Technology - Led Savings in Indirect Procurement

Rajaraman Sundaresan, CEO, Aahaa StoresLarge enterprises in India,by and large,come in two remarkable variations. Either the enterprise operates in large facilities concentrated across a few metros(Example:Cognizant),or the enterprise operations is a network of hundreds or thousands of branches and regional offices (Example: ICICI Bank).Most companies have great stories to tell on direct procurement optimization. But indirect procurement is beginning to catch up in terms of maturity. The introduction of GST and associated Input Tax Credits are making several large enterprises and banks move swiftly in getting their indirect spends more organized using technology. Let’s deep dive into three levels in indirect procurement, technology tools used, and how large Indian enterprises can move up this value chain.

Level 1: Unit Cost Reduction
Enterprises today, in many sectors, use this as the only metric in awarding contracts. Being a beaten path,it offers only an incremental impact on cost savings.When consolidated purchases happen,companies use eAuctions and Reverse eAuction tools to discover the best unit cost. This works to some extent, but the value realized is only good as your empaneled bidders. Often, these bidders come from the eAuction software company, which may or may not meet the kind of service levels large enterprises need. But there is no scope for external bundling of demands like Office Supplies, IT, Travel, Marketing or Services. Welcome to the world of collective bargains. In combination with variety reduction, price bench marking, reducing number of vendors and contracting, collective bargaining offers the best unit cost. Here, the vendor consolidates the volumes generated by multiple customers nationally and negotiates the best pricing with manufacturers. When negotiated PAN India, it optimizes the shipping costs as well.

Level 2: Transaction Cost Reduction
In concentrated enterprises like a large IT company with 26,000employees in a SEZ, or a hospital handling thousands of patients every day, the indirect procurement
complexity lies in variety of products and services consumed, creating millions of transactions a year. For instance,an IT company regularly consumes over 3000+ R&M products, 200+ Stationery supplies,150+ Housekeeping supplies and 1200+ IT accessories across multiple facilities. In case of distributed enterprises like banks or insurance companies, the transactions run into millions per year if branch purchases are local. A teller also must also act as a buyer. With GST, exposure to unregistered dealers at a branch level can open up compliance issue and loss of ITC benefits, which can run into crores if an enterprise has thousands of branches. For both types of enterprises, consolidation starts with using a catalog based demand aggregation tool, usually a cloud based purchase requisition tool for every branch or demand center. With approval work flows in place, enterprises can implement suitable controls and reduce transactions by nearly 90 percent.

If KPIs are defined, procurement teams are trained, KRAs are set and tools are deployed, significant savings can be unearthed systematically

The centerled platform approach also dramatically reduces human capital needs for managing transactions. With APIs for your ERP application, purchase requisitioning tools reduce transaction costs.

Level 3: Consumption Reduction
A central procurement team has a responsibility like that of an Air Traffic Control in measuring, monitoring and guiding requestors across the system. Many corporates rarely achieve this level today due to three main reasons – Too busy with transactions and issue management, Lack of KPIs in this area, and Lack of technology tools for real time monitoring. Result of this is most enterprises today are battling increase in consumption, and the realization is not timely enough to take preventive actions. This must work like an Air Traffic Control. When top 10 banks spend less than two percent of their OPEX on Print & Stationery, is my bank's spend within industry limits? Housekeeping material spends per SF for various demand centers. Office supplies spend per head for various demand centers. There are cloud-based portals available in India today that offer indirect spend intelligence dash boards to reduce your enterprise consumption, set budgeting, reduce hotel or flight cancellations, and reduce uncontrolled discretionary spends.

Take Aways
Enterprise savings on indirect purchases come in three forms-Unit cost reduction, Transaction reduction and Consumption reduction. Central procurement teams must have KRAs that address all three forms. Today's cloud based purchase requisitioning platforms with controls and contract management offers humongous value on all dimensions of indirect procurement.I see a potential for enterprises in India to save over 20 percent on indirect procurement. While immediate unit cost savings is often in plain eyesight,it's only incremental. The transaction cost and consumption reduction is where most savings are. If KPIs are defined, procurement teams are trained, KRAs are set and tools are deployed, significant savings can be unearthed systematically. I want to call these ‘indirect savings in indirect procurement’.