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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Corporate F&A
- Sprache: Englisch
Managing corporate spend is far more complex than conducting RFPs. Learn how the most efficient and effective procurement departments operate, control costs, enforce compliance, and manage indirect spend.
Managing Indirect Spend provides executives and procurement professionals with the knowledge and tools necessary to successfully reduce costs with a strong focus on the often-overlooked area of indirect spend. It also offers great value to those procurement and purchasing professionals aspiring to be leaders in the profession, regardless of the spend they manage. It includes an overview of the challenges faced when sourcing indirect spend categories, a detailed dive into the strategic sourcing process, tools that can help drive savings, technologies that drive efficiencies and compliance, and examples of success based on real-world experience. It is a how-to guide that clearly covers sourcing engagements of any complexity and provides the details needed to source effectively. The book is structured into sections covering the sourcing and procurement process, the tools and technologies, examples from the field, walkthroughs of specific sourcing engagements, guidance on building an effective sourcing team, and the information needed to become a best-in-class sourcing organization.
Since the initial publication of this book, the procurement profession and the discipline of Strategic Sourcing have matured. Markets have changed, processes developed, trends have come and gone, and technology has experienced leaps and bounds, posing new and interesting challenges for procurement professionals. In addition to covering tried-and-true practices for strategic sourcing, this Second Edition discusses how strategic sourcing has evolved and provides an update on the techniques, tools, and resources available to purchasing groups. This book:
- Includes updated coverage of everything you need to know to source more effectively
- Covers the latest trends in procurement and sourcing, including technology, process improvements and organizational design
- Presents guidance for reducing costs through strategic sourcing, no matter what the economic climate or level of maturity of the existing procurement organization
- Shows how effectively managing indirect costs can provide a huge impact on bott
- m line growth
- Introduces Market Intelligence (MI), including techniques, tools, and resources available to procurement and supply chain management groups
With tools, real-world examples, and practical strategies, Managing Indirect Spend provides insider guidance for big bottom-line growth through effective management of indirect costs.
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Veröffentlichungsjahr: 2021
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Table of Contents
Cover
Title Page
Copyright
Dedication
Preface
WHAT THIS BOOK WILL DO FOR YOU
WHO WE ARE
HOW THIS BOOK IS ORGANIZED
BEGINNING YOUR JOURNEY
Acknowledgments
About the Authors
JOE PAYNE
WILLIAM R. DORN
DAVID PASTORE
JENNIFER ULRICH
PART I: The Process
CHAPTER 1: An Introduction to Strategic Sourcing
VISIBILITY
OBJECTIVITY
PROJECT MANAGEMENT TOOL
IN SUMMARY
CHAPTER 2: Data Collection and Spend Analysis
WHAT IS DATA COLLECTION?
WHERE TO START?
DEALING WITH DECENTRALIZED DATA SETS
SPEND ANALYSIS
SPEND ANALYSIS TOOLS
KICKING OFF THE PROJECTS
END‐USER INTERVIEWS
LINE‐ITEM DETAIL AND GETTING THE MOST FROM YOUR SUPPLY BASE
SUPPLIER INTERVIEWS
ANALYZING CONTRACTS AND PRICING AGREEMENTS
THE FINAL ANALYSIS: BUILDING A BASELINE
IN SUMMARY
CHAPTER 3: Conducting Research
TYPES OF COST‐SAVINGS OPPORTUNITIES
UNDERSTANDING THE CATEGORY
IDENTIFYING SUPPLIERS
UNDERSTANDING THE SUPPLY CHAIN
UNDERSTANDING CURRENT MARKET CONDITIONS
UNDERSTANDING THE FACTORS OF COST
REVIEW OF TECHNOLOGIES, PROCESSES, PRODUCTS, AND SERVICES
COLLECTING MARKET INTELLIGENCE THROUGH THE RFI PROCESS
IN SUMMARY
CHAPTER 4: The RFx Process
USING THE RFI TO BEGIN THE SOURCING PHASE
DEVELOPING YOUR SOURCING STRATEGY
GOING TO MARKET
GENERATING THE RFP AND RFQ
SUPPLIER SELECTION AND SCORECARD CRITERIA
ADMINISTERING THE RFX PROCESS
REVERSE AUCTIONS
ALTERNATIVES TO THE RFX—THE IMPORTANCE OF FLEXIBILITY AND CREATIVITY IN THE SOURCING PROCESS
IN SUMMARY
CHAPTER 5: Scorecarding Suppliers
MEASURING VALUE: DEVELOPING SELECTION CRITERIA
THE QUANTITATIVE ANALYSIS: EVALUATING THE BID PORTION OF SUPPLIER PROPOSALS
THE QUALITATIVE APPROACH: DEVELOPING THE RFP MATRIX
REFERENCES
TEAMWORK AND OBJECTIVITY
TECHNOLOGY'S ROLE
IN SUMMARY
CHAPTER 6: Negotiations
KNOWING WHAT TO NEGOTIATE
NEGOTIATION OPTIMIZATION: DEVELOPING FINAL TARGETS
GETTING TO “NO”
WHAT NOT TO DO
IN SUMMARY
CHAPTER 7: Get It in Writing
ESSENTIAL COMPONENTS OF A CONTRACT
ATTACHMENTS
CONTRACT MANAGEMENT
MAKING THE BEST USE OF YOUR LEGAL TEAM
CONTRACTING PITFALLS AND LANGUAGE TO AVOID
WORKING OUTSIDE OF A CONTRACT: PRICING AGREEMENTS AND HANDSHAKES
IN SUMMARY
CHAPTER 8: Implementation and Continuous Improvement
THE CHALLENGES OF IMPLEMENTATION
OVERCOMING CHALLENGES
MONITORING IMPROVEMENTS AFTER IMPLEMENTATION
SAVINGS AND COMPLIANCE BEST PRACTICES
CONTINUOUS IMPROVEMENT INITIATIVES
IN SUMMARY
CHAPTER 9: What Not to Do During a Strategic Sourcing Initiative
CREATING OVERLY COMPLEX OR LONG RFPs
LETTING THE SUPPLIER WRITE THE RFP FOR YOU
RFP SPAM
IN SUMMARY
PART II: The Tools
CHAPTER 10: The Importance of Market Intelligence
THE TYPES OF MARKET INTELLIGENCE
COMPONENTS OF SUCCESS
BREAKING DOWN THE COMPONENTS
IN SUMMARY
CHAPTER 11: Introduction to Procurement Technology
A BRIEF HISTORY OF PROCUREMENT TECHNOLOGY
THE SOLUTION LANDSCAPE
UPSTREAM AND DOWNSTREAM PROCUREMENT
SPEND ANALYSIS
SOURCING
REVERSE AUCTIONS
CONTRACT LIFECYCLE MANAGEMENT (CLM)
SUPPLIER INFORMATION MANAGEMENT (SIM)
SUPPLIER PERFORMANCE MANAGEMENT (SPM)
SUPPLIER RISK MANAGEMENT (SRM)
PROCUREMENT (P2P)
INVOICING AND PAYMENT
S2P INDIVIDUAL PRODUCTS VERSUS FULL‐SUITE SOLUTIONS
IN SUMMARY
CHAPTER 12: Increasing Stakeholder and Supplier Engagement
WHAT IS A STAKEHOLDER?
