We've all done it. We've bought indirect supplies without thinking about cost, let alone who is the best supplier. It seems harmless at first -- a box of pens here, a shipment of work gloves there. The rationale: It's easier to buy ad-hoc and pay a 20% premium for the item rather than jump through procurement hoops. But like any bad habit, it's a downward spiral into the land of no return.
Indeed, maverick spend on indirect materials can really add up when you consider, on average, indirect spend equals 50% of a company's purchases, according to The CAPS Center For Strategic Supply Research, a Tempe, Ariz.-based think tank sponsored by the Institute for Supply Management and Arizona State University. "Unfortunately, a significant amount of indirect spend is not purchased using the organization's purchasing/supply function or purchasing processes," notes CAPS.
For Kennametal Inc., a Latrobe, Pa.-based supplier of tooling and engineered components, indirect spend on gloves, safety supplies, computer software, computer peripherals and the like costs the company about $350 million a year. If the company isn't diligent about enforcing where employees buy materials from, there could be potential for an additional $70 million tacked onto the indirect-spend line.
Fortunately for Kennametal, the company has been utilizing a purchasing solution from Santa Clara, Calif.-based Ketera Technologies Inc., a provider of on-demand spend-management solutions.
The solution enables employees to buy indirect materials from designated key suppliers (Kennametal has 15) via an online shopping portal.
"We utilize Ketera in conjunction with our procurement card," says John LaDuke, North American purchasing manager for Kennametal. "The system basically handles low-value, high-volume transactions."
According to LaDuke, the return on investment is immediate and significant -- about 160%.
Another fortunate thing for Kennametal, Ketera has introduced a new solution which is said to manage spend management by "consumerizing" the corporate procurement process for end users. Essentially, the solution is set up to mimic a shopping experience at Amazon.com. The solution enables users to search for particular items (even if they spell the word wrong). The search will bring back several options from approved suppliers. Users can choose to learn more about the items they are looking for and then ultimately put them in the shopping cart for purchase. An e-mail will alert purchasing managers of the proposed transaction. The managers then have the ability to approve or decline the request.
"During the development of these new products, it was our belief that previous spend-management solutions failed to deliver full business value because of a lack of user adoption inside an organization, despite the investment made by the purchasing team," says Burton M. Goldfield, CEO of Ketera.
According to LaDuke, there is a greater level of granularity with the new solution. "We're able to narrow searches down quicker. The quicker we can make it for the end users to utilize the system, the more they are going to want to use it, and we will be able to direct our spend into that channel. Like every other company today, we are in a time-constrained environment. So if you make things easier, better, faster more efficient, people are going to do it. That's what we are hoping for."