3 Outsourcing Models. Which is Right for You?

Digging deeper into outsourcing options, the situation gets a little more gray – especially in the complex supply chain and transportation management environment where so many aspects of your business can be affected by diverse nodes across your network.  

If you are reading this blog, you probably know what is involved with insourcing your supply chain management. Let’s explore three approaches to outsourcing. The model that best fits your business depends on your goals.

  1. Complete, Monitored Control

If complete in-house operational management is at one end of the spectrum, monitored outsourcing is on the opposite end. This is the throw-it-over-the-wall type of outsourcing.

That’s the original equipment manufacturer that says, “Hey, I need to make this widget. Here are the specs. This is how many we need. This is when we need them.”

You might examine activity once a quarter, once every six months, maybe only once a year. If something breaks, it is very hands-off.

A lot of times in logistics management, there’s not a lot of differentiation in that monitored outsourcing. A lot of times, it is going to cost a lot less and yield a lot less added value. In this scenario, you don’t have the management resources or the people you need it to manage a business function, so you put that completely on your service provider.

  1. Orchestrated Outsourcing 

With an insourcing environment, you have complete control, but you also face the most cost in the staffing of expertise, technology resources and all those strategic drivers in your supply chain performance.

In an orchestrated outsourcing approach you relinquish a measured amount of activity.

A lot of 3PL relationships today operate in an orchestrated model. You are relying on a 3PL, maybe it’s a broker that executes shipments, but you are still managing them. You have staff assigned to oversee their performance, track those shipments and make sure that 3PL is doing the things they need to do.

There is a lot more review, a lot more interaction, and of course, you are still driving that strategy piece.

  1. Hybrid Model 

You can often realize the most benefit through a hybrid approach. Here, you outsource key functions and access expertise-driven intelligence that supports ongoing improvement. You give up a measured amount of control, but develop a strategic trust that can help you determine service adjustments as business demands change.

In a hybrid approach, our logistics experts might be on site with you, right in there operating in your supply chain. As things change, minute-by-minute, hour-by-hour, day-by-day, as your partner, we are there ready to pivot our objectives as well.

This creates a strong strategic alignment, and it allows for a lot of trust and transparency. We operate as your logistics department, utilizing performance monitoring processes that help you hold our team more accountable for results. 

What Outsourcing Approach is Best for Your Business?

Understanding your company‘s internal people, process innovation, technology, and culture helps you decide whether to insource or pursue orchestrated, hybrid or monitored outsourcing.

You can start with one model and adjust with emerging change – in business strategy, human resources, marketing or supply chain disruption. The challenge is, as we saw in the first half of 2020, things are changing at a pace we have never experienced before. 

Having a strategic partnership in place can help you adjust the control you want to have. More importantly, in that close partnership you will always realize more value in responsive communications and rapid deployment of alternative supply chain strategies.

If you are deciding whether supply chain management is best insourced or outsourced for your business, watch our webinar, The Great Dilemma: Insource versus Outsource.  It shares four things your logistics partner must be able to deliver, as well as company traits you need to understand before making a decision.

Insource or Outsource Supply Chain? 4 Questions to Ask Yourself

If you are a growing company and are not already asking that question, you will soon – especially considering all the changes we’ve experienced in our economy recently. 

When weighing pros and cons of this important operational decision, start with a look in the mirror. Who are you as an organization?

You examine closely potential partners for any outsourcing relationship. You should pursue the same due diligence within your own organization. Knowing where your business stands in key areas can help you decide if the time is right to insource or outsource.

Here are four things you need to know about your organization – and any of your partners – to drive your insource/outsource decision. 

  1. Do We Have the Supply Chain Talent?People are the driver behind success. This is incredibly important in today’s supply chain environment. There’s so much change happening in the marketplace you have to stay on the cutting edge

    How do you stay on the cutting edge? Experienced people with tons of drive, in terms of learning and bringing innovative ideas to your organization.

    The supply chain talent gap is already big, and it is only going to get bigger. Companies are fighting for the top talent, and it is difficult competing against companies with unlimited budgets – Amazon, Apple, DHL or Transportation Insight.

    Are you confident that your company has the ability and the resources to attract and retain top-tier supply chain experts? As a mid-market or small market company, it is not going to be easy to get.

    And it’s not just the talent. What is your bench strength? Is your supply chain resource depth going to be able to rise to challenges and power your company’s disruption-filled environment? 

    The intelligence, and the experience that these people have is critical, but it also comes down to raw numbers. If you are a growing organization, maybe at one point, one person with the experience and intelligence necessary to do the job can effectively handle every step of your supply chain. 