WHO ARE THE STAKEHOLDERS?
THE VALUE BROUGHT BY STAKEHOLDERS
IN SUMMARY
CHAPTER 13: Leveraging Group Purchasing Organizations
TYPES OF GPOS
SERVICES PROVIDED BY GPOS
BENEFITS OF GPOS
GPO DISADVANTAGES
BEST PRACTICES FOR MANAGING GPO RELATIONSHIPS
IN SUMMARY
PART III: Examples from the Field
CHAPTER 14: Supplier Collaboration
OPENING UP YOUR REQUIREMENTS
GIVING SUPPLIERS WHAT THEY NEED
HELPING SUPPLIERS WITH THEIR SUPPLY CHAIN
COLLABORATING WITH SUPPLIERS IN SIMILAR INDUSTRIES
IN SUMMARY
CHAPTER 15: Leveraging Supplier Feedback
AVOIDING THE RFP PROCESS
MAKING YOURSELF THE IDEAL CUSTOMER
EXAMPLES OF LEVERAGING SUPPLIER FEEDBACK SUCCESSFULLY
IN SUMMARY
CHAPTER 16: Opportunity Assessment and Sourcing Roadmap
INTRODUCTION
STARTING WITH SPEND ANALYSIS
PROCUREMENT TAXONOMY
OPPORTUNITY ASSESSMENT
ROADMAP
IN SUMMARY
PART IV: How to Do It
CHAPTER 17: Determining Project Complexity
COMPLEXITY DRIVERS
IN SUMMARY
CHAPTER 18: Planning and Optimizing Low‐complexity Projects
GETTING FAMILIAR WITH LOW COMPLEXITY
WHERE TO FIND LOW COMPLEXITY PROJECTS
DEALING WITH UNEXPECTED COMPLEXITY
ADDING COMPLEXITY WITH PURPOSE
FACTORING LOW‐COMPLEXITY PROJECTS INTO YOUR ROADMAP
IN SUMMARY
CHAPTER 19: Navigating High‐Complexity Projects
PROCESS DRIVERS
PROJECT DRIVERS
IN SUMMARY
CHAPTER 20: Building an Indirect Procurement Team
DEFINING THE ROLE OF PROCUREMENT
DESIGNING THE FRAMEWORK
BUILDING THE TEAM
IN SUMMARY
CHAPTER 21: Team Training and Development
WHERE TO BEGIN
BALANCING THE CONTENT
HOW TO MAKE IT STICK
IN SUMMARY
CHAPTER 22: Process, Policy, and Digitalization
ENACTING THE CHANGE
THE ROLE OF GOVERNANCE
ENABLING THE TEAM THROUGH TECHNOLOGY
IN SUMMARY
Index
End User License Agreement
List of Tables
Chapter 2
TABLE 2.1 General Ledger Information
TABLE 2.2 General Ledger Information with Cleansed Supplier Name
TABLE 2.3 Pivot Table with Category and Supplier
TABLE 2.4 Project Road Map
Chapter 4
TABLE 4.1 Sample Request for Proposal Milestones
TABLE 4.2 Sample Table of RFP Requirements
TABLE 4.3 Summary Page of Volume Information
Chapter 5
TABLE 5.1 Quality and Service
TABLE 5.2 RFP Scorecard Summaries
Chapter 6
TABLE 6.1 Office Supplies Bid Results
TABLE 6.2 Office Supply Bid Results with Lowest Cost
Chapter 8
TABLE 8.1 Baseline Spend and Projected Savings
List of Illustrations
Chapter 4
FIGURE 4.1 Buyer Spend Classifications
Chapter 16
FIGURE 16.1 Demonstrates a simple overlay of the middle savings percentage n...
FIGURE 16.2 The total master categories of spend by distribution and is an e...
FIGURE 16.3 The estimated opportunity distribution for the same categories t...
FIGURE 16.4 Several pieces of information. On the
x
‐axis, we see the assigne...
FIGURE 16.5 The collective projects in this example show an annualized $3.1 ...
FIGURE 16.6 A waterfall diagram helps to better emphasize the difference bet...
Guide
Cover
Table of Contents
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Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.
The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management.
Managing Indirect Spend
Enhancing Profitability Through Strategic Sourcing
Second Edition
JOE PAYNEWILLIAM R. DORNDAVID PASTOREJENNIFER ULRICH
Copyright © 2021 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
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Managing Indirect Spend is and always will be dedicated to Abraham Podolak and Steven Belli. Without your perseverance, vision, and enthusiasm, these pages would surely not have been written. Your joint leadership, guidance, and compassion built a unique company that changed all our lives forever.
Preface
WE WROTE THE FIRST EDITION of Managing Indirect Spend in 2010. At that time changes were happening in procurement, and many organizations were moving to centralized indirect spend and fully leveraging the aggregated purchasing power of their companies. Investments in procurement were high, with organizations adding people, processes, and technology to meet their objectives. Early in that decade, much was written about “Procurement 2020” and how far the function had come.
