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The procurement organization rethinks sourcing for maximum efficiency and results.
A revolution started about a dozen years ago in the federal government and is spreading to state, local, and commercial purchasing organizations. This revolution is about turning procurement efforts into a sustainable cash-flow-generating stimulus machine by extending available resources to get more spend under management, competitively bid spend more often, and take advantage of market dynamics that create marginal pricing opportunities. It is a change in thinking that drives maximum efficiency, maximum savings, and creates a truly holistic procurement management system that goes well beyond the 50% to 80% control that most organizations have.
Many leading companies and organizations have worked hard during the past several years to become lean, agile, and flexible. Among other initiatives, they have taken a close look at support function staffing (including procurement) and have downsized, right-sized, outsourced, and off-shored with the net effect resulting in an environment where employees are having to do more with less resources or more without more resources. Another set of companies and organizations have taken a different path, and, as it relates to purchasing goods and services, have never upgraded the effort nor staffed their procurement organizations appropriately. In either case, the net outcome has been one where real and significant savings have been left on the table because there were not enough resources or not enough skilled resources available to competitively bid a maximum amount of the company's or organization's spend for goods and services.
With the remaining resources, highly skilled organizations take a position of focusing on ensuring that crucial goods and services are protected by contracts and rebid every one to five years. These companies leave the smaller spends to sort themselves out with the help of dozens or even hundreds of business end-users following procurement policy to engage suppliers and hope for the best. The companies that have less skilled purchasing departments continue to focus on transactional buying with little professional oversight. In both cases, organizations are paying more than they need to pay and also are putting their companies at risk by not formally vetting many of the suppliers they are using.
In the effort to cut costs, many companies in the pharmaceutical industry and other industries have purposely taken an approach that reduces cost by cutting infrastructure, including significant reductions in full-time employees. Although much of this cutting is needed and laudable, there are many examples where cuts have been equally applied to all internal functions (e.g., 15% for all support staff). Although this approach fixes one part of the business (i.e., procurement labor costs), it has a negative impact on the organization as a whole. Procurement is one of the few functions that can have a direct and ongoing impact on the bottom line and should be staffed or supported appropriately for maximum savings delivery and overall risk mitigation.
To offer an example of the value of procurement, take the case of a small but growing pharmaceutical company that had no real center-led procurement strategy or organization. When it came to purchasing indirect goods and services (i.e., all goods and services with the exception of direct materials to make products), senior management and administrative assistants became the purchasing experts, which resulted in little, if any, competitive processes being used, suppliers not properly being screened, and generally creating unnecessary cost and risk for the organization. Poor procurement practice was evident when buying contract research organization services; marketing services; facility services; maintenance, repair, and operations; office supplies; benefits; and other services.
After reviewing the company's buying practices, limited policies, and several recent purchases, it was clear that the company was over-paying onaverage by a minimum of 20% for indirect goods and services. This organization spent approximately $100 million per year on indirect goods and services with revenues of approximately $250 million. It was recommended that the company make an investment in upgrading its procurement capability by naming a head of procurement to institute a center-led program for purchasing direct materials and indirect goods and services. The investment would easily have a 50 times return during an 18- to 24-month period, according to conservative estimates.
Approximately 10 years ago, federal agencies began using FedBid to buy common goods and basic services. FedBid is also available for commercial use and offers a highly efficient procurement solution for commodity products and basic services. There is never any cost to the participating sellers and no upfront cost to the buying organizations. A small transactional fee is added to the winning sellers' bid and is paid by the buyer as part of the purchased price. After the buyer pays the seller, FedBid collects the transactional fee from the seller. Both parties win; the seller receives additonal revenue and the buyer nets average savings of > 10% (based on more than a decade of buying awards). If the product or service is not currently in the marketplace, the marketplace operator will at, no charge, find the right sellers and even train a company's existing suppliers so they can compete on a regular basis in the marketplace.
Today, the marketplace has more than 57,000 approved sellers. Buyers use a simple and efficient Internet-based user interface to enter the requirements of what they want to buy (i.e., a specification), and FedBid, being a fully-managed marketplace, takes full control of the sourcing process to ensure robust competition from multiple sellers, validate quality assurance of leading bids, and delivers final seller pricing options back to the buyer for award. The marketplace is fair, ethical, and transparent. It enables dynamic competition by providing the best market pricing available at the time the purchase is completed. FedBid is rapidly branching out into state and local governments, schools and universities, and commercial organizations.
Every organization has an opportunity to do a better job of buying indirect goods and services. Buying smart, saving money, and reducing risk by having better controls in place makes real economic sense, especially in today's environment.
Gregg Brandyberry is senior vice-president of FedBid, and formerly senior advisor for A.T. Kearney Procurement and Analytic Solutions, Gregg.Brandyberry@FedBid.com.