Procurement Outsourcing in Manufacturing

Manufacturers realize significant savings.

Large manufacturers helped lead the procurement outsourcing (PO) market to 30% growth in 2008, according to a recent study by Everest Research Institute. Manufacturing is the largest adopter of PO, accounting for nearly 70% of contracts signed.

The study found that manufacturers can achieve significant savings -- often 5% to 15% of revenue -- through procurement outsourcing. For a $10 billion organization, that means savings of $50 million to $150 million. The average total cost value of PO contracts in manufacturing was approximately $30 million. Within manufacturing, pharmaceuticals, hi-tech and consumer products buyers sign the largest contracts.

The relatively high degree of importance and maturity of the procurement function has helped to drive PO adoption in manufacturing. Because procurement is a more mature function in manufacturing than other industries, the relative degree of outsourcing challenges is lower, researchers found.

Two suppliers, IBM and ICG Commerce, account for more than 60% of the annual contract value in manufacturing. For example, United Technologies signed a contract with IBM and was able to save in excess of $250 million in indirect purchases. Other major PO suppliers to manufacturers include DSSI, Infosys, BPO and Xchanging.

Everest found that some 68% of PO contracts in manufacturing have an offshore component. The company estimated that 90% of contracts signed in 2008 had some offshore component, compared with 60% in 2007. The degree of offshoring in unionized environments such as auto manufacturing remains low.

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