Still, not everyone got the memo. When we wrote the first version of this book, strategic sourcing and category management for indirect categories was still relatively new for many organizations. Now, organizations have teams of category managers, third‐party outsourcing, and comprehensive savings tracking. At the same time, they still have many of the same problems as they did in those early days. They lack spend visibility, they're seeing diminishing returns in terms of cost savings, they're having trouble driving change, and procurement is still perceived as a tactical, nonstrategic function.
The organizations that were in “build mode” earlier in the decade now need a seat at the table at the C‐level, they need investment in new systems that drive adoption and compliance with procurement policies through enablement, and they need training for their teams. They struggle, however, to create the business case for this investment. As Kurt Vonnegut wrote in his novel Hocus Pocus, “Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance.”
Many large organizations—from publicly traded services companies without procurement departments, to large industrial manufacturers that allow each plant to purchase independently without leveraging volumes, or healthcare providers that have relied on their group purchasing organization to effectively manage budgets for them—still do not know how to achieve substantial cost savings on all of the “stuff” they buy. The people burdened with these tasks often do not know where to begin. It is for these beleaguered souls that this book has been written.
In our experience, resources for these types of organizations are sorely lacking. Many consulting firms and analysts pitch sourcing optimization and a variety of other buzzwords with which they seek to replace the term “Strategic Sourcing.” For some reason, people have begun to associate the Strategic Sourcing process with the standard three‐bid‐and‐buy process that most organizations have been using for decades. They all believe they are sourcing strategically; therefore, management does not see the need to provide the proper people, technology, time, and training to effectively manage spend and look for cost reduction opportunities. Industry analysts and other experts are already looking to identify the next big thing—calling strategic sourcing irrelevant, outdated, or ineffective—while their customers continue to struggle with getting their arms around the basics of what it means to source strategically.
WHAT THIS BOOK WILL DO FOR YOU
Whether you are an executive, procurement professional, or any individual concerned with reducing spend and strengthening your supply chain, this book will provide you with the knowledge and necessary tools to successfully reduce costs in the area of indirect spend. The processes and real‐world examples in this book are based on more than 20 years of consulting experience and the successful implementation of cost reduction strategies for clients of all sizes, in just about every industry and in hundreds of spend categories.
Specifically, this book provides you with the following:
An overview of the challenges faced when sourcing indirect spend categories
An overview of the Strategic Sourcing process
A description of the tools and technology that can help you source and manage the procurement process more efficiently and effectively.
A do‐it‐yourself guide to building and maintaining a best‐in‐class procurement organization
This book focuses on specifics instead of theory and will detail how to actually get started, run through the process, and implement cost savings across a wide variety of indirect spend categories. It also details the most important aspects of strategic sourcing that many other books overlook: the use of creativity when performing research; how to identify leverage points during negotiations; and most importantly, effectively dealing with people, both externally and within your own organization.
WHO WE ARE
Recently, the procurement and supply chain management profession as a whole has received more focus than ever before. In fact, procurement and supply chain professionals are now regularly covered in mainstream media publications and are even quoted on cable news channels. Because of this sudden awareness of our profession, no shortage of consulting firms have been jumping on the bandwagon and offering strategic sourcing services. Many of these firms employ the same standard tactics that organizations have been using for years, while trying to rebrand their services to sound more impressive.
The primary authors of this book were utilizing a Strategic Sourcing process and best‐in‐class procurement techniques long before they were well known. Our team consists of experienced supply chain and procurement leaders who have led and managed thousands of strategic sourcing initiatives for mid‐market and Fortune 500 customers and have helped stand up or digitize hundreds of procurement organizations. We are successful in producing savings in more than 97% of all of the initiatives we have tackled. Over the course of our work, we have seen what companies do right and, more importantly, what companies do wrong and in many cases fail to do at all.
HOW THIS BOOK IS ORGANIZED
The book is broken into four parts: Process, Tools, Examples from the Field, and How to Do It.
Part One: The Process
Part One of this book provides you with a detailed, step‐by‐step account of the typical Strategic Sourcing process, outlining the steps with which most sourcing professionals are already familiar. These steps include Data Collection and Spend Analysis, Research, the RFx process, Negotiations, Contracting, Implementation, and Continuous Improvement. Each step of the process is covered as a separate chapter in this section, providing an explanation of the goal of that step in the process, a high‐level overview of the tools needed to reach the goal, and the people involved. Each chapter also provides an in‐depth account of how to work with people, both inside and outside your organization, to achieve optimal results.
Part One concludes with a chapter on “What Not to Do,” specifically focusing on our years of hands‐on experience seeing the mistakes other procurement professionals have made in the past (and continue to make) and offering lessons to help you avoid similar pitfalls. Some topics of discussion include sending spam RFPs, creating overly complicated sourcing documents, allowing a supplier to write RFPs for you, and not engaging the right stakeholders within an organization.
Part Two: The Tools
Part Two of this book provides an overview and analysis of the resources and technologies that can help professionals source and purchase more effectively. The first chapter in this section defines market intelligence and its importance as a primary tool in the Strategic Sourcing process. It also defines the distinction between static and dynamic intelligence and offers guidelines for using each. It continues by describing types of static and dynamic market intelligence, such as industry publications and commodity reports, group purchasing organizations, online tools, and consultants.
The second chapter in this section focuses on the technologies and software solutions that are available in the marketplace. It explains the advantages and disadvantages of using software tools and sheds light on some of the best‐kept secrets of procurement tools as well as little‐known free technologies that are available online
The last chapter in this section discusses using stakeholder engagement as a tool to motivate suppliers and implement change within the organization, outlining how critical it is to your organization to have a team of committed stakeholders to ensure the success of your sourcing project.
Part Three: Examples from the Field
Part Three provides a detailed account of some first‐hand experiences we have had helping customers reduce costs by employing the Strategic Sourcing process, including some of the most creative solutions we have developed as well as some of the most challenging sourcing engagements we have come across. Each chapter in Part Three offers you an example of each experience and covers different sourcing strategies.
The first chapter defines some of the creative methods you can use to get your incumbent supplier, or potential supply base, to assist you in strengthening a relationship and reaching your own organization's goals. We discuss tactics that can be used to help get your suppliers on board with your goals and help them help you drive savings.
