Finding mid-market savings on mid-size categories

In Spend management by Michael Lamoureux10 Comments

If you’re a mid-market company, it can be tough to find the kind of procurement savings you constantly read about in vendor and analyst press releases. While those press releases can describe how Global 3000 companies used a specific technology or process to generate year-over-year savings in double digit percentages, the reality is that while better analysis, modelling, and supply chain design were necessary in identifying those savings, so was hitting a volume threshold that made the buy very attractive to a set of suppliers and/or carriers. If a company is able to spend five times what you can in a category, their leverage is much better than yours.

Generating a decent level of savings is especially difficult in mid-sized categories. For an average mid-sized company, large categories are often on par with a Global 3000’s smaller categories. This is typically enough to identify considerable savings with smaller suppliers desperate for orders that are large for them, as these smaller suppliers often cannot serve the larger companies due to their capacity constraints. Similarly, tail spend is tail spend regardless of organizational size, and the same opportunity exists across the board by consolidating suppliers, getting more categories under management, and just being smarter about how money is spent.

So, what is a company to do?

Many consultancies will recommend taking one of the following three actions:

Simultaneously Source Categories That Can Be Satisfied by the Same Supplier

Cell phones, tablets, laptops, and servers are all electronic products that can be manufactured by a single company; IT, MRO, and back-office support services can often be supplied by larger contingent labour providers; and so on. Non-specialists might not have the absolute best base pricing, but sometimes volume discounts and consolidated shipments can save more money than the pricing offered by a specialist who gets a multi-million dollar order. This works well if the organization can identify appropriate suppliers—and do so efficiently. But if it can’t, it’s just wasted time and money.

Bring in an Expert Consultancy

There are consultancies that specialize in just about every category imaginable, especially in indirect services. These consultancies have experts in telecommunication plan sourcing, insurance sourcing, consumable sourcing, and other categories that the organization is not likely to have in-house experts for, often knowing tips and tricks to squeeze an extra percent or three of savings beyond what standard methods and processes will generate. This works great if a consultant is available and can identify the savings quickly. But if the organization has to wait three months while it continues to lose money, or hire the consultant for three weeks to source the category at $15K a week and the category is only 500K with a likely maximum savings potential of 6%, the consultant’s fee can eat up half of the identified savings.

Hi-Ho, Hi-Ho, it’s Off to GPO

Many consultancies, those associated with Group Purchasing Organizations in particular, will say the best way to save money fast is to join a GPO and get in on their (typically) already negotiated contracts to start saving right away. This is great if their contracts include the products you want—but what if their contract is with the telecommunications provider that has been milking you for the last two years, at rates 15% higher than the GPO gets? Is that really going to work out well? Or what if the products under contract in MRO are inferior to the products your organization is using now?

It’s not going to be worth the switch. Unless you are willing to put enough categories under GPO management so they can get their transaction or finders fee, the GPO might not even be interested in having your organization as a client. GPOs want big enterprises with lots of spend—those too busy to source their indirect categories or just don’t want to bother—because that’s where the spend is and where the money is.

In other words, none of these solutions is necessarily the answer, and none of these solutions are guaranteed to identify savings for your mid-sized category.

However, a fourth option is emerging, and your organization should become aware of it.

SaaS One-Stop Procurement Shopping Provider with GPO Option

The problem with traditional GPOs, especially for mid-size organizations, is that an organization is stuck with the contracts in place when it joins and does not get any input into the next contract for a product or service of interest until its renewal time for the GPO.

Plus, if the organization is a smaller customer, it’s vote is not going to carry the same weight as the giants, the GPO’s bread, butter, and box seats at the local stadium.

This problem can largely be alleviated by a provider of a one-stop procurement shopping platform for mid-market companies. This provides all of the organization’s punch-out, EDI, flat-file, and custom catalogs on a web platform, allowing the provider to track the types of goods purchased, the suppliers it purchased with, and the total volume purchased across its client base.

This provider can see where real GPO opportunities are for its clients as those opportunities arise, negotiating contracts that not only save clients money, but work for its clients as well.

Since all the supplier cares about is total volume, it doesn’t even need to know each potential client’s spend to cut the deal! And because the provider is mid-market focused, every client carries equal weight. This can provide a mid-market company with the same opportunity as a Global 3000, but with group contracts that actually work for it as the platform provider can monitor trends and even anticipate needs over time.

It may not beat hiring the number one category expert or finding a hungry supplier that can supply multiple categories, but since these situations are more likely to be the exception and not the norm, it’s an option that might prove to be profitable going forward.

About the Author
Michael Lamoureux

Michael Lamoureux

Michael Lamoureux is The Doctor of Sourcing Innovation and the founder and Editor-in-Chief of the Sourcing Innovation blog, one of the longest running independent blogs on sourcing and supply management. Focused on helping current and future supply management leaders identify the issues and trends that matter, Dr. Lamoureux writes and talks about topics that matter to sourcing professionals.