Gregg Brandyberry is senior vice-president of FedBid, and formerly senior advisor for A.T. Kearney Procurement and Analytic Solutions, Gregg.Brandyberry@FedBid.com

Gregg Brandyberry

 A revolution started about a dozen years ago in the federal government and is spreading to state, local, and commercial purchasing organizations. This revolution is about turning procurement efforts into a sustainable cash-flow-generating stimulus machine by extending available resources to get more spend under management, competitively bid spend more often, and take advantage of market dynamics that create marginal pricing opportunities. It is a change in thinking that drives maximum efficiency, maximum savings, and creates a truly holistic procurement management system that goes well beyond the 50% to 80% control that most organizations have. 

Many leading companies and organizations have worked hard during the past several years to become lean, agile, and flexible. Among other initiatives, they have taken a close look at support function staffing (including procurement) and have downsized, right-sized, outsourced, and off-shored with the net effect resulting in an environment where employees are having to do more with less resources or more without more resources. Another set of companies and organizations have taken a different path, and, as it relates to purchasing goods and services, have never upgraded the effort nor staffed their procurement organizations appropriately.  In either case, the net outcome has been one where real and significant savings have been left on the table because there were not enough resources or not enough skilled resources available to competitively bid a maximum amount of the company’s or organization’s spend for goods and services.

With the remaining resources, highly skilled organizations take a position of focusing on ensuring that crucial goods and services are protected by contracts and rebid every one to five years. These companies leave the smaller spends to sort themselves out with the help of dozens or even hundreds of business end-users following procurement policy to engage suppliers and hope for the best.  The companies that have less skilled purchasing departments continue to focus on transactional buying with little professional oversight. In both cases, organizations are paying more than they need to pay and also are putting their companies at risk by not formally vetting many of the suppliers they are using.

In the effort to cut costs, many companies in the pharmaceutical industry and other industries have purposely taken an approach that reduces cost by cutting infrastructure, including significant reductions in full-time employees. Although much of this cutting is needed and laudable, there are many examples where cuts have been equally applied to all internal functions (e.g., 15% for all support staff).  Although this approach fixes one part of the business (i.e., procurement labor costs), it has a negative impact on the organization as a whole.  Procurement is one of the few functions that can have a direct and ongoing impact on the bottom line and should be staffed or supported appropriately for maximum savings delivery and overall risk mitigation.  

To offer an example of the value of procurement, take the case of a small but growing pharmaceutical company that had no real center-led procurement strategy or organization. When it came to purchasing indirect goods and services (i.e., all goods and services with the exception of direct materials to make products), senior management and administrative assistants became the purchasing experts, which resulted in little, if any, competitive processes being used, suppliers not properly being screened, and generally creating unnecessary cost and risk for the organization. Poor procurement practice was evident when buying contract research organization services; marketing services; facility services; maintenance, repair, and operations; office supplies; benefits; and other services.After reviewing the company’s buying practices, limited policies, and several recent purchases, it was clear that the company was over-paying on average by a minimum of 20% for indirect goods and services. This organization spent approximately $100 million per year on indirect goods and services with revenues of approximately $250 million. It was recommended that the company make an investment in upgrading its procurement capability by naming a head of procurement to institute a center-led program for purchasing direct materials and indirect goods and services.  The investment would easily have a 50 times return during an 18- to 24-month period, according to conservative estimates. 

Approximately 10 years ago, federal agencies began using FedBid to buy common goods and basic services. FedBid is also available for commercial use and offers a highly efficient procurement solution for commodity products and basic services. There is never any cost to the participating sellers and no upfront cost to the buying organizations. A small transactional fee is added to the winning sellers’ bid and is paid by the buyer as part of the purchased price. After the buyer pays the seller, FedBid collects the transactional fee from the seller. Both parties win; the seller receives additonal revenue and the buyer nets average savings of > 10% (based on more than a decade of buying awards). If the product or service is not currently in the marketplace, the marketplace operator will at, no charge, find the right sellers and even train a company’s existing suppliers so they can compete on a regular basis in the marketplace. 

