SMT

SMT
Procurement
Lesson 11 – Chapter 17
Purchasing Services
Supply Chain Canada

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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

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Quiz # 5
30 minutes

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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

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

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

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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

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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

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Transportation Sourcing Strategy Development –
Decision Making Process

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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?

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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

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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

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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
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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

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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

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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

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Question #1
 How does 3rd Party Logistics impact your company?

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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

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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

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Internal Methods of Managing Indirect Spend
1. Data collection and consolidation
2. Restructuring to establish accountability
3. Automating the requisition/sourcing process
4. Standardization

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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

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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

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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

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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

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External Methods of Managing Indirect Spend
 Reverse auctions
 Consortiums
 Supply management outsourcing

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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

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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

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Break

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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

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Consultant Evaluation and Selection
 Supplier quality
 Cost competitiveness
 Potential delivery performance
 Technological capability
 Often best performed by a cross-functional team

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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

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Sourcing Professional Services Cont’d
 Optimize the supply base

 Develop a standardized contract
 Monitor results
 Develop policy compliance
Similar to product suppliers…

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Clearly Defined Scope
 Avoid misunderstandings
 Provide detailed guidance to provider

• Deliverables
• Milestones
• Deadlines
• Budget
 Define rewards and penalties
 Distribute risk between parties

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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?

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Centralized Procurement Structure
 Allows leverage of volume
 Provides oversight to expenditures
 Increases accountability
• Greater objectivity
• Improved negotiation
• Better pricing
 Reduces supply base redundancy

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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

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Optimize the Supply Base
 Interview potential sources of supply
 Use a preferred supplier list
 Price discount or volume-leveraging opportunities
 Determine supplier capabilities

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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

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Monitor Results
 Parameters
• Quality
• Cost management
• Delivery
• Technical support
• Wavelength (ease to work with)
 Develop feedback mechanism
 Update databases as required

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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

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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?

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Supply Chain Canada

 Understand indirect spend

 Explain best practices in managing indirect spending and the

Supply Chain Canada 2

Supply Chain Canada 3

 Review the role of SCM to address indirect spend

Supply Chain Canada 4

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

Supply Chain Canada 5

Supply Chain Canada 6

 Arrange pickups and deliveries

Supply Chain Canada 7

Supply Chain Canada 8

Plot Relative Ranking of all 5 transportation modes against the

What is “INTERMODAL” transportation?

Supply Chain Canada 11

 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

 Customs brokers  Local sourcing and

Supply Chain Canada 15

 Plan – understand internal demand plan, develop KPIs

 Select – based on 5 performance criteria OR overall suitability

 Implement – go through change management, share required

 Improve – performance measures lead to improvement

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

 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

 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

 Merchandising  Inventory control

Supply Chain Canada 19

 How does 3rd Party Logistics impact your company?

Supply Chain Canada 20

Category % of Total % of Total

Direct 18% 44%

Services ** 11% 30%

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

Supply Chain Canada 21

 Growth of the services sector

Supply Chain Canada 22

1. Data collection and consolidation

2. Restructuring to establish accountability

3. Automating the requisition/sourcing process

Supply Chain Canada 23

 Different units purchasing the same goods from the same

 Expenses may be coded differently for accounting purposes

 Spend is often decentralized and not conducted by supply