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How to Build a High-Impact Indirect Sourcing Organization

Author(s):

Derek Everitt


March/April 2012, eSide Supply Management Vol. 5, No. 2

A global sourcing director looks back on what worked best for his own team when the cost savings pressure was on.

When launching a new supply management organization, the most often-asked question is: Where do we start?

This was the burning question we faced in 2007 at Terex, a global manufacturer of construction and industrial equipment with global sales (at the time) of US$9 billion. The company was organized in five global segments, each containing several business units. A new corporate supply management organization was being formed, and the pressure was on our team to show results. Global indirect spend was my responsibility. Terex defines indirect spend as all purchases of goods and services that aren't on the bill of materials of the products it manufactures and sells. Some examples include office supplies, MRO, energy, travel, contingent labor and employee benefits.

The process of ensuring we met the management team's expectations broke down into four basic steps.

Step 1: Determine where you're spending money. This first step was particularly challenging for us. At that time, Terex was using multiple operating systems and consolidating financials at a high level.

To get everyone on the same page, the indirect sourcing team distributed a basic template — with high-level spend classifications — to the financial leads at each of the businesses. We requested that it be populated with the previous year's spend value.

Because we knew that requesting too much detail at an early stage could bog down the process, we opted to gain a high-level view. We knew this would help direct our effort, allowing the detailed drill-down that would come later to be more targeted.

Step 2: Conduct an opportunity assessment. Our team then completed an opportunity assessment to identify the highest-impact areas to target in the first wave. This was a structured, analytical approach that involved asking a series of questions for each spend category. The result was a clear map of high- versus low-opportunity targets.

The first set of questions we asked the appropriate stakeholders related to expected savings. We asked them to score each spend category on a one-to-five scale on each of the following dimensions:

  • Supply industry competitiveness
  • Number of capable suppliers (Market depth)
  • Intensity of the competition (Are suppliers fighting to take a share?)
  • Low-cost-country sources
  • Availability of substitutes
  • Terex relative buying power/scalability
  • Switching cost
  • Internal considerations
  • Spend concentration (The more concentrated, the better.)
  • Specification accuracy
  • Time elapsed since last competitive bid.

For example, we asked the individuals involved with purchasing office supplies: "On a scale of one to five — with five being 'very competitive' and one being 'not competitive' — how would you score the office supplies industry?" This question was repeated with that group for each dimension.

The second set of questions related to the ease of implementation and business impact of each spend category. Specifically:

  • Complexity of the product or service
  • Number of SKUs
  • Number of team members impacted
  • Technical complexity
  • Ability to specify
  • Criticality to the business
  • Customer touch (external customers)
  • Safety
  • Senior management impact
  • Passion level.

Their responses were scored in such a way that high scores represented a relatively high savings potential and relative ease of implementation. The categories were then mapped onto a chart with the expected savings score on the vertical axis and the ease of implementation score on the horizontal axis. The categories were shown as bubbles, which were sized based on their total spend. The spend categories mapped onto the top right quadrant represented the high-priority targets — particularly the largest ones — while the categories in the bottom left were designated as low-priority.

High- Low-Priority Targets Mapped.

We circulated this analysis to key stakeholders (including the finance department) and together planned the first of several waves of projects. Examples of initial-wave projects included small-pack shipping, office supplies, welding supplies, fleet management, travel and IT peripherals.

The focus then shifted from analysis to execution.

Supply management professionals know that every spend category has unique characteristics which must be considered in the sourcing process. However, through experience, our team identified some critical success factors, regardless of the spend category.

  • Identify the key stakeholders associated with the spend category. Include them on the team as full participants
  • Understand the history and relationships involved with the current supplier(s)
  • Document internal service requirements in detail, ideally using a service level agreement (SLA)
  • Follow the sourcing process
  • Get the finance department's sign-off on the savings calculations and tracking methodology
  • Make team decisions on the major decision points in the project, including which suppliers to include, selection criteria and the ultimate award decision
  • Promote the results as a team success.

Overlooking any of these strategies — something we've all probably done at least once — makes realizing the potential savings much more difficult.

Step 3: Plan adequate resources; ensure the capacity to achieve savings objectives. This plan should account for project execution, implementation and supplier management. Once an award decision is made, considerable time is often required to manage the implementation process.

Even with the most optimal advanced planning, unexpected issues arise during implementation, and these require strong involvement to solve. Implementation leadership and support are critical to actually achieving the expected savings. It also sets the tone within the organization that change is expected, and initiatives will be completed. Too often, organizations leave potential savings on the table because they fail to allocate the resources required to sustain the change management process.

Step 4: Shift the focus to ongoing supplier management. Once the plan is implemented and a supplier dealing with multiple internal groups is in place, someone needs to ensure the ongoing expectations in terms of savings, scope of business and service levels are met. If the supplier is allowed to "divide and conquer," the value of the initial scaled effort might be lost.

While the first few months of a new supply management organization is heavily weighted toward analysis and project execution, its responsibilities soon evolve to include implementation and supplier management. It's important to plan resources with this eventuality in mind.

More Success Strategies Defined

So, the organization is staffed. Initial objectives are met. The future looks bright. Now what?

Well, this is when reality sets in: External pressures impact the organization; budgets might not be able to grow as planned, necessitating reduction; and the "low-hanging fruit" has likely already been plucked. The challenge is to continue to expand a more mature supply management organization's value proposition. In my experience, there are several strategies you can pursue, including:

  • Align savings plans and big initiatives with the company's strategic goals and leadership's priorities. Essentially, become part of the solution.
  • Create balanced savings plans that include sourcing events, renegotiations and supplier-led improvements.
  • Give suppliers annual savings targets. Measure quarterly.
  • Track savings. Use a methodology agreed to by finance, and keep that department involved in the reporting.
  • Take advantage of team members who can take on broader category responsibility by managing certain suppliers across all states, for example.
  • Formalize communications with stakeholders. Conduct regular calls with indirect sourcing councils, either quarterly or for semiannual meetings.
  • Publicize your team's achievements. Let the organization know what your department is accomplishing.
Keep It Simple

Regardless of the professional level you've attained in the supply management realm, sometimes it's very beneficial to stick to the basics — and all these strategies fall under that category. Doing so enables your team members to address the challenges they face most today.



Derek Everitt

Derek Everitt is global sourcing director for Terex Corporation in London, Ontario, Canada . To contact this author, please send an email to author@ism.ws.

For more indirect sourcing resources, visit the ISM articles database.

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