Indirect Category Sourcing Savings: Fact or Fiction?

We told you the other day about our new research paper available for download here (free on registration). It is titled:

Indirect Category Sourcing Savings : Fact or Fiction? Delivering Credible Benefits from Sourcing and Category Management Programmes

I’ve co-authored it with Ed Cross, Managing Director of Xchanging Procurement Services, and in our two previous posts on the Paper, available here and here, we looked at the issue of savings credibility, then how procurement and sourcing programmes benefit from a strong focus on what we call programme and delivery management.

The final section of the Paper looks at how Xchanging themselves are addressing the issue of benefits tracking and measurement. Of course, this is particularly important for them as an outsourced service provider, as their success – and in some cases, their direct income – depends on showing clients real, tangible benefits.

So, after looking at what was available in the market, they decided to develop internally a system – “the Vault” - that links project and programme management, category management disciplines, and benefits tracking, measurement and sign-off.

It starts with the annual category planning process, with sourcing teams identifying annual plan initiatives that will be able to cumulatively meet the assigned procurement targets. Sourcing initiatives are created, linked through from the annual plan, and the process begins with a Project Charter, which formalizes each initiative and captures all key information relative to the initiative. As we explain in the paper;

“This starts to address the need we discussed earlier around stakeholder governance and buy-in. stakeholders have considerable clarity about what is happening in the programme and what they are agreeing to support. 

The initiative tracks the sourcing project against key milestones and collects quantitative data such as savings forecasts, as well as qualitative data such as commentary. All of this data can be accessed online, providing open-book visibility to the success and progress of the programme”.

Savings are then tracked, measured and proven – for instance, data around actual prices paid and use of contracts can be picked up direct from other data sources, such as ERP systems, providing an accurate and credible measure of savings.

Xchanging are rolling the system out to their clients now, and I hope to get some validation from users in terms of how it is working once it is fully established. This whole area of capturing and demonstrating credible savings is going to be one of increasing importance for procurement over the next few years we believe, and the Vault won’t be the only product supporting that. But it’s certainly an interesting addition to the solutions landscape in that area.

And don't forget to download the paper here...

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Voices (6)

  1. bitter and twisted:

    Value is very hard to quantify. If it was easy, it wouldn’t be labelled ‘value’.

  2. Ian Heptinstall:

    Another price v value example I’ve used before is the one from Zara the fashion chain. Apparently they spend more (by traditional, per item measures) on transport and distribution than their so-called efficient competitors. The result is that they have fewer customers leave empty handed because they are out of stock of a size/item, whilst at the same time they have lower working capital and discounted end-of-season sell offs. They are also known for buying in small volumes and from local European suppliers, more than many do, again missing out on perceived per-item savings.

    They have grown faster than the market for over 20 years, and their owner has just entered the Forbes top 3 billionaires list. Their buyers knew a good deal was about making more profit and supporting sales, not a blinkered focus on reducing unit prices.

  3. Paul Vincent:

    I would agree with Steve and RJ. This certainly mirrors my own experience when advising the ‘sell-side’ on how best to engage with procurement. On the flipside when I advise procurement teams about how to add the most value to their organisation when looking at indirect spend without doubt the biggest ingredient of success is to approach it from a change management rather than commercial mindset. I will give you a simple example. A procurement professional came to me one day and asked for my advice. He said his organisation spent too much on taxis in London and his big dea was to negotiate a central contract with one provider and achieve lower rates. Did I know who would be best and what target he should aim at? I asked him who owned his organisation’s internal policy for taxi usage he wasn’t sure. I asked him how much taxi spend was compliant with that policy he didn’t know. He merely saw his task to reduce the ‘price paid’. Success to him was being able to say that a taxi journey would now cost x% less than it would have done without his involvement. When I pointed out that taxi users may see cheaper rates as a reason to use taxi’s more often so he would fail to meet his principle objective i.e. overall taxi spend down he realised the naivety of his thinking! Unfortunately in my advisory day job this is not an isolated occurrence!!

  4. steve mullins:

    Thanks RK – that I should be so transparent! A great build, though, and thanks.

    This all exactly mirrors the debate I am have with professional services organisations here. I am developing this very minute some material to support their engaging with the various tribes of Procurement 2013 and to help them get procurement people to lift their eyes up from the unholy trinity of rate card squeezing, master service agreements and preferred supplier lists – and onto addressing the real question, ‘What value does my business need from this organisation and therefore what are the best means to acquire that’

    Peter & Ed? Over to you I think!

  5. RJ:

    An interesting and important topic to explore, I agree, and the structured process and system that Xchanging offers is well worth exploring. A couple of points I’d like to see you and others build on, though:

    i) As Steve implies above, many Procurement teams still have a long way to go in the first, and, particularly, second building blocks of technical and interpersonal skills to really drive a strategic agenda in their business;

    ii) Partly as a consequence of i) Procurement is still seen by most organisations, as a former boss of mine described his team, as “cost killers”: having the primary purpose of attacking suppliers to drive down cost (or more often than not, price).

    In my view this is where functions such as Marketing, Finance and even HR still retain the edge over Procurement in organisations’ perceptions. These organisations are seen as “value drivers”, whereas the Procurement role of “killing cost” can just as easily be interpreted as killing innovation, time to market, quality (of product or service) and external relationships.

    Over the past few years you yourself have noted the rise in interest in the role that strategic procurement (with a small “p”) can play in non-traditional categories such as professional and financial services, marketing, audit etc. In such areas cost (and certainly price) are low on the agenda of senior executives – they see spend in these areas as “investment” rather than “cost”. What they want to measure is the VALUE they obtain from these services, whether this is better or worse than their competitors, what would drive improvement and what would they have to put in in order to get a better return for their investment.

    Now that’s great consultancy speak and I don’t claim to have all the answers in how you actually quantify and capture such points. I’d therefore conclude that that’s a paper I would really like to read and a system I would really want to invest in as a procurement leader!!

  6. steve mullins:

    Peter (and Ed) – great paper, thanks very much as ever!

    My practice at the moment is now very heavily skewed towards advising sales and client management teams on how to engage effectively with the mystical world of procurement. And if I add up the list of famous names involved, I can somewhat belatedly see that, as they come from marketing marketing , property, facilities, IT, comms, professional services (various) and financial services, then they in effect represent the full cross section of what procurement would see as the ‘indirect’ world.

    And what is really interesting or, rather, alarming is the set of common issues relating to their experiences of ‘Procurement 2013’! Of course, all this is open to the obvious response, ‘well they would say that wouldn’t they’, but on the other hand, it occurs to me that this might be an area to explore a little and maybe report on in due course

    Do let me know what you think!

    All the best – and thanks again, Steve

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