    As you scale your business, you may need more than one person. In our webinar we talk about how possessing the agility to scale up your organization rapidly can make a big difference in the responsiveness you need to deliver on sales. 

    Other organizations experiencing their own growth face those same needs for people. That exacerbates the talent gap.
  2. Do We Innovate Processes by Nature?As you continue to scale your business to meet demand, are you confident that you have the processes in place to not only support that, but also innovate within those processes over time? Is that driven through KPIs? Or through the talent that you have?

    Many organizations are not set up to consistently advance innovation and measure that evolution. Companies like Amazon have process innovation inherent in their DNA, but not everyone has it at their core.

    The first half of 2020 has been a stark reminder: processes that were sufficient yesterday may not position you to compete tomorrow. To respond rapidly during a global economic disruption, a dynamic shift to e-commerce, or even a simple hiccup, it is necessary to evolve.

    As you do, collecting and monitoring data around process change determines whether you are heading in the right direction or toward more required adjustments.

  1. Do We Have the In-House Technology?The speed of change in technology is nearly impossible to keep up with unless that is your primary focus. Does your current technology platform support your supply chain management now? Will it continuously evolve with you as your customers’ demands change?

    You can build your technology stack, maintain it in-house, and join the race with the Joneses of the Technology World – SalesForce, Microsoft and Amazon. This generates a need for ongoing capital investment. 

    Unless you are a technology company, this might not be your area of expertise. One of those technology companies will sell you a base solution and customize it at added cost.

    Alternately, you can realize cost effective value working with a partner built on technology to suit your specific business needs. Be mindful of the cultural effects a new partnership might create. 

    Change management is a huge piece of the insource versus outsource conversation, but it can also allow you to redeploy current resources toward supporting your core competency. 
  2. Does this Fit Our Culture?Culturally, what does your organization look like? How do you make decisions? Is it a top-down, “You’re going to do what I tell you to do,” or a bottom-up, “Hey, I want ideas, bring the ideas.” 

    Are you seeking internal innovation or are you more focused on your core competency? Do you build or buy to solve challenges? What will our culture tolerate? What will it support? What does it really need?

    You have to be honest with yourself, and your company, and your partners. Having this perspective is imperative to the success of any relationship. 

    You could be the best company in certain spaces, but outsource certain things that you are not good at, culturally. To do that, you have to understand your organization. Even though Amazon is extremely good at what it does, it also recognizes the areas where it is not good. That drives focused Amazon investment into supply chain improvement opportunities.

    Understanding your culture will also help determine how you work with your partners, and whether your organization is in a position to realize success from an outside relationship. 

Master the Logistics Dilemma: Insource vs Outsource

People, process innovation, technology and culture. Before deciding whether to insource or outsource supply chain management, develop a clear understanding of these four aspects of your own organization. Keep them in mind when considering potential partners.

For more insight that can help you determine whether your company is better suited to insource or outsource logistics activities, watch our webinar in Transportation Insight’s Supply Chain Masters Digital Event Series. 

Open the webinar today for real world examples of companies evolving their supply chain strategy for growth. You will also get insight on the three types of strategic outsourcing approaches and four things that your logistics partner must be able to deliver.

Lean Supply Chain Perspective Required for New Normal

Meanwhile, the pressure is on lean-focused supply chain experts expected to examine internal processes and accommodate supply chain shortfalls. Their perspective is integral not just to the continuous improvement of in-house activities, but, importantly, to the network adjustments that come with the re-shoring of supply production.

Unfortunately, just as COVID-19 disrupted manufacturing networks, it also created new challenges for keeping lean supply chain teams engaged. Workforce reductions and remote operating environments create hurdles for maintaining the close awareness required to identify wasteful activity and efficiency improvement opportunities.

As manufacturers focus on a new normal, a lean perspective supports supply chain corrections, and the timeline for turnaround does not need to be limited by social distancing and remote environments. An expert partner can help you identify and execute the most effective supply network strategy, so you can keep focus on advancing your business.

New Manufacturing Normal Begins to Emerge

Midway through a year of disruption, we are hearing common refrains among manufacturers across diverse industries. It seems that, regardless of the supply chain network, the comments are very similar:

  • Manufacturing is moving toward reshoring to reduce supply chain disruption and distance.
  • Constant supply chain focus is needed to eliminate current and future supply chain disruptions.
  • Supply chain failure is the No. 1 reason a company is having issues in start-up or restart activities.
  • Adjusting product mix and production set-up is a struggle.
  • Lean training and learning is difficult outside the facility “Gemba”

Focused on cost, some companies furloughed or laid off their lean teams. This leads to significant impact across the organization, often requiring executive attention to resolve emerging network problems. Losing the process visibility provided by these experts can lead to costly misalignment across your existing network and in any future supply chain adjustments.

