Building a Successful Strategic Sourcing Program for Indirect Materials

By Andrew K. Reese

Indirect spending historically has been a thorn in the side of many procurement organizations. Often comprised of high-volume, low-dollar purchases or specialized one-off items or services purchased locally across an enterprise, indirect spending can amount to as much as 50 percent of a company's spend, according to CAPS Research reports. Yet CAPS has noted that a large share of spending for indirect goods and services frequently takes place outside an enterprise's formal sourcing and procurement processes.

That was the situation facing the procurement team at Respironics Sleep & Home Respiratory Group a couple years ago, according to Tim Halloran, commodity manager for indirect materials and services with the Murrysville, Pa.-based medical equipment manufacturer, which reported 2007 fiscal year net sales of $1.2 billion. "There was no focus on indirect spend," explains Halloran. "As a result, organizations learned to fend for themselves in the indirect spend categories, and everybody was doing their own idea of what they thought sourcing was."

To address this issue, in late 2005 Respironics' procurement team began to ramp up its focus on indirect materials with two goals in mind: putting in place a formal strategic sourcing process for indirects across the company's U.S. locations and getting greater total value out of its indirect spend. Right away the team confronted two challenges: lack of internal resources and lack of expertise in specific indirect categories. That prompted Respironics to look for an outside consultancy that could bring both experienced personnel and deep category-specific knowledge to bear on projects targeted at particular areas of indirect spend. Halloran says that the company was looking for a "small-scale consulting engagement" with an "à la carte" menu of services rather than a full-blown consulting project.

Around this same time, Respironics' director of global sourcing, David Butler, met Robert A. Rudzki, president of Pittsburgh-based consultancy Greybeard Advisors, at The Conference Board's 2005 Spend Management conference in New York City, where Rudzki was a speaker. Rudzki had served as senior vice president and chief procurement officer for Bayer Corp. and previously as the senior procurement and transportation executive with Bethlehem Steel Corp. He founded Greybeard in 2004 to offer what he calls "light touch" consulting that involves bringing in senior-level advisors with specialized expertise to address procurement pain points and opportunities. Rudzki's consulting philosophy jibed well with Respironics' objectives, and that, along with the fact that Greybeard was local to Pittsburgh, near Respironics' home office, made the consultancy a good fit for the manufacturer.

Assess, Plan, Train

After engaging with Greybeard in early 2006, Respironics brought in the advisors for an opportunities assessment to identify potential areas of savings and to help define a sourcing process for achieving those savings. During this time, the procurement team also worked with Rudzki to create a roadmap for transforming sourcing within Respironics to become world-class and to initiate training for staff that would be involved in the transformation process. The training was cross-functional, involving procurement team members but also staff from other areas within the company who might or might not have ever been exposed to strategic sourcing concepts.

Halloran views the cross-functional training as a key factor in the long-term success of the initiative. "Making sure all the stakeholders involved get some training and exposure to what it's going to mean to them to be either a team member or a team leader [on a sourcing project] helps make sure that there are no misconceptions about the project," he says. "And getting that organizational buy-in before anything is implemented ensures that everybody at least has the opportunity to participate in the process. That makes it easier to sell future projects."

The training also helped Respironics' staff across functions understand the importance of what Rudzki calls "speaking with one voice" in communications with suppliers. "Every conversation with a supplier, no matter how innocent or ‘technical' it might appear, is part of the negotiation process," Rudzki says. The "one voice" methodology, which Greybeard has turned into a DVD that the firm provides its consulting clients, constitutes a uniform business process for interacting with suppliers. It ensures that all contact points within an organization are identified and brought into the sourcing process. Under this methodology, all meeting and conversations with the supply base are planned, with objectives and a script. The goal is to prevent a supplier's sales staff from doing an end-run around the sourcing team to gain information from employees who might not even realize they are tipping the hand of one vendor or another. It also reinforces the buy-in of all stakeholders in the process.

Pilot Project

The first strategic sourcing project at Respironics targeted the print category, encompassing copying, office printing and fax. Greybeard provided a full-time advisor to help guide the manufacturer's sourcing team through the process for this kick-off project, as well as to provide subject-matter expertise. Halloran believes that it was important that the Greybeard consultant be involved with the project as a resource, but that the primary driver of the project remain a staff member within Respironics. "The owner of the process has to be an internal person," he says. "Change has to come from inside, otherwise there would be a lot of resistance. And ultimately we desired to become self-sufficient as far as the process."

The objectives for the print project centered on delivering overall better value rather than solely reducing the price. Halloran points to this "total value" approach as another success factor for this kind of initiative. "When people that have not been involved with sourcing hear that we are going to get involved in a project," Halloran explains, "they may assume that we're going to put something out to bid and get a lower price, but that they're going to wind up with something that's worse than what they have today." The "total value" approach helps counter these assumptions.

Rudzki's curriculum for the training that Greybeard provided to Respironics included guidance on how to define the value that a sourcing project is delivering above and beyond any unit-price cost reductions. These beyond-price benefits are typically more difficult to measure than price cuts reflected on an invoice, but just making stakeholders aware of the different types of added value that a project can deliver often is enough to break down resistance to engaging in a strategic sourcing exercise, Halloran says. And while he preferred not to discuss specific numbers, Halloran confirmed that the office print project delivered a significant return. "We've certainly been able to deliver a better product, with more capabilities and more functionality, for a much lower bill at the end of the day, along with better service and better support." Moreover, he adds, "We've been able to demonstrate the concept of better value."

In the case of another category, outsourced engineering, the process itself has been the value. The procurement team developed a U.S. standard process template for use in sourcing outside design work, including request for proposal and analysis of the historical performance of approved suppliers. Replacing disparate, undefined processes with a ready-made template for end users might not necessarily produce dollars and cents savings, but Halloran contends that it ultimately will save engineering time and translate into shorter development cycles and faster time-to-market.

Building the Home Team

Respironics' procurement team has moved on from office print and, with support from Greybeard's subject matter experts, has engaged in projects addressing various IT categories (including desktop computers and cell phones), travel and entertainment, and energy, with more categories under consideration. The team also is looking to bring the knowledge and experience it has gained with indirects over to the direct side, again beginning with the definition of a standard process for sourcing the company's direct materials.

Reflecting on additional success factors for building a strategic sourcing program, Halloran suggests that starting with a pilot program provided good insights into the challenges involved in running a sourcing project. Based on the pilot and subsequent projects, the procurement team assembled a "lessons learned" document that they incorporated into the training process for staff involved in future initiatives. That helps ensure that all members of the team for each project understand the "ins and outs" of the process, as well as the commitment that they will need to make for the project to be successful.

But Halloran stresses again that this type of program can only achieve its goals when it combines the necessary expertise, drawn from outside resources when necessary, with a home team that is fully committed to the process. "Bob Rudzki's folks are here as a resource, providing support, but we really need to make it happen internally," he says.

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