Succeeding Through Indirect Procurement Outsourcing

Jan. 8, 2010
In tough economic times, industrial manufacturers often reduce costs in areas such as indirect procurement to quickly gain major, sustainable savings. 
Outsourcing of indirect procurement may also help them in their pursuit of optimal results. Accenture has found that companies mastering procurement to drive greater value are increasingly relying on outsourcing. Moreover, those that outsource indirect procurement can save from 8 percent to 12 percent on operations materials that companies must purchase as part of the cost of doing business. Given that typical indirect procurement costs can range from 10 percent to 15 percent of a company’s annual revenue, this is notable, as even small reductions in the cost base can have a big impact.Companies today also are challenged by a host of indirect procurement issues—from acquiring needed procurement skills, reducing risks and lowering transactional costs to optimizing processes—that outsourcing can help to address.  One leading construction services firm, for instance, is generating savings of 23 percent across seven of its outsourced purchasing categories. Industrial manufacturers looking to maximize the potential of their indirect procurement function and achieve high performance will need to weigh whether they want to seek the management experience and category-level expertise required to become world-class, as well as create a system to handle procurement across different regions, countries and kinds of business, or, alternatively, to pursue outsourcing. Companies will need to compare the business case for internal capability vs. an outsourcing option. Those, for example, that have a significant budget of $300 million or more for indirect procurement, but may not have a high-level professional procurement program in place, may want to consider using the capabilities of a procurement outsourcing provider.The next consideration is the approach to be taken to develop an effective program. Chief procurement officers who have leveraged outsourcing as part of their overall transformation strategy usually recommend a phased approach. This demonstrates to a business that outsourcing can meet its needs in one area, and the company can then expand from there. A good example of this is taking one manufacturing plant or type of commodity and seeing if outsourcing works for those areas. This strategy offers more control over the risk and impact.Procurement outsourcing companies also may improve the effectiveness of a program, as they have procurement-dedicated talent, methods and content that can be leveraged. For instance, in indirect materials, such as office supplies, outsourcers have knowledgeable commodity managers, specific office supply sourcing strategies, specification rationalization and demand management methods, and blanket, low-cost contracts that can be applied to improve cost and service.Thinking throughFinally, if an outsourcing option is pursued, it will be important that the procurement processes are redesigned to accommodate involvement of an outsourcing function. The best results have been achieved when processes are standardized and the process changes at the company have been well thought through with the outsourcing partner. Additionally, the number of outsourcing companies selected should be limited to avoid creating added complexity within processes.Evidence from past recessions shows that high-performance businesses take the opportunities offered by adverse economic conditions to create a sustainable, competitive advantage—an advantage, for example, that may be achieved by adopting low-cost and high-efficiency procurement processes. Industrial manufacturers will need to closely examine their particular situations to determine if indirect procurement outsourcing is right for them. But, those that pursue it may have a better chance to lower cost, increase productivity and develop more sustainable, effective operations.James Robbins, [email protected], is a senior executive for Accenture, a global management consulting, technology services and outsourcing company.

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