The case for outsourcing procurement
By John M. Matthews -- Purchasing, 7/18/2002 2:00:00 AM
As a career purchasing professional who works for an outsourced purchasing service, I found Bill Koskie's article, "The Business Case Against Outsourcing" (PUR: May 2, '02; p.48) interesting. I agree with Mr. Koskie's summation that outsourcing the procurement function may not be the lowest cost option for every company. However, I would like the opportunity to explain why in most cases outsourced purchasing is a low cost solution that also delivers the largest cost savings. I would also like to offer a nontraditional view of how outsourcing can be a positive influence on today's purchasing professional.
Why companies outsource purchasing
By way of example, outsourced purchasing tends to start with less strategic commodities such as maintenance repair and operation (MRO) and information technology where the buy has already been abdicated to end users utilizing procurement cards. The value of outsourcing in this and many other cases is in centralizing the buy to manage and control the wide variety of items purchased, allowing for product aggregation and reduced process costs.
As a first step, centralization and aggregation allows buyers to analyze clean centralized data, identify the best price and negotiate with suppliers to extend the price point across the company. There are huge savings to be achieved through centralization and organizations with the technology and resources should implement this strategy.
Most often however, companies do not have these capabilities, resources or time. Enter an outsourced purchasing firm that has the technology, processes and people, as well as the experience of implementing procurement strategies for multiple customers and you can understand why companies are attracted to the concept of outsourced procurement. These companies can jump-start purchasing initiatives and receive immediate bottom line cost savings without incurring large investments in technology and implementation. Additionally, they convert their fixed costs to variable and receive the benefit of significant cost savings due to the leveraging of volumes, headcount and technologies across multiple customers.
There are a dozen other scenarios, both in direct and indirect commodities that illustrate why it makes good business sense to outsource the purchasing function and hundreds of success stories to point to as evidence that it works. However, one item that isn't addressed a good deal in the media is the digression Mr. Koskie made at the end of his article where he listed the requirements of a true purchasing professional.
This digression spoke loud and clear that the reason why outsourcing is a bad idea (in the purchasing professional's mind) is that it may lead to displacement. This is a valid concern.
Purchasing opportunities
The good news is that there will always be a need for high-quality purchasing professionals, and rather than viewing outsourcing as a threat, purchasing professionals need to realize the opportunities that exist. When a firm decides to outsource the buy, someone still needs to negotiate the contracts and manage the supply base.
It can be argued that for a purchasing professional, the desired state is to work for a company whose core competency is purchasing. These companies take purchasing seriously and recognize the value of the profession. They are comprised of competent purchasing professionals from large and small companies across various industries. Together, the best practices of these purchasing managers and buyers are combined and new insights are developed and implemented.
The evolution of outsourcing is an evolution of the purchasing profession. Industry is finally recognizing purchasing as a profit center and appreciating the tremendous value it can offer. They are also recognizing it as a business in and of itself and many companies acknowledge it is not the business they are in. So, rather than fearing the unknown and in response articulating the evil nature of outsourcing, today's purchasing professional needs to understand the marketplace, recognize their own value and pursue the opportunities that exist in today's changing business environment.
Send your contributions for this column to dsmock@reedbusiness.com. Articles by buyers will be published here and at www.purchasing.com as space permits. Include photo (as a high-res jpg or tif file), current position and biographical data.
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