Trends in Sourcing and Procurement
          By Greg Stoller


Published: June 2008

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Auxis is a leading Management
                                              Consulting firm located in the Coral
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Auxis Executive Series Trends In Sourcing And Procurement


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Strategies to stretch your budget so you can buy more for less

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Auxis Executive Series Trends In Sourcing And Procurement

  1. 1. Trends in Sourcing and Procurement By Greg Stoller 2008 Published: June 2008
  2. 2. 1 © Auxis, 2008 All Rights Reserved With many of the world economic indicators when and where those orders are relatively “bearish” in the short term, and inflation on profitable for the supplier. the rise, companies face increasing prices for goods and services. While some Efficient Energy Utilization companies will reduce discretionary As the cost of energy in all forms rises, those spending, others will look for ways to stretch companies consuming energy most efficiently will their budgets through savvy sourcing perform better, all things being equal. For heavy techniques, turning economic “lemons” into energy consumers, the savings and cost avoidance “lemon-aid”. benefits can exceed seven digits annually. Optimizing Performance During a Even though more efficient energy consuming Recession equipment has a high purchase and set up cost, the total cost of ownership can pay off in only a few Peak sourcing and procurement years. And it’s not only the additional cost over the performance is always important to less efficient energy appliances that is equalized, but corporate objectives. During a recession, the entire CAPEX cost can be recouped in many achieving this goal can mean the cases. difference between emerging from the recession successfully and not emerging at These demand benefit CAPEX costs should not all. When revenues are down, cost overshadow the benefits of supply side opportunities containment will help ease the strain, and such as negotiating lower energy rates or even strong sourcing and procurement practices physical and/or financial hedging. Moreover, the will make cost containment possible. supply side opportunities require little or no CAPEX compared to demand side appliance retrofits. Sourcing and procurement departments “live and die” by the strength of their Mitigating Price Risk and Volatility supplier relationships. These relationships have a direct impact on a business’ The commodity and currency markets are causing a profitability, providing favorable or lot of “sleepless nights.” Not only does a weak dollar unfavorable pricing, as well as continuity of mean added cost for imports, but price pressures on supply. A strong relationship with a supplier commodity based products also lead to higher will bring “win/win” solutions during adverse domestic product costs. economic times, due in part to a long-term Some companies are implementing currency and relationship mindset. Strong relationships commodity hedging strategies. These strategies will ensure continuous product flow at the best bring predictability to product costing and avoid cost cost. By comparison, a more transactional volatility risk. As an example, consider a US company relationship typically results in a “win/lose” importing goods from China where the US dollar is situation. getting weaker. As time passes under these It’s a “win” for the supplier and a “lose” for circumstances, it takes more and more US dollars to the buyer when the supplier works to pay for the imports. With a currency hedge, the maximize its profits and fulfill orders only amount of money required to satisfy the exchange becomes fixed, adding budget and product cost predictability.
  3. 3. 2 © Auxis, 2008 All Rights Reserved Low Cost Country Sourcing in the opportunities outside of, but closer to the Short and Long Term domestic border compared to say a US company sourcing from Asia. Pressure to offer to customers products at the lowest retail prices has forced Near Shoring offers advantages in addition companies to look for a lower cost supply of to those mentioned above including skilled goods outside of the domestic market. labor at a lower cost than the US, Developing countries such as China, India, government support, geographic proximity, and Africa offer low cost solutions. These more English speakers, more similarities to “producing” economies, in some cases, are the US culture, and similar time zone daily growing even in the face of recession in operating hours, just to name a few. These many parts of the world. Purchasing in these advantages aid in control by facilitating low costs countries is not without Economic, visits to the point of operation. Social, Geopolitical, Technological, and/or While the potential cost reduction may not Environmental Risk. be as large as Asia or other low cost country As these low cost country economies flourish sourcing alternatives, some of the common and create wealth, the amount of low cost country sourcing risks can be discretionary income will increase. Over mitigated or even eliminated, thereby time, the trade pendulum swings and a strengthening the chances for success. country that was a “producing” country Direct Buying and Selling becomes a “consuming” country. Companies that recognize this will plan for For various reasons, businesses purchase the future and establish sales operations in and sell goods or services indirectly through these countries now in advance of the intermediary companies. These development of this sales market. They do intermediaries add value, but over time their so when it is easier and less costly to build a customers may be able to work through a sales presence and capitalize on “first direct relationship. In addition to offering mover” advantages. cost savings, these direct relationships shorten supply chain lead times, and Near Shoring troubleshooting response times. Low cost country sourcing is not without risks. When buying directly from the Some of those risks include slower customer manufacturer, it is possible to gain control, service response time, loss of general and/or lower the mark up paid, and eliminate the quality control, poor handling of data, overhead formerly paid to the intermediary. language barriers, and excessive logistics/ warehousing/tariff costs. As a result, some companies are implementing “Near Shoring” strategies. Near Shoring exploits
  4. 4. 3 © Auxis, 2008 All Rights Reserved When able to sell directly to the end can grow exponentially. Technologies customer, a similar cost reduction takes include e-procurement, reverse auctions, place. It becomes possible to lower the spend analytics and business warehousing, sales price and make the product more performance management, and others. affordable to a larger market. Whereas acquiring and implementing some Sometimes there are greater logistics and of these technology tools was once cost warehousing costs, so the entire cost of prohibitive for small businesses, the cost has delivery must be measured before making greatly decreased, making many of these any decisions. options now affordable to the smaller enterprise. Outsourcing Procurement for Non-Core Activities These tools help in analysis, goal setting and performance measuring; all of which are When a company evaluates its expenditures critical to reducing costs. and procurement activities, there are diminishing returns to managing every direct Overall Trends and indirect spend category. In a challenged economy where corporate When the indirect spend products and sales revenues fall, more pressure is placed services do not warrant a dedicated on sourcing and procurement to keep costs internal procurement resource, some in check. This forces sourcing and companies choose to outsource the procurement to go beyond the procurement of these categories. This is one conventional cost saving methods in order reason why procurement consortiums have to respond to competitive cost pressures. come about. Eventually, sourcing and procurement The outsourcing solution is also a scalable departments will reach a point when approach. When a temporary need for “bullying” suppliers to hold or lower prices added resources arises, the outsourced no longer works. Anticipating this, company fills the need without necessarily companies need to explore technology having to grow its procurement tools, more closely manage demand, check department. their indirect expenditures for efficiency and value, utilize financial tools, re-examine and Mixing Purchasing and be critical of their chosen supply markets Technology for Superior Results and suppliers, and chase the right sourcing and procurement opportunities in a When a company operates a great prioritized manner. By implementing these purchasing department, they are capable strategies, companies will maximize their of great results. When Technology is added sourcing and procurement performance in to a great purchasing department, results any economic environment.
  5. 5. Auxis is a leading Management Consulting firm located in the Coral Gables, Florida area. Auxis’ Supply Chain Excellence Practice believes in a practical, “back to basics” approach to help our clients buy, ship, and store right. Our methodology is designed to provide our clients with real-world business solutions anchored by solid financial analysis. Auxis can help you to adapt your supply chain for the benefit of your customers, business partners, and shareholders through service offerings such as sourcing and procurement, strategic evaluation, network design, provider selection and deployment, and IT supporting infrastructure, selection, and deployment. Headquarters Ft. Lauderdale 55 Miracle Mile, Suite 300 7901 SW 6th Court, Suite 130 Miami, Florida 33134 Ft. Lauderdale, Florida 33324 (305) 442-0060 (954) 236-6682