SMT

Procurement

Lesson 11 – Chapter 17
Purchasing Services

Supply Chain Canada

Copyright © 2019
Lesson Objectives

 Understand indirect spend

 Learn transportation and 3PL services’ sourcing options

 Explain best practices in managing indirect spending and the

purchasing of services

Supply Chain Canada 2

Copyright © 2019
 Quiz # 5
30 minutes

Supply Chain Canada 3

Copyright © 2019
Indirect Spend
 Spend that is not accounted for (considered for) sourcing
activities. Sometimes, managed by non-SCM functions. Not
easily identifiable (not perceived as high value spend or critical
category).
 Transportation is a major cost (mostly left on suppliers to manage)
 Utility bills
 Training or certification support for employees
 MRO
 Advertising and promotional spend
 Employee travel and expense reimbursement
 Common consulting services

 Review the role of SCM to address indirect spend

Supply Chain Canada 4

Copyright © 2019
Managing Transportation Services

 Transportation is the central part of “Logistics Management”.

 It might not be the CORE business for the organization.

Supply Chain Canada 5

Copyright © 2019
A New Role for Supply Management
Decide in-sourcing Vs. outsourcing
If in-sourcing,
 Emphasize other transportation links – beyond just “inbound”
 Recovery and Recycling is NEW area of focus – should be made
part of the logistics agreement

If outsourcing,
 Carrier selection
 3PL provider selection
 Negotiate long-term freight agreements
 Evaluate carrier performance

Supply Chain Canada 6

Copyright © 2019
SCM should manage…

 Arrange pickups and deliveries

 Processing damage and loss claims
 Tracing and expediting shipments
 Coordinating interplant and outbound movements
 Auditing freight bills for accuracy
 Determining plant and warehouse locations
 Load and routing optimization
 Mode selection
 Reverse logistics
 Carrier and 3PL performance

Supply Chain Canada 7

Copyright © 2019
Transportation Sourcing Strategy Development –
Decision Making Process

Supply Chain Canada 8

Copyright © 2019
Supply Chain Canada 9
Copyright © 2019
Supply Chain Canada 10
Copyright © 2019
Transportation Modes

 Motor carrier
 Rail carrier
 Air carrier
 Water carrier
 Pipeline carrier

Plot Relative Ranking of all 5 transportation modes against the

performance criteria.

What is “INTERMODAL” transportation?

Supply Chain Canada 11

Copyright © 2019
Supply Chain Canada 12
Copyright © 2019
Supply Chain Canada 13
Copyright © 2019
Outsourcing Logistics Services to 3PL providers

 Select providers

 Gain access to critical and timely data

 Develop systems visibility to material shipments

 Develop closer relationships with fewer providers

 Establish company-wide contracts

Supply Chain Canada 14

Copyright © 2019
3PL should be able to manage…

 Customs brokers  Local sourcing and

 Freight brokers (air and purchasing
surface)  International trade
 Warehousing and DC management
operations  Global transportation
 Packaging and export optimization
documentation  Supply chain planning
 Delivery services (milk runs)  Hot shot delivery

Supply Chain Canada 15

Copyright © 2019
An Effective Approach to Selection

 Plan – understand internal demand plan, develop KPIs

 Select – based on 5 performance criteria OR overall suitability

 Implement – go through change management, share required

info, build relationship

 Improve – performance measures lead to improvement

opportunity.

 Partner – make alliance and agree to tradeoffs and risk s

haring
Supply Chain Canada 16
Copyright © 2019
3PL Advantages

 Economies of scale and increased flexibility

 Improve service performance levels

 Release capital from sale of assets

 Release running costs (at times, resources)

 Concentrate on core business activities

Supply Chain Canada 17

Copyright © 2019
3PL Disadvantages

 Relinquish control, ownership, and expertise

 Loss of integration between sales and supply

 Changeover costs and operational problems

 Loss of dedicated in-house staff

 Sacrifice key service differentiation

Supply Chain Canada 18

Copyright © 2019
Types of Services 3PL can handle…

 Merchandising  Inventory control

 Marshalling  Warehouse management
 Postponement  Vendor-managed inventory
 Installation profit  Export packaging
 Cross-docking  Spares (returns and repairs)
 Transport  Reverse flow
 Finished goods pull
expediting

Supply Chain Canada 19

Copyright © 2019
Question #1

 How does 3rd Party Logistics impact your company?

Supply Chain Canada 20

Copyright © 2019
Services and Indirect Items

Category % of Total % of Total

Revenue Purchases

Direct 18% 44%

Indirect 9% 23%

Services ** 11% 30%

** expected to grow by 13% over next 5 years

Based on research on fortune 500 companies

Supply Chain Canada 21

Copyright © 2019
Indirect Spend Issues

 Growth of the services sector

 Increasing cost pressure
 Decentralized nature of the spend
 Wide variety of goods and services sourced
 How to allocate as overhead
 Often hidden in the price of direct materials and services

