Procurement outsourcing can pick up money left on the table.
With greater pressure than ever to do more with less, business leaders are continually looking for solutions to cut costs and improve efficiencies. Companies like Kimberly-Clark and Goodyear recognize that they spend billions of dollars on non-strategic materials and services, such as maintenance of manufacturing equipment, logistics, marketing services, travel and entertainment, office supplies and telecommunication services and equipment. Responsibility for managing these non-core areas of spending is often fragmented across multiple departments, potentially leaving millions of dollars on the table. Increasingly, industry leaders charged with meeting business unit or division level P&L goals are engaging outside specialists to help them manage these areas of spending and drive significant savings.
To identify, capture and sustain measurable cost reductions across these non-core spend areas, business leaders are advocating long-term, comprehensive procurement outsourcing solutions to help companies select, implement and manage preferred suppliers and the associated purchasing activities. By bringing in a third party with unique market information and expertise in non-core spend areas, leaders can not only reduce budgets, but are also able to drive superior service levels and stronger supplier relationships to promote sustainable cost reductions. Moreover, with the ability to deliver five times the savings of other functional outsourcing endeavors such as HR and IT, procurement outsourcing helps these leaders fund other initiatives that directly support corporate-wide strategies for growth and innovation.
Goodyear, Kimberly-Clark, Timken Improve Company Performance
Many business leaders have implemented multi-year procurement outsourcing programs to deliver sustainable cost savings and performance improvements that have a significant impact on company performance. Since 2005, The Goodyear Tire & Rubber Co. has leveraged procurement outsourcing to support the company's focus on driving cost reductions, one of the seven key drivers in their corporate strategy to build momentum and maintain profitable growth through improvements in company performance. Leaders of the company's North American Tire division have delivered significant savings and increased efficiencies across major non-core spending categories, allowing the company to focus on its core competencies. Based upon the success of the program to date, Goodyear recently extended the initiative for another three years.
Kimberly-Clark's decision to outsource vendor selection, negotiation and management and the processing of purchase orders for its North American and European operations was driven by a global competitive improvement initiative focused on innovation and brand-building to support long-term, sustainable growth. The five-year procurement outsourcing program supports key business unit goals and is enabling their sourcing and supply management team to focus their expertise on core business purchases, such as raw materials and packaging supplies, while leveraging third party expertise to reduce costs and improve efficiencies across non-core materials and services.
The Timken Co. began outsourcing procurement in 2002 to accelerate the realization of savings while creating centralized purchasing capabilities to support its expanding global manufacturing operation. In early 2003, Timken leveraged the program to support the acquisition and successful integration of Torrington. Over the past five and a half years, the initiative has enabled Timken's leaders to drive significant savings and, as a result, has evolved into a comprehensive, holistic program aimed managing complex supply bases to support the continuing growth of the business and the increasing breadth of its product portfolio.
Reducing Spend Yields Five Fold Savings
The savings and benefits derived through procurement outsourcing are based on the level of expenditures and opportunities for improving pricing and service levels. Through this focus on spend reduction and its immediate impact on an organization's bottom-line, according to Everest Research, companies are able to deliver five times the savings through procurement outsourcing compared with other functional areas, which in turn, can fund initiatives such as other outsourcing endeavors or strategies for growth and innovation. While other functional outsourcing initiatives, such as F&A, IT and HR, use labor arbitrage to reduce personnel costs associated with the function, procurement outsourcing focuses on reducing the amount companies spend on external goods and services, which can range from 20% to 70% of their revenue. To capture this significant savings opportunity, business leaders have selected solutions that augment their existing purchasing capabilities -- providing access to deep commodity-specific expertise, firmly established infrastructure and market information and tools enabling them to achieve aggressive savings targets. And to achieve these savings goals, they recognize the importance of proven experience enlisting strong internal support from other business leaders to help drive the organizational change.
Procurement Outsourcing Market is Growing Quickly
The ability to rapidly drive significant savings to power strategic company initiatives, without negatively impacting a company's existing resources, has fueled the growth in procurement outsourcing over the past three years. Outsourcing research firm Everest Research cites 35% growth in 2006 and, as the market matures, outsourcing market expert IDC predicts continued 22% growth over the next 5 years.
Looking forward, more business leaders will incorporate or expand procurement outsourcing as part of their strategy to meet business performance objectives. Based on proven successes, executives that have outsourced procurement will continue to expand their programs into new commodities and geographical locales. Those already experienced with outsourcing will look to expand upon their success by including procurement within their outsourcing strategies. And as business leaders continue to look for new solutions to improve profitability and fund corporate initiatives, procurement outsourcing will increasingly be adopted as a strategic tool that will help them achieve their objectives.
Bob Kothari is Senior Vice President, Business Development,, ICG Commerce Inc, a procurement outsourcing specialist delivering comprehensive source-to-pay as well as strategic sourcing services. http://www.icgcommerce.com/
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