Market Conditions are Ripe for 20-60% Savings on "Niche" Industrial Services

Spend Matters would like to welcome Thom McLeod, founder and managing director of Tenzing Consulting for today's guest post on niche industrial services.

Working across numerous process industry plants across the US, we are seeing ideal market conditions for the sourcing of a wide variety of industrial services, if you take the right approach. Walk into a typical process plant in the U.S., be it a chemical plant or refinery, and you will notice hundreds or even thousands of people working there. But, look closely and you will see that they are not full-time employees, but overwhelmingly contractors, providing virtually all of the services necessary for the safe and efficient operation of that plant. Typically, many of these people serve under very large contracts that the manufacturer has in place with EPC, turnaround, or maintenance services companies -- contracts worth hundreds of millions or even billions in spend per year. These mega-contracts get a lot of attention from executive management and plant operations, not to mention procurement, but enormous sums are also spent in smaller chunks of $5 to 10 million on "niche services" that are also ultimately vital to the plant. Examples of these include scaffolding, design and drafting, component overhaul and repair, sewer cleaning, rental equipment, crane services ... the list is endless.

Our recent sourcing efforts in these and other similar categories have yielded from 20% to 65% savings, with an average of over 30%. Here are the critical success factors:

Overcapacity Market Dynamics: In a down economy, many suppliers are eager to fill their book and lock in business for the next year or more. While some regions may vary, the Southern California, Texas Gulf, and Great Lakes markets seem overcapacity for people in these services sectors and in materials inventories to support the services, e.g., scaffolding materials. But this opportunity may be short lived as other buyers will likely "book up" these suppliers at very favorable rates, and the suppliers will begin taking capacity out of the system -- proactively or by attrition. So, act now and act quickly.

Strategic Sourcing versus Direct Negotiations: In these smaller categories, buyers are often short of the time necessary to really run a sourcing process, and with small spend packages they perceive that "juice isn't worth the squeeze." So they resort to direct supplier negotiations, hoping for the standard 5% concession. We are not seeing successes in the 20-60% range with a direct negotiation approach. In fact, even in this market, buyers were frequently rebuffed or countered with price increases when they approached suppliers directly. Even worse is that they do get a small concession -- and completely miss the larger opportunity. We have only seen high-double digit results when we used a full strategic sourcing process, with real competition, a credible threat of switching, and a total cost of ownership approach.

Total Cost of Ownership to Find the Value: The results we achieve are not pure price or margin reduction plays. While that is clearly an element of the outcome, our post-bid analysis shows that as much or more of the value extracted in these categories comes from TCO elements. Consolidating service requirements, standardizing material specs, reducing underutilized equipment, establishing new norms-based or unit-rate supplier management regimes are integral to capturing maximum value.

How do you get at it? It may seem daunting since there could be dozens of categories like this in your business spread across many buyers, category managers, business units, and sites. If attacked one at a time, it is a virtually impossible task. We are forming teams around clusters of these categories to facilitate complex organizational coordination and concentrate resources. This way we can work multiple categories in parallel. When looked at as a group, Niche Services is suddenly a very large category, and one worth paying close attention to. When combined, those $5-10 million categories become a $100 million-plus category with a 30% savings potential. That is the equivalent of saving 3% on $1 billion. Interested?

- Thom McLeod

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