Centralise indirect procurement for strategic value
There is consensus among leading economists and world leaders that the worst of the downturn is over. Consumers are confident, lenders also, while businesses, overly cautious since the financial crash of 2008, are more optimistic about their own prospects.
However, while the global economy is very much in recovery stage, it’s uneven, slow and still susceptible to numerous risks, which the International Monetary Fund (IMF) took into account when it revised its outlook at the start of the year by cutting its previous forecast.
“New factors supporting growth – lower oil prices, but also depreciation of euro and yen – are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” Olivier Blanchard, director of research at the IMF, said, highlighting the challenges of the global landscape.
“This makes for a complicated mosaic … good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others.”
Against this multifaceted backdrop, businesses, especially those operating across the globe, are keen to shore up their defences, reduce spend, streamline processes and, all the while, maximise value.
Increasingly, executives are looking to indirect procurement for answers and to make a significant difference to not only their profits but to their overall direction as a company. In this piece, using a language service provider as a case in point, we examine why centralisation of this traditionally overlooked area is a business must.
A new understanding of indirect procurement
While indirect procurement can account for a significant amount of the spend a company makes, it has all too often been considered secondary to direct procurement. This is a big mistake in thinking.
In its paper Indirect Procurement Optimisation, Ernst & Young pointed out that this is something that “organisations underestimate the influence of”. Failure to control this spend, set appropriate terms and conditions and assess supplier performance will invariably impact negatively on the bottom line.
However, centralising indirect procurement aligns this necessary expenditure to company-wide objectives and makes your money go further.
So, taking translation as an example, in a decentralised environment where visibility is lacking, you’re likely to be using multiple language service providers in a sporadic fashion.
There is a lot of waste associated with this and ultimately, it’s not attached to a higher, organisational goal. Indirect procurement becomes just an acceptable cost, as opposed to what it can be – a facilitator for productivity and innovation.
Making supplier expertise work for you
Supply chains are a natural part of business life because there are limits to what any organisation can achieve on its own. This is particularly evident with indirect procurement, where services and goods are obtained from third party sources to support a business in its day-to-day activities.
This orientation of indirect procurement has long been accepted as the norm. However, these days, it is somewhat limited in scope. The key differentiator is the idea that you need to now go “further” with your suppliers and establish better, long-term relationships.
Consequently, supplementary to accessing a much-needed service – which can’t be duplicated – organisations are exposed to an inimitable level of expertise.
This, in turn, can transform your “capabilities and effectiveness” as an organisation, as ISG highlighted its report Procurement Outsourcing. The right partner “will get” and appreciate your bigger picture and endeavour to work towards helping you achieve this.
For example, your global enterprise might currently approach translation requests without appreciating how this essential service can go above and beyond just responding to ad hoc requests and commissions.
However, elevating it a boardroom level consideration will help executives better understand how, through a streamlined approach, they can deliver a better, more relevant service to customers.
Delivering impressive savings
As Thomas Linneberg, vice-president of indirect procurement at the Danish component manufacturer Danfoss, explained in an interview with Supply Management last year, prior to centralising indirect procurement, spend management at the company was “very fragmented”.
It was difficult to track and, in effect, there was a lack of regulation or transparency in-house, meaning “everyone could buy anything from anywhere they wanted”.
This resulted in a massive proliferation of indirect suppliers – approximately 24,000 in total. It was excessive and because “there were no clear roles or accountability” it represented an unnecessary and costly expense as well.
Since spending was moved into being a central part of the organisation – and a dedicated team set up to deliver tactical and strategic indirect procurement activities – Danfoss achieved their savings target one year ahead of schedule.
This siloed approach from a translation point of view is commonplace and not ideal. Without a unified system, an informal strategy will inevitably lead to more work than is needed.
Whether it’s duplication of documents across different departments – through accessing different suppliers – or dealing with compliance issues because you’ve sourced an inadequate language service provider, a fractured way of working will be costly.
Overcoming organisational complexity
Indirect procurement can end up being an expansive area and, as a result, inherently complex. As such, managing all your suppliers in an effective way that delivers value for money can be challenging for business leaders, as Ernst and Young made clear in its study.
It explained that without centralisation, you’re more likely to experience “sporadic buying patterns” and find yourself engaged with suppliers that are, in the end, holding you back from properly realising your aims.
For example, if your approach to translation is done on a purely departmental basis, with no real consensus on what others are doing or what constitutes best practice, your return on investment is going to be small.
In short, you’re going to find yourself in a position whereby the wrong buyers are purchasing the wrong products at the wrong price. The more splintered indirect procurement is, the less visible such scenarios will be to executives. Integrate it to wider company targets remedies this defective way of operating.
An opportunity to be better
While the advantages of centralising indirect procurement are plain to see, there is still a long way to go in changing, as KPMG International stated, “the status quo and actively working to enhance value, capabilities and reputation” of this function throughout the entire organisation.
Nevertheless, those in a position to make a strong business case will take some comfort from the fact that this asset, this way of working – i.e. the strategic deployment of indirect procurement – will deliver real and lasting value across the board.
Beyond this, things can only get better. You’re less susceptible to risk, your suppliers are wholly invested in your success, you have greater visibility of what goes on within your enterprise and, as a result of this, empowered to be more daring. The competitive advantage now lies with you.