Problem Solving for Inventory Management, Network Changes 

Looking deeper at these trends, some of the specific emerging problems can be resolved through the total supply network awareness your lean expert maintains. 

Inventory management drives the biggest questions manufacturers encounter as they reset to serve a new normal. Common inventory problems in our assessments of  manufacturers include:

  • Too much of it, not balanced or not accurate.
  • Too much of the wrong inventory for the manufacturing product family mix.
  • Not enough of the correct inventory to manufacture replacement parts and service clients.
  • Never adjusted parts inventories for major equipment repairs.
  • Single sourcing from Asia, Europe, etc.

Losing the visibility of your supply chain expert can quickly impact your transportation cost, especially in a volatile environment following a significant disruption.

Organizations that scaled back their lean team during COVID-19 experienced common outcomes:

  • Quickly lost awareness to inbound ocean transportation and ensuing TL freight moves
  • Unprepared for spike in air freight costs for productions and parts inventory
  • Increased costs such as detention fees resulting from misaligned lead times and production planning
  • Reduced capacity for problem solving 

In the “old” normal environment, while your lean resources maintained process awareness required to exert continuous improvement, ongoing training also offered perspective for global practices that are applicable within your organization. Losing access to those resources – usually provided on-site – impedes your ability to evolve your processes.

Leverage a Master Partner to Evolve Processes

There is no doubt that a loss of process monitoring inside the operational environment leads to reduced visibility. Lean operators need to be in the Gemba to be most effective.

In a quarantine or remote environment, it is not always possible to have that consistent on-site presence – but, you don’t always need it. Some organizations have achieved success with lean supply chain teams of two that maintain social distance and COVID-19 protocols. While this has slowed Kaizen work, there has been success, it just takes longer than planned. As a positive outcome, lean leaders have executed administrative items for each Kaizen, a process that can be carried forward.

A problem solver’s mentality supports these types of in-the-trenches adjustments, and they are vital not only to your disruption response, but to the ongoing evolution of your supply chain. We offer our clients access to that mentality on an ongoing basis, using supply chain data analysis to provide awareness of emerging improvement opportunities.

At the same time, we offer organizations the ability to develop their own internal lean expertise. While protocols of a contact-conscious environment can limit on-site activity, the power of modern technology not only supports classroom-like digital learning, it also grants virtual visibility on par with physical presence.

For more information about invigorating your organization’s supply chain capabilities to support reshoring or other new practices for a new normal, schedule your lean supply chain consultation today. Whether you want to bolster the expertise of your internal resources or plan and design a supply chain network suitable for serving your customers tomorrow, we apply our mastery to help you establish efficient processes that control cost and improve service.

Plan, Adjust, Communicate with Data Visibility

Shippers with good visibility into all aspects of their supply chain – including suppliers for multiple tiers – can build resilience and agility to lessen the impact of disruptions like global pandemic, natural disaster or political upheaval.

Data visibility, however, is just one piece of the puzzle. Your ability to act on that visibility is the key.

Drive Network Improvement with Data Visibility

Supply chain leaders around the globe are basing immediate action on real-time supply chain information – often captured through emerging supply chain technologies.

According to a recent Oxford Economics survey of 1,000 supply chain leaders, 49 percent – the top 12 percent of respondents – can capture real-time data insights and act on them immediately. Of those surveyed, 51 percent use Artificial Intelligence and predictive analytics to capture information. Although more than 75 percent of respondents recognize the importance of visibility into sustainability practices of their organization and suppliers, few have visibility into either.

While those leaders may realize new efficiencies in tactical execution, truly developing a strategic plan for procuring services and serving customers, requires more than a customized transportation management system.

Visibility End in Mind: Plan, Adjust, Communicate

You can know where to find the load, the inventory or the vendor, but you need technology, tools and talent to execute three steps integral to monetizing that information into cost savings or enterprise growth:

  1. Supply chain visibility is vital to initial network design, as well as contingency planning that may be required during an era of disruption.
  2. Supported by a contingency plan or evidence-based analysis, visibility empowers tactical operators and executive leadership to adjust their strategy to mitigate risk or seize an opportunity.
  3. Close the loop by communicating those adjustments to customers and supply chain partners, and enhance experiences while controlling costs across your supply chain.

Ultimately, visibility into your end-to-end supply chain helps you understand how to pull different levers across your network and increase the return on investment of the whole supply chain.

Real-Time Data vs. Real-Time Access

There’s a big difference in real-time data and real-time access, the latter can be far more valuable because allowing data to solidify can increase accuracy. The most important real-time data is track and trace. Although from the standpoint of being actionable, there is likely limited actions that can be taken to impact it other than communication.

