Sunday, October 25, 2009

Procurement Service Providers - Better Go Get Your Armor

The market for procurement service providers (PSPs), a sector that includes everything from strategic sourcing consulting to GPO contracts to full blown procurement outsourcing, is shaping up to be quite a battlefield over the next 12-18 months. From personal observations of recent trends I predict there will be spectacular confrontations between the industry's major players as they seek to capture and protect market share, particularly in the eagerly desired upper mid-market segment of companies between $500M and $5B annual sales. And it won’t just be the E-Sourcing Suite Giants and Consulting Firm Goliaths fighting for the business of a customer base considerably more PSP-educated than in the heady pre-B2B bubble days. There will be a myriad of PSP boutiques and GPOs joined in the battle, many of these smaller and more nimble players able to offer flexible and customized solutions at significantly lower cost. To make matters particularly feisty, many of these PSP boutiques will be led onto the field of play by the very same consultants who helped to shape and form the procurement consulting practices of their larger opponents in the late nineties and early 2000’s.

If you are the CFO or CPO of a mid-market company today, you stand to benefit handsomely from the upcoming smackdown in the PSP market. You will be able to categorically demand the highest levels of tangible and lasting value from the various players, large and small, who will parade their wares in front of you over the coming year. You will be able to insist that this value be delivered at the lowest possible cost and with the lowest possible operational risk. Specifically, you will be able to stridently and confidently voice the following demands to the massed ranks of Davids and Goliaths standing in front of you ready to fight for your PSP budget dollars-

DEMAND ONEI want big cost savings that I can measure

You should demand at least 5-12% savings on direct materials and 15-25% or more on indirect. You should demand that these savings be measurable and budget-impacting based on either lower prices or reduced usage through demand management. Look for PSPs who will guarantee cost savings or offer benefits-funded fee arrangements. Avoid PSPs who mention "process" or "efficiency" savings or who ask to be paid like it’s 1999.

DEMAND TWO – I want a fast ramp-up of the cost savings during the first year

You should demand that at least 80% of annualized cost savings be realizable in the first year. You should ask for specifics about how they will bring forward cost savings and avoid multi-month sourcing projects that take a year or more to throw dollars to the bottom line. Avoid PSPs whose proposals feature pages of “sourcing wave strategies” and “commodity work teams”. Look for PSPs who offer flexible rapid sourcing approaches, incumbent renegotiations and pre-negotiated contracts.

DEMAND THREE – I want suppliers that meet or exceed the service levels of incumbents so that I face minimum resistance from internal department stakeholders

You should demand that whatever techniques are used to create savings, internal departments receive equal or better levels of quality and service. You should demand that any new suppliers selected will sign up for service level guarantees in the areas of quality, delivery lead times, customer service and other key category-specific metrics. Avoid PSPs who talk only about “mandating compliance”. Look for PSPs who talk about how they will work in an integrated fashion with internal stakeholders during the sourcing process.

DEMAND FOUR – In exchange for me providing you with a multi-year spend commitment, I would like some of my savings paid up front in the form of a prebate or signing bonus

Depending upon the categories in scope, you should demand that providers work with suppliers to provide upfront savings in the form of cash prebates on contract signing. This technique, used mainly with pre-negotiated contracts, serves as a compliance enabling tool since such arrangements require the customer to pay back some or all of the prebate if a pre-set spend dollar commitment is not met. Avoid PSPs who won’t consider this. Look for PSPs who will.

DEMAND FIVE – I’d like to pay the minimum possible fees for your services. In fact, where practical, I would like to pay nothing at all

Particularly for indirect categories, paying little or nothing for a PSP’s services is not at all far-fetched. Whether through benefits funded approaches or pre-negotiated contracts you should press on providers’ willingness to dig deep and dramatically reduce your investment requirements. Avoid PSPs who persist with ridiculous seven-figure spend management outsourcing pitches. Look for PSPs who offer procurement savings programs where their revenue models are either supplier-funded (e.g. pre-negotiated contracts) or benefits funded (e.g. sourcing fees based upon savings from an RFP).

