Purchasing

A CAHNERS PUBLICATION

T H E M A GA Z I N E OF TOTA L SU PPLY CH A I N M A N A GEM EN T

Taking c o n t r o l
of ‘indirect’
corporate spending
B Y A N N E M I L L EN PORT ER

O
Over the last decade consumes. In addition to production mate- only 40% of their total corporate spending
the purchasing func- rials, we buy advertising, health-care under purchasing. “Many companies feel
tion has begun to services, travel, legal services, and real es- comfortable in the handling of their indi-
establish itself as a tate. Half of what we buy might be rect spending simply because they employ
strategic contributor, considered non-traditional in other firms. purchasing cards or formal purchase or-
often driving competitive advantage Nothing is non-traditional as far as we’re ders,” Hottinger observes. “In reality,
through improvements to cycle times, qual- concerned.” however, the vast majority of indirect
ity, service, price, and total cost. “Until But, in corporate America at large, this spends are not consolidated, leveraged, or
recently, however, the primary corporate level of purchasing involvement in indirect integrated by purchasing.”
focus has been in direct purchasing-prod- corporate spending (spending not related to In failing to control the commercial
ucts and services that are direct components production) is certainly the exception rather aspects of their indirect spends-leverage,
of finished products,” says Dick Hottinger, than the rule. Indeed, Urioste had estimated total cost, terms and conditions, supplier
strategic sourcing consultant and former that, on average, many companies capture performance specifications and measure-
chief procurement officer for Owens Corn-
ing. Now, companies are beginning to take
control of the so-called indirect spend in Taking concept to reality
addition to driving continuous improve-
ments in spending for production. Pr o f e s s i o n a l Immediate plays/ Sh a r e h o l d e r e q u i t y
“Creating value in such spending areas as ser vic es 1 best deal leverage ec onom ic pr ofit
professional services, information technol-
Segment and prioritize

Infor m at ion User education

ogy, facilities, energy, and travel is t echnology Price/cost restructuring and training
becoming a ‘must do’ for purchasing de- 2 (Volume leveraging and supply pattern
partments,” observes Steve Trecha, CEO of Te m p o r a r y shifts - less complex) Process/policy
ser vic es enforcement
Integrated Strategies, located in East Lan-
sing, Mich. “The price-cost reductions and M RO Short term buy plans Measurement
service improvements are simply too great 3 (Volume leveraging, innovation, and supply and budget
Fa c i l i t i e s pattern shifts - more complex) restrictions
to ignore,” Hottinger adds.
Last fall, IBM’s Javier Urioste, direc- Tr a ve l

$
Sourcing effectiveness teams (SETs
(SETs))
tor of policy, strategy, and international Ut ilit ies 4 (Supplier integration, productivity, capacity contracting,
operations at IBM Global Procurement told standardization, performance base improvements)
PURCHASING Magazine that, “IBM pro-
curement touches everything the company SOURCE: INTEGRATED STRATEGIES

