Five keys to minimising indirect procurement in the company

Five keys to minimising indirect procurement in the company
January 3th, 2017
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On average, indirect procurement represents 15% of a large organisation's global purchases, corresponding to 50% of its orders and close to 80% of its suppliers! These figures highlight the need for companies to streamline their non-product related purchases, just like their strategic purchases. Manutan has developed a five-step strategy for reducing indirect procurement costs that targets the key areas in which money can be saved: the product range, the contract, suppliers, transactions and users.

An indirect procurement strategy prioritising "cost reduction"

After analysing the way in which the purchasing department is organised, as well as the technical solutions and the tools used (ERP/P2P) and obviously the company's on-the-ground needs and constraints, we work together in defining a saving strategy focusing on the following areas:

  • An appropriate product range
  • Downsizing the supplier portfolio
  • Digitised transactions
  • Reduced product access costs

The idea is not to launch a series of projects targeting each area at the same time, but instead define a real strategy by planning actions, establishing objectives for reducing acquisition costs and setting up indicators to track performance. The following is a realistic scenario to illustrate how this strategy can be implemented...

Key 1: define the most appropriate product range

This stage involves identifying which products will be made available to users. The goal is to offer the right products at the right prices. This includes:

  • Choosing a wide product range, or conversely, establishing a list of defined products.
  • Selecting the product categories and chosen brands: premium, mid-range or entry level.

The main indicator for tracking performance: the take-up rate for the recommended products, i.e. trends in the share of products in the range.

Key 2: roll out the contract

It is essential that all users are aware of the new contract, the dedicated points of contact and the advice available. The deployment plan mainly comprises:

  • A schedule for visiting the most important facilities
  • A call campaign targeting users
  • A broader information campaign (emails, leaflets presenting the products and associated services) carried out by Manutan or the customer

Management of the contract's deployment is monitored by means of the take-up rate and the achievement of the potential revenue defined for each site.

Key 3: downsize the supplier portfolio

To lower the costs associated with managing suppliers and especially reduce the number of orders and related expenses, it is essential to downsize the number of suppliers. Replacing a large number of small suppliers with a single distributor offering a broad product range helps reduce the number of orders for the same volume of purchases, while increasing the number of lines per order.

The main indicator for tracking performance is the number of active suppliers. Downsizing the supplier portfolio should also reduce the number of orders placed by each site (in the product category) and increase the average order value. The change in the number of lines per order can also be used as an indicator.

Key 4: digitising transactions

Digitisation can significantly lower transaction costs (searching, ordering and invoicing). The average cost of a standard transaction is €95, whereas for a fully digitised transaction, the budget may be less than €30 thanks to the use of an e-procurement system.

Ideally, transaction costs are evaluated with the customer and then validated by the management controller. Otherwise, many other studies on the subject are available for assessing the transaction cost. At this stage of the project, the main tracking indicator is the digital order rate (order generated by an e-procurement solution, the EDI order rate and the e-invoicing rate) in order to calculate the money actually saved.

Key 5: adapt to users

The last focus area for reducing costs involves reducing the time and effort that users actually spend in accessing the products that they have ordered, which gives them more time to concentrate on higher value-added tasks. This can be achieved by improving the delivery solutions or providing products close to the place of use, particularly through vending machines.

All these solutions also minimise storage, transport and reception costs, not to forget that vending machines help reduce product use by approximately 30%!

The benefits are measured by reducing the cost of making products available (in terms of FTE*), such as receiving deliveries and travelling to fetch products.

Each step is obviously monitored over time to ensure that the objectives are reached and, if necessary, take the corresponding corrective action. A specific reporting system is implemented to analyse the results of each focus area, complete with a monitoring plan between Manutan and the customer. This may be in the form of a monthly conference call between Manutan's project manager and the customer's representative, including quarterly business reviews with the sales executive and the purchasing manager.

*Full-time equivalent, i.e. hourly cost

To find out which cost reduction strategy Manutan can offer you, call Xavier Laurent on +33 1 34 53 35 04
or by email at