Procurement center and profit center

Visibility around indirect spending

Financial report

Although summer is in full swing, it is not too early to be thinking about the fourth-quarter wrap-up and how hiring a procurement consultant mid-year can improve your bottom line by the end of the year.

The truth is, procurement expertise matters. While purchasing professionals are known for spending money, what we do can actually be a savings center within an organization. Think about that for a moment—spending money, but spending it wisely, can actually save you money.

An April 2017 report by McKinsey & Company, “Turning indirect sourcing into a multimillion-dollar profit center,” describes indirect spend as representing 10% of total revenue in most organizations. Having been in professional procurement for my entire career, I would argue it’s a higher percentage (in the range of 15-25%) for most companies, and even higher still for manufacturers who don’t watch indirect spend costs creep up when they have to keep the production lines running.

The McKinsey report notes that “building sourcing capabilities drives twice the impact that improving procurement’s integration and alignment with company strategy would…The resulting improved performance in turn translates directly into improved EBITDA and higher sales growth.”

McKinsey makes the point that companies need to “create visibility into indirect spend to allow fact-based decision making.” Ways to do this include:

  • Developing a clear understanding regarding what is being bought and from whom, as a way to uncover significant savings opportunities
  • Analyzing purchase order books and accounts payable systems so that companies can construct a more complete picture of spend by vendor and category
  • Merging accounts payable data with other data points (data on customer demand or specifications, for example), which can be located in contracts or spec sheets, or through conversations with business units

Creating visibility around indirect spend is exactly what we do at LAC Group.

As for making procurement into a profit center, I totally agree. In one large corporation where I worked, the VP of Sales hated it when I told him the company’s purchasing team impacted the bottom line far more effectively than he did—because a 10% cost savings hits the bottom line as a 36.9% profit improvement.  See the chart below. It’s a great tool to visualize how what LAC Group does makes an immediate impact.

Cost Reduction Impact chart

Companies have lagged in their ability to engage procurement within the strategic territory of business processes. The business automation software solutions company Jaggaer (formerly known as SciQuest) found in their 2017 survey of procurement professionals in manufacturing, consumer packaged goods, higher education and transportation companies with annual spend ranging from $150 million to $2 billion that only a quarter of such professionals considered procurement to be a profit center within their organizations.

Close to half of procurement professionals surveyed did not currently consider the procurement function as a ‘trusted advisor’ to their firms.” However, 67% of procurement professionals believed that executive interest is increasing, with company leaders looking for procurement to deliver on cost savings and value within their organizations.

Emphasizing the role that procurement can play within organizations, Deloitte’s Global Chief Procurement Officer Survey 2018 noted that “exceptional procurement, supplier, business, and digital leadership will differentiate those organizations that will make an impact that matters.”

The Deloitte survey noted that 61% of procurement leaders delivered better year-on-year savings performance than last year,” but that supply chain transparency remains poor, with 65% of procurement leaders saying they have limited to no visibility beyond their tier 1 suppliers.

And 51% of procurement leaders said their current teams were lacking in sufficient levels of skills and capabilities to deliver on their procurement strategy. Deloitte noted a greater need for strategic leadership traits such as positive disruption, leading digital transformation and innovation, traits they see as currently not sufficiently evident.

LAC Group takes the time to understand your business and analyze what you are spending money on and why you are using those particular vendors. Then, we help to optimize indirect spend by assuring you are aligned with the right vendors for your needs at the right total cost of procurement and with the right service to accommodate your organization.

Do you think you may be paying too much for an indirect good or service? It is a common occurrence and if addressed now, could lead to cost savings that impact your bottom line.

Susan Walker

Susan Walker

Susan Walker is LAC Group's Director of Procurement Strategy and an expert in procurement best practices including sourcing, negotiating, vendor relationship management, and contracts. She is a Certified Purchasing Manager and holds an M.B.A. from the Lake Forest Graduate School of Management.
Susan Walker

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