Managing Indirect Spend. Joe Payne

phase to achieve a lower net price for a specific product or service. The goal is to gain advantages that less‐informed customers might miss out on. You can secure these lower prices through negotiations or a transition to a new supplier. To identify these opportunities, you'll want to gather intelligence related to potential alternate suppliers, including soliciting pricing proposals.

      Remember that the Strategic Sourcing can do more than lower unit hard costs. It also involves investigating and implementing efficiencies that can result in decreased processing time, lower transaction costs, and enhanced support for the procurement and supply chain management units within your organization. Process improvements and product or service changes are often overlooked during Strategic Sourcing initiatives; however, these factors have the potential to reduce overall spend much more than unit cost negotiations. Just because you currently process orders a certain way or use one type of technology to support a requirement does not necessarily mean that those are the best or most efficient methods. During the Research phase, you'll begin to explore the alternatives as they relate to technology, processes, products, and services.

In this chapter, we review the components of the Research phase of a sourcing initiative. More importantly, we identify what to look for in your research. We also discuss the predominant method for collecting this information—the request for information, or RFI.

UNDERSTANDING THE CATEGORY

      During the Research phase of your initiative, you are taking your preliminary ideas, adding context to them (gained through Data Collection and Spend Analysis), and converting them into a final sourcing strategy. To accomplish this, you need to gain a broad understanding of the category you're sourcing. This sounds like a simple concept, but many professionals don't take time to understand the nuances of the categories they're sourcing. Many rely instead on documentation provided by their predecessors, “legacy processes.”

      Relying on previous work alone is potentially dangerous for several reasons. First, suppliers can easily pick up on your lack of understanding and insight into the spend category. If they know you're not familiar with the market, they may offer higher‐than‐average prices—and they'll probably get away with it.

      Second, without some market you may not be able to successfully identify all the suppliers in the marketplace, or you may overlook the right types of suppliers. We review types of suppliers in greater detail later in the chapter, but for now, a simple example would be a manufacturer versus a distributor. Currently, you may buy all your copy paper through a distributor, such as Staples. However, if the volume of paper you consume is great enough and your organization has the inventorying capabilities, it may make more sense to contract directly with a paper manufacturer and purchase paper by the truckload. Without a firm understanding of the market, you may overlook this type of opportunity.

      Third, a lack of market insight inclines you toward mimicking the methods and obtaining the results of whoever sourced the category before you. Without the Research phase, you may feel tempted to consult the documentation, employ the methods, and seek the results available to you. This ignores, however, that markets are fluid, changing constantly. New technologies, new products, or new competitors may have emerged since the last time you sourced categories related to the product. Alternative processes, sourcing tools, or services may be available that have not been considered before. Without market research, these opportunities can easily be overlooked.

      Each spend category necessitates a different type and amount of research. However, you should explore some general elements during the Research phase of any Strategic Sourcing initiative:

       Identifying suppliers

       Understanding supply chains

       Understanding market conditions

       Understanding the factors of cost

       Reviewing available technologies

       Reviewing alternative processes

       Reviewing alternative products and services

       Performing a want‐versus‐need assessment

IDENTIFYING SUPPLIERS

Perhaps the most important step in the Research phase is supplier identification. It simply would not be possible to engage in a Strategic Sourcing initiative without a supply base. Oftentimes, however, professionals do not take as much time to identify suppliers as they should. Identifying suppliers can be a tedious task—a wealth of information is available online, but it's often overwhelming in scope and difficult to sort through. In an effort to save time (and sanity), many professionals adhere to the three‐bid rule, meaning they only ask three suppliers to provide a quote. The three‐bid concept normally ensures you are not getting completely gouged with poor pricing, but it by no means ensures you are going to get the best price or service.

      Others identify more than three suppliers but may choose to arbitrarily exclude certain suppliers from their list. For instance, if an end user expressed that a certain supplier used to have the business, but that the relationship ended due to a dispute or even just a poor experience, you may be tempted to avoid the supplier. However, former suppliers often have good insight into the needs of your organization, and over time, they may have taken efforts to correct the issues that had resulted in their termination. If nothing else, they may be able to provide some previously unrealized insights into the markets in question.

      Similarly, for common or well‐understood categories, it's easy to be lured into the trap of only including the well‐known suppliers or only those who have already been aggressively pursuing your organization's business. This often means missing out on suppliers who could be a perfect match. When a satisfactory quantity of suppliers is identified, research is discontinued, potentially omitting suppliers who could be a great match and may perform best from a cost and service perspective.

      Another common problem occurs when organizations prepare an RFI or RFP and send it to dozens of suppliers, but fail to communicate properly with those suppliers. The suppliers who receive an unsolicited bid document with no further communication from the prospective buy may perceive the document as a “phishing” attempt to discover their pricing range for a product or service. In these instances, they won't bother providing a proper response.

      Overall, the goal of supplier identification is to create a rather comprehensive list of supplier names, contact information, and other relevant data. During the RFx phase of the initiative, you begin to narrow this down to a short list. Many tools are available that can be used to help identify suppliers, and many of these tools are discussed in Part Two.

UNDERSTANDING THE SUPPLY CHAIN

      The question that comes up most often when talking about supply chains is “Who is my supplier's supplier?” These discussions often revolve around the concept of risk and determining how reliable the supplier's supply base is.

When sourcing raw materials, it is particularly critical to understand where the materials your suppliers use are coming from. Generally, in the case of indirect spend, the risk of outage is somewhat reduced—while it may result in inefficiencies in your business, it probably will not stop your business from running. However, there are several reasons beyond just risk to make sure you have a firm understanding of the entire supply chain. Your Research phase is the best time to ask the question, “What type of supplier should we be buying from?”

      Each basket of goods or services or individual spend category has its own unique characteristics, and therefore, each has unique types of suppliers that serve the market. The most common types of suppliers that span most categories of indirect spend are local, regional, and national suppliers; manufacturers and distributors; as well as brokers, group purchasing organizations (GPOs), and other third‐party suppliers.

      Local, Regional, and National Suppliers