Here’s part of some spam I recently received from an e-procurement software company:

… Many companies are struggling to understand how today’s economic climate will impact spending, jobs and business viability. And if you are a purchasing professional, you are tasked with the additional challenge of cutting costs and saving money throughout the organization.

Below are just some of the questions we are frequently asked and some ideas on how you can address these challenges.

Question: Beyond personnel costs, where can costs be cut?

Answer: There are really only two options to generate savings: you can negotiate better prices for what you buy, or you can simply buy less. Often by setting aggressive goals and budgets, you can drive the organization to adopt a more penny-pinching attitude, which translates into overall cost savings for the organization since people will not be spending as freely as they might have originally.

Certainly logical. You can try to squeeze more blood out of your vendors. It’s unclear these days how much is there to be had, and a financially strapped, anemic vendor means some additional risk in your business. In addition, you can threaten the troops every Monday morning: make less coffee, and when you feel you must make coffee, use the filter twice!

But isn’t there another path to consider here? Call it stewardship. Is your company a smart owner, distributor, and consumer of the products it buys? Many are not, especially when it comes to indirect goods in large, complex, highly distributed organizations. The proverbial $74 bottle of Windex cost only $2 to buy, but $72 to requisition, receive, store, distribute and consume. Why?

Let’s discuss one factor: the curse of indirect goods supplier-sponsored technology.

The indirect goods supply chain for most companies has traditionally been of secondary importance to its direct goods supply chain.  Because direct goods affect the competitiveness of the product or solution, they have long been scrutinized by procurement professionals. In the ’90s we saw a small revolution as companies like General Electric and GM saved billions by evaluating all elements of their direct goods supply chain.  Sometimes that led to greater vertical integration and sometimes it led to more outsourcing.

The indirect goods supply chain, however, has been a different story.

Typically, since it has not been a high priority for many companies, employees, departments and even entire locations have been allowed to procure indirect goods as needed from the vendors that they choose.  The more distributed the business, the more fragmented the vendor base from which they procure.  Many times this resulted in hundreds if not thousands of vendors.

Many companies have now realized that the total spend can be large.  Accordingly, they have assigned procurement teams by category of spend (i.e. print, office supplies, jan-san, promotional products, etc.) to improve control in these  respective categories.  This is called the “Product Category” approach to indirect goods procurement.  For each targeted spend group, companies consolidate the vendor base by aggregating the spending and offering the entire category to a single vendor with the lowest price.  Large multi-year purchasing contracts were offered to vendors that offered the lowest price and the best suite of value-added capabilities.

Naturally, as all commodity-based business models demand, these providers are constantly in search of value-added services that enhance their offerings products and differentiate them from the competition. In order to ease the procurement process for their customers, many offer online ordering technology. There was mutual benefit. The buyer got ease of ordering with the (at least perceived) ability to extend the solution across a highly distributed enterprise, and the vendor got deep hooks into the buyer.

Buyers are discovering that using vendors’ on-line ordering systems comes with consequences. For example, the buyers’ processes become hopelessly entangled with the vendors’ processes. In fact, supplier-sponsored ordering systems are often able to get upstream and prevent the buyer from ever adopting a single, streamlined buying process and achieving zero switching costs. Which in turn is why incumbents rarely get displaced.

Moreover, even with just a few vendors, a company still has a few ordering processes with a few sites.  Not only is changing vendors hard, but adoption by the extended enterprise falters because there are too many ways to buy. An overdose of convenience is no longer convenient, in other words. Four51 is working with a company that had 71 separate supplier-sponsored buying sites. Employees won’t tolerate that, so maverick spending ensues.

So, as far as cost of ownership (versus cost of acquisition) is concerned, it’s not too surprising that Accenture concluded that 85% to 90% of buyer workflows associated with indirect goods were inefficient, and could be streamlined based on providing a single buying experience across the extended enterprise.

Pay attention to pure product cost, by all means. But don’t overlook the costs of ownership, and the role that suppliers can play in entrenching those costs.

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