The second chapter discusses tactics that help you become the ideal customer in the eyes of your supplier. Typically, gaining this status leads to improved supplier relationships and even larger savings opportunities. We then conclude with specific examples in which clients have leveraged supplier feedback to gain improvements in their supply chain.
To summarize, we also discuss uncovering savings through data analysis. The last chapter in Part Three focuses on ways to achieve savings without negotiations by purchasing more efficiently and utilizing easy‐to‐manage tracking and scorecarding tools.
Part Four: How to Do It
In Part Four, we provide insights and sourcing strategies for specific indirect spend areas. Some of these include office supplies and telecommunications services. Each spend area is detailed in its own chapter and provides an industry overview with sourcing strategies you and your company can use to produce the optimal result.
BEGINNING YOUR JOURNEY
As you read through the book, keep in mind that the methods and processes we discuss are not rigid instructions that you should apply to your organization. Just as markets are ever‐changing and flexible, so should your strategies. Start thinking about how to apply these concepts in the most effective way based on the objectives, constraints, and culture of your own organization. You can only successfully transition from process to profit by customizing your sourcing strategy based on your own unique internal considerations and restrictions.
Acknowledgments
SPECIAL THANKS TO BENNETT GLACE. Without his mastery of the English language and attention to detail, this book would be virtually unreadable.
We'd also like to thank Kathleen Jordan and Scott Decker, who contributed to the first edition of Managing Indirect Spend. Much of their contribution remains intact in this edition.
About the Authors
JOE PAYNE
Joe has dedicated the last 20 years to helping improve the procurement and sourcing function within midmarket and Fortune 1000 companies. Over that time, Joe has held several positions, from leading a consulting organization dedicated to the build out of indirect procurement functions to most recently running a business unit that provides technology, advisory, and managed services support to enhance and improve the full source‐to‐pay life cycle.
During his career, Joe has developed insight into the challenges that organizations face when undertaking initiatives to reduce costs in the area of indirect spend and create sustainable procurement value. While reviewing the consulting market and existing printed publications, he identified a gap in this critical component of business and created the idea for this book.
Joe is a long‐standing contributor to the Strategic Sourceror blog and leads discussion groups and brainstorming sessions at various training seminars and networking events.
Joe holds a bachelor of science degree in operations and information management from the University of Scranton.
WILLIAM R. DORN
William R. Dorn or “The Bill Dorn” as most call him, started his career in manufacturing and mechanical engineering before transitioning into technology, automation, procurement, and operations. Bill subsequently helped transform Source One into a leading consulting firm known for delivering high‐quality procurement advisory, sourcing technologies, and strategic sourcing managed services. Bill and Joe started in the weeds, conducting hundreds of sourcing events, building a library of best practices, and later focusing on building and scaling the business itself. Bill and Joe later became partners at Source One. Bill focused primarily on operations, finance, sales, marketing, product management, and information technology. In 2018, the business was sold to a growing financial services technology company, Corcentric, in order to build out a complete source‐to‐pay solution offering.
After participating in the sale of Source One, Bill stayed on after the acquisition and took on a new role within the organization, managing the upstream product strategy for Corcentric. Corcentric subsequently acquired Determine, a P2P SaaS provider where Bill then led the technology teams focused on sourcing, analytics, contract lifecycle management, and supplier portal and supplier performance management.
Bill holds a bachelor of science degree in information technology, an associate of arts degree in electronics engineering, and is a certified Six Sigma Black Belt.
DAVID PASTORE
David is a procurement thought leader. For 15 years he has lead teams of consultants who help midmarket and Fortune 1000 companies manage their most complex and strategic spends and supplier relationships. David's work focuses on elevating the role of procurement to become a leader and create a competitive advantage in clients' respective industries.
David contributed to the first edition of Managing Indirect Spend and regularly writes for the Strategic Sourceror blog. His work has been featured in numerous publications, and he speaks regularly at industry events.
David graduated summa cum laude with a bachelor of science degree in management information systems from Lock Haven University of Pennsylvania. He has a remarkable sense of humor, which he prefers to keep to himself. He lives in Pennsylvania with his wife, Nettie, and two dogs, Gary and Gray.
JENNIFER ULRICH
Recognized industry‐wide as an authority on procurement, finance, and digital transformation and category management, Jennifer boasts more than a decade of consulting experience. Jennifer provides cross‐functional procurement knowledge and innovative strategies necessary to develop top‐performing procurement and finance teams and realize long‐term savings. Her efforts have also included developing customized training programs for strategic sourcing, contracting and negotiations, spend analytics, procurement process redesign, and supplier relationship optimization.
Throughout her career, Jennifer has worked on both sides of procurement as an end user in a previous role and now leading a team of advisory consultants in the areas of procurement and finance transformation, digital transformation, and change management.
Jennifer is a regular contributor to the Strategic Sourceror blog, actively participates in industry‐leading publications and events, and has a bachelor of science degree in marketing and a master of business administration from the University of Phoenix.
PART IThe Process
CHAPTER 1An Introduction to Strategic Sourcing
MANY AUTHORS HAVE ALREADY WRITTEN on Strategic Sourcing and Supply Chain Management. In general, each describes a sourcing process that includes somewhere between five and seven steps. The primary differences among their books are in the ways those steps are defined and segmented. The process described in this book should look familiar in that it includes six steps, starting with the inception of the initiative (Project Kickoff) and concluding with final monitoring of the implemented program (Continuous Improvement). This book's process, however, specifically applies Strategic Sourcing techniques to indirect spend categories and offers insights and strategies that have been applied successfully for decades. Our process is not based on theory; the techniques described have been refined through years of experience alongside many types of organizations to reduce their costs for indirect goods and services. As you will discover, the process itself serves primarily as a project management tool. Creative strategies and adaptability in the face of uncertainty are the key elements that make your sourcing initiative truly strategic.
In the first edition of this book, published back in 2010, we noted that many organizations still neglected to apply Strategic Sourcing techniques to their indirect spend categories. Instead, indirect spend was treated as a series of one‐off purchases or was sourced with a simple three‐bid strategy with little effort beyond reviewing the supplier price responses. Typically, with indirect spend, per‐item prices are relatively low, the product or service is not crucial to the business, and the overall costs are rarely examined because of the difficulty entailed in gathering meaningful spend and market data.