There’s a balancing act between the information you have and the amount of lag time required for the information to be validated and integrated across the reporting. The length of time the data needs to “soak” depends how you intend to use it. You want to be able to correct performance before it gets out of hand, but at the same time you don’t want to make decisions based on incomplete data.

For instance, bidding on an LTL shipment in the TMS, you don’t want your financial reporting to reflect cost until the carrier has invoiced with any additional accessorials applied. Real-time access to your latest data gives you the power to identify trends so you can validate or eliminate services for improved cost control.

Mastering Data Visibility

Deep, multi-layered visibility is a fundamental ingredient in elevating your supply chain to its optimal performance. Solutions for achieving that visibility are widely available, but none deliver greater supply chain mastery than Transportation Insight.

We build personalized solutions that give you visibility to rate savings, optimization opportunities and behavioral changes across the organization that reduce cost and can fund your initial start-up in the process. Executing in those areas, our team leverages transportation technology tools to improve the flow of data to drive ongoing process improvement that generates waste reduction, improves equipment utilization and protects profit margins.

Master visibility across your supply chain with our free resource “Mastering Your Supply Chain: Layers of Visibility.”  Download it today to access the information you need to improve service and achieve monetary savings.

Business Objectives Determine Supply Chain Visibility Needs

However, in the wake of a global pandemic where both short- and long-term effects are still emerging, there’s limited value in a rear-view look. This is especially true as North America emerges from a stay-at-home state. Organizations need a rear-view look, as well as in-depth awareness of current activity and the financial implications. Add contingency scenarios to requirements for companies pursuing supply chains that can support the emerging “whack-a-mole” recovery where product demand and service requirements vary widely for customers across different geographies, depending on ebbs and increases in COVID-19 infection and business closure.

COVID-19 brought greater attention to the value of end-to-end supply chain visibility. Solutions for achieving that visibility are widely available, but not all solutions are equal. And not all visibility is the same. Your business objectives determine the level of visibility you need to make the best decisions.

What is Supply Chain Visibility?

Supply chain visibility means different things to different people. It covers everything from the physical “Where is my shipment?” to the virtual, like “Which customer/SKU combinations are profitable?” Depending on your role in an organization, you may be more concerned with the operational aspects of visibility or the more strategic. Either way, you need the information you need when you need it.

Beyond physical and virtual visibility separation, there’s the difference between real-time data and real-time access to data. When it comes to data, there is a lot of it, and it is coming from a growing diversity of sources – often separated within your organization by operational and functional silos.

An expanding list of technology-driven solutions offer varying degrees of visibility, and you can gain improved supply chain clarity through internal efforts and external partners. In weighing these options, it is important to consider:

  • Which solution is best for your business objectives?
  • How do you leverage information in business decisions?
  • What investments provides the greatest return?

Supply chain visibility can be complicated. It doesn’t have to be.

Peeling back layers of visibility, you gain an understanding of the information you need to plan and execute your day-to-day activities as well as adjust your strategy; react to changes that impact performance; and enhance your service to partners and customers.

Visibility, Mapping Key Disruption Planning and Continuity

The U.S. Armed Forces are a role model for logistics, and planning is critical to the military’s risk management focus. To quote General Dwight Eisenhower “Plans are useless, but planning is indispensable.” Companies have to be in a continuous planning mode, as we move through the recovery to account for these shifts in demand.

Effective planning, like military leadership during crisis, relies on visibility to a single source of information. When you have to go to multiple places to piece a story together, it takes time, and time can be costly.

Organizations that map their end-to-end supply chain create one foundational information source that can support business operations through disruption. As noted by Dr. Yossi Sheffi, director Massachusetts Institute of Technology Center for Transportation and Logistics, this requires supply chain mapping that goes beyond identifying company suppliers. It requires physical locations of supplier plants and warehouses. “For large and complex enterprise with thousands of suppliers around the globe, mapping is a massive exercise that cannot be done on the fly,” he says.

Likewise, mapping cannot be accomplished without awareness to all activities across your supply chain.

Mastering Supply Chain Visibility

Deep, multi-layered visibility is a fundamental ingredient in elevating your supply chain to its optimal performance. We created Mastering Your Supply Chain: The Layers of Visibility to help you uncover ways that your supply chain information can have a transformational impact on your bottom-line performance and your customer service.

Inside differentiate visibility options in the marketplace to help you identify solutions that best fit your needs. Read it today to learn more about how individualized technology solutions give you visibility to rate savings, optimization opportunities and behavioral changes across the organization that reduce cost.

