Midmarket companies have many of the same challenges as larger companies when it comes to managing procurement and reigning in spending, but they also have fewer resources to attack the issue, less market leverage, and less funding in general.What to do?
According
to a recent study by sourcing, procurement and commodity vendor Ariba of
Sunnyvale, Calif., many midmarket companies believe their current procurement
and spend management approaches are falling short, due in part to lack of
buying clout and resources, said Paul Tong, senior product marketing manager at
Ariba in a recent panel discussion.
“Many
respondents recognized that manual processes and ERP [systems] weren’t enough
to drive the approaches that they implemented, so they are making investments
in spend management expertise and technology to improve the coordination and
process compliance of their operation,” Tong said.
The
study also shows that midmarket companies are putting more emphasis on
bottom-line results, and consider procurement patterns to contain valuable
information to help their companies save money and manage risk. That means
moving away from paper and turning data into information for better
decision-making to drive company results, he added.
All
of this means that that in large part, spend management is becoming a more
strategic priority in midsized businesses.
“The
respondents recognized that departmental efforts and individual heroics were
not providing the results that could be obtained by a unified strategic
approach,” Tong said. “[Companies are making it a priority to think about
managing their spending through an integrated collection of disciplines, moving
from a project-based perspective to a true strategy perspective deploying a
collection of capabilities on what they are calling spend management.”
For
example, executives at Myers Container LLC, an industrial packing company in
Portland, Ore., have spent the last several months—ever since the company
changed hands in October of 2007—trying to centralize operations and spending.
“When
we bought the company we found that we had six facilities operating as six
islands with no strategic centralization of anything. We found that even in the
same town we’d have three facilities each dealing with different vendors, or
the same vendor with three different price structures, and three different sets
of terms,” said Kyle Stavig, vice president of sales and marketing. “So the
first thing we did is organize and bring up the visibility of our current spend
while implementing lean manufacturing and looking at the indirect spend with
zero-based budgeting to figure out where the waste is and how to eliminate it.”
Focusing
on indirect spend— non revenue-generating expenses, such as travel-related
costs, transportation, real estate and legal expenses—is being viewed with
renewed enthusiasm as a way to reduce costs in general.
Waters
Corp., for example, a scientific manufacturer chemistry-related products based
in Milford, Mass., is moving from the departmental approach to a more
whole-company approach and trying to automate the process to the highest degree
possible.
“For
many years, we have enjoyed a fat, dumb and happy approach to spend management,
but as we get into more competitive markets and a different economic situation
we find that our margins are always under attack, so we have tried to extend
that more into the indirect spend customer supplier relationship where we have
taken a much broader look at our indirect spend,” said Tom Wesley, Water’s
global sourcing director.
As
a result, Waters Corp. now categorizes spend into ten different categories,
prioritizes them, and then analyzes where most of the money is being spent. By
doing that, the company soon found that most of its money was going to travel
and entertainment, prompting executive to focus on that area first. The company
attacked the issue by developing a global travel arrangement policy and
standardizing on one company credit card for travel-related expenses to garner discounts
and rebates.
To
get the best rates on hotel and food, the company relied on its SAP system to
analyze how much it spent locally. Through that analysis, they found that they
pay for 7,500 room nights at a local hotel, and have been able to determine how
much money is spent at each of several local restaurants. Armed with that
information, the company has been able to negotiate discount with restaurants
and hotels.
And
Melaleuca Inc. a retailer of scientific and wellness products based in Idaho Falls,
Idaho, is pitting its buyers against each other based on inventory turns, using
data from its JD Edwards system.
“They
are measured on how much money they saved versus how much they spent for the
month and then we overlay that with inventory turns,” said Alan Cole, director
of purchasing. “We determine their ranking on that each month, and they receive
bonuses based on those rankings.”
When
trying to reduce expenses on indirect items and processes, don’t forget the
little things, Wesley said.
“Rather than going after large half-million
dollar projects [to reduce spend], we are going after things that are much
smaller in scale like paper consumption. Things like copying on two sides of
the paper and bottled water consumption. For bottled water, we saved $30,000
last year by switching vendors and looking at our consumption,” he said.
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