The opportunity for optimizing procurement "is quite large," says Hillman. For the average company, non-core spending makes up between 15 percent and 40 percent of revenues. Businesses can realize significant advantages by scrutinizing their indirect spend.
They already know the value of optimizing strategic sourcing. "A lot of companies show great expertise in managing their direct supply chain," says Hillman, "almost because they've had to. You need to be an expert in sourcing and designing of materials."
They have failed to apply the same degree of rigor to indirect spend. It's often a challenge just getting that area under management, Hillman says. Responsibility for spend within various product categories is likely to be split among multiple departments. And once the process of optimization begins, companies often find they lack the intelligence they need to make the right decisions. As a result, "the savings don't materialize."
Most companies only manage about half of their indirect spend, he says. Best-in-class is between 85 percent and 90 percent. Often a company will negotiate significant savings with a supplier, but those results won't show up on the bottom line. Buyers continue to purchase off-contract, and poor communications frustrate management's efforts to unify the activity.
Corporate departments can be extremely protective of their control over indirect spend. To address that reluctance, management needs to show how a coherent approach can bring value to the process. Then it needs to examine all supplier relationships to discover which rates are out of date or uncompetitive.
"It takes leadership at the top level," Hillman says, "but also evangelism to make sure that all stakeholders buy into the program."