The above demands are fair, reasonable and – more importantly – will result in your organization being able to maximize the return on its investment in PSP services. Don’t listen to the whines of those who long for a return to the days of multi-million dollar cost structure-feeding “house accounts”. Listen to your business. Listen to your internal stakeholders. Then seek out those PSPs who fight to win the battles in their market place but who do so with a clear focus on what it will take to be successful – putting their customers’ demands above their own.

Sunday, October 4, 2009

Let Me Be Direct

Procurement service providers can create game-changing value for their customers in the current economic climate through high impact sourcing initiatives in both DIRECT and INDIRECT spend areas. Since indirect procurement has been well covered in the blogosphere recently (and one can only keep readers interested for so long about how to design the perfect office supplies core list) I'm going to to focus here on how procurement can not only protect profit margins but create sustainable competitive advantage through world class direct materials sourcing. Whether your customers are in manufacturing, retail, food, or consumer packaged goods these procurement strategies will keep your clients afloat through the perfect economic storm and excellently equipped to maintain a healthy lead over their competition when balmy financial weather returns.


Increase Gross Margins by developing a supply base that enables an organization to minimize cost and maximize customer service for its most highly demanded products.

Thousands of companies go out of business in recessionary economic environments because their supply chains are unable to deliver the very products that their customers are ready and willing to buy. It turns out that many of these same products are also their most profitable. In good economic times, a poorly performing supply chain like this doesn't present too many obvious problems. If you're selling a billion dollars of product at 20% gross margin you can swan along quite happily feeding an operating expense base of nearly $200 million, leaving millions of customers wanting stuff you've run out of and millions of dollars of stuff they don't want sitting on store shelves or in the warehouse. However, when the downturn hits and your sales nosedive, your 20% gross margin is now trying to satisfy the same operating expense base. Hello negative operating income!

Procurement service providers can help companies maintain positive operating margins in recessionary or slow growth environments by helping them select suppliers that can deliver the lowest total cost inputs to production (or resale merchandise for retailers and distributors) while also supporting the highest levels of customer service for the end products that are in highest demand from customers. Low cost inputs result in a profitable product while high customer service results in an available product. Making a profitable and highly demanded product available is the greatest lever a company has to increase gross margin.

What role can Procurement play in this? First, analyze historical order history by product (making sure to include backorders) and identify the 20% of products comprising the top 80% of customer demand. Then calculate profit contribution for each of these high demand products, where profit contribution is the difference between a product's selling price and its total cost including procurement cost, transportation cost, and any internal manufacturing costs. Now identify the 20% of the high demand products that comprise 80% of total profit contribution. These are your company's most profitable and highly demanded products! If an organization can ensure that these products are always available for their customers to buy, it will be fully realizing maximum potential gross margin for its industry sector.

Procurement's role in helping an organization maximize gross margin should be to facilitate a cross-functional strategic sourcing process that identifies, evaluates and selects suppliers based on their ability to meet exacting criteria for total cost management and customer service. Specifically, Procurement should work with stakeholders in marketing, manufacturing, distribution and other departments to develop weighted, metric-based criteria in areas such as a supplier's capability to strategically source their own raw materials, implement lean manufacturing processes, deploy logistics strategies capable of consistently achieving 99% line item fill rates at their customers' point of sale, and manage indirect operating expenses to maintain financial health while delivering low prices to their customers. The outcome of the strategic sourcing process should be a set of closely integrated supply relationships with a small number of supply partners that between them satisfy the ultimate goal of lowest total cost of ownership and highest customer service for the company's highest demand products.

If you are a service provider with a competency for developing low cost/high service level supply bases, you can ensure that your customers will always enjoy gross margins in the top quartile for their industry. Particularly in recessionary or slow growth periods, a laser-like focus on service levels and availability for high profit/high demand products will guarantee financial health until the recovery is in full swing. And by helping your customers optimize their supply chains today, you will help them remain strides ahead of their competitors long after the recessionary period has ended. By maintaining above average profitability for their industry they will be able to make heavier investments than competitors in all aspects of their business, allowing them to maintain a perpetual competitive advantage.

Who said procurement was all about buying pens and pencils?