average organizational spend cost savings as a percent of spend has been declining. If that’s the only value proposition, and it’s declining, we are at risk.”

The question is how to drive value beyond spend cost savings. When companies are in high-growth mode, procurement has a difficult time getting attention. When things level off, that changes.

“Look at financial services today,” Sawchuk said. “Procurement had trouble getting access to get behind the drive. Costs are much more important now to big banks and financial houses. Procurement has access to do things it didn’t before.” The leveling off and challenges faced by financial institutions have helped procurement grow.

If you look at procurement as a five-stage value evolution, starting with a foundation of supply assurance, progressing to the development of capabilities to deliver that value and get the stuff the company needs, followed by focusing on total cost as opposed to price, and then managing demand (why is everybody traveling so much?), you arrive at the final stage: value management. This is not about reducing the magnitude of a company’s spend, but rather asking the crucial questions: How can we get more value out of what we are buying? How can we get more out of our relationships with suppliers? In an innovative model, suppliers will bring new ideas to a customer, resulting in better savings or increased efficiencies.

But where does outsourcing fit in all this? Mostly in the areas of indirect spend, from Hackett’s point of view. “Outsourcing allows procurement organizations to look at what they are doing. If you are in catalog management, someone has to manage the catalogs a company uses to buy things. You could outsource that. Procurement is looking at decomposing how they outsource in two dimensions: processes—meaning the activities we do, the transactional activities—as well as the dimension of spend areas. Those are driving what is considered.”

Often, outsourcing can help a company focus its efforts and drive down costs. If a company doesn’t have a strong capability for offshore locations, outsourcing is a good solution. A few more providers are jumping on the procurement outsourcing bandwagon, although ICG Commerce remains the big dog in the space. According to Sawchuk, CORE Business is entering procurement, as are certain Indian firms, as well as Ariba, with its purchase of Aliente some years ago. “As companies coordinate more procurement across the organization, it might drive more ability to outsource some of it,” said Sawchuk. If that continues to increase, as companies get their arms around spending behavior, opportunities will open up to have somebody else do the work for them.

The Hertz Corporation took the plunge in indirect procurement outsourcing in April, announcing a five-year contract with ICG Commerce for procurement outsourcing services to support Hertz’s efficiency improvement and reengineering efforts.

“Our objective is to be the lowest cost, highest quality, and most customer-focused company in the rental markets we serve. We are selecting service providers who will help us drive efficiency, quality, and service improvements worldwide,” said Mark P. Frissora, Hertz’s chairman and CEO.

John Thomas, executive vice president of the global supply chain at Hertz, added, “Partnering with ICG Commerce enables us to drive material savings across our indirect spend over the next five years while increasing our focus on our direct expenses and other key supply chain opportunities.”

Under the contract, ICG Commerce will provide comprehensive procurement outsourcing services for Hertz’s North American and European operations. These services will help Hertz drive greater control over expenditures in buying categories including professional services, equipment and automotive, facilities, transportation, IT, benefits, and marketing. A partnership with Genpact will support procurement processing in Europe.

Jason Gilroy, vice president, business development at ICG Commerce (pictured at the top of this page), leads the solution design work for that company’s large outsourcing customers. He noted that Hertz was addressing a number of “pain points” during a larger business process reengineering transformation. “We view our value proposition from the procurement outsourcing side as a tremendous driver to achieve goals Hertz has set,” Gilroy said. Among broader corporate targets is management of indirect spend on a global basis.

The bulk of Hertz’s spend is going to be working with its stakeholders within the company to help with category strategies and the sourcing provider selection process, as well as ongoing management of that supply base to work on continuous improvement. The work ICG Commerce does will be on higher levels, including spend analytics, sourcing, and ongoing management. The support ICG brings to Hertz will impact a number of departments, including marketing, IT, operations, and more.

The Value Proposition
Gilroy said the value proposition on procurement outsourcing is different from that of other major BPO domains. “When an organization looks to outsource other areas, a large component of the value proposition is labor arbitrage.” In the case of procurement outsourcing, the value proposition is more valuable to the organization, but it is also difficult to get your arms around.

“People want to simplify, bundle processes, and think of it as the same as other BPO areas. But procurement outsourcing is about lowering your spend across the organization,” he said. “The types of spend procurement outsourcing will manage and make more effective are in your marketing spend, in IT—it’s in travel, it’s in everything.”

Because spending affects so much of an organization, procurement can realize huge benefits compared with reducing an operating budget by tapping low-cost labor.

“The value our customers see through this model is it’s a company-wide initiative to drive efficiency. It’s not just on the operation side—it is driving efficiency out into the rest of the organization,” said Gilroy.