Managing Indirect Spend. Joe Payne
during a Strategic Sourcing initiative, large companies with multiple locations seek to consolidate their purchasing, particularly for indirect spend categories. If the organization has locations across the country, this means that it is ideal to identify suppliers who can provide nationwide service. If the organization has multiple locations that are all in the same general region, this might entail looking for both national and regional suppliers. If an organization only has one or two locations, and both locations are in the same region, you might be able to consider local suppliers alone.
While consolidation of suppliers generally makes sense in less‐strategic spend categories, it may a substantially higher per‐unit price for certain markets. This is particularly common for products where freight is a major component of cost, such as corrugated boxes, wooden pallets, or light bulbs. Spend categories in which services are unique to particular locations or regions may also contravene a single‐supplier strategy. A good example is janitorial services, for which on‐site presence is required daily.
In order to determine the type of supplier who makes the most sense for your Strategic Sourcing initiative, first look at how the products or services are currently being purchased. Are you currently buying from multiple suppliers across multiple locations? If so, why? It might be because different locations have different requirements or because freight costs make a local source of supply the better option. Of course, it might also mean that there is an opportunity for cost savings through supplier consolidation.
Remember that during the Research phase you are hoping to develop a long list of suppliers that will be refined as you move into the RFx phase. At this stage, including local, regional, and national suppliers on your list is better than limiting it to only one type of supplier, but it is important to understand the differences and distinguish between these supplier types when going to market.
Manufacturers and Distributors
The difference between manufacturers and distributors becomes a consideration when you are purchasing products (as opposed to services). A manufacturer is the organization that actually produces the good you are purchasing. A distributor purchases the goods (normally in large quantities), warehouses them, and then ships them to you (typically in smaller quantities). In the office supplies example used earlier, Staples is a distributor of paper products; however, Staples does not have any facilities that actually produce paper. Instead, the organization buys product from a manufacturer and warehouses it across the country.
The choice of sourcing and purchasing from a manufacturer versus a distributor comes down to three primary factors: cost, quantity, and service level. Most manufacturers prefer to sell their products in quantities of a truckload at a time; however, some may accept half‐truckload or even pallet‐load orders, depending on the market. If you believe the quantities you purchase of a particular product are a motivating factor to the manufacturing community, then you may want to consider including manufacturers in your supplier long list.
Conversely, if your quantities are low, or if you believe you require specific service levels, such as dedicated account management or same‐day deliveries, then you may want to focus your supplier list on distributors alone.
As a side note, many sourcing strategies include engaging with both distributors and manufacturers, even if the initiative ends with the decision to purchase through a distributor. For example, in the area of maintenance, repair, and operations (MRO) supplies, working with manufacturers to standardize the types of products being purchased and committing to a certain volume with those specific manufacturers may result in obtaining special pricing for your organization beyond what a distributor can offer. The distributor still delivers the product, with their markup on top of it, but the base price will be lower.
Another example is enterprise software acquisition, such as Microsoft licensing, or maintenance programs with hardware manufacturers, like Cisco. In both cases, it is common to negotiate directly with the manufacturer and then have the manufacturer require your selected supplier to pass on the negotiated prices. We discuss manufacturer and distributor collaborative strategies in greater detail in Chapter 20.
Group Purchasing Organizations (GPOs), Brokers, and Other Third Parties
GPOs, brokers, and other third parties can provide a wealth of market intelligence and give you access to pricing or services that are not normally accessible. The basic concept behind these types of organizations is that they receive a small markup (normally paid by their supplier) to bring that supplier new accounts or additional sales.
GPOs normally aggregate volume from several members in order to get lower pricing from suppliers and often provide account management and other enhanced services to those members across multiple categories of spend. Most GPOs are tied to one specific supplier for a particular category of spend. Alternatively, some have multiple suppliers for certain categories.
Brokers are experts in a particular market and can help identify the right supplier for you based on your specific requirements. They typically have relationships with multiple manufacturers and distributors, and some even warehouse and distribute products themselves.
Other third parties, such as manufacturer representatives, are paid to bring sales into organizations that do not have their own dedicated sales teams or organizations that want to supplement their internal sales team with additional resources. These third parties work with one or multiple manufacturers and across one or many types of products or services.
You should consider looking at third‐party options when developing a supplier long list. Pay particular attention to these options if you are unfamiliar with the category in question, lack resources, or if you feel the category adds little value to your organization and you hope to outsource its management.
UNDERSTANDING CURRENT MARKET CONDITIONS
Market conditions are comprised of the current trends or recent events going on in the marketplace. These include capacity issues, supplier consolidation or deconsolidation efforts, new regulatory changes, natural disasters, and political or socio‐economic changes. Often, these conditions can play a major role in the results of a Strategic Sourcing initiative.
Having a firm understanding of ongoing market conditions will help you solicit proposals from suppliers at the most advantageous time for your organization. For example, if markets are currently unstable or fluctuating dramatically, it is probably not the best time to request a price decrease from a current supplier. In addition, if product is scarce and capacity is unavailable, alternate suppliers are going to be less likely to provide you with a low price. Instead they may focus on ensuring supply for existing customers.
You would not, for example, want to approach your suppliers for discounts on oil‐based products during hurricane season because that is when oil prices typically peak. You also would not want to go to market for electricity during the summer, when electricity consumption is normally at its highest, keeping prices high.
Conversely, periods of excess supply are optimal for reaching out to your suppliers and signing long‐term pricing contracts.
UNDERSTANDING THE FACTORS OF COST
Understanding the factors of cost can be the most difficult piece of the Research phase, particularly in unfamiliar categories. Cost factors include the materials that make up the final product (plastic, copper, oil, etc.) as well as the other indirect components of cost (labor, freight, processing, etc.). Identifying the components that go into the cost of a product or service can help identify the right types of suppliers. For example, if a product has a rather high cost for freight, you may want to consider a local source of supply in order to minimize that freight cost. Knowing that copper is a major component of raw material costs in a certain product may help you decide to put off sourcing that product until supplies reach an optimal level.
Similarly, understanding the cost and margin will help you provide guidance to suppliers with regard