Tag Archives: cost reduction

This Little Procurement Pro Went To Market…

How do you know when you should  go to market? ThomasNet discuss strategies for three common sourcing scenarios. 

Strategic sourcing is all about generating a return on investment for every sourcing initiative. However, different sourcing scenarios require different levels of investment – in terms of time, effort and resources. Therefore, it’s important to approach each situation differently as well in order to produce the best results.

Here are three common sourcing scenarios, along with proven advice you can use to ensure an optimal return.

Scenario 1: Reducing Costs With A Strategic Partner

Your current supplier is deeply involved in the design, engineering, and process improvement of your product. You rely on them for the success of your day-to-day operations, and they have invested heavily in technology to ensure the success of your product. However, you are exploring ways to reduce costs.

When your incumbent supplier already acts as a strategic partner, the potential return on investment from pursuing alternate suppliers is significantly reduced. In fact, pursuing alternative suppliers can actually yield greater risk than reward. That’s because the supplier has provided you with capital investments that they have engineered and maintained, and the transition costs are likely to exceed the cost savings opportunities available with an alternate vendor. In addition, your current supplier has a comprehensive understanding of your product design, so they are less threatened by outside competitors who are likely working with imperfect information, and therefore less likely to reduce their pricing.

The Strategy

Rather than pursue alternative suppliers, you should engage the incumbent supplier in direct negotiations. Leverage the value your business brings to their operations; be upfront with your desire improve pricing; and be transparent about your procurement goals. Should negotiations prove unsuccessful, that may be a flag that your supplier is too complacent in the relationship, and alternate options can be explored at that time.

Scenario 2: The Unsolicited Proposal

Before reviewing a purchasing category, you reach out to suppliers within that category to notify them about your initiative. One supplier responds with an unsolicited proposal that reduces costs or otherwise increases value.

As a Supply Chain Project Analyst at Source One, this is a situation I encounter often. After a supplier realizes that their spend is being reviewed or a sourcing initiative is being considered, they attempt to get ahead of the process by offering up a proposal. The proposal typically includes a cost reduction in exchange for a longer contract or additional business.

The Strategy

The supplier is aware that their costs are not market competitive and are adjusting accordingly. However, while it may be tempting to award your existing supplier and reap the savings, it’s better to conduct a full sourcing initiative through an RFP, eAuction, or even an RFQ. At worst, you will have alternative bids to use as leverage with your incumbent supplier. At best, you can save a substantial amount of money. In fact, in my experience, the savings you can realize from alternate suppliers is often greater than the cost reduction proposed by the incumbent.

Scenario 3: Tactical Versus Centralised

Your business has been purchasing tactically in a particular category. The overall market basket is high mix, low volume, with very few recurring purchases to leverage for specialized pricing.

This is a common occurrence in indirect categories such as industrial supplies, industrial hardware, safety supplies, and office supplies. Employee preferences and unique company needs can influence purchasing, and standardization of products is nearly nonexistent.

The Strategy

 In this scenario, the continuation of tactical purchasing may seem like the most appealing option, as prompting a centralized supplier to bid on such an immense market basket would likely result in poor pricing and participation. However, it’s almost always prudent to conduct an RFP. Invite suppliers that can cover all required geographies and product categories. Focus on leveraging the overall value of the market basket to establish discount structures, rather than having suppliers exhaust resources pricing out an extensive product list.

To gauge the potential savings available, examine a random sampling of products and ask suppliers to apply the proposed discounts to those items to compare to your baseline price. If you do eventually move to a centralized account, lean on the supplier to drive product standardization and compliance. This will give you the opportunity to further refine pricing and terms down the line.

Other Strategies


Granted, not all sourcing events will fall into one of these three scenarios. However, there are some principles that can be applied universally:

  • Closely monitor the relationships with current suppliers
  • Don’t be afraid to shake up the status quo if a competitive event can yield cost savings or product improvements
  • Maintain clear and consistent communication between procurement and other departments
  • Above all, remember that the strategic sourcing process does not begin with the identification of an initiative, it thrives on the constant analysis of the current state of purchasing

Jennifer Engel is a Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives for Fortune 1000 clients.

This article was orginally published on the ThomasNet blog. 

Procurement Faces Balancing Act as Business Uncertainty Rises

According to new research from the Hackett Group, procurement faces a balancing act in 2016 thanks to rising business uncertainty.

Business Uncertainty

  • Key issues research shows budgets and staff expected to rise slightly in 2016
  • The Hackett Group recommends that to improve agility and reduce cost, procurement must harness the value of Big Data and control tail spend

According to new Procurement Key Issues research from The Hackett Group, Procurement leaders expect operating budgets and staffing to increase slightly in 2016. This comes at a time as they attempt to balance the need to reduce costs, with the desire to become a better strategic business partners and other priorities. 

Increased business uncertainty and risk are driving a resurgence in traditional cost reduction strategies, according to research. At the same time, the research identified critical development gaps in four key procurement strategy areas:

  • Becoming a better strategic partner to the business.
  • Increasing spend influence.
  • Improving agility.
  • Tapping supplier innovation.

These are seen as important targets for capability development.

Harnessing Big Data

To improve agility, The Hackett Group’s research recommended that procurement organisations become more information-driven and harness the value of ‘Big Data’. Unfortunately, the research found that over half of the study respondents currently lacked a formal market intelligence program, or were only in the earliest stages of adoption.

Study respondents also identified predictive analytics and forecasting as the trend with the greatest transformational impact for procurement over the next decade.

Finally, The Hackett Group’s research recommended that, to unearth new sources of savings, procurement examine tail spend. This is­ the 20 per cent of spend that is spread thinly across up to 80 per cent of suppliers.

This is an area where most procurement organisations have not focused heavily.  But with effort, The Hackett Group estimates that savings of 3-5 per cent for less mature sourcing organisations is possible, in part by identification of high-dollar maverick spending that should have been strategically sourced.

A complimentary version of the research is available for download, following registration, here.

Cost Reduction Pressures

According to The Hackett Group Global Procurement Advisory Practice Leader, Chris Sawchuk, “For 2016, companies are expecting to see business uncertainty and risk increase, along with greater struggles to grow revenue. So the pressure to reduce costs is increasing. At the same time, procurement leaders need to balance this with other more strategic priorities, like becoming a better strategic business partner.

“This is challenging, because for 2016, procurement operating budgets are expected to increase by just 1.1 per cent, and staffing will only grow by 2.2 per cent. So procurement can only afford to fund its highest-priority initiatives. One clear differentiator we saw in the research this year was the recognition of the value of improved market intelligence.

“Procurement leaders are realising that higher-quality information can help them drive greater business value. Big data has been a game changer when it comes to customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured data from multiple sources. But procurement’s lack of maturity in market intelligence is a significant obstacle that must be overcome,” said Mr. Sawchuk.

The Hackett Group’s 2016 Procurement Key Issues research  is based on results gathered from executives from nearly 180 large companies in the US and abroad, most with annual revenue of $1 billion or greater.

Chris Sawchuk is a keynote speaker at the Big Ideas Summit on April 21st. Chris will be talking about how procurement is applying key agile capabilities in the areas of leadership, talent, service placement and information-driven performance.

If you’re interested in finding out more, visit www.bigideassummit.com, join our Procurious group, and Tweet your thoughts and Big Ideas to us using #BigIdeas2016.

Don’t miss out on this truly excellent event and the chance to participate in discussions that will shape the future of the procurement profession. Get Involved, register today.