Strategic Sourcing Cost Reduction
Case Study 1 – Post-Acquisition Synergy Value Capture
Situation:
- Total unmanaged spend was $900 million in key categories
- Lack of integrated or leveraged spend
- Lack of standardization of commodities
- Each business unit bought separately
- Lack of product specification
- Consumption numbers were inaccurate and difficult to get
- Purchasing was done by individuals at different levels, by district or local offices, and by corporate
- Proliferation of vendors
- Lack of disciplined process, price control and strategy
- Management needed to capture synergy value from purchasing spend
What was Done:
- Consolidated corporate and all business unit spend
- Performed data extraction and spend analysis to develop a clearer overall consumption pattern
- Codified and classified all commodities, goods, materials and services
- Created a sourcing strategy to leverage the parent company, its subsidiaries, and international locations volume purchasing
- Decreased cost of ownership via consolidation of number of commodity items, and rationalization of vendors and suppliers
- Identified global and regional diversity qualified vendors
- Developed bid packages and conducted strategic sourcing
- Developed a disciplined procurement process for all business units
- Implemented performance and compliance management tools
Results:
- Will realize approximately 15% in savings annually over next three years
- Implemented best practices
- Trained procurement organization as category managers
- Established spend visibility at all levels of the organization.
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Case Study 2 – Procurement of IT Contractor Services
Situation:
- IT contractor services is an out-of-control spend for this global client
- Spend was $105 million
- Contractor services included – systems programming, applications development, field services, operating support, project management, help desk and document management
- Contractor services provided a strategic resource augmentation opportunity
- Purchasing of contractor services was fragmented across nearly 2000 suppliers and was done by individuals at different levels, by district or local offices, and by corporate
- Poor services level agreements with no end dates for contracted services
- Limited visibility to spend and suppliers
- Lack of control and accountability
What was Done:
- Defined what constituted contractor services and aligned supplier/company skills definitions and classifications
- Aggregated all contractor services spend by business unit, services type, geography and skills
- Developed economic models of services costs by skills level and geography
- Profiled suppliers and rationalized supply base to 10 primary and 20 secondary suppliers
- Redefined pricing structure based on consistent, transparent value-added supplier mark-ups and market basket value index
- Implemented a disciplined purchasing and compliance process
- Implemented performance management system to evaluate supplier performance against agree to service and skills level and deliverables
Results:
- Delivered 25% in rate reduction
- Improved skills matching/needs fulfillment process
- Implemented a disciplined process to ensure right skills at the right time for the right job at the right price
Case Study 3 –Information Technology
Situation
- Out-of-control spend on IT – software packages, software development, consulting, data management, hardware, maintenence
- Annual IT spend was in excess of $285 million in multiple locations with no management visibility to aggregated spend
- 90% of IT projects had no statement of work, lacked scope definition, lacked clear deliverables and accountability
- Lack of business-based requirements and ROI
- Many vendors providing similar services and products to multiple business units at different costs and service levels
- 85% of IT projects were over budget, suffered scope creep and suffered delayed completion times
What was Done:
- Aggregated and developed a comprehensive IT spend database by project type, business issue, business unit and geography
- Developed a decision model to rationalize projects based on customer value, business requirements and economic value
- Established a best practices approach for business-driven IT project definition and management oversight
- Profiled and pre-qualified IT services and product providers on a global basis
- Developed templates for Statement of Work and business requirement definition, functional requirements and specifications, and value-indexed evaluation approach
