Procurement, Supply Chain, Outsourcing

Procurement, supply chain outsourcing: The yes and no of it

22 Mar 2007 | (Case Study)

Handing over purchasing to an external body is a mistake, argues Sue Fleming. But Chris Stapleton says that his organization has reaped the benefits

No

Sue Fleming
Project buyer
Foreign and Commonwealth Office Services: Supply Solutions (Procurement)

Would you trust a stranger with your baby? Probably not. So why would you trust an outsider to choose what should or should not be outsourced from your organization? I believe procurement should be involved early when making outsourcing decisions to make sure it fits the business and is likely to achieve savings but, in my experience, it is often invited late to the party, or not at all. Instead, outsourcing decisions are made by consultants, who liaise with management and exclude purchasing.

If the procurement element of your organization is outsourced, how can you be sure the consultant's findings will be the correct fit for you? The provider may have little knowledge of the climate of the business and their ideas might be too generic.

There is a requirement for outside help in some situations, including outsourcing, but we must get the balance right. It is often considered in isolation rather than analyzed as part of a complex whole that requires an accurate knowledge of the business. We must also tap into our own historical knowledge of procurement within an organization.

And what about those all-important cost savings? It is said to take about two years to recoup the spend on setting up an outsourced deal but does that take into account the wider, unspoken cost implication? For example, those relating to inconsistent quality, increased pricing following the deal, and customer dissatisfaction?

And, what about redundancies and loss to UK industry, with the broader economic effects. This might result in neutral cost benefit or worse. Money might be better invested in making sure the right procurement specialists are in place within your organization.

We are strongly advised to resist outsourcing for fear of losing supply chain control and accountability. But even this seems to be a growing area for outsourcing consideration. There is a great deal of risk in outsourcing all or part of your procurement function and I believe organizations often consider the opportunities and not the consequences. But the problems aren't only financial.

If you get it wrong in the public sector, you could be hauled before the European courts to justify your actions. In business there is CSR and the company's reputation to consider. If your outsourced provider makes savings by using suppliers in Third World countries, how can you be sure workers are being treated fairly? Audits might be carried out but even they are not infallible.

And what will the UK have left if it does not stop and think about a sustainable future? Just because 50 million lemmings decide to jump off a cliff, that does not mean it is safe to do so.

Early 'make or buy' decisions generally involved a provider located nearby, small areas of the business were outsourced but not isolated and procurement was relatively uncomplicated and easy to control.

As purchasing becomes increasingly complex the trend for offshoring can add a competitive edge and higher profit margins. But it seems anything goes, from manufacturing to call centers and other services considered for outsourcing. The further away the supplier, the more risk around delivery and quality. Offshored providers might be very far off indeed with all the differences in culture, ethics and standards that entails. Outsourcing procurement might result in supply chain social accountability being compromised and loss of valuable skills. Caveat emptor (let the buyer beware) has never been more apt.

(Article continues below)

Yes

Chris Stapleton
Interim manager
United Biscuits

In today's world businesses cannot ignore opportunities for cutting the cost of purchasing, while protecting service and product performance. At United Biscuits (UB), we believe this is a business imperative and important to our strategy.

Procurement outsourcing - and in our case the strategic sourcing process for our indirect goods and services - has provided an opportunity to deliver step-change cost reduction.

In 2004, UB set up a project to evaluate the opportunity to outsource the procurement of our indirect goods and services. This recognized a number of business challenges associated with managing our indirect spend:

• a wide range of indirect spend categories, in many cases requiring specialist market knowledge.
• a lack of scale within these categories, with a limited ability to get the best deals.
• an inability to invest in appropriate resources to manage all areas.
• limited resources and high levels of competition for experienced indirect procurement specialists.
• difficulty in providing the necessary service and support to all the user or stakeholder communities.

In late 2004, following a market review, we chose to work with Xchanging Procurement Services (XPS). This provider demonstrated it had the necessary experience in managing indirect categories on behalf of clients and the skilled resources and processes to deliver what the business required.

The scope of the outsource contract was wide-ranging, encompassing all third party spend associated with below the line marketing, sales, HR, travel, facilities management, utilities, IT and communications, engineering and operations and fleet. The purchasing requirements were across UK, northern and southern Europe with XPS category teams based in our London, Paris and Barcelona offices.

We changed from using an in-house team focusing on goods and services procurement to using more than 47 specialists in 2005, working in category teams for each of the spend areas identified above.

By the end of the first year of operation, we had:

• baselined 95 per cent of the spend, so we could accurately measure the benefits as they were delivered.
• a robust financial benefits tracking process in place across the three regions.
• a program of more than 100 initiatives from single sourcing temporary labor, to outsourcing maintenance, repairs and operations (MRO), renegotiating our fleet contract, introducing new agencies in learning and development, travel, marketing and sales.
• new web technology for travel and recruitment previously developed by XPS.
• introduced new ways of working with goods and services purchasing.

In addition, we have access to up-to-date market information across the category areas and are able to take advantage of spend accumulation in fleet, temporary labor, MRO and telecoms, without having to participate in consortiums. Because of the duration of the contract with XPS we were able to plan for and deliver more complex change, as well as looking for quick wins.

The procurement outsourcing has proved successful with the contract delivering a significant increase in annualized savings. All the direct costs associated with the program are funded from the benefits delivered, so the extra savings are UB's share.

This has been a substantial change program within the business and it took time to build unified sourcing teams with UB stakeholders and XPS working together as one team. We have continued to develop and improve the three-way relationship between UB, XPS and suppliers. But the effort has been well worth it and we continue to reap the benefits.

Source: Supply Management.com

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