Things have changed in the years since our first edition, but not as much as we might have hoped. Most organizations are now familiar with a Strategic Sourcing process. True best practices for sourcing indirect spend, however, are still rare. Sourcing managers are still accustomed to the old way of running bids and still continue to engage suppliers at arm's‐length, which does not engage the supplier community in a way that maximizes competition. Concepts like category management have become even more important, yet even organizations with dedicated category managers suffer from diminishing returns and increased costs as they attempt to hire in‐house specialists for virtually every category of spend.
In the current world of procurement, leaders and managers shouldn't focus on effective sourcing processes alone, but they should also turn their attention toward ensuring a high return on investment for the function, creating efficiency and effectiveness metrics that drive results faster, increasing visibility, and engaging their stakeholders and suppliers effectively. Strategic Sourcing, combined with proper category management techniques, continues to allow organizations to shift away from thinking about indirect spend in an ad hoc manner and provides spend visibility, objective decision‐making, and a project management tool to ensure efficient use of the sourcing team's time and efforts.
VISIBILITY
Strategic Sourcing provides a new level of visibility into business processes, operational concerns, and spend details that may not have been available to management and stakeholders in the past. The process provides a road map for collecting and analyzing this information and determining how particular products or services truly fit into the overall business operations of an organization, from the identification of a need to the use of the product or service, and (if necessary) its disposal. This includes identifying the following:
Who buys the product?
How is it ordered?
How is it received?
How it is paid for?
Where is the payment information stored in your systems?
What are the payment reconciliation processes?
Where is the product stored?
When is it used?
Why is it needed?
Who are the suppliers?
What value‐adds or services are provided?
What happens to the product after its useful life is over?
As we discuss throughout the book, all of this information is necessary to properly perform Strategic Sourcing, to ensure the most efficient processes and tools are utilized, and ultimately to implement and maintain the final program developed through the process.
OBJECTIVITY
Strategic Sourcing allows organizations to change the way they manage indirect spend, shifting it from a series of one‐off purchases to a more coordinated effort with checks, balances, and objectivity to justify costs and requirements. Historically, indirect purchases and spend for most organizations were managed by one or many individuals, with little oversight from management and no requirement to justify their selection of suppliers. Strategic Sourcing provides a process to identify the true requirements of the organization (rather than those of the individual(s) managing the spend) and to identify suppliers and price points that appropriately meet those requirements. The process is performed in such a way that requirements are identified well ahead of supplier identification, and stakeholders agree to those requirements before exploring alternatives to the existing arrangement.
PROJECT MANAGEMENT TOOL
Finally, a well‐designed Strategic Sourcing process becomes a project management tool that can ensure engagements will not end in failure due to scope creep or lack of clear paths forward and that those working on the project will make the most efficient possible use of their time and resources. Attempting to reduce costs without a formalized Strategic Sourcing process can easily end in frustration, as roles are not clearly laid out between team members, steps are not identified, and timelines are not set.
As discussed throughout this book, even organizations that employ a strong Strategic Sourcing process will face many challenges, and teams can easily get bogged down in noncritical details or fail to reach consensus at critical points. The process in itself includes steps that can be integrated into a comprehensive project plan to avoid convoluted outcomes.
The Strategic Sourcing process has six basic steps:
Data Collection and Spend Analysis
Research
The RFx Process (requesting information, quotes, and proposals from suppliers)
Negotiations
Contracting
Implementation and Continuous Improvement
Our goal is to help you navigate through specific activities that most sourcing books fail to cover—dealing with and effectively utilizing internal constituents, motivating the supplier marketplace, and gathering the information required to make informed decisions during each step of the process.
Data Collection and Spend Analysis
Once you identify the need for Strategic Sourcing, the next step is collecting and analyzing spend data. The purpose is twofold. First, you need this data to determine where you should focus your efforts. Your resources are more than likely limited, and it will not be possible to immediately reduce costs across all of your organization's spend areas. You need to identify areas of opportunity and develop a project road map to provide context and timelines for your efforts.
Second, you need these data to determine both the quantitative and qualitative requirements associated with a particular spend category. When we discuss the quantitative aspects, we are referring to current price points, discounts, payment and freight terms, and other costs associated with a particular area of spend or specific suppliers. Qualitative requirements refer to the quality and services tied to these costs. The current suppliers were more than likely chosen based not just on price, but other value‐added considerations as well, and these factors need to be understood and considered. The quantitative baseline and qualitative requirements become the launching pad for the rest of the engagement, which makes it critical not just to identify them, but also to make sure they are agreed on by other interested parties within your organization before moving to the next step.
Research
The research phase provides context for the categories you are sourcing. The purpose of research is to develop or refine your sourcing strategy by determining what competition exists in the marketplace. This entails identifying any available alternative products, services, or processes and whether or not current market conditions make it a good or bad time to go to market.
The RFx Process (Requesting Information, Quotes, and Proposals from Suppliers)
During the RFx phase, you will execute the sourcing strategy that you developed during the Data Collection and Research phases. In all likelihood, this will include requesting proposals or quotes from alternate suppliers or performing a reverse auction. Depending on market conditions, the competitive landscape, and how the product or service fits into your overall business strategy, however, it could also mean focusing on other cost reduction strategies that do not involve bidding out the business. During the RFx stage of Strategic Sourcing, you will also evaluate the proposals and other information submitted by suppliers to determine both their quantitative (cost savings) and the qualitative (service/value‐add) benefits. This culminates in an objective grading or scorecarding process.
Negotiations
Once you've received, refined, and analyzed the initial proposals, you will move into the Negotiation phase of Strategic Sourcing. At this stage, you will develop target price points for the products or services you buy, identify preferred suppliers (incumbents or alternates), and request that suppliers meet the established targets in order to win your business. Chapter 6 provides strategies for identifying price targets and leveraging multiple bidders against one another.
As discussed in Chapter 6, organizations should not view Negotiations as separate from the rest of the Strategic Sourcing process. Even thinking of it as a distinct “phase” can be misleading. Some form of negotiations should be taking place with the supplier community throughout the Strategic Sourcing process.