Today, the marketplace has more than 57,000 approved sellers. Buyers use a simple and efficient Internet-based user interface to enter the requirements of what they want to buy (i.e., a specification), and FedBid, being a fully-managed marketplace, takes full control of the sourcing process to ensure robust competition from multiple sellers, validate quality assurance of leading bids, and delivers final seller pricing options back to the buyer for award. The marketplace is fair, ethical, and transparent. It enables dynamic competition by providing the best market pricing available at the time the purchase is completed. FedBid is rapidly branching out into state and local governments, schools and universities, and commercial organizations.

Every organization has an opportunity to do a better job of buying indirect goods and services. Buying smart, saving money, and reducing risk by having better controls in place makes real economic sense, especially in today’s environment. 

 is senior vice-president of FedBid, and formerly senior advisor for A.T. Kearney Procurement and Analytic Solutions, 

Articles

The procurement organization rethinks sourcing for maximum efficiency and results.

Creating a Holistic Procurement System

Procurement has witnessed dramatic change during the past several decades. A much simpler regionalized supply base has evolved into complex global supply chains. In the late 1970s, most purchases were from domestic, even relatively local sources. Companies had personal relationships with whom they were buying from, and as result, they were able to manage risk on a personal basis. Purchasers knew the character of their major suppliers and understood their financial health. It was easy to ensure that every purchase came from a select pool of suppliers. The biggest supply risks were of a much different nature, such as temporary labor strikes or mechanical breakdowns of shippers. It was easy to compensate for these and other basic supply risks by carrying extra inventory of in-process and finished goods. Most organizations had at most, dozens of suppliers, not the thousands of suppliers as most companies do today.  

In 1977, I was a young laboratory technician for a manufacturer that made power-steering hoses for the automotive industry. That was the year that early personal computers were first mass-produced for consumer sales, including the Commodore PET (Personal Electronic Transactor) with either four or eight kilobytes of memory, Apple II, which became an instant success with its printed circuit motherboard, and Tandy Radio Shack's first desktop computer TRS-80 with four kilobytes of memory and an early microprocessor. 

The year 1977 also was the beginning of the US prime interest rate ascent from 7.75% in September 1977 to an all-time high of 21.5% in December 1980. (Today, it is 3.25%.) It was a time of rapid technology growth and unpredictable financial stability. Both of these forces were key drivers of 35 years of procurement transformation. 

My earliest memory of what was then called the purchasing department was that  "they were the folks standing in between what I wanted to buy and the supplier I wanted to buy it from." But what a change we have witnessed since: purchasing to procurement, a highly tactical function to a valued strategic business partner. 

I have been lucky to have spent more than 20 years in procurement working for companies and leaders who were truly transformational, including in my role as vice-president of procurement, global systems and operations for GlaxoSmithKline (GSK). Working for GSK and other companies gave me a chance to be a part of tremendous change. Reflecting on the total experience, there are five areas that have driven the purchasing evolution to the procurement revolution: value to the organization, skills development, technology, best-practice adoption, and organizational design. 

. Thirty-five years ago, the typical purchasing department reported low within the company's overall reporting structure. It was a tactical operation whose basic function was commonly known as "place and chase," that is, call in an order and expedite the delivery. Today, the function is known as the procurement organization and typically reports directly to the CFO, head of supply chain, or COO.  We are even beginning to see a new trend where the chief procurement officer reports to the CEO and is a board member. 

. In the late 1970s, the primary skills required of purchasing personnel was the ability to handle multiple tasks in a fast-paced environment. It also helped if one were a "leveraged buyer" and was good at haggling. Most supplier selections had already been made by engineers, facility managers, and other end users before purchasing was contacted. The common hand-off to purchasing ended with a comment, such as "see if you can get a few more dollars off." Now, companies actively recruit seasoned procurement professionals with impressive resumes and proven track records of taking significant cost out of third-party spend. Also recruited are new graduates from the ever-increasing colleges and universities that have undergraduate and graduate degree programs focused on the supply chain. 

 Three and a half decades ago, purchasing technology consisted of the three-ply traveling requisitions and a telephone for ordering. When doing a detailed purchasing analysis, we were armed with a sharp pencil, lined paper, and a basic calculator. Early manufacturing resource planning systems with purchasing modules that aided in planning and produced a printed requisition were soon implemented. By the mid- to late 1990s, the first P2P (procure-to-payment) systems were available that automated the full cycle of requisitioning, approvals, ordering, tracking, receipt, and payment. Next to arrive was technology that allowed procurement to do online bidding (i.e., reverse auctions). Today, procurement technology has evolved to significantly improve process efficiencies (less headcount required), automatically analyze spend (identifies more savings opportunities), drive incremental savings (bottom-line impact), and enable effective control and contracting of critical spends (risk management). New solutions now allow organizations to compete better by using a true marketplace approach that automatically does the bidding and negotiation for the buyer. Solutions that perform combinatorial optimization for complex global spends result in new levels of savings and end-user satisfaction.  

