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Best Practices for Defining and Managing Services Spend Category
the Services Spend Category Presented By: H. Lee Muller, C.P.M.
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OVERVIEW OF LEARNING The Growing importance of Services GDP
Employment Picture SG&A Evaluating your Current Situation Services In your Company Collecting Data What to include? / What not to include? Initial Subcategory Assessments Developing a Strategy for Services Services e-Procurement Implementing a Strategy for Services Managing and Continuously Improving Services Suppliers
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BIO Name: Hazer Lee Muller Experience Education Certifications
Georgia-Pacific Corporation (2001 – Present) Director of Services Honeywell (AlliedSignal) (1985 – 2001) Regional Materials Manager, Operations Support Global Sourcing & Transitions Mgr. Various Supplier Quality assignments Education Bachelor’s Degree in Economics (Montclair State University, NJ) MBA Graduating Spring 2003 (Colorado State University) Certifications Six Sigma Black Belt ASQ-C.Q.A. ISM-C.P.M. RAB Certified ISO9000 auditor
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Fortune top 10 Companies then and now
1954 1. General Motors 2. Standard Oil (NJ) 3. U.S. Steel 4. GE 5. Swift & Co. 6. Chrysler 7. Armour 8. Gulf Oil 9. Socony-Vacuum Oil 10. DuPont 2001 2. Exxon Mobil 3. General Motors 4. Ford 5. Enron 8. Chevron Texaco 10. Philip Morris 1. Wal-Mart 6. GE 7. CitiGroup 9. IBM Source: Services companies are growing in Economic importance and Impact
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Services as Component of GDP
Source: GDP $381 Billion GDP $9,872 Billion Services have more than Doubled as Component of GDP since 1954
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Employment in Services Vs Manufacturing 1991 - 2001
40,907,000 17,695,000 Source: Source: In ten (10) years from 1991 to 2001 jobs in the Services sector increased by 12,634,000 (45%) The manufacturing sector lost 711,000 (-3.9%) jobs Services’ increasingly important economic role reflected in employment Also
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SG&A / Revenue According to an annual CFO magazine survey, cutting one percent from SG&A will tweak earnings by 2.3 percent on average. In this survey, the average net profit margin for companies is 5.06 percent; so slicing SG&A by one dollar has the same bottom-line effect as boosting sales by thirteen dollars. Source:
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SG&A / Revenue Example:
One percent in SG&A translates to: 17,197,000,000 x 1% = 171,970,000 171,970,000 / 7,713,000,000 = 2.2% in Net Income IBM ROS is 9% (7,713,000,000 / 85,866,000,000)
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SG&A / Revenue / Various Industries
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Step I Evaluating your Current Situation
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Universe of Indirect Materials and Services Subcategories
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Technical/Engineering Dept.
Sources of Preliminary Category Information Accounting Dept Purchasing Dept Technical/Engineering Dept. History of purchases (G/L) Unit prices by suppliers (invoice files) Volume purchased by supplier (A/P) Seasonality of purchase (A/P, G/L) Information on current and past suppliers Unit prices Price and pricing bases Supplier characteristics Capacity Quality Location Term of payments Supplier constraints Product specs Potential suppliers Spend Analysis Software Product specs Potential suppliers (name, capabilities, quality) Current supplier (capability, quality, certification) Bill of material structure Possible alternative products Sales Dept. Manufacturing Dept Suppliers/Others Seasonality of end product Sales Dept. requirements to Purchasing Dept. (local, content, advantaged suppliers…) Target sales markets Incoming quality history Volume by site Seasonality of usage Volume history Pricing Service performance Technical specs
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Potential “Services” subcategories Management Level Segmentation
Scoping Services for Your Organization Potential “Services” subcategories Category Structure SG&A Indirect Materials Operation Support MRO Services Management Level Segmentation Company level SBU level SBE level Site level Scoped Category Company SBU SBE Site
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Potential “Services” subcategories
Things to Consider when Scoping the Category Structure Things to Consider: Industry Geography Procurement Organization Structure Functional Organizations structure Resources Skill Sets and Expertise Potential “Services” subcategories Scoped Category Category Structure SG&A Indirect Materials Operation Support MRO Services
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Management Level Segmentation
Things to Consider when Segmenting the Category Things to Consider: Opportunity for leverage Used by all segments Used in all regions Size of Spend Geography National Potential Regional Potential Where does the expertise and experience for the category reside? How is the subcategory currently sourced? SBU Scoped Category Company Site SBE Management Level Segmentation Company level SBU level SBE level Site level
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Scoped, Segmented Services Subcategories
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Company Level Segment Services Subcategories
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SBU, SBE, or Site Level Segment Services Subcategories
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Step II Initial Subcategory Assessments
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Initial Subcategory Assessment