Contracting
Once you've selected the final supplier (or suppliers), your next step is to award the business. The Contracting phase converts the business terms you agreed to during the sourcing phase into a legally binding document that details the rules of engagement between the customer (you) and the supplier. The Contracting phase does not necessarily end with a signed contract. It could result in a pricing agreement with agreed‐to terms or a simple purchase order.
Implementation and Continuous Improvement
Often overlooked, Implementation and Continuous Improvement ensure that the work performed throughout the Strategic Sourcing process pays off for years to come. Simply entering into an agreement with a preferred supplier does not result in cost savings. You need to ensure end users and stakeholders adhere to agreed‐upon terms and crack down on maverick purchasing. You need to track savings to ensure the supplier is holding up its end of the bargain (price) and your organization is holding up its own end (volume). This means rolling the agreement out internally, reviewing invoiced pricing as well as other internal documentation to ensure internal customers are not buying off‐contract, and requesting credits for improper billings—and that's just the start.
IN SUMMARY
Part One of this book covers each of the steps in the Strategic Sourcing process in great detail. While some of the challenges discussed may not apply to your organization, we have taken care to use examples we find in many of the organizations we work with, regardless of size, industry, or type of project.
While the Strategic Sourcing process on its own can produce cost savings, working to optimize your results requires reflecting on the steps in the process and determining the best way to customize those steps for your organization. Developing cost‐savings strategies, delving into market research, and negotiating with both internal stakeholders and external suppliers requires a highly creative approach—it is not all analytics. Applying Strategic Sourcing techniques to indirect spend categories can be a challenging endeavor; however, for organizations looking to cut costs or enhance profitability, these spend areas can provide a wealth of untapped savings opportunities.
CHAPTER 2Data Collection and Spend Analysis
COLLECTING AND ANALYZING DATA isn't just the starting point for any Strategic Sourcing initiative; it lays the foundation for success. The information you gather during this phase is used to quantify results later on, but the Data Collection phase is about much more than just gathering and analyzing information. Approaching it with care can help build sponsorship within your organization, inspire collaboration, and create the required momentum to generate optimal results.
In this chapter, we start from the beginning. We discuss pulling data out of internal accounting systems and analyzing it in order to develop a roadmap for potential Strategic Sourcing initiatives. We then examine how to gather data for specific projects, kick off your efforts, and engage suppliers and stakeholders.
WHAT IS DATA COLLECTION?
The Data Collection phase is where you generate the insights that will drive you throughout the rest of your initiative. Those insights will inform your strategy and ensure that the products and services you source will align with your organization's requirements. Having a detailed understanding of your current state in terms of price, quality, and service provides the context for analyzing offers from alternate suppliers in a much more meaningful way. In addition, establishing an accurate starting point helps justify your position when you need to ensure alignment or justify your decision‐making.
By collecting and developing a thorough understanding of the data, you have a foundation to conduct a gap analysis and to explore new or changing requirements. Providing alternate suppliers with a complete and accurate picture of your requirements eliminates any guesswork they may need to incorporate in their proposals and eliminates additional costs that may arise due to ambiguity. Before digging into the most effective ways to collect data, let's first identify the types of data you need to get started on an initiative.
On the surface, quantity and price may look like simple data points. However, once you begin to dig, you will discover that some tricky complexity can be hidden within these data points. For example, a logical first set of questions is, “How much does the company buy (total units) and how much does it cost (price per unit)?” As you explore the answer, the notion of price quickly grows in complexity when you realize that unit cost is not the only component you need to consider. A number of other factors come into play: Are there quantity price breaks? Is freight included, or are there additional charges? What are the payment terms, and is there a discount for early payment?
In many cases, net cost per unit is not the only way (nor the most advisable way) to evaluate price. Consider, for example, an initiative that includes a basket of items, some purchased regularly and others rather infrequently, such as office supplies. In this scenario, high‐volume items might be identified as having a fixed unit price, but what about items for which a fixed price wasn't negotiated? This is a fairly common occurrence because it is not likely that you will have negotiated a fixed unit price for everything in a supplier's catalog. Still, controlling the costs of the less‐frequent purchases is also important. For these items, you likely have a discount structure based on a list price. For instance, pens and pencils that are not listed as contract items might receive a 20% discount off of the list price. In this example, price is a combination of net costs, list prices, and discounts. Collecting pricing information may appear to be a simple concept, but as you can see, many factors must be considered to understand the total cost.
Usage or volume (how much you buy of a particular product or service) is the other basic component of the Data Collection phase. In most cases, companies consider the last 12 months of usage to be reflective of future purchases. However, this may not always be the case. If business has decreased or increased, processes have changed, or requirements are being met through alternate means, volume will likely have shifted, and those changes must be documented before engaging in the RFx phase. In some cases, consolidating volumes across locations (if you have multiple sites buying the same products) might make sense. In other cases, the data should stay separate. Order size may also make a big difference, so line‐item detail for purchases across locations becomes critical. As we discuss later in this chapter, getting this level of detail out of your own internal systems can be a challenge—sometimes it is impossible.
Price and usage are the foundation of a spend analysis, but many other factors should also be considered while you're collecting and analyzing data. Understanding existing contractual commitments, contract terms and conditions, quality levels, and scope of work are also important. Business concerns such as the order‐to‐payment process, the shipping and receiving process, and a detailed understanding of the historical relationships with current suppliers should all be reviewed and evaluated during this stage. With all this data to collect, getting started can prove a daunting task. In reality, it is not that difficult, as long as you have a clear idea of what you are looking to accomplish and an organized plan to get you there.
WHERE TO START?
So where to begin? For the purpose of this book, we'll assume you are starting from scratch—you are about to engage in a Strategic Sourcing initiative, and your primary goal is to maximize the amount of dollars your organization can save. You need to identify categories or projects and develop a plan to source those categories. You want to build momentum for your initiative with a few quick wins, and you do not want to squander limited resources on projects unless your return on investment is significant. To do this, you need to identify the quick wins—categories that you can source quickly and realize significant savings.
To get to that point, you must identify your supply base and categorize the suppliers into buckets based on the products or services they provide. From there, you can identify potential projects and begin collecting data.
