I have done a few procurement and sourcing projects in my life, and you learn very quickly that there are a few fundamental levers to pull when trying to reduce an organization’s procurement spend. Most often, these levers are grouped into three broad categories: Vendor management, demand management and process management. I have actually seen some presentations (including some McKinsey documents) that use four categories, including one for “compliance management.” But I personally believe that this largely falls under the categories of demand management and process, so it’s better to stick with three. Plus, as any consultant will tell you, three is the magic number.
The graphic below lists the three categories, and examples of what specific levers to be considered in each of them.
Vendor management: Consolidate the vendor base (less vendors with bigger volumes), combine volumes (e.g. negotiate a better deal with vendors who supply two divisions or geographies), switch to lower cost vendors (make sure you establish a solid list of “qualified vendors” for each category), renegotiate prices (the obvious), and renegotiate terms and conditions (often overlooked).
Demand management: Standardize the product offering (“you’re only allowed to fly with BA and LH”), substitute products (“we are now replacing airline X with airline Y”), adjust spending authorities (“any flights over $1000 have to be approved by …”), streamline the ordering process (“all airline bookings have to be processed through our internal travel department”) and improve compliance (“flights that are not booked through our travel department will not …”).
Process management: Streamlining the invoicing process (e.g. making sure a majority of spend is managed through POs, invoices are matched to POs, and invoices have details in terms of products, services, milestones, etc.), use consistent competitive bids (“In the category ‘Professional Services’, any PO over $50,000 requires at least three competitive bids”), apply e-auction tools (e.g. asking suppliers to submit anonymous best rates, sometimes couples with certain volume assumptions), and partnering / incentive structures. The last point is an interesting one, and I’ve seen it applied in situations where clients worked with strategic suppliers on core products or services (e.g. pharma companies with CRO or API providers, high tech companies with component designers/suppliers). There is often a significant upfront investment required from these suppliers, who tend to be single source. So finding ways to share risks and upsides (based on factors such as volumes, time to market, etc.) is interesting for both parties.
There are plenty of details on the web on all of these sourcing levers, but hopefully this overview tree diagram provides a good overview.
