Procurement Savings in Manufacturing: Culling Out Top Performers

Please click here for Part 1: Transition Suppliers of this series.

This series of posts is based on content, ideas and recommendations from the following Spend Matters Perspective: Making Sourcing Savings Stick: New (and Not-so-New) Strategies to Drive Savings Implementation. In fact, some of this paper's content was first published 10 years ago by Jason Busch, David Jungling, and Jay Odell, who were with FreeMarkets (at the time). While adapted for today's manufacturing environment, the ideas represent a timeless look at a topic that few companies are fully addressing through their procurement practices today.

Roughly a decade ago, a FreeMarkets study of approximately 50 global procurement organizations made these discoveries:

  1. Significant division between top performers and low performers in the area of savings implementation. For example, high-performing companies were far more likely to award to the low bidder than low-performing companies. For every $100 dollars in awarded business, top performers allocated 97% to the lowest-price supplier, while bottom-performers only awarded 74% to the lowest-price supplier, implying that top performers had processes and resources in place to better handle the challenges posed by implementing new, global suppliers.
  2. Top performers were also far more likely to realize identified savings from strategic sourcing activity. The top quartile was able to implement nearly 90% of identified savings from sourcing efforts. In most cases, however, bottom performers were unable to implement? the majority of identified savings. Of these bottom performers, only 25% had standardized, formal implementation processes in place. At the time, the research findings suggested that increasing the savings implementation rate by only a few percentage points could have tremendous, bottom-line impact. This observation holds true today.
  3. Over the course of a year, one global organization was able to increase savings capture by 9%. This percentage increase enabled the firm to implement an additional $3 million in bottom-line savings.

At Spend Matters, we can observe a number of conclusions from these findings. First, top-performing organizations take a programmatic approach to new supplier adoption, creating processes that measure the effectiveness of implementation initiatives, creating accountability and cross-functional cooperation for implementation success, and involving senior management throughout the process. For example, one top-performing organization mandated that not going with low-cost suppliers requires executive approval of a business case to use higher-cost suppliers.

To be continued. Curious to learn more in the meantime? Download the full Spend Matters Compass research brief here: Making Sourcing Savings Stick: New (and Not-so-New) Strategies to Drive Savings Implementation.

- Jason Busch

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