Disruption – Not Necessity – Is the Mother of Supply Chain Improvement

However, the novel Coronavirus outbreak created major supply chain disruption which affects all companies and industries. In the interest of safety, a whole new set of rules govern how we do business. Some of those trends coming out of this include:

  • Rules on social distancing, mandating how many people can be in a space at a given time.
  • Truck and delivery driver safety suggestions for transporting goods from the warehouse to the end customer.
  • A spike in e-commerce orders and home deliveries across industries, including grocery and consumer packaged goods.

These changes have one thing in common: They all rely on a strong and resilient supply chain. Without a constant flow of inbound components and finished goods, they can’t go from origin to the warehouse, and then outbound to the end customer.

This is why it’s critical to master your supply chain now. Understanding where components come in, measuring key performance indicators, and cutting out waste is the only way companies can get the insight they need to drive future invention from supply chain disruption.

Excelling During a Period of Infrastructure-Led Disruption

When the novel Coronavirus began spreading in the United States, we saw a lot of supply chain disruption. The truth is we may not be done. A recent Gartner analysis suggests we could see three different scenarios play out as the country re-opens for business: a short-term disruption leading to a quick recovery, a long-term disruption leading to protracted recovery, or a resurgence of COVID-19 cases leading to one of the two other scenarios.

Because we don’t know which recovery to expect, your supply chain leaders need to understand infrastructure and operations weaknesses and opportunities now. There are many different ways to do this, including supply chain mapping and modeling, identifying new supply partners closer to your facility, and identifying the best transportation networks to achieve your customer service goals.

So why invest in technology and analytics today? Historically speaking, companies who invest in their processes and people during disruption experience a faster recovery than those who don’t. More importantly, a disruption allows you to view your operational plans candidly and determine how the combination of leadership and talent, technology, business mission and values, and process framework can improve your supply chain.

As we see from the Gartner figure above, infrastructure-led disruption can directly lead to new innovations within your supply chain and network plans, but only to the extent your talent drives them. Thus, disruption – not necessity – is truly the mother of invention.

Where Do We Start Driving Infrastructure-Led Disruption?

The first step to creating long-lasting change starts inside your company. Now is the perfect time to start having those conversations because leadership teams were talking about making lasting change well before COVID-19 became part of the common vernacular.

2019 survey of boards of directors by Gartner revealed those leaders anticipated a complete transformations of their infrastructure and operations by 2025, with the core goals being improving maturity, driving quality and creating more agile supply chains. The current situation gives leadership teams two options: either attempt to improve within the legacy framework, or use infrastructure-led disruption as an impetus to improve operations.

Trying to improve a legacy model may not work for several reasons. If you can’t answer these questions, any attempt to repair a broken system could create more problems:

Going through a supply network analysis will not only answer these three questions, but give you the analytics you need to make better customer-focused decisions. By going through the exercise and continually improving infrastructure and operations through regular analysis, your team can drive true cost savings and customer experience improvement, leading to improved service and earning more orders over time.

Start Your Infrastructure-Led Disruption Today

Your leaders don’t need to approach infrastructure-led disruption on their own. Transportation Insight has the tools and technology your team needs to drive innovation, combined with the insight into thousands of supply chains across industries. With our expertise, our teams can help you understand where your supply chain is falling short, and where you can drive improvement both through disruption and into recovery.

Our team works through the lens of your business perspective, helping you unlock value from your supply chain and creating efficiencies into the future. Contact us today, and let us help you use disruption a tool to drive long-lasting success.

From Micro to Macro: The Effect of Social Distancing on the Supply Chain

In restaurants, they are moving tables and putting a hard maximum on the number of people allowed inside. Although the return of patrons generates badly needed revenue, moving tables apart means less diners, resulting in less money coming in the door. In order to maintain a peak level of performance, those restaurants need to turn tables and customers faster to achieve the same amount of revenue.

A similar concept will be introduced into the supply chain, as factories, warehouses and distribution centers come back online. Employees will need to consistently stay six feet apart, forcing managers to figure out how to keep up productivity while adhering to guidelines. Are you prepared for the change?

The Newest Constraint in the Supply Chain: Social Distancing

There are several supply chain constraints that most companies can plan around. These include capacity, throughput, and on occasion, emissions.

Using an Extended LEAN approach, managers and facilities are encouraged to reduce the amount of time and distance per process. This reduces waste throughout the production line, improving efficiency and ultimately providing more output with the resources already in place.

But due to social distancing, there’s a new constraint supply chain managers must deal with: the maximum amount of physical distance you can remove from production. Some of these situations are easier to plan for: Truck drivers can stay in their cabs, while using e-signatures for receipts.

