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Procurement outsourcing delivers value
The competitive landscape in the forest products industry seems to be continuously eroding. Each year, suppliers become more sophisticated, while customers demand lower prices and better service. As the industry faces its most difficult times in recent memory, forest products companies need to simultaneously focus on the top and bottom lines.
Procurement is one business function that can have a significant impact on the bottom line regardless of market conditions. Due to the fact that at least half of a forest products company’s cost-of-sales can be spent on its suppliers, many producers are investing in developing their procurement capabilities. Whereas benefits have undoubtedly been realized, many procurement initiatives have been difficult and slow to implement, thereby sub-optimizing the potential value.
Several factors have led forest products companies to study procurement outsourcing, and executives now show an increased willingness to consider outsourcing noncore business processes like procurement. Corporate procurement managers cannot always gain access to highly-skilled procurement resources and need to aggregate nonstrategic spend and gain scale advantages, especially against the growing power of suppliers.
There are several providers of outsourcing services for specific items like maintenance, repair, and operations, facilities management, and other categories. Using these suppliers, procurement outsourcing lets a company use the latest purchasing technology without making huge investments in software, implementation, and support.
WHAT IS PROCUREMENT OUTSOURCING? Procurement outsourcing transfers the operation of sourcing and spend management to a third-party service provider. The goal is to enhance shareholder value through a change in procurement performance. A basic question to consider is, “What aspects of the procurement function should be outsourced?”
To answer this question, an organization must answer the following questions: What is our business strategy?What are the implications on procurement segments to retain or outsource? What procurement processes offer the best improvement opportunity? What technology is required to capture the identified value? What skills are needed to create and sustain value?
BENEFITS OF OUTSOURCED PROCUREMENT. The primary benefits of outsourcing are lower operating costs and better capital allocation. Procurement-related costs are often reduced from 5 to 15%.
Companies optimizing procurement value-creating opportunities have developed important characteristics through outsourcing. These include automated, streamlined transaction processes with minimal buyer involvement and high contract compliance; balanced metrics to capture performance in cost/price, process excellence; customer focus and supplier performance; world-class organization and expert procurement professionals; end-to-end e-sourcing solutions that enable and accelerate the sourcing process; and the ability to exploit short-term sourcing opportunities to create a self-funding procurement outsourcing program.
SELECTING A THIRD-PARTY PROVIDER. Best-in-class procurement outsourcing arrangements achieve benefits from spend reduction and continuous process improvements, as well as utilizing the new outsourcing entity to accelerate value capture. Other characteristics include deployment of innovative governance models and financing arrangements to allow benefits and risks to be shared by multiple parties, and commitment to a multi-year agreement for transforming new procurement capabilities into a competitive advantage.
To maximize the speed and the amount of value obtained from an outsourcing arrangement, the third party selected should be able to provide a benchmarking database and a full range of auction services. It should also offer diagnostic tools, such as those for spend analysis and for assessment of company procurement capabilities.
In addition, the third-party provider should offer best practice methodologies for sourcing, requisitioning, and performance management. Also, it should provide systems and e-procurement capabilities such as vendor landscapes, evaluation tools, implementation plans, and deployment frameworks. Organization design, job descriptions, skills assessments, human resources solutions, and training materials should also be offered.
SUCCESS IN OTHER INDUSTRIES. The example of a British utility company shows the benefits of procurement outsourcing. It transferred its entire procurement function, including payments and logistics, to an independent procurement company.
Several improvements resulted from the transfer, including reduction in procurement expenditures by 10%, reduction in service costs by 40% at a service level of over 99%, reduction in inventory level by 58%, reduction in order backlogs by 70%, improved communication with the customer, improved information base for management, an educated staff, and optimized processes.
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