The next few pages provide a high‐level overview on how to collect data and perform a rudimentary spend analysis. Later in the book, we'll outline a more detailed process. Before we go into detail on that process, it is important to note that there are tools that can make the spend analysis process easier. Spend analysis tools have many advantages, which we discuss later in this chapter and later in the book. Most also require an investment of time and money to implement properly. If you are or your organization is new to Strategic Sourcing, you should only consider investing in technology after you've confirmed that your process works. Regardless, the process we outline over the next few pages should only be considered if you do not have access to spend analysis tools.
Assuming you don't already have a robust system in place, the best place to start is in the general ledger or Accounts Payable (AP) ledger. The general ledger provides a list of all financial transactions, normally classified into groups used by the Accounting department. However, using these categories as a basis for an engagement is a mistake because purchasing requirements are typically not considered during the categorization process. For example, most general ledgers include a category for supplies, which can include anything from coffee filters to paint. Since you will probably want two different suppliers (and therefore will want to perform two distinct initiatives) for these items, classifying them the same way isn't helpful. While general ledger classification requires refinement, the ledger can point you in the direction of categories that (from an accounting standpoint) have the highest levels of spend and therefore the biggest impact on the organization.
Typically, each line item in the general ledger includes a description or comment field, and if that transaction represents the purchase of a good or service, that description will include the supplier's name. The challenge is that this description data, which is pulled from an AP or purchase order (PO) database, will not be consistent for each transaction and requires additional manipulation of data.
Table 2.1 provides an example of general ledger data that provides supplier name, but the name is not consistent enough to properly utilize the data as is.
In this case, our supplier, Widget Providers, is listed in the comments field; however, the comments also include other information, such as the PO number. In order to get a good understanding of how much is spent over the course of a year with Widget Providers, an analyst might create a spreadsheet that includes all the information above and an additional field called Cleansed Supplier Name, as demonstrated in Table 2.2.
Now that the data includes a standardized Supplier Name field, it becomes possible to analyze spend by supplier. Taking it a step further, we might also add a column called Category and identify Widget Providers as a provider of office supplies. Categorizing Widget Providers under this general category, along with other office supplies vendors, provides a good basis for identifying spend areas to consider. We will cover categorization in greater detail later in this book.
TABLE 2.1 General Ledger Information
GL Account Code
Period
Date
Journal
Comments
Debit
5162600‐02
03
3/26/2009
AP‐002926
40WIDG000 WIDGET PROV 22809 PO 6361
$12,472.20
5162600‐02
04
4/23/2009
AP‐003106
40WIDG000 WIDGET PROV 33109 PO 7258
$15,145.00
5162600‐02
05
5/31/2009
AP‐003336
40WIDG000 WIDGET PROV 43009 PO 7412
$17,595.00
TABLE 2.2 General Ledger Information with Cleansed Supplier Name
GL Account Code
Period
Date
Journal
Comments
Debit
Cleansed Supplier Name
5162600‐02
03
3/26/2009
AP‐002926
40WIDG000 WIDGET PROV 22809 PO 6361
$12,472.20
Widget Providers
5162600‐02
04
4/23/2009
AP‐003106
40WIDG000 WIDGET PROV 33109 PO 7258
$15,145.00
Widget Providers
5162600‐02
05
5/31/2009
AP‐003336
40WIDG000 WIDGET PROV 43009 PO 7412
$17,595.00
Widget providers
Depending on your enterprise resource planning (ERP) system, an AP report may also be a useful tool to help give focus to sourcing initiatives. The AP report has several advantages over a general ledger. First, while the general ledger includes every financial transaction (debit or credit) made by the organization, an AP report only shows money paid to vendors. Second, because the report is vendor specific, supplier names will likely be standardized to a higher degree than in the general ledger. This will make the data cleansing process much easier. A potential disadvantage to using an AP report instead of a rolled‐up general ledger report is that (depending on how your financial reporting is structured) each business unit or location within your company may be operating under its own Accounts Payable journal, which means you need to run a report for each location, then consolidate files (if you intend to source across multiple locations).
DEALING WITH DECENTRALIZED DATA SETS
This leads us into the next challenge, which is how to deal with decentralized spend. Decentralized spend typically means that a supplier relationship (and subsequent payment to that supplier) does not flow through a single point of contact or group, such as a centralized Accounts Payable team and payment process. Instead, employees out in the field (or at satellite locations) are able to place, pay for, and process orders for goods and services without oversight from a centralized entity.
This impacts the spend analysis in several ways. First, if your company has grown by acquisition, it is possible that different sites are utilizing different ERP systems. These systems may or may not roll into a single financial system.
Second, when the responsibility of ordering and paying for goods and services falls to multiple people (or groups of people), it usually results in a variety of payment procedures. For example, some locations might run all purchases through a purchase order system and pay via check, while others may pay via a purchasing (credit) card, and others may receive invoices and pay via electronic funds transfer.
Depending on your situation, it may be a good idea to enlist the support of the Finance department, the Information Technology (IT) department, or both. If you are dealing with a situation where multiple ERPs are used, Finance can give you a good indication of how those systems interact with each other. Finance can also shed light on the types of payment options that are used within the organization and how those options are reflected in various ledgers and reports.
IT should also be able to help run the reports you need. In addition, IT may be able to aid in standardizing and consolidating data sets coming from different sources.
If some payments are going to vendors through a procurement card (p‐card), the transactions you pull out of your ERP are only going to reflect payments to your p‐card company, not the vendors you were actually paying. However, most p‐card providers can give you reports that detail whom you have paid with their cards. These reports can be as simple as a list of suppliers and total amounts, or as detailed as a line‐by‐line account of particular items purchased and quantities. If you do not already have access to this data, Finance should be able to provide you with the appropriate reports.
When working with IT or Finance, remember that (during this first pass of data collection and analysis) you are simply trying to identify total spend by supplier over a period of time, normally a year. Two to three years might also make sense if one of your goals is to identify trends over time.
SPEND ANALYSIS
Now that you have collected data sets representing at least one year's worth of spend across all operating units within the organization, the next step is to consolidate and standardize your information. It is important to note that, at this point, the goal is to identify project areas. Capturing line‐item details (such as product purchased, quantity, and price) comes later.
