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The data we see is quite poor in terms of item nomenclature, material coding and at times even item description. Why does this happen? Simple fact there is no uniform process or code or means of classification to represent the data. As we can see in the illustration something as simple as a notebook computer can be misrepresented in the electronic system across different business units and geographic locations. Thus, in spite of having your data available unless it is classified uniformly it will not help you achieve any meaningful savings.
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Item Description
647445 HP Nc6000 LAPTOP WIRELESS Latitut
Material code
Material Group
Office supp Notizbuchcomputer Computer
Classification Code
43211503 43211503 43211503 43211503 43211503 43211503
Category
Notebook Computers Notebook Computers Notebook Computers Notebook Computers Notebook Computers Notebook Computers
43211503
Australia England
HP NC6000 Latutude NX6120 notebook / 256MB RAM KINGSTON 256MB Pc2700 HP PAVIL Ordinateur portable donn pour la haute de Napoleon DELL-L131 0206ZX XSDF12
Australia France
The data classification should be granular and then combined with an analytics tool that not only reads the data and gives you a full picture of your spend but also provides what if analysis and suggest areas where savings opportunities can be mined.
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Maverick or Off Contract Spend: A large amount of spend in categories for which enterprise-wide contracts do not exist.
Several times purchases are requisitioned by people who are not part of the procurement department. Purchases might also be requisitioned in cases of urgent requirements whereby the available discounts which have been negotiated based on volume with supplier are not met. A major benefit from spend data can be obtained by using it to analyze contract compliance within the organization. Comparing and benchmarking compliance from spend data for various business units within your organization can help you eliminate maverick spend and thus create savings without even changing any processes. Let's look at a hypothetical example of how eliminating maverick spend can be a potential source of savings opportunities. According to a research conducted by the Center for Advanced Purchasing studies in a traditional manufacturing organization the amount of maverick spend made off contract is about 2 - 5% of the total spend on goods. Based on this assumption let us look at a small example of how much you can save by eliminating maverick spend from your process. Considering total revenues of US $ 500 million for company ABC we assume that total spend is about 50% of total sales. For a company in the manufacturing domain assuming a 60-40 percentage ratio between direct and indirect spend, we get that about 100 million is the indirect spend. Assuming maverick spending to be about 5% of this total indirect spend, nearly 5 million is lot in maverick. An above average spend analysis implementation would help you achieve about 70% elimination of maverick spend which in turn translates to elimination of about 3.5 million of maverick spend and potential for more.
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moves across the various stages in the sales cycle. This will be an aid to Sourcing heads or CPOs to see clearly what savings opportunities are available and need to be acted upon immediately.
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The Easy Savings Categories
When launching a new process, starting with little risk and gradually accepting more is wise. So begin your strategic sourcing initiative with a category where success is easier to achieve. Simple categories like office suppliers where several competent suppliers compete against each other with fervor may be the first place to look for easy savings.
Non-Traditional Categories
So after a procurement department gets through the easy savings categories and hopefully and saves the company tons of money they need seek other opportunities to use sourcing to save money. Now categories that have been traditionally managed outside of Procurement need to be addressed. These areas include health benefits, advertising, travel, and fleet services. Identifying these areas and learning to work with your new internal customers is a challenge all to itself. Some of the categories you've identified will require careful consideration and a very cautious, deliberate approach to supplier selection. But some of the categories will be a bit more straightforward. These more straightforward categories will enable you to use e-Sourcing, which has been a proven way of achieving higher degrees of cost savings compared to traditional competitive bidding.
Each of these stages is plagued by particular issues when your sourcing process is purely manual or even spread sheet based. In terms of the planning stage, lack of collaboration between sourcing teams or even sourcing departments at multiple locations is a common problem. Process for event planning becomes ad hoc and tedious when done by manual means. Modeling the RFx in an eSourcing tool - Creating an electronic RFx in the desired format (identical to the one created in your excel sheet) with all the necessary requirements such as a detailed cost break-down with respective item attachments and inclusion of decision parameters and cost benchmarks is unarguably the most cumbersome and time consuming task in the eSourcing process. It accounts for as much as 25% of the entire sourcing cycle time and still leaves the users far from satisfied, simply because it is either not easy to use or it doesn't have the capability to model the complex cost breakdown structures. This often leads to user frustration and beginning
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An e-Sourcing tool can provide benefits at each stage of the sourcing process Sourcing planning ! Enhanced collaboration between multiple business units can be encouraged to enable streamlined
planning within the sourcing process.
! Profiling can be done for multiple categories. Event creation ! Existing events can be replicated to create events faster and more effectively ! More suppliers can be invited for sourcing events and hence cost savings can be induced Supplier Evaluation and Award scenarios ! Supplier responses can be viewed, scored and analyzed easily to make objective evaluation much simpler. ! Multiple what-if scenarios can be built and analyzed before awarding the contracts to suppliers.
Let's look at a case study to further understand the benefits derived from an eSourcing solution.
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nearly 35 countries
to navigate from opportunities to savings The Company: A global manufacturer of complex medical devices based in London and having centers across
The Problem: The sourcing process was completely manual. The two parameters which defined the sourcing process were how efficiently the sourcing could fit within the tight timelines and the quality of the products sourced. Being a player in the healthcare segment both being able to deliver the required surgical equipment on time as well as the quality of the equipment delivered were of paramount importance. The manual process spread across the various business locations was simply not able to match up to either of these parameters The need: The need was to implement a solution that helped to conduct sourcing events quickly and
efficiently within the desired timelines as well as create a process of thorough supplier evaluation to ensure the high level of product quality that was needed.
The Solution: A comprehensive e-sourcing solution was implemented that helped the organization to model
RFPs/RFQs for several complex categories and evaluate suppliers across almost 40 different parameters. The total amount of spend sourced across the eSourcing solution was nearly $18 million. At the end of the event the resultant saving was close to $ 6 million-nearly 35% of the total spend sourced. More importantly the organization was enabled with a solution that enhanced the sourcing process while reducing time and complexity An e-sourcing solution thus helps to reduce the time to source, reduces complexity in your sourcing process and increases the potential to generate savings from your current process. An e-sourcing application seamlessly integrated into a Spend Analysis solution can be a great enabler to realize
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! Provide savings calculations which are accurate and actual rather than providing estimates and
predictions. Estimates if not met raise questions on whether there has been a slip up at the procurement department end. This approach also helps to ensure that you keep your eye on end-user compliance with the new contracts often the difference between a sourcing initiative that delivers what was expected and one that does not.
! Second, be careful in how you claim cost savings when quantities change from year-to-year. If your
quantities are increasing by 50% from last year to this year while price goes down by 5% that means you are still buying more than last year. Change in quantity should be compromised with the change in prices negotiated to report actual savings.
! Calculate savings on a year-on-year basis comparing average prices from the previous year with that of the
current year and state the quantum of savings.
Conclusion
Well, as you can see, it is possible for a procurement department to identify and act on cost savings opportunities, even when the starting point involves very bad data. While many people in the procurement field would consider overcoming the lack of data to be a gargantuan task, with five structured steps, you can deliver some real results. And the best part is, none of this involves tediously long processes or resource investments. The primary enabler for all the steps here is the data that your organization will already possess. All that needs to be done is the establishment of the correct processes to ensure realization of these savings potential.
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