Initial Evaluation of Current Situation Gather Initial Supply base Intelligence Assess: Issues / Barriers Opportunities / Risks Current supplier(s) Subcategory spend Functional area ownership Recently sourced? Contract(s) Contract expiration dates Diversity Opportunity? P-card opportunity Subcategory description
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Initial Subcategory Assessment Summary 4up
Subcategory Status: Prime - Addecco Kelly, Olsten, CDI, Manpower Not sourced subcategory includes: 1) Light Industrial, 2) Clerical 3) Professional Contracts expiring Q32003 Diversity Opportunity: First and Second tier P-Card Opportunity: Investigate
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Initial Subcategory Assessment
Initial Evaluation of Current Situation Gather Initial Supply base Intelligence Assess: Issues / Barriers Opportunities / Risks Current supplier(s) Subcategory spend Functional area ownership Recently sourced? Contract(s) Contract expiration dates Diversity Opportunity? P-card opportunity Subcategory description Major suppliers Overall size of the Industry Industry trends
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Initial Subcategory Assessment Summary 4up
Subcategory Status: Prime - Addecco Kelly, Olsten, CDI, Manpower Not sourced subcategory includes: 1) Light Industrial, 2) Clerical 3) Professional Contracts expiring Q32003 Diversity Opportunity: First and Second tier P-Card Opportunity: Investigate Market data Note key: D = Diversity, IN = International, N = National, R = Regional Industry has experienced some consolidation Adecco / Olsten merger 1999 Alert forms partnership with Adecco in 1997 Alert Staffing filed for chapter 11 protection in July 2002 Sluggish economy has impacted this industry $94 billion Industry world-wide 16 providers represent 29% of US Market (~7000 providers in US) Sources: Staffingtoday.net, SI Industry report Major Providers Manpower (IN) Addecco SA (IN) - AOC - AJILON -TAD - LEE HECHT - Jonathan Wren - Adecco Technical CDI (N) Kelly Services (IN) Olsten (franchises) (R) Georgia TEMP (R) Staff Workers (R) Alert Staffing (D) Act I Personnel (D) Personnel Connect (R) NEW SNELL Personnel
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Initial Subcategory Assessment
Initial Evaluation of Current Situation Gather Initial Supply base Intelligence Assess: Issues / Barriers Opportunities / Risks Current supplier(s) Subcategory spend Functional area ownership Recently sourced? Contract(s) Contract expiration dates Diversity Opportunity? P-card opportunity Subcategory description Major suppliers Overall size of the Industry Industry trends Known complexities Known obstacles Regulatory Statutory Political Social
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Initial Subcategory Assessment Summary 4up
Subcategory Status: Prime - Addecco Kelly, Olsten, CDI, Manpower Not sourced subcategory includes: 1) Light Industrial, 2) Clerical 3) Professional Contracts expiring Q32003 Diversity Opportunity: First and Second tier P-Card Opportunity: Investigate Market data Issues / Barriers to Sourcing HR Strategy for Temp labor unclear Internal resource does not currently compete with external suppliers Some pressure to move away from existing agreements with incumbents -- killing credibility within industry Major Providers Manpower (IN) Addecco SA (IN) - AOC - AJILON -TAD - LEE HECHT - Jonathan Wren - Adecco Technical CDI (N) Kelly Services (IN) Olsten (franchises) (R) Georgia TEMP (R) Staff Workers (R) Alert Staffing (D) Act I Personnel (D) Personnel Connect (R) NEW SNELL Personnel Note key: D = Diversity, IN = International, N = National, R = Regional Industry has experienced some consolidation Adecco / Olsten merger 1999 Alert forms partnership with Adecco in 1997 Alert Staffing filed for chapter 11 protection in July 2002 Sluggish economy has impacted this industry $94 billion Industry world-wide 16 providers represent 29% of US Market (~7000 providers in US) Sources: Staffingtoday.net, SI Industry report
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Initial Subcategory Assessment
Initial Evaluation of Current Situation Gather Initial Supply base Intelligence Assess: Issues / Barriers Opportunities / Risks Current supplier(s) Subcategory spend Functional area ownership Recently sourced? Contract(s) Contract expiration dates Diversity Opportunity? P-card opportunity Subcategory description Major suppliers Overall size of the Industry Industry trends Know complexities Know obstacles Regulatory Statutory Political Social Estimate potential benefits Estimate potential Risks
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Opportunity to reduce cost
Initial Subcategory Assessment Summary 4up Opportunity to reduce cost Low High Risk Med Subcategory Status: Prime - Addecco Kelly, Olsten, CDI, Manpower Not sourced subcategory includes: 1) Light Industrial, 2) Clerical 3) Professional Contracts expiring Q32003 Diversity Opportunity: First and Second tier P-Card Opportunity: Investigate Risk Elements: Potential divergence from overall Temp labor strategy? Opportunity Elements: Not Sourced TCO / Make-buy / BV Large, fragmented spend Develop Sourcing Strategy Validate market pricing Market data Issues / Barriers to Sourcing HR Strategy for Temp labor unclear Internal resource does not currently compete with external suppliers Some pressure to move away from existing agreements with incumbents -- killing credibility within industry Major Providers Manpower (IN) Addecco SA (IN) - AOC - AJILON -TAD - LEE HECHT - Jonathan Wren - Adecco Technical CDI (N) Kelly Services (IN) Olsten (franchises) (R) Georgia TEMP (R) Staff Workers (R) Alert Staffing (D) Act I Personnel (D) Personnel Connect (R) NEW SNELL Personnel Note key: D = Diversity, IN = International, N = National, R = Regional Industry has experienced some consolidation Adecco / Olsten merger 1999 Alert forms partnership with Adecco in 1997 Alert Staffing filed for chapter 11 protection in July 2002 Sluggish economy has impacted this industry $94 billion Industry world-wide 16 providers represent 29% of US Market (~7000 providers in US) Sources: Staffingtoday.net, SI Industry report