If you are consolidating data yourself, review each data set to determine which columns of information are important. Transaction Date, Supplier Name, and Spend are the three most critical pieces of information. You may want to capture other data as well. Pull this information out of each individual data set and add it to a new consolidated spreadsheet file that includes a column indicating which data set the information came from. For instance, if you pull data for a particular location (let us say location X) out of an AP report for that location, add a column called Location and indicate location X, then add a column called Source Data and indicate AP report.
Once the data are consolidated, it is time to standardize and categorize it. Sort the data by the Supplier field, and create a new column called Cleansed Supplier Name. As discussed previously in this chapter, you may find that each data set has multiple names for a particular supplier. You might even see multiple names within the same data set. Let us use FedEx as an example. If your company makes payments to FedEx, you will probably see this supplier listed as FedEx, Federal Express, FedEx Corp, and so on. In the cleansed supplier name field, standardize all these different options to a single name. Repeat the process for all lines of data.
At this stage, it may not make sense to standardize supplier names across 100% of the data. If you are dealing with hundreds of thousands of records, this could be a very tedious task. If that is the case, utilize the 80/20 rule. Run a pivot table on the data by supplier, then total up the spend. Identify which suppliers make up 80% of the total spend and focus your efforts on standardizing those supplier names. Ignoring 20% of the spend may seem troublesome, but keep in mind that within this data, there are likely to be repeat entries for the same supplier (for example, FedX instead of FedEx). At this point, we are simply identifying target areas. Once we identify worthwhile projects, we then focus on collecting more detailed information. At that point, we will look more closely at the FedX data.
Once you have cleansed and standardized supplier names, it is time to group the data into sourcing categories. Sourcing categories are essentially high‐level identifiers that indicate suppliers that provide the same or similar services. Grouping them together allows you to identify project areas and, eventually, leverage opportunities.
Creating your category list is the first real step in the spend analysis process—turning data into information. Spend analysis is not an exact science. There is no single right or wrong way to do it, but there are some best practices worth considering.
First, be general in your initial classification. Start at the highest level of categorization you can identify. You'll drill down later in the process. For example, you may know that Staples is used for pens and pencils, and Xerox is used for paper products, but categorizing them in different buckets is not appropriate at this time. At its base, the initial spend classification is looking to identify which suppliers provide the same or similar services. Right now, you may use Staples for some items and Xerox for others, but a potential sourcing strategy might be to consolidate all of this spend with a single supplier. So, for now, classify both suppliers under the category Administrative Supplies.
Many suppliers provide a wide range of goods and services. This makes it difficult to classify by name alone. If you have managed to capture any line‐item usage details in your initial data collection, this information can be used to classify the supplier. If a single supplier performs multiple different services or provides multiple, very different types of goods, only one high‐level classification for the supplier should be applied at this time. The final stage of spend analysis is an overall opportunity assessment. Understanding the full impact of a supplier relationship is critical to identifying these opportunities. This high‐level classification will aid that analysis. We'll go into much more detail on the spend analysis and classification processes later in the book.
Once you have completed the initial classification, it is time to start ranking categories for further analysis. Run a pivot table that shows spend by category, then sort the data by spend. You can now see which categories contain the highest spend and therefore have the greatest impact on the organization.
TABLE 2.3 Pivot Table with Category and Supplier
Sum of Total Spend
Category
Supplier Name
Total
Facilities maintenance
Sai Elevator Company
$ 1,421,000
Waste Services Incorporated
$ 908,312
Steven's HVAC
$ 532,127
Complete Maintenance Solutions
$ 444,893
Heating and Cooling Supply Company
$ 364,459
Universal Plumbing Associates
$ 320,276
Jan‐Tactic Cleaning Services
$ 200,555
Maintenance Supplies Unlimited
$ 143,264
Facilities maintenance total
$ 4,334,886
Marketing
Franklin Advertising Agency
$ 2,170,000
Budget Print Services
$ 989,767
Color True Graphic Design
$ 270,312
National Printing
$ 95,000
Standard Market Research of New York
$ 62,123
Marketing total
$ 3,587,202
Administrative expense
Office Max Incorp.
$ 750,309
Federal Express Corporation
$ 546,999
Warehouse Direct
$ 506,380
U.S. Postal Service
$ 413,075
Xerox
$ 311,189
United Parcel Service
$ 281,406
Administration total
$ 2,809,358
Grand total
$10,731,446
Now, add the Supplier column to the pivot table. You can now see how many suppliers make up each category of spend. Table 2.3 provides an example of an analysis of spend by category and supplier.
When ranking categories, you are essentially determining the order in which you plan to drill down further into the data. Factors to consider when developing your ranking include how much spend is included within a category, how many suppliers are included with in a category, which categories have not been sourced recently, and which categories can be sourced most quickly (and with the least resistance). Understanding your company culture is important for properly managing this step. For example, depending on the industry you serve, the Marketing category will probably be high up your list in terms of both spend and suppliers utilized. However, many Marketing departments rely on close relationships with their suppliers and maintain tight control over their supplier selection process. This may cause them to be very reluctant to work with people outside of the Marketing department on supplier selection or supplier negotiations. If you are unfamiliar with sourcing and purchasing in the Marketing category (or you get the impression that there is high resistance from Marketing), you may not want to identify this area as a starting point. Instead, focus on areas of the organization that are more open to change or are less politically sensitive.
This is not to say that Marketing spend should not be examined. The purpose of a Strategic Sourcing initiative is to reduce costs and hopefully create significant savings opportunities in the area of Marketing. However, building sponsorship and buy‐in to the process is critical, and sometimes the best way to do that is by showing some positive results from previous initiative. Starting with a department that is reluctant to engage will not help you build that business case.
Now that you have ranked the categories, it is time to subcategorize the information into projects. During this stage, you are identifying what you consider to be distinct Strategic Sourcing initiatives, each with its own project plan, timeline, and sourcing strategy. In doing this, you are developing a preliminary sourcing strategy based on leverage points—grouping the spend in a way that provides the best opportunity for a supplier to reduce price, improve service levels, or provide additional incentives.
At this stage, you probably won't have a clear understanding of price points, a full understanding of the supply base (capacity issues, regional variances, service differentiators, etc.), or other aspects that could create leverage; all you know is spend by supplier and category.