Supply Chain Canada 22

Copyright © 2019
Internal Methods of Managing Indirect Spend

1. Data collection and consolidation

2. Restructuring to establish accountability

3. Automating the requisition/sourcing process

4. Standardization

Supply Chain Canada 23

Copyright © 2019
1. Data Collection and Consolidation

 Different units purchasing the same goods from the same

suppliers at different prices

 Expenses may be coded differently for accounting purposes

between divisions

 Spend is often decentralized and not conducted by supply

management

Supply Chain Canada 24

Copyright © 2019
2. Restructuring

 Setting up accountability for indirect spend

 Based on thorough data analysis

 Designed to prevent maverick spend

 Purchases from unauthorized sources

 Defined chain of command and oversight

Supply Chain Canada 25

Copyright © 2019
3. Automation

 Electronic requisitioning

 Automated routing, approval, and purchase order or release

creation

 Automated checking of receipts against invoice and PO or

release

 Electronic transfer of funds

Supply Chain Canada 26

Copyright © 2019
4. Standardization

 E-catalogs
• Limits access to non-approved sources

 Allows aggregation of indirect spend across the organization

 All off-catalog purchases must be reviewed and approved by an

executive-level manager

Supply Chain Canada 27

Copyright © 2019
External Methods of Managing Indirect Spend

 Reverse auctions

 Consortiums

 Supply management outsourcing

Supply Chain Canada 28

Copyright © 2019
Indirect Spend Sourcing Strategy
Enabling Tactics and Strategies

 Zero-based budgeting

 Pre-budget savings (forced budget cut)

 Organizational structure (centralize/decentralize)

 Integrating accounts payable into supply management (SCM

controls indirect spend: no contract no pay)

 Training to Power spenders

Supply Chain Canada 29

Copyright © 2019
Enabling Tactics and Strategies Cont’d

 Supplier managed e-catalogs

 Commodity coding for (categorized) indirect spend

 One commodity team assigned to large suppliers (counter

divide and conquer technique used by supplier)

 Outsourcing indirect sourcing

Supply Chain Canada 30

Copyright © 2019
Break

Supply Chain Canada 31

Copyright © 2019
Sourcing Professional Services

Ex: consulting, software development, E-procurement tool

selection, Procurement transformation, etc.

Discuss – Award process to Consulting Service

Discuss – Award process to Tool Selection

Supply Chain Canada 32

Copyright © 2019
Consultant Evaluation and Selection

 Supplier quality

 Cost competitiveness

 Potential delivery performance

 Technological capability

 Often best performed by a cross-functional team

Supply Chain Canada 33

Copyright © 2019
Sourcing Professional Services Cont’d

 Rationalizing and optimizing the supply base

 Working closely with key suppliers
 Leveraging volume across business units
 Implementing better control systems
 Developing cost savings ideas
 Determine baseline spend
 Have a clearly defined scope*
 Move to a centralized procurement structure
 Develop a professional services database
 Develop a sound procedure for evaluation and selection of
consultants

Supply Chain Canada 34

Copyright © 2019
Sourcing Professional Services Cont’d

 Optimize the supply base

 Develop a standardized contract
 Monitor results
 Develop policy compliance

Similar to product suppliers…

Supply Chain Canada 35

Copyright © 2019
Clearly Defined Scope

 Avoid misunderstandings

 Provide detailed guidance to provider

• Deliverables
• Milestones
• Deadlines
• Budget

 Define rewards and penalties

 Distribute risk between parties

Supply Chain Canada 36

Copyright © 2019
Clearly Defined Scope

 How are scope changes handled?

• Renegotiate if changes are too significant

 Include nondisclosure agreement

 Insert language as to whom is supposed to accomplish the work

 Who has operational control over the project?

Supply Chain Canada 37

Copyright © 2019
Centralized Procurement Structure

 Allows leverage of volume

 Provides oversight to expenditures

 Increases accountability
• Greater objectivity
• Improved negotiation
• Better pricing

 Reduces supply base redundancy

Supply Chain Canada 38

Copyright © 2019
Professional Services Database

 Cumulative knowledge database

• Prevent duplication of effort by different units
• Allow review of past projects

 Preferred supplier list database

• Performance records
• User satisfaction ratings
• Existing long-term contracts

Supply Chain Canada 39

Copyright © 2019
Optimize the Supply Base

 Interview potential sources of supply

 Use a preferred supplier list

 Price discount or volume-leveraging opportunities

 Determine supplier capabilities

Supply Chain Canada 40

Copyright © 2019
Standardized Contracts

 Use of an online template to ensure that all major legal issues

are addressed

 Scope must be clearly defined

 Reward and penalty clauses

 Clause for renegotiation

Supply Chain Canada 41

Copyright © 2019
Monitor Results

 Parameters
• Quality
• Cost management
• Delivery
• Technical support
• Wavelength (ease to work with)

 Develop feedback mechanism

 Update databases as required

Supply Chain Canada 42

Copyright © 2019
Service Supply Chain Challenges

 Imprecise and unclear specifications…..leads to:

 Not having a well-thought-out and thoroughly defined set of

performance and outcome expectations

 Determining satisfactory progress

 Scope creep

 Not defining what constitutes completion or level of effort

Supply Chain Canada 43

Copyright © 2019
Questions

 Question 2:
What is the importance of purchasing services and indirect items
for your organization?

 Question 3:
Do you have examples of best practices for buying services or
indirect items?

Supply Chain Canada 44

Copyright © 2019