Growing Manufacturer Invests in Dynamic New Procurement Function

It's not unusual for fast-growing companies – especially those evolving into a global enterprise – to overlook important, but often out-of-sight processes that could limit growth and profitability later. Typically, this blind spot develops when companies are busy making acquisitions or pouring investment into product innovation, capital improvements, or research and development and see expenses significantly outpace revenue growth.

One of our North American manufacturing clients encountered its blind spot during a period of rapid growth fueled by multiple acquisitions. Although annual sales were advancing toward $6 billion – marking a growth rate of 130 percent over six years – the organization had nevertheless suffered from unexpected expenses and a sizable drop in stock price.

Looking for a way to reduce SG&A expenses, the company’s Director of Supply Chain realized that while the company was focused on their direct material spend, no one was managing the more than $600 million spent annually on the indirect costs not tied directly to manufacturing, including necessary but not always well-controlled items such as laptops, mobile phones, and travel.

To address this indirect spend, the client turned to Protiviti to help build an indirect procurement department from the ground up.

Workflow initiated

Protiviti used the first 90 days of the 10-month engagement to establish relationships with 85 stakeholders, which proved to be critical in creating support for the upcoming changes. Our procurement experts held over 20 meetings with business units and executive leadership to analyze and appropriately categorize sourcing practices and identify opportunities to consolidate and renegotiate supplier contracts.

Among other activities, Protiviti collaborated with stakeholders in several functional areas to provide sourcing support, prioritize sourcing opportunities, and develop sourcing plans and savings estimates. We then embarked on a three-pronged workstream solution:

1. Building the foundation for a sustainable procurement process: This included developing sourcing templates, defining roles and responsibilities, and designing the governance structure. A critical part of this phase hinged on creating a plan that would communicate the procurement function's value to business units and foster buy-in. Protiviti also developed a system that the procurement function could use to prioritize, manage, and address internal requests to negotiate with suppliers on behalf of other business units.
2. Resource planning and enablement: We defined the procurement function's organizational alignment, then worked closely with the client to define roles and responsibilities, develop job descriptions, and conduct a search for candidates.
3. Transfer of the function to the client: The function was transferred to the client following a thoughtful onboarding and transition plan, with continued support during this period from Protiviti. Part of that effort also included creating a playbook detailing all aspects of the program—from processes, procedures, policies, governing models, onboarding plans, and reporting requirements among others.

The multi-phase process benefitted greatly from support received from various departments within the business. The IT department was particularly engaged, regularly reaching out with concerns and requests while communicating the benefits delivered by these changes back across business units. 

Gaining trust with specific, bottom-line wins

The company prides itself on its spirit of independence and ability to lead and get things done. The success of the new program hinged on stakeholders' confidence in the solution's design and their willingness to champion its adoption. This trust was cultivated over numerous working sessions, during which many problems were resolved on the fly. Protiviti’s practice of “fixing the problem while assessing the problem” led to several concrete sourcing efficiencies with clear wins for the bottom line. For example, we negotiated with an IT supplier early in the assignment, achieving substantial savings. Each one of those tactical wins encouraged the client to embrace the bigger strategy.

In all, by targeting 14 categories of procurement spending, the team identified $22.2 million in potential savings and the company was on track to save nearly $13 million that year alone. Early savings targets were achieved two months ahead of schedule and a 10-to-one return on investment smashed initial expectations of a four-to-one return.

Growth with 360-degree view

When growing organizations lose sight of necessary but out-of-sight functions, they miss opportunities to avoid problems, improve efficiency, and trim fat. Frequently, companies become aware of those opportunities only after growth has accelerated so much that the inability to manage it causes significant disruption to operations and profit. To avoid this scenario, organizations must intercept the problems before they can interrupt accretive initiatives and lead to weakness. In this case, it was a lesson learned, and problem solved before it could grow out of hand, positioning the company to achieve its growth objectives with a solid and sustainable procurement function.