Applied Savings (Part 2) — Sourcing Optimization/Negotiations in Complex Categories: Temp Labor

In the first post in this series examining how companies can apply and gain incremental value from new sourcing approaches across their complex categories, we looked at how one organization, courtesy of Trade Extensions, has used an advanced sourcing/optimization approach in the packaging area. We'll continue the analysis today with another example of optimization and related data gathering and scenario analysis approaches in the area of contingent/temporary labor. This particular case involves a Fortune 500 manufacturer that leveraged an optimization-driven approach to source this category in both the US and Europe prior to deploying a specific services procurement/VMS platform to manage the broader contingent lifecycle.

The company's main objective in going after temporary labor from a sourcing/price discovery perspective was to take advantage of downward price pressures on wage rates during the economic downturn and slow recovery. Previously, Trade Extensions told Spend Matters, "Their buying approach had focused on the major suppliers' 'mark ups,' the management fee paid to the temporary labour suppliers." In contrast, using an entirely new, intensively data-driven approach focused on cost decomposition and constraint-based analysis, the organization would expand their sourcing and evaluation criteria.

The project was large in scope, involving nearly 200 stakeholders, 5,000 workers, 600+ job descriptions across 36 locations, 10 skill categories and 104 suppliers. Using the sourcing platform, the organization was able to gather information and conduct evaluations at multiple local, regional and global levels by individual sub-category based on specific job descriptions, locations and skill categories. The organization knew the power of taking an optimization approach would ultimately come as much from creating transparency and visibility as driving volume leverage. Specifically, the software allowed the company to collect and examine data at a highly granular level, including individual pay rates, social costs and management fees across all geographies, sites and job descriptions.

Like many complex markets global markets, this particular one came with its own set of challenges, including a supply duopoly situation where two suppliers were capable of meeting the organization's entire staffing needs. Yet the manufacturer did not want this global supply duopoly to "restrict its freedom in the market now or in the future" so it actively "encouraged niche suppliers to bid in the process," allowing them to note all of their specific capacity constraints during the multiple bidding rounds of the project, including highly specific restrictions. The company then evaluated these constraints as well as the conditional discounts (e.g., volume based) and combinatorial offers that both the small and large suppliers came up with.

In each of their offers, suppliers bid individual rates by location and the company then applied its own constraints on top of these offers. For example, a constraint might factor into account "restrictions based on the introduction of new suppliers into locations taking account of an internal supplier grading system" based on past performance. In the end, the company made its final award decisions over the course of an intensive three-day scenario workshop in which 40 key internal stakeholders convened to analyze and manipulate various business constraints so they could see the added-cost for each constraint they added.

Yet despite factoring in additional constraints to drive a decision based on both price and non-price based factors, the ultimate, consensus-driven outcome enabled the company to drive eight-figures of annual savings. At the same time, they also consolidated the supply base to 50% of its previous size (while avoiding a duopoly supply situation) while cutting the number of job descriptions by two-thirds.

Stay tuned as we continue our investigation into applying advanced sourcing models and approaches across other complex categories. We'll also plan to share a company update looking at the solution and customer progress of both CombineNet and Trade Extensions.

- Jason Busch

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