Guest Post by Jeffrey Frost, VP Supply Management, Strachan Products Inc.
As a contrast to me droning on, I'm excited to welcome Jeff Frost to 1 Procurement Place. Jeff is the VP of Supply Management for Strachan Products, a manufacturer of parts and components for automotive and aerospace OEMs. Strachan Products is also a founder member of Spend Engine, a collaborative procurement community which in full disclosure is owned by my company SpendWorx LLC. It is the subject of procurement communities that Jeff writes about in his fascinating post below. Welcome Jeff!
When Mark Usher first approached me last year about the idea of participating in a procurement community I had two immediate thoughts as to what he might be talking about. That it might involve camping out at weekends exchanging purchasing war stories I quickly dismissed. More likely was some type of Group Purchasing Organization (GPO) pooling G&A purchases like office supplies or PCs across member companies. GPOs are certainly something Strachan has looked at in the past but on the times we have evaluated them their pricing has only been marginally better than what we could negotiate on our own. In addition they have always seemed to me to represent one rather tactical component of what could be a far more strategic approach to collaboration. I was very pleased when it turned out that Mark was talking about something a lot closer to this more strategic model with his company's collaborative procurement community. Take the clock forward a few months and I'm only too happy to describe some of the initial benefits and learning that have arisen from our involvement in Spend Engine.
First, though I say it myself, our company does most of its buying pretty well. We also don't sweat the small stuff. When we acquired a former federally funded entity in 2009 to bolster our R&D capability we also "acquired" a small team of outstandingly talented procurement professionals who knew indirect sourcing & contracting inside and out. Within six months they had over 80% of our non-payroll G&A expenditure nailed down under aggressively priced blanket contracts with all kinds of contract clauses, market-linked indexes and SLA guarantees to ensure we were always getting the best deal without having to do the three bid-and-a-buy game that steals procurement resources from higher value work. Once indirect was put to bed we turned our focus to where this higher value resided, namely in our direct materials spend.
When it comes to our direct spend it's extremely custom and - you would think - as poor a candidate for any type of collaborative procurement as it comes. But that's only if you think of collaborative procurement in traditional GPO-type terms as a group of buying companies pooling volumes to secure leverage-based unit pricing with vendors. That's not what Spend Engine is. Mark Usher can do a far better job of explaining the details of Spend Engine but for Strachan it's allowed us to form relationships with companies that don't necessarily buy the same stuff but that buy stuff with similarly constrained specifications and from supply markets with similar dynamics. Take precious metals for example. We buy significant quantities of platinum to manufacture some of our products. Two other companies in the Spend Engine consortium also buy precious metals, but not platinum. Although we will never leverage spend together in the GPO sense there are numerous common precious metals-sourcing best practices we can mutually support each other in the development of such as management of price volatility, addressing global supply risk, ensuring ethical practices of supply sources, and many others. After just a few months of involvement in the community I can say with certainty that the core business-impacting value captured from this collaboration has exceeded by many times the equivalent value that would be created over the same period from, say, an MRO consortium contract. That's not to say we wouldn't get value from such a contract - one day we might - but the point is that today it is magnification of knowledge that moves the dial for us, not dollar spend.
My closing point for procurement organizations thinking of using GPOs or similar approaches is to look beyond the benefits of leverage-based unit price reduction to the higher value that is possible from collaboration with other companies on strategies related to your core business. From experience I can say that for Strachan Products the investment of time in a collaborative procurement community has certainly been worth it and is something that we plan to continue.
1 Procurement Place
Non-spin commentary on the world of procurement, supported every now and then by the occasional piece of factual information.
Mark is Founder and CEO of SpendWorx LLC, a provider of spend analytics services. Prior to SpendWorx Mark co-founded Treya Partners, a boutique procurement consultancy. Earlier in his career Mark held various positions at Accenture, GE Aviation and Rolls-Royce.