Other conditions are going to be much more difficult to apply: In the interest of keeping employees healthy, they must consistently stay six feet apart. Companies now have to determine what that means for receiving, production and shipping. If employees have to maintain a safe distance, how does that affect their critical daily operations? Some companies say they are experiencing a 40 percent decrease in capacity due to the social distancing protocols.

Social Distancing Extends From the Facility and into the Network

The physical plant isn’t the only stakeholder affected by social distancing. The impact of lost production and capacity also extends to your logistics network.

If your output is slower due to social distancing, it can have a ripple effect on everything from loading trucks and time-in-transit to service guarantees. Capacity decreases mean it takes more time to load trucks and impedes trucks from moving freight from point-to-point. That cuts into your bottom line.

From there, the issues fall like dominoes. The late truck has more time on the dock, so your freight is arrives at its destination later. When it does, there could be a delivery failure due to a closed dock or a receiver bound by rules prohibiting deliveries outside a set window. Additionally, freight bills could increase because transportation providers are unwilling to wait a long time for freight loading and unloading. Your carrier partners might not be able to meet service times because of your approach to social distancing.

There are ways to approach this that will help your business move forward. Once the impact to individual facilities is determined, it’s possible to reconfigure your logistics network to meet the current capacity needs. Some of the options your team can explore include:

  • Do you need to reduce inbound material shipments until capacity can increase?
  • Should you adjust your outbound schedule to ensure you can maximize transit lanes?
  • Can your team or warehouse be more efficient in managing inbound and outbound freight?

Having a Partner to Help You Adjust for Social Distancing

It’s critically important to have a partner in your corner that not only understands how to configure logistics operations using tried and true techniques, but how to translate them to the broader supply network to balance cost, service and risk. While technology plays a key part into this transformation, these solutions need to be approached with a holistic solution in mind.

As we reopen facilities and plan for the “new normal” for the foreseeable future, it’s important to solve these problems now. Because we have no idea when social distancing practices will ease, the problems you face now won’t go away on their own. Instead, solving them will help you become a “shipper of choice” as activity ramps up. You can also maintain profitability and positively plan for the future.

In this race, Transportation Insight is your complete partner in success. Our technology tools allow you to decide between the best carriers and networking options.We can also help you drive success through supply chain mapping, optimization, and applied Extended LEAN strategies with social distancing in mind. Because we’ve worked through thousands of supply chains with hundreds of companies across industries, we know how to apply the best practices and wisdom around your current and future strategies.

Partnership matters – and Transportation Insight is prepared to help you now and well into the future. Contact us today to get started with a consultation on how your facility can manage productivity despite social distancing.

7 Pitfalls Imperil Indirect Spend Management

Indirect Spend analysis requires different processes and technology knowledge from those of direct procurement. There are more stakeholders, segment complexities, and varying levels of expertise at the suppliers. Some items are commodities, and others are specialized for a business unit and rely upon a continually changing and improving set of technologies.

Efforts to improve Indirect Spend management relies on a complete understanding of the wide variability in factors that affect the cost of an item, the cost of procurement and issues that arise for vendor and buyer .

7 Variables Complicating Indirect Spend Management

  1. Low Average Spend: The product volume is generally on the smaller side because of the wide assortment of product and service categories and a large number of suppliers. In this case, the procurement group is unable to coerce better pricing or terms during negotiations with suppliers.
  2. Frequent low-volume purchases: Often, the frequency of purchases of small individual values, makes indirect sourcing difficult and resource-intensive.
  3. Maverick/Uncontrolled/ Non-negotiated Spend: Maverick Spend is the purchase of legitimate goods but using unauthorized buying arrangements or unapproved suppliers. Companies understand the value of robust management of direct spend, but may not recognize the benefits of managing Indirect Spend. The fact is that cost savings for indirect procurement does not originate from a specific bill of materials, as with direct procurement. Often, companies underestimate the Indirect Spend totals and the potential cost savings. Indirect Spend purchases usually are not covered by a contract negotiated in collaboration with a professional procurement group. Items purchased outside of an agreement could be a one-time purchase of office supplies, or travel expenditures, or expenditure on critical ad-hoc technical troubleshooting services. These costs add up over hundreds of items, categories, suppliers, and transactions.
  4. Driven More by Internal Stakeholders: Indirect procurement professionals may not have any mandate over an internal stakeholder’s budget. Unlike with direct spend, the procurement group has less say concerning Indirect Spend. Internal stakeholders hold on tightly to their approved budget and spending authority. Also, many of the expenditures require in-depth industry knowledge and experience to specify a product or service. These factors and this complexity make it more difficult for the procurement function to control indirect spending. The company’s procurement team must act as an internal advisor, influencing decision-makers about optimizing spend and getting more from suppliers.
  5. Hard to Evaluate: There exists hundreds of categories, adjacent categories, item suppliers and distributors, and each mandates an exceptional understanding to procure cost-effectively and also with an eye on long-term value to the company. Each of the tens of thousands of suppliers invests in a sales team assigned to each buyer. Motivation for those sales teams may not always be in the buyers’ best interest.
  6. Measuring Suppliers: It can be more challenging to measure the quality of indirect goods and services. There might be metrics for individual vendor performance, but there are few industry standards against which to benchmark those metrics. In some cases, delivery of indirect products and services is not in a company’s ERP system, so tracking contract renewal and evaluating vendors can be spotty. 
  7. Requires Diverse Experience: Purchases are as diverse as safety products, marketing software, maintenance items, and electricity supply. This breadth of categories requires a procurement group with expertise and a willingness to learn the full range of products and services.


