Another Perspective on Middle Market Direct Materials Sourcing

This morning, I'd like to welcome a guest blogger to Spend Matters. Lisa Reisman is Managing Director and Co-Founder of Aptium Global. She is also Spend Matters' middle market guru. For this guest post, I asked Lisa to jot down some of her thoughts on Aberdeen's recent survey of direct materials sourcing in the middle market.

Jason, thanks for giving me the opportunity to comment. Sudy's study is spot on! In this post, I'll bring up three key points to reflect on.

First, many middle market companies believe they are not large enough to engage in process consulting assistance or technology and that they don’t have enough complexity, line items, suppliers, locations from which to squeeze out additional savings. Obviously, this is false! But Sudy's findings ring true, but I would also add that this is largely due to the fact that the procurement organization often doesn't know what it's annual spend is by category or the number of line items it sources within those categories.

The notion of a "spend analysis" is particularly foreign to these types of enterprises. But let's illustrate this with an example. A mid-market automotive supplier purchases a couple of dozen bushings, levers, shafts etc. The purchasing agent begins to notice price increases on a limited number of parts (say 4-5). What strategy does the purchasing agent deploy? Quite simply, get the 3 perfunctory bids and threaten to re-source that part with a new vendor in order to keep the spend with the incumbent. What you observe it that each "category" is never sourced or – re-sourced. Rather, only bits and pieces are partially negotiated on a periodic basis.

Second, Sudy talks about how "process" can be embedded inside of organizations and that establishing a company wide process is the first step to sourcing success. Agreed but here too there are some significant short-comings in many mid-sized companies. In particular, we find huge differences in purchasing professionals' understanding of latest strategic sourcing and purchasing processes and subsequent openness to looking at sourcing in new ways. Whereas most large company purchasing departments are staffed with MBA's and analytical thinkers, most mid-sized companies are staffed with purchasing clerks that have worked their way up the organization or were in other positions such as Materials Manager roles or other shop floor roles.

In addition, middle market companies typically don't send these individuals for training with organizations such as the Institute of Supply Management but instead reward them with a purchasing "desk job". The resistance to change can stifle the company's ability to extract cost savings if the company executives aren’t pounding their fists.

Third, regarding Aberdeen's contract compliance conclusion that middle market firms lag behind both their smaller and larger brethren probably has a lot to do with what specific activities middle market company purchasing departments undertake on a daily basis. Most of the individuals in these departments are "drinking out of the fire house" processing purchase orders (some are doing over 30 per day), making sure the right goods are coming in, expediting orders etc. In short, their focus is on operational tasks and not strategic sourcing. We see this in nearly every company that we work with.

I'd like to thank Aberdeen for taking the time to dive into the middle market direct materials sourcing opportunity with their latest research. Only through analysis like this will the majority of middle-market owners / CEOs begin to understand the massive opportunity they're leaving on the table by not transforming their procurement and sourcing function.

Lisa Reisman, Managing Director of Aptium Global, implements direct material cost reduction programs for small and middle market industrial companies.

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