Direct Materials Spend Management and the Middle Market

Nearly every vendor and consulting firm that I've spoken with considers the middle market a huge Spend Management opportunity. And for good reason: middle market firms represent a huge segment of the overall procurement and supply chain market, but many have failed to adopt even rudimentary processes and technologies necessary to tackle opportunities from strategic sourcing to lean manufacturing. In addition, only a handful of middle market organizations are willing to pay the six figures necessary to recruit top talent into operational roles, outside of VP-level hires. Yet selling to the middle market brings an additional set of challenges relative to selling to larger organizations, which is deserving of its own series of posts in its own right. I know this first hand as an advisor to Aptium Global, a middle-market focused direct materials advisory firm that my wife, Lisa Reisman, co-founded back in 2004.

Last week I had the chance to talk to Sudy Bharadwaj of Aberdeen group about a report he published in April of this year which looked at how middle market companies stack up (registration / subscription required) when it comes to direct materials sourcing. In analyzing the findings from his research, Sudy came to the conclusion that "the U" best defines the results. College football analogies aside, "the U" makes sense to me as a visual to describe the findings. Consider that Aberdeen’s data shows that small organizations ($1 billion in revenue). For example, small companies have roughly 49% of their direct materials spend under management, middle market companies have 39% of spend under management, and large companies have 56% of spend under management. When it comes to standardized sourcing processes, 48% of small organizations have organized processes. This number drops to 45% for middle market companies, and rises to 75% for larger ones.

When I consider this data, what jumps out at me having observed executive interactions with some of Aptium Global's smaller clients is the CEO's frequent active involvement in sourcing and negotiation (which explains the relative success of a larger percentage of smaller organizations when it comes to direct materials sourcing vs. true middle market ones). With the owner actively involved -- because it directly impacts his end of year results and, hence, his kid's college fund -- one often finds a surprising level of basic savvy on the negotiation and supplier management side of the house. Still, as I've watched Aptium Global work, I've also observed that a huge savings opportunity often exists in smaller companies as well (often by combining lean and strategic sourcing principles). But as companies hit the $50 million mark -- I might say $75 million is even a better break -- in revenue, one often finds less CEO / owner involvement, and even a larger opportunity from a percentage savings perspective. At this stage, there's often an organized procurement function, albeit one that would be more at home in the 1950s than the twenty-first century. The skills gap inside this size procurement and operations organization compared with those over $1 billion in revenue is typically huge, although certainly exceptions exist.

On Friday, I'm also going to ask Lisa Reisman, probably the world's top authority on middle markets direct materials sourcing, to analyze some of the points of the study as well, in a follow-up post to this one. We all love to support our spouses, but I honestly have not met anyone in my Spend Management travels who knows more about direct materials sourcing in the middle market than she.

Jason Busch

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