In this guest post, Procurement Leaders invites Genpact's Anuj Kumar and R. Raghavendra to look at the value on offer for those businesses prepared to adapt their model and develop the capabilities in the often overlooked arena of tactical buying.
While Chief Procurement Officers (CPOs) remain under relentless pressure to show sustainable savings, most procurement organizations overlook the bottom of the spend food chain. This stems from limited resources and the belief that savings percentages and opportunities diminish as spend value decreases.
However experience shows that focusing on indirect spend between $10,000 and $150,000 can actually yield savings of up to 20%. Companies that employ rigorous sourcing processes, specialized expertise and analytics-based change management are leading the way to transformational cost reduction. For instance, a Fortune 500 global security software corporation has notched up to $40 million in savings with a 500%+ return on investment through tactical buying.
Our data shows that in reality, every $100m in indirect spend may represent up to $2m of lost savings when there is a lack of focus on lower-end spend, or what often gets termed "tactical buying".
Effectively negotiating tactical spending between $10,000 and $150,000 can yield 10-20% savings, depending on region, category and other variables.
This is especially true for categories such as IT, services, marketing, facilities, maintenance and repair operations (MRO) and office supplies, which add up to a significant portion of indirect buying expenditure for many companies, especially those that are high-tech. Moreover, this spend is easily addressed as a tail spend and doesn't typically have strong organizational preferences, incumbency issues or risks.
There are several components that contribute to maximizing the opportunity for tactical spend savings. One must begin by realizing the role that category and market intelligence can play not only in identifying and prioritizing the right opportunities, but also in implementing the results.
Companies we've seen reap the benefits of tactical buying typically share three characteristics:
Building these capabilities and realizing value from tactical procurement is possible by effectively implementing an operating model that is characterized by advanced business processes supported by technology systems and analytics, and delivered through a specialized organizational structure. One such model is Global Business Services (GBS), an evolution of shared services where in-house and outsourced operations are orchestrated under a unified—though not always centralized—operating entity. This model "industrializes" operations, providing improved flexibility and an enhanced capacity to run tactical procurement processes at scale.
Tactical buying is an opportunity for procurement organizations to transform the way they approach lower-end spend for game-changing results. As procurement and finance executives strive for cost savings, risk mitigation and compliance, they should reprioritize tactical sourcing and buying.
While these benefits were previously constrained by limited resources, employing an advanced operating model for the related processes—often leveraging an outsourcing partner who brings the right processes, skills and analytics-based change management—can make a decisive difference. With the right partner, companies can achieve up to 20% savings in areas they never previously considered.