New spend areas: A great adventure, or a problematic jungle?
William Atkinson -- Purchasing, 10/6/2005 2:00:00 AM
As companies continue to look for ways to cut costs, they are asking purchasing to become involved in more far-ranging areas of spend, especially in nontraditional purchasing, such as personnel benefits, advertising and marketing costs, travel, fleet management, etc. The challenge is to first gain control of what the company is actually spending in these areas and also finding out how to leverage the spend to advantage.
"For example, because of the skyrocketing costs of healthcare, which is something that human resources has traditionally purchased, senior management may ask procurement to become involved in sourcing healthcare benefits," says David Clevenger, vice president of operations for Corporate United, a group purchasing organization in Cleveland.
If handled well, purchasing can find such endeavors to be challenging but enjoyable adventures. If not handled well, though, they can be problematic jungles fraught with headaches and frustrations. Here are some strategies for getting off on the right foot.
First, if you have a formal process in place for how you source your existing products and services, it makes sense to study this, according to Charles Dominick, president of online training firm Next Level Purchasing in Pittsburgh. Dominick was a procurement professional for 10 years for U.S. Airways and the University of Pittsburgh before becoming a consultant. "You can use this as a template for beginning to source the new product or service for which you are now responsible," he suggests.
Next, analyze transaction data. That is, get your arms around what your company is already doing. "For example, you need to know what kind of volume you're doing in the commodity and how much is being spent," suggests Dominick. In addition, find out which departments are spending the money and which suppliers they are using. It may be a challenge to get this information, in that not all of it is going to be available in purchase order systems. "You may need to look at things like check requests and purchasing card transactions," he adds.
When Bob Grieser becomes involved in new procurement areas, he likes to look at past pricing trends first. "Ask your own people, as well as supplier salespeople," suggests Grieser, a purchasing leader for Weyerhaeuser Co. in Rothschild, Wisc. "Talk with other people in your company who have knowledge about the products or services. Ask them to bring you everything they have on past experiences with purchasing the product or service. In addition, ask them for any verbal history they can provide."
Consider future demand forecasts. "Relying only on historical transaction data is like driving a car by looking in the rear-view mirror," cautions Dominick. In a changing business environment, future demand is not necessarily going to be the same as past demand. Look at future demand forecasts, such as whether you will be building a new facility or closing one down, whether you will be adding or discontinuing a product line, etc.
Where can you get all of the data and other information you need? According to Clevenger, there are three sources: the buy side, the supply side and independent analysis. Unfortunately, he has found that a lot of purchasing people limit themselves to the first two, ignoring the very important third aspect.
Buy-side tactics
Work with business owners, spend owners, and users. "Understand what their specific needs and requirements are," suggests Clevenger. If you're in a situation where the current people responsible for purchasing are only too glad to wash their hands of the activity, getting this information shouldn't be difficult. However, in many organizations, current buyers may want to retain their authority to buy and will resent professional purchasing people coming in and taking over. "There is no sense in creating a new procurement process only to find that current users still fully intend to continue purchasing on their own from their own preferred suppliers," says Dominick.
But gaining cooperation in such circumstances can be a challenge in itself. The key is relationship building, according to Dominick, who says the first step is to get all of the departments and users involved in the process. "Make them feel that they still have some degree of control over the decisions," he suggests. For example, make sure they have some input into creating the specs, identifying qualified suppliers, ultimately selecting the final suppliers, negotiating points in the contracts, etc.
Clevenger believes it is possible to gain cooperation by delineating different risks and how working together can address all of these risks. He has identified four: performance risk, implementation risk, price risk and market risk. For example, if you are asked to begin working on the procurement of healthcare services, explain to human resources that they are experienced in performance risk and implementation risk, in that they are experienced in plan design and the qualitative functions of a health plan.
"However, without your help, they are going to be exposed in the areas of price risk and market risk, because these are not their areas of expertise," says Clevenger. These are areas of expertise for procurement. His recommendation, then, is to work with HR and use them as the subject matter experts. Then, you can come in and use your expertise related to negotiating, creating contracts, etc.
Another strategy is to show users and others who are currently making buys how they will be able to save money for their departments by taking advantage of the efficiencies and expertise that you bring to the table. Show them how you have done this in the past with products and services for other departments.
If all else fails, seek the support of senior management. "If the people who are currently making the buys don't want to give up their purchasing rights, you need to get senior management behind you," suggests Grieser.
Supply side strategies
Here, Clevenger recommends studying market dynamics, such as who the key suppliers are, how to qualify them, and what the industry-accepted negotiation strategies are. Grieser offers additional details. "Besides talking to supplier salespeople, identify other people in supplier organizations who can help you get up to speed on technical information," he suggests. In fact, he has found that salespeople will sometimes bring their technical people with them on sales calls. When they do, learn all that you can from them.
If at all possible, try to find out about supplier production-run rates. Once you know this, you will get an idea of how much opportunity you may have to negotiate with suppliers. When it comes to chemical processing suppliers, for example, if they are operating in the 90-95% range, they figure that's pretty close to full capacity, so you probably don't have a lot of bargaining power.
"However, if they are operating at 75%, you know you have leverage, because they're anxious to increase their capacity," states Grieser. The reason is that they have about the same fixed expenses whether they operate at 70% capacity or 95% capacity. He admits that it may be a challenge to locate this information. One way is simply to ask the supplier's salesperson or someone else in the supplier organization. "If the run rate is low, it's not to their advantage to provide you with this information, but it's still worth asking," he adds.
Third-party advice
Once you have gathered as much information as you can from the buy side and the supply side, it is important to seek more objective third-party "market intelligence," according to Clevenger. This can involve information from research firms, analysts, trade publications, etc. "This helps to validate the information you have collected from the buy side and the supply side, which, as you will probably find out, are skewed to the end goals of either or both of the parties," he explains.
The Internet has made it a lot easier to get a lot of this third-party information. "You can do so much research on new products and services, as well as the companies that provide them," says Grieser. "In the past, you were limited to product catalogs and supplier salespeople and, to some degree, consultants or industry experts."
Finally, consider seeking information from fellow purchasing professionals in other companies. "Talk with colleagues who are already involved in purchasing these products or services," says Dominick. "Generally, they are willing to share their 'lessons learned' with you."
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