- Strategically sourced all existing IT budgeted projects to renegotiate fees and materials using iServiceX’s ROSI Application solution
- Established a cross-functional Center-led Program office for coordinating IT project workflow and project management and deliverables tracking
- Reorganized the IT group to make it more business related and more accountable for IT project deliverables and cost effectiveness
Results:
- Achieved $54 million in savings, 19% annualized savings
- Created a Business-driven and performance-based IT organization
Case Study 4 – Procurement of Contracted Maintenance Services
Situation:
- Contracted services for Pipeline maintenance spend in excess of $50 million a year
- Proliferation of contracts and contract service providers
- Lack of service level agreement
- Lack of contract service specification
- Poor project management
- Purchasing was done at different levels, by multiple individuals, by district or local offices, and by corporate
- Inadequate contract management process and experience
- Lack of disciplined cost control and strategy
- Poor data quality
What was Done:
- Consolidated all maintenance and equipment contract spend and identified savings opportunity
- Performed data extraction and spend analysis to develop a clearer overall contract services pattern
- Developed contract services capability profile
- Developed contract services management process and service level models
- Modeled contract cost structure and benchmarked to market
- Developed contract services bid packages and developed sourcing strategy
- Conducted strategic negotiations with best-in-class service contract provider
- Developed contract rates and SLAs
- Implemented performance and quality of service metrics
Results:
- Realized approximately 22% in savings annually over next three years
- Build a database of best-value contract service providers
Case Study 5 – Cellular Phones
Situation:
- Cellular spend in excess of $11 million a year
- Scope included both internal and customer spend on cellular services
- Due to increase in usage of mobile communications, cellular spend experienced an 20% growth in concurrent years
- Cellular spend was highly fragmented across multiple suppliers and user groups
- Advent of new PCS technology and number portability opening market to competition
- Purchasing was done at different levels, by multiple individuals, by district or local offices, and by corporate
- Multiple contracts with same and different suppliers in same and different business units, functional areas and geographies
What was Done:
- Consolidated corporate, business unit, geographies and supply chain cellular spend
- Established user needs and business requirements
- Established cellular functionalities and capabilities to meet business needs across the USA
- Established corporate standards in hardware and service requisitioning policy and practices
- Established service provider network
- Leveraged buying power through a national consolidator and direct-service providers
- Converted cellular phone users to the lowest published corporate rates
- Leveraged Total Value Concept with selected suppliers
- Established cellular spend management as a purchasing group’s responsibility–single point of contact
Results:
- Reduced cellular costs including administrative processing costs by 18%
- Improved tools to manage compliance and spend patterns
- Established corporate standard hardware and service policy
Case Study 6 – Corrugated & Packaging Materials
Situation:
- Needed to get a handle on over 1,000 Corrugated & Packaging items
- There were no internal specifications or standardization of items
- True spend was not visible and purchasing was done on a regional level without leveraging $40 million company wide consumption
- Many of the vendors had multiple agreements and pricing for same goods for different regions
- Previous sourcing attempts of Corrugated & Packaging items consumed over a year with minimal product standardization, vendor compliance, and savings realization
- Inventory management problems with damaged or missing items
- Lacked supplier market intelligence
What was Done:
- Performed spend analysis to extract true spend, buying pattern, and geographic preference
- Performed a major data cleaning/updating event to develop internal spec and standardization through the company
- Performed Internal Data Request (IDR) to get a better insight into organization purchasing behavior (including minority/women supplier spend) and procurement process preference.
