Manufacturing Money: Looking Beyond Traditional Cost-Cutting

Outsourcing non-core procurement can be a compelling strategy for delivering significant cost savings and improving financial performance

Manufacturingmoneylookingbeyon 10269174

According to a recent McKinsey Global Survey, executives have taken every action they thought possible to cut costs during the recent recession — they've closed plants, reduced staff and cut benefits, while adopting other Lean principles. While these actions took significant costs out of the business in the short-term, the study found that executives are concerned with the sustainability of these cutbacks and looking for the next round of cost savings — this time preparing to make strategic cost reductions that will position them for the longer term.

However, many executives may be surprised to find that a large area of cost is often overlooked as part of a broader cost reduction program, yet it represents a significant opportunity to drive sustainable savings. This untapped source of savings is non-core procurement.

Non-core spend — which includes categories such as IT/telecom, marketing services, logistics, professional services, plant/facility services, secondary packaging, utilities, MRO and travel — is often not professionally managed for a variety of reasons. The spend is highly fragmented across business units, locations and departments. It encompasses hundreds of unique sub-categories, and it spans thousands of end-users — leaving room for significant leakage throughout the purchasing process. When these categories are combined, non-core spend can represent as much as 20 percent of revenue. And, when aggressively managed, they can yield hundreds of millions in cost savings and sustainable improvements in financial performance.

Capturing the Savings Opportunity

According to the same McKinsey study, 54 percent of executives cited plans to lower non-labor costs through strategic sourcing or procurement effectiveness initiatives in 2010. Leading manufacturers, like Greif, have already taken actions to optimize their procurement capabilities and capture this savings opportunity. To do this, Greif chose to focus internal procurement efforts on core, direct materials, including resin, steel and paper, and outsource the management of non-core spend to accelerate the capture of savings in this area.

Through outsourcing to ICG Commerce, Greif taps into a global infrastructure and operational model that includes specialized expertise in each non-core buying category, strong negotiating power gained through market insight and intelligence, and an integrated sourcing and buying process — a model that would take years to replicate internally.

Ron Brown, senior vice president of global sourcing and supply chain for Greif, explained further in a recent video interview: "We consider these people to be a part of our team, just as if we hired them ourselves. But we didn't have to train them, and they came with intellectual capital and tribal knowledge. They know the ways and moors of the different countries and how to operate, speak the languages and understand how business is conducted. If we were to go out and build that today, it would take past my lifetime."

According to Everest Research, by helping companies reduce spend on outside goods and services, procurement outsourcing enables companies to save 0.5-2.0 percent of revenue. Given that most manufacturers have not invested heavily in building a non-core capability, procurement outsourcing has become the preferred approach for manufacturers like Kimberly-Clark, Whirlpool and Goodyear looking to accelerate the capture of this savings opportunity.

Reducing Costs Today, Funding Growth Tomorrow

Approximately 40 percent of respondents to the previously mentioned McKinsey study believe that at least some portion of the costs their companies cut since September 2008 will return. While short-term reductions can make for a positive quarterly statement, employees will have to be rehired and benefits reinstated as demand increases and the economy shifts. By aggressively managing non-core spend, savings will not disappear as output increases. And by working with a procurement outsourcing specialist, manufacturers can deliver cost savings while remaining laser-focused on driving margin improvement and growth.

As we all look forward to a highly anticipated and much needed economic revival, we can be certain that operational efficiency and cost reduction will continue to be of paramount importance for manufacturers. As executives look across the business to identify new and sustainable ways to reduce costs, outsourcing non-core procurement will continue to be a compelling strategy for delivering significant cost savings and improving financial performance.