Transforming the procurement organization: How to save $2 Million in 6 Months

During the first year [of deployment], we sat down with the leadership of each business unit, identified our overall goal, and developed individual business unit plans to support that goal. ” - Sourcing Manager

A heavy manufacturer was struggling with increased competition and price depreciation. In response to these challenges, they set out to dramatically reduce cost structures for ongoing competitive advantage.

Over the past few years they’ve attained great savings with a significant portion driven by improved sourcing and supply management operations. The company now sources much of their spending online, driving typical savings of 15 percent. They have also linked sourcing to compliance and performance management initiatives, ensuring savings negotiated drops to the bottom line.

The CEO upped the ante after its success, further raising the savings bar. Achieving such a successful repeat performance, however, would be challenging for the procurement team. In order to drive the next round of savings, they needed to organize procurement into a globally aligned, strategic, and highly efficient operation. After working hard to negotiate the best prices and terms with the right suppliers, the executive team realized that managing the entire procurement process, from requisition through to payment, was the next critical step to ensuring that expected savings reach the bottom line.

Transforming the Procurement Organization

To achieve its goals, the company looked to overhaul the way its businesses sourced and managed spend. At the time, nearly 40 percent of all North American sourcing and purchase decisions were executed at the plant level. To maximize its buying leverage, strategies, and process efficiencies, they needed to reduce plant-sourced purchases to 10 to15 percent of total spend—not an easy task considering that nearly half of the diversified conglomerate's spend is unique to individual business units.

The first phase of the procurement transformation included reorganizing into a "center-led" procurement organization that could align sourcing and procurement operations across business units. The company also formed sourcing teams aligned along major commodity groups to identify sourcing opportunities, assess supply markets and supplier capabilities, develop sourcing strategies, and manage supplier performance and relationships. To accelerate its procurement transformation, they implemented a common procurement platform worldwide and adopted online sourcing tools.

Early Successes Leads to Broad Rollout

New to online sourcing, the company quickly learned how to leverage reverse auctions as part of its overall sourcing strategy. Within the first six months of deployment, they completed seven reverse auction projects and negotiated $2 million in cost savings. These early successes caught the attention of business unit leaders and executive leadership, fueling demands for a broader rollout of Ariba's capabilities across the company.

Despite demands for rapid adoption, they took a methodical approach to its e-sourcing rollout—incorporating these methods into a six-step sourcing process, which included; Profiling the commodity and completing a market analysis, developing a sourcing strategy, determining selection factors and screening suppliers, identifying proper negotiation methods, developing and negotiating the contract, and implementing and managing the supply agreement.

“As you become more global in your sourcing, it is increasingly difficult to keep all
the regions coordinated on common processes, best practices, and spend management," said their global sourcing director. "Project management capabilities give us insight into our sourcing strategy and in-process projects. We are using contract management to manage compliance and performance on a global basis.” - VP of Procurement

With online sourcing strategies and market-making methods in place,
the company continued deploying Ariba Sourcing to empower buyers to initiate and fully manage online negotiations with suppliers. The adoption of this self-service tool dramatically accelerated the online sourcing volumes and savings.

Today, the central sourcing strategies and business goals are closely aligned. The procurement organization sets the overall goals with executive management and works with each business unit to develop plans to achieve those goals. To date, they have executed online negotiations for nearly every spend category. The company has also established a sourcing database that consolidates information on all the company's sourcing events, which the procurement group uses to measure cost savings, evaluate sourcing approaches, and drive compliance.

Since the company had realized significant savings through process efficiency, better sourcing practices, and purchasing compliance, the next step was to use Ariba applications to provide full requisition-to-invoice functionality to ensure expected savings reach the bottom line. The company wanted a system to automate, monitor, and control the purchasing process from requisition to payment. Having a complete approach would allow buyers to easily find the items they need, establish efficient supplier relationships, and ensure that payment is quick and accurate.

The company knew that implementing an eProcurement package could help track captured spend data by cost center in order to aid expense management—and ultimately lower the company's purchasing and processing costs by being a major driver of process efficiency.

While improved sourcing and greater contract leverage have delivered savings, the company uses Ariba for full requisition-to-invoice functionality for all users and suppliers to maximize process savings, compliance savings, and sourcing savings.

Ariba eProcurement is used to manage spend in more than ten service and commodity categories, and overall spend through Ariba is increasing as user and supplier coverage continues to grow. Currently, over 400 ad-hoc and catalog suppliers have been enabled for purchasing transactions through the Ariba® Supplier Network™ (Ariba SN) so doing business is completely paperless. PO submission, invoicing, reconciliation and payment are fully automated, which results in stronger, more efficient supplier relationships .Ariba catalogs and approval flows have streamlined and standardized the ordering process, especially when supported by business forms and PunchOut™ for selected suppliers. In addition, the company has experienced hard dollar cost reductions when suppliers have fully integrated into Ariba SN to receive orders electronically. Standardized pricing through Ariba catalogs has driven significant savings from increased compliance and usage of selected vendors across business units.

Once the goods or services are received, the automated invoice and payment process ensures accurate and timely settlement. Line item discrepancies are managed on an exception basis. Each invoice is automatically matched against the receipt and PO for accuracy and compliance against your business rules. Suppliers can expedite invoice creation by simply “flipping“ the PO with a single-click. For non-PO orders, the invoice is validated directly against the contract to ensure compliance. Once reconciled invoices are confirmed as “OK to pay”, payment information is then sent to the Accounts Payable system for final processing.

Continuous Improvement Initiatives Underway

"Spending analysis is currently one of [our] main focus areas in procurement. Having good, clean spend data is absolutely key to effective strategic sourcing. We are working to systematically improve the quality of our spend data to ensure that we have ac-curate and detailed data on a global basis. Better understanding our spending will allow us to identify the next round of savings opportunities."

After developing a sound sourcing decision framework and the adoption of self-service sourcing tools, the company rapidly progressed its e-sourcing program, increasing spend volumes sourced. Savings achieved through e-sourcing has ranged from 5 to 20 percent, and they have shaved off more than a month off traditional sourcing cycles. With approximately 46% of indirect materials spend now under management; they have achieved a reduction in maverick spending of 74%, a requisition to order cycle time reduction of 66% and a reduction in requisition to order costs of 58%. Building on its early successes, they are now focused on continuous improvement, including gaining visibility into and classification and analysis of spend.