PURCHASING 1
 existence of other high-priority or high-vis-
Indirect sourcing initiative process ibility initiatives taking place in the
1. Define company.
category • Variability in fragmented “legacy” con-
tracts can render too daunting the tasks of
2. Initial data/
information gathering
coordinated decision-making and establish-
ing new policies and procedures for indirect
3. Segment and prioritize procurement.
(tactical vs. strategic approach) • Rivalries among disparate business units
4a. “What is needed 6. Develop 5a. “What data is
or managers can make it difficult to achieve
and how buy?” commodity profiles available?” cooperation or compliance with corporate
(key users) (quantitative & qualitative) (auto/manual) initiatives.
• Customer needs/expectations • Limited availability of indirect purchase
4b. “How established • Current sales • Suppliers/$ 5b. “How is data stored
current agreement?” and retrieved?” data and information
• Decision makers • Usage
(key buyer)
• Metrics • Other
(auto/manual) Despite these realities, Trecha argues
that by taking a systematic approach, allo-
7. Develop indirect cating the appropriate resources, integrating
sourcing approach low-cost technology (for example, the
8. Supplier discussions Internet) to manage initiatives, and harness-
and alternative review ing senior management interest in
controlling indirect spending, companies
9. Agreement
execution can easily surmount these and other ob-
stacles. In fact, based on his experience in
10. Implement and helping firms to control indirect spending,
maintain compliance
he says big results can often be achieved in
SOURCE: INTEGRATED STRATEGIES
a matter of just weeks or months. For ex-
ample, he says a multinational company
ments-corporations may be leaving 8%- may be limited in the definition of objec- launched an indirect sourcing initiative that
15% of their indirect dollars on the table, tives, deliverables, timing, tasks, roles, and included office furniture buys as a targeted
according to Trecha. They may also be performance expectations and measure- category. The initiative team discovered
missing opportunities for improving service ments tied to costs. “Under these one of the company’s business units was in
quality and reducing their cycle times. circumstances, it’s not uncommon for IT the process of salvaging and depreciating
“Typically, indirect spending is not linked service relationships to expand to 4-5 times over two million dollars worth of 18-month-
to business-unit performance,” Trecha says. their initial cost expectations,” Trecha says. old furniture. The team broadcast the
“Without specialized purchasing processes What’s more, Trecha notes that indirect furniture availability to other business units.
in place, it’s difficult to see how indirect spending tends to be budget-driven rather The result: avoided write down and avoided
buying decisions contribute to profitability than cost or value-driven. This means purchasing of new furniture for other busi-
or customer service. It’s difficult to know people making indirect buying ness units. “From a corporate perspective,
if these dollars are being applied as effec- decisions may be spending to their it affected profitability positively by avoid-
tively as possible.” budget (money they don’t wish to lose) ing both the write down and the new
Often, Trecha says, fragmented indirect and not to the real market value or func- purchases, a bottom line impact of three
buying decisions and processes can place tionality of products or services they might million dollars,” says Trecha.
too much emphasis on suppliers’ perceived be purchasing.
capabilities with too little understanding of Co n c e p t t o p r a c t i c e s
total value delivery, resulting from inad- Business realit ies To take from concept into practice the idea
equate emphasis on the total costs of While opportunities may be numerous for of controlling indirect buys, Trecha says
products or services being purchased. A improving corporate approaches to indirect companies are most likely to succeed if they
good example is the purchase of consult- buys, Trecha remarks a number of common follow well-defined processes. Critical
ing services related to information “business realities” serving as barriers. activities that need to be included in such
technology (IT). “Traditionally, purchasing Some examples: processes-
has had limited involvement and influence • Because they’re not typically seen as con- • Establishing objectives for indirect buy-
with major IT or MIS projects. Purchasing tributing to competitiveness, indirect buys ing initiatives. This involves understanding
is perceived as bringing limited value into rarely capture the attention of top manage- the general size and shape of indirect cor-
technology discussions,” Trecha says. ment porate spending and creating realistic
However, by focusing too heavily on tech- • It can be difficult to assemble teams and expectations for improvements. It involves
nology service providers’ perceived other resources needed to control indirect dedicating resources (people, money). It
capabilities, the commercial relationship spending due to limited staffing or to the involves the discovery of best practices (ei-

2 PURCHASING
 Indirect purchase categories
Pr o fe s s i o n a l • Education and training • Video conferencing • Mail services
ser vic es • Computer systems training • Electric • In-house distribution
• Consulting services • Professional/career • Gas • Priority/express mail
• Management development • Water • Courier service
• Information Technology • Facilities management • Cable • Office furniture
• Engineering/operations • Cleaning services • Printing services
Co m p a n y Tr ave l
• Architecture • Waste hauling • Internal production
• Airfare
• Scientific/product design • Recycling • External production
• Internal aviation fleet
• Accounting/finance • Food services • Archiving/record storage
• Lodging
• Staff augmentation • Conference planning • Document disposal
• Executive search/recruiting • Car rental
(temporary)
• Administrative support • Legal services • Ground transportation Em p l oy e e b e n e f i t s
• Plant direct labor • Real Estate • Fleet purchasing/leasing • Life, health, and disability
• Professional service support • Group travel/meeting insurance
I n fo r m at i o n planning • Employee relocation
• Help desk support
Te c h n o l o g y • Travel agency
• Marketing/advertising Ot h e r i n d i r e c t
• Hardware • Corporate travel cards
• Creative services purc hases
• Software
• Media buying Of f i c e Pr o d u c t s • Maintenance, repair and
• Telemarketing/lead tracking Ut ilit ies • Office supplies operating supplies (MRO)
• Databases/mailing lists • Telecommunications • Copying expense • Capital equipment
• Public relations • Voice communications • Internal copy
• Graphics illustration • Data communications • External copy SOURCE: INTEGRATED STRATEGIES

