Understanding Procurement Spend and Sourcing Optimization

Understanding Procurement Spend and Sourcing Optimization

Procurement can represent a substantial 60%-70% of a company's total expenditure, a figure that fluctuates depending on the industry. This significant portion often remains overlooked due to the dispersion of external costs, such as raw materials, office supplies, and specialized services, across different business units and regions. For many companies, there's a vast potential for refining their procurement processes. For example, in a manufacturing company with a revenue benchmarked at 100, after considering EBIT, depreciation, and payroll, up to 55% of the revenue might be allocated to external procurement, encompassing both direct and indirect spend.

A pressing concern for both buyers and senior company management is determining how much of this expenditure can be effectively streamlined through a smart and assertive sourcing strategy, targeting savings of 3-5% in the first year. It's a fallacy to aim for a uniform 10% reduction across all expenses.

In the manufacturing sector, where procurement spending ranges from 60% to 70%, there are instances where companies purchase unique, non-negotiable raw materials. Such proprietary expenditures can vary between 5% and 20%. Initially, the most effective strategy is to focus on optimizing the tail spend in procurement, which constitutes about 20%-30% of the total spend. Savings on this tail spend can range from 5% to a substantial 15%.

Kickstarting the Process

While many companies utilize ERP tools for procurement management, from order handling to invoicing, these tools often don't address the sourcing process. In procurement, "sourcing" refers to the interaction between buyer and supplier, encompassing inquiries, quote comparisons, and negotiations. This process, largely manual, requires significant digitization for optimization. eSourcing software, like the one offered by eSupplier, streamlines various aspects, particularly RFQ and negotiation, saving both time and money.

Strategizing Procurement Spend

For a successful sourcing strategy, procurement teams must first categorize their spending into segments such as Direct Spend, Indirect Spend, Logistics, and Services. This categorization aids in devising a detailed sourcing plan.

Direct Spend: Typically raw materials, this can include complex items like master batches or simpler ones like packaging boxes.

Indirect Spend: These support the primary manufacturing process, like maintenance parts or office supplies.

Logistics & Services Spend: This encompasses transportation costs and professional service fees.

Initially, the focus should be on optimizing Indirect and Logistics spends, as they offer multiple supplier options. This approach is recommended for the initial quarters while the team develops a comprehensive strategy for more intricate direct spend items.

Supplier Engagement

Most companies have a handful of approved suppliers. It's crucial to inform these suppliers about upcoming sourcing projects via the eSupplier platform, utilizing tools like RFQs and reverse eAuctions for negotiations. If a company has a limited supplier list, the procurement team should first identify and vet new suppliers. eSupplier provides RFI templates for this purpose.

RFQs, RFPs, and Negotiations

After establishing a sourcing plan, buyers can initiate RFQs and gather quotes from vetted suppliers. The system then offers comparative analysis, which can be exported to Excel for team discussions. Negotiations can be conducted through reverse eAuctions. It's essential to provide clear specifications and terms to ensure all suppliers have consistent information. Post-negotiation, the system produces audit-compliant reports for internal use or order placement.

Over time, procurement teams can refine their strategies, leading to increased savings and enhanced workflow transparency.

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