Procurement & Sourcing Guide

WHITE PAPER

MAKING ROOM FOR 2011's NEW PROCUREMENT INITIATIVES
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© 2011 GEP. All Rights Reserved.

MAKING ROOM FOR 2011's NEW PROCUREMENT INITIATIVES

Leading organizations are still reeling under the effects and after-effects of the global economic downturn. Companies across industries and regions have sharply cut down spending and are reviewing ways to ease pressure ontheir margins and sometimes even to continue to stay afloat. As the focus on costs and revenues increase, Procurement function has found itself to be in the cross-hairs of the executive management. Companies realize that this function is in control of a significant component of the cost base in purchased goods and services. As a result, procurement departments, almost universally, are faced withchallenging annual savings targets. In addition, they are also responsible for ensuring realization of the identified savings of all past initiatives. Consequently, Procurement departments will need to develop a detailed plan for 2011 to meet their challenging targets as well as put in place mechanisms to monitor the implementation of these initiatives. Leading organizations are using a mix oftraditional cost-cutting measures as well as advanced techniques to meet their goals of higher cost efficiency and cash savings. This paper outlines some of these advanced approaches as well as the critical success factors for each of them. Cost Management Approaches Traditionally, procurement cost reduction has primarily been achieved by focusing on supply-side issues (online negotiations througheAuctions, low cost country sourcing, global supplier rationalization). A notable few organizations have also focused on demand side reviews (specifications rationalization, consumption management) as well as compliance management(contract compliance, supplier relationship management).
Fig: 2 Initiative for promoting compliance
78% 70% 62% 55% 41% 36% 31% 33 % 19%

Fig: 1% of companies using varioussourcing approaches

Leaders Followers

19%

Directives from management

process clarity

Rewarding of correct behaviors

Non-reimbursement of purchase

Other disciplinary actions

Figure 1 shows that leading companies are increasingly including advanced techniques into this set of initiatives. The advanced techniques push the envelope for procurement companies by increasing theircollaborative role with other entities. The nature of collaboration can range from working with other departments such as IT and Marketing in the same company, to collaborating with purchasing departments of companies with a similar profile to collaborating with an external entity to drive results through outsourcing of functions. Companies that have leveraged these advanced techniques haveachieved an additional 3-4 percent on their on-going targets from traditional approaches.

1

MAKING ROOM FOR 2011's NEW PROCUREMENT INITIATIVES

Traditional Avenues Compliance management: Organizations are using compliance management to monitor overall service quality and more importantly, to minimize 'savings leakage'. Procurement function has dedicated teams to measure supplier-sidecompliance, process related compliance for internal users and contract compliance to measure adherence to contractual rates, terms and conditions on both sides. Companies typically

Fig 3: Global sourcing strategies for key categories

have a self-sustaining process where incremental changes to compliance policies and processes are introduced based on the results achieved and feedback received from theinternal and external stakeholders. Although some compliance processes are in place for most companies, the process clarity which is communicated to internal users as well as suppliers sets the leaders apart. In addition, the leading companies also have explicit support from the top management to enforce these processes at all levels to ensure maximum compliance. Global sourcing: Global...