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Step III Developing a Strategy for Services
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Opportunity to reduce cost
Developing a Strategy for Services Aggregate Risk / Cost Reduction Analysis Opportunity to reduce cost Low High Risk Med Benefits Temp Labor Professional Services Wireless Office Supplies IT Consulting Janitorial Opportunities DeskTops Rental Cars Insurances Subscriptions Waste Disposal Hotels Office Equipment P-Card Relocation Service Uniforms Small Pkgs
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Possible Implementation Waves Alternate Sourcing Strategy
Developing a Strategy for Services (Con’t) Planning and Prioritizing the category Priority Screening - Business Impact - Potential Savings ($ MM) Possible Implementation Waves Wave 1 M Wave 2 Wave 1 $1.25 L $1.00 Wave 2 Wave 3 K $0.75 I D J $0.50 O H Wave 3 N Q C P $0.25 G E S F A B T Low High 1. Ease of Implementing Alternate Sourcing Strategy Drop Note: (1) Size of circle represents total expenditure for the category
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Possible Screening criteria
Things to think about What is the cultural climate within the organization? What is the companies value discipline(s)? Operational Excellence? Product leadership? Customer Intimacy? What are the company’s strategic objectives? Cost control? Sales growth? Earning growth? Diversity? Are there SBU/SBE/Site issues or objectives that should be considered? Specific service issues Specific cost reduction opportunities Specific opportunities
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Possible Screening criteria Con’t
Things to think about: What is the strategic objective of the purchasing organization? Internal process Improvement? Supplier process Improvement (productivity)? - Strong supplier partnerships? Commodity trading? Supplier Alliances? Strategic Sourcing? What are the resources available to work the strategy? Analytic support? Category management? What is the current economic climate? Buyers market? Sellers market? Do unusual opportunities exist in specific categories? Distressed industry New technology
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Supply Strategy Decision Tree (Trident)
Approaches Supply Strategy Decision Tree (Trident) Technically Complex ? High Spend Price Volatility Market Difficulty Strategic Importance Savings Potential Strategic Alliance Close Relationship Partnership Commodity Trading Simple Tender Leverage Relationship Focus Cost Focus Low Yes No
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2002 Services Category Wave Plan Summary:
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Step IV Implementing the Strategy for Services
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Determine Strategic Sourcing Strategies to Apply
Analyze Current Situation Initial GO 1 2 4 3 Assess Supply Base Determine Strategic Sourcing Strategies to Apply Strategy GO Engage Suppliers Execution GO 5 Develop Transition Plan Determine Strategies Gather Information Implement Strategy 6 Manage Supply Base And the Category Strategy is? Leverage and cost reduction focused? Leverage and cost control focused? Relationship and process Improvement focused? Diversity focused? The overall Category Strategy will Set the tone for how you approach the sourcing process
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Managing and Continuously Improving
Step V Managing and Continuously Improving Services Suppliers
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Relationship Management Structured Process Improvement
Analyze Current Situation Initial GO 1 2 4 3 Assess Supply Base Determine Strategic Sourcing Strategies to Apply Strategy GO Engage Suppliers Execution GO 5 Develop Transition Plan Determine Strategies Gather Information Implement Strategy 6 Manage Supply Base Supplier Management Relationship Management Metrics Structured Process Improvement Define Appropriate Management Structure Contract Management Issue Resolution Market Dynamics - suppliers position relative to market New Products,services & technology New suppliers Competitor evolution Pricing relative to market Communication Plan Confirm goals Understand issues & current metrics Create metrics Confirm collection methods Set up review procedure Take action based on metrics Communicate results Set Goals Review progress Communicate results The degree to which these attributes are required is dependent on the category and the supplier
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Supplier Management Risk
Understand Risk/Opportunity Understand risk/opportunity inherent with supplier High Spec Chem Risk Med Insurance Wireless Low Fleet Office Supplies Opportunity to reduce cost (including delivery of savings) Low High
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Define appropriate Management Structure
Relationship Management Supplier Management Define appropriate Management Structure A similar risk/opportunity matrix to the one developed in understanding the risk/opportunity inherent with the supplier can be used to show the appropriate management structure for supplier management. Cross-functional team Steering Team High Risk to G-P Small Team No Steering Team Increasing complexity of process and resources required One person Team not necessary No Steering Team Low Opportunity to reduce cost (including delivery of savings) High Low
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