SERVICES OUTSOURCED / OTHER/ PURCHASING AND PROCUREMENT
Scope: The classic investor’s adage, “buy low, sell high,” applies to the functions of purchasing goods and services in a coordinated procurement strategy. The purchasing function involves identification of the goods and services necessary to acquire, the timing, volumes, quality and related services to purchase, and the pricing, payment terms and related financial and operational risks associated with an inability to provision goods and services for delivery to internal and external customers.
Technical Requirements: Three essential components of outsourced purchasing and procurement functions: business models, technology and managed services.
Business Models. Every business organization adopts a business model for different revenue streams. Each product or service is a different revenue stream that needs to be matched by a concomitant purchase (or manufacture) of goods or services. Effective outsourcing of the purchasing or procurement functions depends on having clearly identified models that enable the outsourcer to plan and implement multiple strategies, with clear quality and performance metrics. The outsourcer must work with the business organization to identify the business models, business requirements, historical and current roadblocks to efficiency and future directions for new business models and new markets.
Information Technology. Purchasing departments depend on information technology to enable competitive bidding based on requests for proposals (“RFP’s”) and requests for information (“RFI’s”). The procurement outsourcer thus needs deep understanding of the customer’s existing IT systems, data, products by SKU (“stock keeping unit”), vendors and processes, and how such systems and background information is used to support the company’s R&D, testing, manufacturing, distribution, sales, customer support and other mission-critical operations. Web-enabled procurement systems can conduct reverse auctions to purchase bulk commodities.
Managed Services. By day-to-day management of the purchasing functions, the procurement outsourcer delivers “managed services.” The question for the business organization is why to outsource such functions, when they are repetitive, closely related to the core value of the business and could be done by employees. In response to these questions, procurement outsourcers take the view that they deliver greater expertise in these “managed services,” that the results are better quality, lower price and less risk in the delivery of essentials needed for pursuing the company’s growth, and improved transparency, responsiveness and productivity in the procurement functions. Of course, every case is different, depending on its facts.
Benefits: “Procurement outsourcing” competes with ERP systems and specialized software (including Web-based software-as-a-service) that automate the purchasing functions. The benefits of procurement outsourcing may depend on the particular problems and challenges of the individual enterprise. In addition, in some cases, outsourced purchasing can save money simply due to aggregation of demand into definable higher volumes. Procurement outsourcing may also enjoy the benefit of reduced antitrust scrutiny in comparison to a trade association or group purchasing consortium that purchases goods and services by volume.