Indirect Spend Management Requires Broad Capabilities

Organizations working to manage Indirect Spend must maintain a variety of skill sets within the operational areas tasked with overseeing these critical budget areas. 

Facing these diverse needs, companies are often challenged to maintain the level of expertise that a trusted procurement partner can often provide:

  • Professional purchasing experience or training
  • Broad category expertise
  • Project and change management
  • Influencing, engaging and advising budget-owners (stakeholders) across the company
  • Specification, facilitation, negotiation, and supplier management
  • Data analysis, creating business insight from raw data
  • Technological know-how
  • Recognizing supply risk from issues like constraints on industry capacity, regulation, or rapidly rising demand
  • Acknowledging the market’s preference for sustainability and the ability to cost-effectively comply
  • Understanding of current market conditions and market pricing trends

Strategic Sourcing Supports Procurement Decisions

Buyers are not all the same. Many procurement decisions have an economic buyer, the person who makes the money decision, and a needs buyer, the person with a job-to-be-done.

Guidance from a procurement group can help meet the requirements of both of these buyer-types. Proper specification of the product or service delivers what conforms to the need, while aggregating volumes and dutiful negotiations keep prices low.

By employing a Strategic Sourcing mindset, these procurement experts look across all activity to address planning, supplier qualification, item specifications, technology advances, training, support, outsourcing, contract negotiation and periodic contract review. Strategic Sourcing identifies the lowest total cost − not just the lowest purchase price. It embraces the procurement lifecycle, from specification to payment.

Strategic sourcing often creates a close, partner-like relationship with a supplier to meet the needs of all buyers, and in turn, improve service to end customers. For more information on employing a strategic sourcing mindset to control Indirect Spend costs through improved procurement practices, download Transportation Insight free guide, “Uncover Indirect Spend: Control Cost with Strategic Sourcing.”

Indirect Spend: Harvest Savings, Improve Competitive Advantage

Why does Indirect Spend matter?

A. Cost: Up to 40% of a company’s expenses might be Indirect Spend.
B. Savings: Optimizing procurement can save up to 25% on Indirect Spend line items.
C. Profit: Improving procurement strategies can deliver double-digit return to your bottom line.

Management of Indirect Spend is a big, challenging job, but the transformative effect on the business justifies the effort. Lower costs are one benefit. Rigorous specification, supplier qualification and strategic procurement processes can improve the products and services used by the company in ways that significantly improve the business.

Getting a strategic procurement effort on track requires persistence and a success-focused action plan. These concepts and tips will help you get started managing compliance, controls, and costs.

What is Indirect Spend?

Indirect spend items are purchases of goods and services not directly incorporated into the final product or service offering of a company.

Indirect Spend categories include Accounting, advertising, marketing, consulting, travel, IT, telecommunications, HR-Facilities, Utilities, MRO (maintenance repair and operations), capital goods, office supplies, furniture, food services and commodity packaging supplies. Indirect Spend in many of these categories can be critical to the company’s success.

Purchases justify a procurement group that can lower costs in the short-term and understands how supplier relationships can generate value for the company.

Gain Control & Harvest Savings

To reap savings from Indirect Spend, companies must strategically manage the processes and people involved. This management requires many collaborative efforts within a company and between suppliers, internal buyers, and your procurement team. Indirect Spend includes everyday items but also complex services. As your Indirect Spend management improves, your evaluation of suppliers becomes longer-term and more strategic.

To do a good job managing indirect spend, a business must commit to:

  • Executive sponsorship
  • Processes that identify, categorize and aggregate items
  • Systems that streamline and improve procurement
  • Support to select qualified suppliers and negotiate sound contracts
  • Collaboration between procurement professionals and departmental buyers
  • Monitoring for pricing, risk assessment, and changing market conditions
  • Measurements and visibility

You can see from this list how efforts to contain and control Indirect Spend are comprehensive and companywide.