- Research supply/demand market intelligence, including supplier economic models to trends
- Profiled Suppliers by tiers and by region, including Minority and Women-Owned Suppliers
- Created inventory management best practices
- Profiled Supplier economics and capabilities as well as identify opportunity for cost control/reduction
- Developed configurable Bid Packages, including templates, market baskets, RFP, RFQ, and negotiation strategies
- Performed detailed bid analysis to maximize cost saving
Results:
- Achieved 12% savings on overall spend
- Reduced and standardized corrugated and packaging specifications
Case Study 7 – Workstation
Situation:
- At $80 million, Workstations represented a significant spend area for client with scientific/engineering intensive applications
- 80% of work station purchases were concentrated with two suppliers
- Market conditions afforded the opportunity to take greater advantage of client’s purchasing power and knowledge of supply market dynamics
- Availability of substitute workstations which delivered equal if not better performance and cost emerged in the marketplace
- The objective was to reduce costs of purchased workstations and improve price/performance value for user requirement levels
- Rapid technology evolution in the workstation market
What was Done:
- Centralized buying that reduced marketing costs
- Concentrated volume and commitments that reduced demand fluctuations
- Established fit-function specs/standards for work types and user requirements
- Standardized platforms that simplified order fulfillment
- Profiled current suppliers and emerging and capable technology vendors
- Established total cost of ownership and lifecycle costs for technology management
- Implemented disciplined purchasing process and practices
- Established a purchasing team involving IT and business users to ensure alignment of objectives
Results:
- Achieved 9% savings in workstation spend
- Established standards and specs to align price with performance and true business needs
Case Study 8 –Promotional Products
Situation:
- Promotional Products spend in excess of $12 million a year
- 350 promotional items – without codification and classification
- Logo differences on promotional designs – confusion and brand erosion
- Lack of product specification
- Consumption numbers were inaccurate and difficult to get
- Purchasing was done at different levels, by individuals, by district or local offices, and by corporate
- Proliferation of vendors
- Of the total spend: $6 million was spent with non-approved vendors mostly by district or local offices
- Lack of disciplined price control and strategy
What was Done:
- Consolidated corporate, marketing, retail, and awards promotional products
- Performed data extraction and spend analysis to develop a clearer overall consumption pattern
- Codified and classified promotional products into Apparel, Sports & Leisure, Business Products, Collectibles, and Gift Certificates categories
- Created a sourcing strategy to leverage the parent company, its subsidiaries, and international locations volume purchasing
- Decreased cost of ownership via consolidation of number of promotional items, increase of electronic catalog usage, and integration of electronic promotions
- Identified global vendors and regional diversity qualified vendors
- Incorporated customer-as-a-vendor (revenue from vendor) as part of the evaluation/decision process
Results:
- Will realize approximately 19% in savings annually over next three years
- Branding and logo usage will be better managed, thereby adding to brand value
Case Study 9 – MRO & Spare Parts
Situation:
- Needed to get a handle on over 20,000 MRO & Spare Parts items
- Proliferation of vendors has resulted in over 400 vendors
- Lack of categorization over time has resulted in hundreds of duplicate items and difficulty in finding items to order in the electronic purchasing system
- Ordered parts via the electronic purchasing system was often late or delivered with wrong products
- Data updates were always behind compared to quarterly price increases on many items leading to mismatch in planned budget vs. actual
- Inventory management problems
- Sweetheart deals
- Lacked supplier market intelligence
What was Done:
- Performed a major data cleaning/updating event to combine and eliminate thousands of duplicate and obsolete line items
- Performed Internal Data Request (IDR) to get a better insight into organization purchasing behavior (including minority/women supplier spend) and procurement process preference.
- Created category classifications for MRO & Spare Parts, including electrical items, mechanical items, engineered items, wheels and casters items, lamps and ballasts items, and other miscellaneous items
- Research supplier market demand/supply dynamics on a “total costs” basis
- Created inventory management best practices
- Profiled Supplier economics and capabilities as well as identify opportunity for cost control/reduction
- Developed configurable templates, market baskets, RFP, RFQ, and negotiation strategies
- Leveraged mega-distributors and OEMs and outsourced MRO management
Results:
- Achieved 15% savings on overall spend on MRO and inventory
- Set up reporting and performance management system
Case Study 10 –Office Products
Situation:
- The client needed to consolidate and source all office products purchased globally by the parent company and its subsidiaries
- Annual office products spend was in excess of $33 million
- Proliferation of vendors was uncontrolled. The incumbent preferred vendor, only captured $12 million of spend
- Contract negotiation was poor, resulting in steady rise in price of purchased items; still, there was a misconceived notion that price of items were already competitive due to the client company’s sheer size and purchasing power