ther by looking within the company, at other rect buying initiative, then prioritizing that “there needs to be a system for tracking
companies, or by soliciting advice from list. (See sidebar above for examples of progress against goals, and for quickly as-
external resources). It involves anticipa- what might be included on such a list.) certaining where the plan is falling down
tion of obstacles. It involves creation of Prioritization is a two-step process. First, and how it needs to be fixed.” He noted
target objectives. “You can’t write a plan teams need to look at potential savings or that low-cost Internet technology is an ex-
to an undefined target,” Trecha says. It also value added that might be delivered in a cellent means for tracking and reporting
involves deciding how aggressively the particular spending area. Then they need performance to a project plan and for pro-
company will pursue innovation. “Com- to decide which projects might be most fea- viding information to relevant personnel.
panies can choose completely tactical sible given their corporate culture or other Another key element in project manage-
approaches,” Trecha says, “where they fo- variables. Trecha recommends that firms ment, Trecha says, is to stay focused on the
cus simply on developing dollar leverage, begin with a combination of easy, rapid-but future. “Too many projects waste time and
but don’t really alter the way business is possibly small payback-projects (to quickly resources documenting the past, instead of
transacted with the supply base in a par- establish legitimacy for the initiative) and looking to the future,” he says. For ex-
ticular spending category.” On the other more difficult, longer-term categories with ample, where good historical data doesn’t
hand, he notes, “they can try to come up higher payback potential. For example, car exist, he says it’s very likely that estimates
with new ways for adding value to business rental and hotel agreements can be put in will suffice.
transactions.” (See “Taking concept to re- place relatively quickly and easily, whereas • Creating a budget reduction process.
ality graphic,” page 1) executive search and consulting agreements Senior managers, Trecha notes are rarely
• Populating and training teams. Indi- may require additional resources and time impressed by “soft” savings (that is, sav-
rect purchasing teams, according to Trecha, to ensure appropriate selection and effec- ings that don’t drop to the bottom line). In
should comprise people who are knowl- tive lowest total cost arrangements. context of indirect purchasing initiatives,
edgeable about particular industries, • Establishing initiative management there needs to be processes whereby depart-
suppliers or spending categories, user needs processes. Project management to a well- mental budgets are actually reduced to
and expectations, and people who have the written plan is critical, Trecha says. reflect savings from new purchasing strat-
wherewithal to drive compliance with new However, he notes that “planning is an it- egies. “Successful budget-reduction
purchasing policies and procedures. In all erative process. It’s important to have programs require finance-accounting, de-
cases, the teams should be trained accord- realistic and well-defined goals, roles, re- partment management, and purchasing
ing to the tactical or strategic sourcing sponsibilities, and accountabilities across participation. Implicit in this process is a
approach as well as the project management the corporation.” For example, business certain degree of resistance. Yet, as the ben-
techniques that will be applied. unit management must be on board with the efits of new supply agreements are
• Targeting purchase categories. This in- expectation that operating budgets will be effectively communicated and demon-
volves drawing up a master list of spending reduced commensurate with new supply strated to department management, they
categories that will be covered by the indi- agreements. “Additionally,” says Trecha, will understand the opportunities and em-