Implement New Processes to Track Spend Better

Historically, companies put more focus on direct spend, which are the costs that go into finished products. Indirect spend categories can be more fragmented, numerous and diverse. Purchasing authority for Indirect Spend items is traditionally assigned to remote locations, business units, departments or internal stakeholders in a group, such as maintenance, operations, legal, HR or marketing. For these managers, relationships, proximity or speed counts more than cost savings.

Additional Tactics to Improve Indirect Spend:

  • Invest in Automation & Technology.
  • Partner, Hire or Train Procurement Professionals.
  • Involve departments in creating processes.
  • Get an optimal supplier portfolio.
  • Move toward long-term savings and value creation.

Get outside consulting if you need help to select technology, develop strategy, implement new procurement processes, pick qualified suppliers, or negotiate better, longer-term contracts. Transportation Insight offers free information and discussion about how to analyze your spend, put together a plan, assess the current situation, establish cost-saving processes, conduct strategic sourcing and save money.

Identify Items and Create Categories

A complex task is identifying Indirect Spend in your company in terms of items and costs. Reviewing payables (Accounts Payable) can offer the clearest listing of suppliers, items and costs. This review requires looking into spending by locations and departments to find the total for each item and the current supplier.

These steps can start bringing indirect expenditures under control:

  • Identify items and suppliers via Accounts Payable (AP).
  • Assign items to categories.
  • Review specifications and newer technologies, materials, or offerings.
  • Aggregate Indirect Spend item quantities into fewer, larger orders with preferred suppliers.
  • Implement company-wide contracts that reap volume discounts, favorable terms, and responsive suppliers.

Once you identify all the items, you can achieve success by aggregating similar items into categories that create larger bid packages for higher discounts. Also, there are opportunities for more substantial discounts, higher-volume deals open opportunities for supplier-managed inventories and multi-location ordering, replenishment, or delivery.

When items are aggregated and categorized, you may find opportunities to keep smaller quantities in stock, reduce the total number of items purchased, or reduce the number of supply closets.

Tasks, Goals & Metrics For Long-Term, Incremental Improvement

In the beginning, better control of Indirect Spend is different from the end game. After processes and suppliers are in place, the company needs to measure success and compliance. These measurement tasks need the right KPIs for suppliers and internal processes. Tasks, such as periodic budget reviews and training, are necessary. The company must build on success to reach higher towards the greater rewards from Strategic Sourcing and partner-like supplier relationships that offer an exceptional level of higher value.

  • Measure Cost Savings & Supplier Performance: Technology can provide real-time 
    visibility into purchase transactions to the line-item level, which helps to stay on track with ongoing spend management.
  • Set KPIs for Suppliers: KPIs can be used across suppliers, measuring contract compliance, customer satisfaction, cost competitiveness, service, support, and continuous improvement.
  • Review Budgets Regularly: Periodically review for savings opportunities under the revised procurement process. Ongoing cost review is part of a continual improvement effort. Also, look for ways to improve your new procurement process.
  • Create Lasting Value & Competitive Advantage: Ultimately, your procurement strategy should shift from the initial cost reduction phase to a value creation phase for the company.
  • Strategic Total Sourcing: Strategic Sourcing identifies the lowest total cost, not just the lowest purchase price. It embraces the procurement lifecycle, from specification to payment. Strategic sourcing is a procurement process that offers continual improvement of the purchasing activities of a company. Strategic sourcing often creates a close, partner-like relationship with a supplier to meet that customer’s needs better.
  • Educate Staff on Indirect Spend: Your procurement group (purchasing group) and budget owners from each department should become acquainted with the goals of your Indirect Spend cost-saving initiative.

Looking through these tasks, we recognize the importance of Indirect Spend management to the long-term profitability and competitiveness of the company. The efforts and organization-wide collaboration needed to attain results are apparent. Excellence in supplier management through Strategic Sourcing changes the basis of competition for a company and requires a continuing commitment to improvement in supplier evaluation, supplier relations and contracting.

Optimizing Indirect Spend Transforms Companies

By combining tactical procurement processes and strategic sourcing, companies realize savings in Indirect Spend that goes to the bottom line. As companies improve buying processes and view supplier relationships over the longer-term, the value of these relationships goes up along with the benefit to the company.

Businesses know that changes in technology, regulation, and markets alter the playing field for the company and that its ability to adapt to lower-cost and better-performing solutions is critical to success. For more information on reducing expenses by improving the management of Indirect Spend, watch our webinar, “Uncover Indirect Spend and Reclaim Lost Profit.”