. In the late 1970s, best purchasing practices were more associated with good inventory-management processes. The purchasing focus was on how to work with suppliers to receive goods just-in-time with suppliers owning the inventory until needed by the manufacturing line. I was associated with some of these early, difficult efforts that often were performed just-in-case  because the risks were just too high to not keep adequate inventory on hand. By the mid 1990s, procurement began adopting a new best practice, strategic sourcing, a seven-step disciplined process that ensured well-defined specifications, requirements, supplier and market knowledge, and a competitive process used for bidding and negotiation. With each passing year, more procurement analytics and strategy have been used to continually make improvements to the acquisition process, overall cost benefits, and total value provided. Best practices also have been developed for supplier management and supplier relationship management that focuses on getting ever-increasing value from the supply base beyond simply savings.  

 When I was starting out, purchasing departments were fragmented, decentralized functions that primarily existed to ensure that goods and services were delivered on time. During the past 15 to 20 years, a new model evolved and perfected where a central procurement group establishes common policies, procedures, and technology that allow corporations to develop the appropriate local, regional, or global strategies to maximize savings and value from the supply base.  

In closing, the past 35 years have witnessed a remarkable transformation for the organization tasked with managing a company's overall third-party expenditure. The evolution of purchasing to procurement has allowed corporations to enhance profitability in new ways. With a best-practice procurement organization in place, more dollars are dropped to the bottom line, and incremental value is elicited from the supply base on an ongoing basis. 

The past three decades have driven a purchasing evolution to a procurement revolution.

Reflecting on 35 Years of Procurement Transformation

The past 15 years has witnessed extreme and mounting cost pressures on the pharmaceutical industry.  This phenomenon has been driven by a host of changes, including:  

A saturated North American market where only a few new high-priced/high-margin drugs come to fruition

Longer and more costly regulatory cycle times with greater drug-failure rates

Advancing generic-drug competition and shorter patent life

Outdated cost structures still laden with excess capacity and high-wage/high-benefit employees (although the industry has done much to change this through plant sales and layoffs).

Few can argue that the golden years of the pharmaceutical industry with high-margin products and regular new blockbusters coming into the market to replace products going off patent is over. 

Although there is sales growth in exciting new global markets, these markets simply cannot command the high-priced drugs of the past. Granted, the potential exists for significantly increased sales volume over time, but the increased sales will be at a lower price and at lower margins.  

To counter these trends, Big Pharma has aggressively deployed network rationalization strategies, other restructuring, outsourcing, and reorganizing, which has resulted in massive layoffs. Reducing infrastructure and operational costs has become the new norm within the industry. Some doomsayers are even predicting the demise of Big Pharma in the decades to come as there will no longer be a financial model that is attractive to investors. Now that may sound a bit farfetched, but one thing is certain: every function and every person is being called upon and challenged to become lean, to cut cost, and to do more with less. 

I've written many times in the past that adopting best-practice procurement methods is a great way to reduce cost and to recover margin. My experience has shown that when the right sourcing strategies are deployed and the maximum amount of spend is truly competitively bid, the resulting savings can range from 10–30% of the starting baseline pricing of a company's total third-party purchases. Additionally, if a company is willing to focus on specifications, requirements, demand, and consumption, especially when buying indirect goods and services, significant incremental savings can be achieved on an ongoing basis.   

An example of the resulting margin improvement (i.e., recovery) from a best-practice procurement-transformation initiative is as follows. Take the case of a company that generates $20 billion in annual revenues and has total costs for third-party purchases (both direct materials and indirect goods and services) of $8 billion annually with gross margins of 33% (i.e., $6.67 billion). If a company reduced its costs by 10% (i.e., $800 million), its gross margin would increase to $7.47 billion, or a gross margin gain of 12%. If a company reduced the cost by 15%, the gross margin gain would be 18%. 

