by Andrew Loken and Guy Strafford
Companies with operations in multiple countries are facing new and increasing challenges in indirect
procurement. These purchases are hard enough to handle in one country, but addressing them in many geographical regions simply makes the challenges posed by the variety of suppliers, diversity of stakeholders and the multiplicity of processes even harder to address.
In the search to take out costs and make operational efficiencies, there is a growing trend for CEOs and finance directors to move towards more centrally managed functions (including procurement).
Driven by the “economics” of purchasing direct goods or services, procurement is also increasingly based in locations that may not actually have a significant operational presence. Vodafone, for example, has transferred its procurement function to Luxembourg.
Companies can benefit financially from moving their procurement to “tax-efficient” areas of the world including some Swiss cantons, where procurement savings can be “charged back” to the international operating units as transfer costs, hence reducing local profits and benefiting from a corporation tax differential.
Brewing giant SAB Miller announced in January that it is to base its global procurement operations unit in Switzerland and said that tax regimes were a key part of the decision. The increase in demand for procurement professionals and procurement consultancy services to these countries is testament to this trend.
For direct goods and services, taking a more centralised approach to procurement does not typically cause problems, due to the centralised nature of the budget holders. Neither is the physical location of the “decision makers” an issue, as centrally controlled supply contracts can be managed from any location.
However, these trends are creating an increasing challenge for the indirects spend manager, who has already faced procurement headcount reductions, greater complexity in the supply markets and increasing pressure to generate further savings for the company.
Being moved further away from operating units where the money is being spent aggravates the issues that the indirects procurement manager already has dealing with the fragmented spending and supply contracts.
The complexity of indirect procurement
In thinking about the challenge of sourcing indirects, it is useful to compare them with direct procurement. To this end, buyingTeam initiated research with CPO Agenda’s sister publication, Supply Management, on this subject.
The responses of 250 senior buyers, who had responsibility for an average spend of more than €1 billion, made interesting reading. These findings are summarised below:
1 | Most businesses spend less on indirects than directs…
Average spend on indirects was 30 per cent of total spend, so it clearly receives emphasis from many CEOs and finance directors when they are taking “top-down” decisions related to overall procurement.
2 | … but have more suppliers for the former…
In fact, there were nearly three times more suppliers in indirects than directs, although the average spend per supplier in indirects was ten times smaller.
Combine this with greater diversity of categories and supply markets (typically more than 100) and some of the challenges of indirects become clearer. Multiple regions intensify the problems further.
3 | …and have more stakeholders to deal with in indirects as well
The challenges of indirects also extend to the number of stakeholders, where our CPOs have to deal with more stakeholders on average than directs. The ability to monitor and control spending (including specifications, demand, negotiations, contracts and so on) in such a fragmented spending environment is often low. Now imagine the consequences of those stakeholders crossing many geographies, and the problem only gets greater – as we explore below.
The consequence of these assessments is clear. Many companies have a significant mountain to climb to extend their coverage of indirects to include a wide range of categories and also to prevent maverick spending (see chart 1).
The CPOs who provided feedback were mainly based in the UK. Once this assessment is given an international dimension, we believe the challenges are greater and the data would show even greater differences.
A centralised problem
The shift to more centralised management of procurement is causing a problem, but why? First, the inherent characteristics of indirects means it is difficult to get maximum value across all categories. The breadth of categories and industries, combined with the number of stakeholders and budget spenders on such a large number of suppliers, is a particular issue for the indirects procurement team. In a world of limited internal headcount and specialist knowledge, they are often required to prioritise and focus on the major categories, leaving significant value on the table.
Second, as anybody who has run an “international” sourcing project knows, an additional challenge presents itself in the fragmentation of the spend across a number of international locations, with stakeholders who often speak different languages and have their own relationships with suppliers.
A “centrally driven” project from headquarters will often fail simply because it doesn’t have credibility in the eyes of the international locations. Indeed, this “credibility gap” has been one of the major reasons why companies with operations across a number of countries have yet to extract the maximum value from their combined indirects spend.
This is also a major factor in our experience with major US companies with European operations, when they attempt to “roll out” a US-driven initiative to Europe and fail to appreciate the complexities of the multiple stakeholder groups and supply markets.
The Holy Grail for any global or international indirects spend manager is to extract maximum value across indirects across all its international operations. For a global value delivery programme to work, it needs a number of critical elements.
Getting it going:
Fact-based ambition.
The prize needs to be big and believable. Too often, the ambitions of indirects spend managers are limited by the perceived constraints of limited resources, capability and budget. It’s the return on investment that counts and will make the CEO and finance director take notice. Be ambitious, but make sure your savings are based on real, recognisable numbers.
Spend clarity and benchmarks.
Having a well-categorised spend view across all major countries is critical to gain credibility for your business case. Focus on insights and facts that the finance director would not already know. Use real benchmark examples from a number of countries to support your savings estimates.
Appropriate language.
Cut procurement jargon when selling upwards. Focus on the business case: what’s the opportunity, what will it take to deliver, what will the return be, what impact will it have, and what is needed from them.
Delivering the programme:
Think global, act local.
Co-ordinate the approach and programme management centrally, but ensure delivery is carried out by local people in the key countries who can speak the appropriate language, engage with stakeholders, understand the culture, and have local supply market knowledge.
Accelerate and share the burden.
Use appropriate external expertise to help accelerate the programme delivery, and to take on the burden of delivering the business case. Every month of delay effectively costs the organisation 8 per cent of the annual savings in lost cash.
Learn and replicate.
Ensure you can capture experiences, templates and processes to allow replication more efficiently as the programme develops.
Quick wins, quickly.
Focus on generating some demonstrable financial results quickly in order to generate momentum and board-level support. The robustness of the savings calculations is critical at this point to maintain the credibility with the local finance departments and stakeholders.
Maintaining the benefits:
Keep control.
Use standardised technology and tools for spend transparency, compliance monitoring, sourcing delivery and contract management.
Expand your remit.
It is likely that your programme will have raised the profile of procurement across the organisation. Use this to expand your influence on operational cost, and to focus on “engineering out” costs at the demand stage
The benefits are worth the effort. A successful programme can deliver a reduction of more than 10 per cent in the overall indirects spend base, raise the profile of procurement in the eyes of the FD and CEO, and improve local stakeholder relationships.
Furthermore, you will probably find that the outcome works best for your top performing suppliers, which will be rewarded with more business and better relationship management. The indirects spend manager who achieves this will have their hands on the Holy Grail.
Andrew Loken (Andrew.loken@buyingteam.com) is managing director, mainland Europe for buyingTeam’s European operations, and is based at its mainland European headquarters in Geneva, Switzerland. Guy Strafford is client director of buyingTeam, based in London
