David Hannon, Associate Editor
Everyone has their own idea of what outsourced procurement means – and they’re all right. There are a variety of different approaches to outsourced procurement from a full-blown takeover of your purchasing department to bringing in a niche expert to assist in a specific spend area or technology implementation. Dan Donaghy, vice president of procurement at $7 billion container maker Crown Cork & Seal in Philadelphia, says too often purchasing staffers assume that outsourcing equates to bad news and uses a simple example to explain his take on procurement outsourcing.
“There are two kinds of outsourcing,” he says. “You might outsource mowing your lawn to someone. You’re capable of doing it, but you’d rather have someone else do it. Secondly, you could say you outsource your dental work. It’s something you couldn’t really do yourself and bringing in outside expertise can make things go much more smoothly. You’re outsourcing his expertise and knowledge as much as his hands.”
Armed with this philosophy, Donaghy sought a way to cut his company’s procurement costs in the midst of the dot-com boom. Donaghy oversees about $50 million worth of capital goods, services, and MRO for Crown Cork & Seal, which has separate groups to handle its steel and aluminum spend, as well as transportation. Donaghy knew that technology was going to play a role in his company’s reducing procurement costs, but at the same time, he felt that more strategic sourcing concepts like consolidating volumes among vendors were also going to play a role. It was the mix of the two he had not yet figured out.
In the midst of this evaluation, procurement outsourcing firm ICG Commerce came knocking on Donaghy’s door and claimed they could save Crown Cork & Seal 7% on its office supplies spend with Staples. It would be the same supplier offering the same products, but for 7% less. Donaghy was skeptical and to get to the bottom of the claim, he invited his Staples rep to come in and talk.
“In talking with Staples, I found there were really three different ways for us to buy from them,” Donaghy said. “First, we could continue to let people buy from the paper catalog using our ‘approved’ list of supplies. Secondly, they presented the option of buying all supplies through the Staples web site. Lastly, there was the option of buying it all through ICG Commerce. We found that moving to the Staples web site would provide one level of savings. But when I asked about ICG Commerce, the Staples rep just smiled and said there was a different price for that.”
The buying volumes of ICG Commerce let a major supplier like Staples afford to sell at lower rates. Just as Staples leverages its volumes to get better prices with its suppliers, ICG Commerce would do the same for Crown Cork & Seal by combining its volumes with other buyers. In the end, a 22% savings was realized on the Staples spend.
The ICG Commerce model lets Crown Cork & Seal keep its contract negotiation centralized but allow plant-level procurement of supplies. No longer did purchasing managers have to maintain an approved list of what buyers could and could not request from Staples because the new system provided visibility into everything that was being bought. Once up and running, there were very few items bought that were out of the ordinary and Donaghy says it is rare to see a purchase get reviewed today.
But this type of system works well with office products because one supplier is likely as good as another in terms of product. Many of the suppliers on the system are large distributors in their industries, but niche direct materials suppliers are not often available. That’s where the outsourcing services option comes into play.
When a buyer wants to work with a supplier outside the ICG Commerce system, there are two choices: either request ICG Commerce go out and source the product or source the product in-house as it would normally. For example, Donaghy says there are some specialty electronic components for which Crown Cork & Seal still deals direct with some suppliers, negotiating prices one-on-one because ICG Commerce has no experience with those suppliers.
“We realized ICG Commerce was the medium, not the solution to our problems,” says Donaghy, referring to the additional effort it took to get more store-room items on the system. “For example, an employee wanted to buy two clamps and 100 feet of wire, but the computer told him he has to buy 100 clamps and 1,000 feet of wire. So we called the supplier and found we need the same interpersonal support with that supplier we had before ICG Commerce. We could talk to them and decide what is the best thing and place the order and then follow up through the new system. But we were still negotiating with our suppliers and maintaining that relationship.”
Right now about 70% of the spend that Donaghy oversees is going through ICG Commerce and the remaining 30% is being reviewed to see if it could be put on the new system. A recent study for the beverage division found that buyers working off the system did not see a sizeable savings but continued to put in the extra work of buying offline with their historic suppliers. To remedy that situation, ICG Commerce worked to negotiate better deals with suppliers in those spend areas, enticing the suppliers with greater volumes overall if they lowered their prices in these areas.
“ICG Commerce will do a market basket study and if we’re not making any money, they’re not interested in us participating,” Donaghy says. “They are making their part of it on the difference in what they’re paying now and what we will pay to these suppliers.”
Crown Cork & Seal experimented with the use of e-auctions for its corrugated buy, saving 14%, but Donaghy says there are not many categories between what’s on ICG Commerce and what is pure metal or material handled by another group, so there are not many options for auctions.
“You go right from raw materials to stretch wrap in our spend,” he says. Also, Crown Cork & Seal usually requires two suppliers for its major spend areas, which does not lend itself to the e-auction model.”
The major benefits of moving to ICG Commerce are that buyers no longer have to deal with the minutiae of contract terms and simply buy off the system where possible. Donaghy says two-thirds of the requisitions his department used to process have disappeared since moving to the system. And buyers are continually comparing prices to ensure those offered through ICG Commerce are the best available.
“We like to see the plants pushing back and saying they can get a certain product for a better price and we like to find out why they can get it cheaper from that supplier as opposed to through ICG Commerce,” Donaghy says.
The ability to reduce costs is as important as the ability to increase sales. CCR provides the practical, long-term solution for reducing the outlay for regularly purchased goods and services.
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