Based on this example, it is clear that a transformed procurement organization is a strong investment. It also should be noted that when done properly, the transformation can be accomplished at net cost post initial investment. Some organizations are even lowering the overall cost of procurement through the use of innovative technology and outsourcing strategies and are seeing a sharp rise in procurement's return on investment.  

With any improvement initiative, the secret to sustainability is to continue to improve and add new best practices as they become available. With that in mind, I offer some examples of what some organizations are beginning to do in this area, namely, recovery audits. Recovery audits are audits performed on past transactions to identify overpayments, recovering those overages, and putting safeguards in place to prevent recurrence. Recovery audits are becoming popular as a no-risk/low-risk method to recover overpayments associated with several areas in a company's business. The great thing about recovery audits are that there are many firms willing to perform the audit service and follow-up collections on a contingency fee basis (i.e., the firm will negotiate a split of the collected over payments). Recovery audits include payables audita, worker's compensation audita, telecommunications audita, and waste and recycling audits.  

Payables audits are probably the most common recovery audit being performed today. Auditors look for items, such as duplicate payments, invoicing errors, wrong price paid, and other incorrect payments. Many firms have reported up to 2% overpayment on the sample data being audited. As monies are found, companies typically expand the scope of the audit. 

The purpose of worker's compensation audits is to recover worker's compensation premium overcharges. Typically, the audit team will review the past five to seven years of insurance policies and premium calculations with the goal of finding errors and obtaining refunds. Various documents are reviewed, including final audit billing statements, experience-modification rating worksheet calculations, policy-declaration pages, auditor worksheets, loss-history summaries and claim reserves, and especially rating plans. Experience indicates that up to 70% of corporations will find that they have overpaid their carrier and will receive a refund as a result of this type of audit. 

Because the telecommunication industry has grown so complex and expensive, it is almost inevitable that waste and errors infiltrate the billing to an organization. The audit eliminates waste, corrects billing errors, and puts an organization in full control of future invoices. Auditors perform an in-depth analysis of local service, long-distance service, data lines and circuits, bandwidth usage, private lines, wireless service, teleconferencing services, equipment leases, and service contracts. Common issues that are addressed and corrected include hidden charges not on billing, overcharges versus contracted rates, incorrect long-distance carrier charges, duplicate charges, charges for unnecessary circuits, charges for services never ordered, and incorrect taxes and surcharges. History shows that corporations can lower their telecommunications bills by an average of 25% with the proper controls in place. 

Independent specialists will perform free comprehensive waste audits that examines every aspect of a company's current waste and recycling services. These audits include contract compliance, thereby right-sizing a company's waste output to ensure that a company's out-density is within its industry standards, margin pricing, and cubic-yard evaluation. Most companies are overserviced and incur expensive bills for frequently scheduled hauler pickups. The specialists also will uncover potential revenues for a company from a more organized and aggressive recycling effort. Specialists are compensated with recovered monies on a negotiated basis or from helping to implement the necessary changes. 

These are just a few examples. Recovery audits also are taking place for utilities, medical claims, merchant services (business-to-business transactions), sales and use tax recovery (for nonprofits), and property valuation, along with other areas where billing complexity exists. 

Recovery audits are important tools for a company to benefit from improved practices and having additional funds returned and should be considered. 

is CEO of Wildfire Commerce and strategic advisor for FedBid, tel. 215.327.5739, 

Recovery audits and other past practices in procurement can improve the bottom line.

Ways to Recover Lost Margins

For several years, Big Pharma has been cutting programs and reducing headcount as a result of mergers and acquisitions and overall cost-cutting efforts. According to industry estimates, approximately 50,000 pharmaceutical industry employees lost their jobs in 2010, and 300,000 have been let go in the past 10 years (1). Many reasons are behind these cuts: a decline in traditional research and development productivity, tougher regulatory hurdles, a plethora of government and formulary pricing controls, and significant patent expiry of major blockbuster drugs. 

Now, more than two years after the economic meltdown, the industry understands that prosperity is not around the corner. What many call the "New Normal," characterized by slower growth, tighter credit markets, a more conservative approach, less money available for investment, and tighter financial regulations, has become the new operating reality. 