- Lack of data management has resulted in duplicate items and decreased volume purchasing
- Vendor reliance on consumption and payment
What was Done:
- Consolidated office products purchased with corporate and its subsidiaries
- Cleaned and analyzed data to develop a source-able market basket of office products by category
- Laid out sourcing strategy to leverage global volume purchasing and restructure supplier relationships
- Decreased cost of ownership via increase of electronic purchasing and supply market economic modeling
- Identified global office products vendors and regional diversity qualified vendors – tiered and layered
- Created RFP documents, quoting templates and evaluation criteria for proposal analysis using proprietary value-indexing system
- Performed bid analysis, including 15,000 line items plus substitution analysis against bids and historical consumption data using value-index tools
Results:
- Achieved $11 million in savings, 33% annualized savings
- All transition cost, including product updates and data management support was negotiated to be inclusive
Case Study 11 –R&D laboratory chemicals and consumables
Situation:
- Materials ordered to inventory and maintained in stores facility
- 6,000 purchase orders annually
- Low-order value
- High degree of chemical obsolescence
- High disposal costs
- Long purchasing lead time – three days to two weeks
- High acquisition costs
- $35 million in spend
- Multiple laboratory locations
What was Done:
- Product specifications to meet laboratory needs
- Alignment of demand with the supplier to minimize obsolescence
- Volume concentration across previously decentralized purchasing organizations
- Aggressive price negotiation
- Conducted environmental and safety risk assessment
- Introduced inventory management best practices
- Rationalization suppliers from 250 to 2
- On-line purchasing and reporting system was linked to inventory management system
- Established JIT delivery from local distribution centers
- Established national service level agreement with 2 major suppliers
- Established product lifecycle management and assigned disposal accountability to suppliers
Results:
- Achieved 21% annualized savings
- Purchasing lead time reduced to 4 to 12 hours
- Established total product lifecycle visibility
Case Study 12 –Telecommunications Equipment & Services
Situation:
- Proliferation of telecommunications equipments and contract services in multi-locations worldwide
- Annual Telecommunications spend was in excess of $42 million
- Lack of equipment and services standardization – over 250 different equipment sets and 380 contract terms
- Lack of global leverage of spend – out of control situation
- Spend data in multi-locations and in multi-sources and formats
- High costs of assessorial and contract term violations
What was Done:
- Conducted “User Need” assessment to identify common needs and unique circumstances
- Segmented Users into Two core segments based on business value and functional requirements
- Captured and codified equipment and services contract data utilizing specialized and proprietary data extraction tools
- Profiled all major original equipment manufacturers and services providers to understand capabilities and fundamental economics
- Identified global equipment and services providers and regional diversity qualified vendors – tiered and layered
- Rationalized and standardized equipment and contracts based on User needs and business requirements and geographical constraints
- Created RFP documents, quoting templates and evaluation criteria for proposal analysis using proprietary value-indexing system
- Performed Bid analysis, developed contract terms, SLA and awarded contract to best value providers on a global and regional bases
Results:
- Achieved $7.6 million in savings, 18% annualized savings
- Implemented best practice processes and measurement tools to enable the organization to replicate the project
Case Study 13 –Marketing & Advertising Services
Situation:
- 195 Marketing research and advertising suppliers – each business unit had its own “preferred” supplier
- Marketing services spend was $105 million
- Marketing cost as a % of revenues was above industry benchmarked average
- Return on marketing investment below industry average
- Lack of standards on retaining marketing service providers
- Lack of agreement among top leaders on how much was spent in marketing services
- Marketing was a “sacred cow”
- Procurement was not allowed to participate in the purchase of Marketing services
What was Done:
- Developed a concise marketing cost structure – identifying all cost drivers and their impact and leverage on overall marketing expense
- Decomposed marketing costs by vendor and marketing category to understand utility and total cost of service
- Conducted spend analysis and benchmarks to identify opportunities for cost reduction and service improvements by marketing category
- Profiled and pre-qualified Marketing services and product providers on a global basis
- Developed strategic sourcing strategies for each of the marketing categories – market research, advertising, promotions, consulting services, etc.
- Created RFP documents, quoting templates and evaluation criteria for proposal analysis using proprietary value-indexing system
- Performed Bid analysis, developed contract terms, SLA and awarded contract to best value providers on a global, regional and local bases
- Implemented a team-based procurement approach including marketing, product development and procurement professional
Results:
- Achieved $11.6 million in savings, 11% annualized savings
- Implemented a balanced scorecard for measuring and tracking return on marketing investment and other leading indicators