PURCHASING 3
 relationships or they may reflect the lim-
Rate of savings and compliance curve ited influence that former decision-makers
(Savings, $000s) have had on the supply base or users.
• Measuring results and tracking com-
pliance. “Results will vary widely based
$12,000
on the type of purchasing being done,”
Savings - Trecha notes. “Team members need to learn
$10,000 100% compliance how to measure the value of supplier rela-
Savings - tionships in terms of total cost and other
Maximum monthly dollar Achievable
80% compliance
$8,000 savings rate (in $000s) performance metrics.” Integrated Strate-
Savings -
50% compliance gies uses a “green-yellow-red zone” rate of
$6,000 $ 859 Existing savings and compliance reporting method-
$ 687
ology. Once category-specific savings
$4,000 measures are agreed to, compliance to a
$ 429 Reduced new supply agreement proceeds. The meth-
odology reports results. It also highlights
$2,000
where best-practice compliance is occurring
as well as where additional focus is re-
$0
1 2 3 4 5 6 7 8 9 10 11 12 quired, says Trecha (See green-yellow-red
Mont h zone compliance reporting spreadsheet and
SOURCE: INTEGRATED STRATEGIES rate of savings curve). The green zone iden-
tifies categories where compliance is
achieving between 80%-100% of available
Rate of savings and compliance reporting cost savings. That is, new favorable sup-
Category Company expenditures ($000s) Compliance Progress1
plier agreements are in place and are being
Company Max
used to their full extent. The yellow zone
BU-1 BU-2 BU-3 Total Status % Savings identifies where compliance is operating be-
Professional Services tween 50%-79% of achievable results. The
Executive search $2,041 $1,650 $2,966 $6,657 6 12% $799 red zone identifies where compliance to a
Staff augmentation 3,750 2,105 9,684 15,539 7 7% 1,088 new agreement is operating at less than
IT consulting 5,682 4,150 9,792 19,624 6 10% 1,962 50%. By color coding level of compliance,
Total professional services 11,473 7,905 22,442 41,820 3,849 the organization can quickly determine
Travel where compliance improvement programs
Airfare 6,095 4,560 16,380 27,035 9 9% 2,433
are required. They can also see the ben-
Car rental 1,175 980 1,345 3,500 7 6% 210
efits achieved by more aggressively
Lodging 4,290 3,040 6,000 13,330 9 15% 2,000
focusing in those areas.
Total travel 11,560 8,580 23,725 43,865 4,643
Office products
Office supplies 2,120 1,976 2,820 6,916 8 15% 1,037 Integrated Strategies has a 10-step
Furniture 1,336 950 953 3,239 9 11% 356
Indirect Sourcing Initiative Process
Express mail 1,650 862 2,734 5,246 9 8% 420
designed to help organizations take con-
Total office products 5,106 3,788 6,507 15,401 1,813
trol of their indirect purchases to achieve
Annual purchases 28,139 20,273 52,674 101,086
Annual savings $10,305
and sustain price-cost reductions, customer
service distinctions, and quality/process im-
1
Dollar and percentage savings estimates are for demonstration purposes only.
typically achievable results average 8%-15% across all categories provements. “Bottom line is improved
profitability and that’s what purchasing
should be all about,” Trecha says.
brace new, lower cost ways of doing busi- (In some cases, Trecha concedes, teams
ness,” says Hottinger. may be insufficiently capable of applying
• Development of processes for new sup- total cost analysis to their buying decisions
plier introduction and development. A leading to price-over-quality-type deci-
limited understanding of how to introduce sions). Indirect buying teams also need
new suppliers to different parts of an orga- ways to overcome the strong sense of own- Integrated
nization will stop indirect purchasing ership felt by people who have historically STRATEGIES
initiatives in their tracks, Trecha says. “The made indirect buying decisions for their lo- I N C O R P O R A T E D

typical reaction from end users in that qual- cations or business units. Very often, these
517-381-4800 x2190
ity and service will be sacrificed to price.” buying decisions may be based on personal Email: isi@[Link]

4 PURCHASING
 Su c c e s s i s
t he only
opt ion!

Qu a l i f i c at i o n s
• Consultants average more than
20 years experience

Supply Chain • Web-Based strategic sourcing tools

Strategic • “Concept to Reality” approach
Sourcing
• Hands-on implementation
Logistics

Materials • Worked with more than 200 firms

Management across multiple industries
Order
Fulfillment • Developed more than 250 supply
chain and logistics strategies
Six-Sigma

Initiative
• Integrate core supply chain with
Management core business strategy

1673 Haslett Road, Suite 24

Integrated Haslett, Michigan 48840
STRATEGIES 517-381-4800

I N C O R P O R A T E D

MICHIGAN QUALITY COUNCIL

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