It doesn't have to be all doom and gloom, however. Even in the best-run organizations, there is an untapped source of cash from what I like to call "creating your own stimulus by buying items and services better." In many companies, the cost of purchased items and services (i.e., the money paid to suppliers) is equal to between 30–70% of total company revenue. In the pharmaceutical industry, this cost is typically between 30 and 50%. What I've come to understand is that regardless of how good or how bad a company is at buying products and services, there is still plenty of cash to extract from its costs. Three methods—spend segmentation, better specifications, and online reverse marketplaces—can improve results. 

. By not applying the appropriate sourcing strategy, a company may pay between 10% and as high as 70% more for products and services, based on my experience. This differential exists because of the strategy or lack of strategy that is in place for a certain purchase. Figure 1 identifies four types of supplier relationships by such attributes as ease of buying, supply-market competitiveness, uniqueness, and strategic importance. A buyer's strategy needs to be in the right quadrant to ensure that a company is paying the right price, producing the right total cost, and getting the best value associated with a particular product or service.  

Figure 1: Spend segmentation categories based on customerâsupplier relationships. (FIGURE 1 IS COURTESY OF THE AUTHOR) 

For example, if a company is making a purchase where the supplier maintains the power in the relationship (i.e., the "critical" quadrant), the buyer is paying an absolute premium. Typically, less than 10% of a company's spend will be designated as "critical," according to my experience. Companies with poor purchasing practices, however, often allow suppliers to act as if they were a natural monopoly. A purchaser should review its spending to move supplier relationships from the "critical" quadrant to "strategic" or better yet to "leverage" positions (see Figure 1). My experience suggests that on average, only 20% of spend is truly "strategic," and most of what is purchased can be highly leveraged among multiple suppliers.  

. Many factors determine how much to pay for a good or service. In simple terms, supply is what is available, and demand is how much is being requested. Consumption is how much is being used at what rate, and specification is what constitutes a product or service. The interactions of these variables are the main drivers of price paid.   

Once spending is properly segmented  per Figure 1, four focal points determine  the price paid. A company's strategy affects its ability to pay less, to use less, to use something else, or not to use at all. Take a close look at specifications and carefully review the requirements. In many cases, a company will find individual requirements that are "over spec'd" or not needed at all, which lead to significant and unnecessary costs. Additionally, consumption can often be reduced by making the user community aware of the total costs involved and by policies that control overall usage, particularly for indirect items and services.   

. Think about how a company buys. It is probably one of the following scenarios. The simplest is calling the supplier and accepting the price being quoted. Then there is the "haggle" method, same as the first method, but with some pressure applied to get a lower price. Then more sophistication with the "competitive bid policy," in which the buyer typically gets three bids before making a selection. Another method is to do additional negotiation after getting the three bids, an interesting approach, but it still may fall short in securing the best possible terms.   

A reverse auction, a transparent and dynamic bidding model, is different. All sellers are bidding on the exact same item or service. When using this method, the buyer must have good specifications or requirement documents available to all sellers as opposed to the haphazard way requirements are given using some of the other traditional methods. Because the buying event has great transparency, sellers can see if their pricing leads or lags. The buyer does not have to select the lowest bidder and may weigh other factors in the purchasing decision. Reverse auctions drive pricing to what the market will bear at any given time against various seller independent variables.  

Until recently, the technology required to conduct reverse auctions was costly, required considerable employee training, and presented certain internal and some external barriers for implementation. These barriers, however, are eroding. The premier reverse auction marketplace, FedBid, used by the federal government for 10 years, is now available for commercial use and offers a procurement model for commodity products and basic services. The marketplace has over 50,000 qualified suppliers. More than 50,000 "buys" were conducted in 2010 with savings ranging between 5 and greater than 50%. There is no cost to the buyer for using the technology,  which is web-browser-based. The winning seller pays a modest 3% transaction fee and is billed by the marketplace operator 60 days after the buying award is made. If the product is not currently in the marketplace, the marketplace operator will at, no charge, find the right sellers and even train a company's existing suppliers so they can compete on a regular basis in the marketplace. Reverse auctions can be good for buyers and sellers. Buyers save money, and sellers gain more opportunities to win business. Reserve auctions, along with the other sourcing practices discussed, are potential drivers for value creation.   

is CEO of Wildfire Commerce, and senior advisor for A.T. Kearney Procurement and Analytic Solution

1. E. Teichert, "Top 10 Pharma Layoffs for 2010,"

Better strategies and practices in sourcing and procurement can contribute to the bottom line.